<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

(MARK ONE)

[X]              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       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 NUMBER 1-15343

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

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

<TABLE>
<S>                                            <C>
                   DELAWARE                                      73-1462856
       (State or other jurisdiction of              (I.R.S. Employer Identification No.)
        incorporation or organization)
     ONE WILLIAMS CENTER, TULSA, OKLAHOMA                          74172
   (Address of principal executive offices)                      (Zip Code)
</TABLE>

              Registrant's Telephone Number, Including Area Code:
                                 (918) 573-2000

          Securities Registered Pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                                                          NAME OF EACH EXCHANGE ON
             TITLE OF EACH CLASS                              WHICH REGISTERED
             -------------------                          ------------------------
<S>                                            <C>
       Class A Common Stock, $0.01 par                    New York Stock Exchange
  value, and Preferred Stock Purchase Rights
</TABLE>

          Securities Registered Pursuant to Section 12(g) of the Act:
            6.75% Redeemable Cumulative Convertible Preferred Stock

     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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

     The aggregate market value of the registrant's Class A common stock held by
nonaffiliates as of the close of business on February 28, 2001, was
approximately $1.2 billion. In addition, the aggregate market value of the
registrant's Class B common stock held by The Williams Companies, Inc. as of the
close of business on February 28, 2001, was approximately $4.9 billion.

     The number of shares of the registrant's Class A Common Stock outstanding
at February 28, 2001, was 92,859,410.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Not applicable.
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<PAGE>   2

                      WILLIAMS COMMUNICATIONS GROUP, INC.

                                   FORM 10-K

                                     PART I

ITEM 1. BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

     Williams Communications Group, Inc. (WCG) was incorporated under the laws
of the State of Delaware on December 1, 1994, under the name of WilTel
Technology Ventures, Inc. The name of the corporation was changed to The WilTech
Group, Inc. on September 20, 1995, and to Williams Communications Group, Inc. on
February 11, 1997.

     In 1985, The Williams Companies, Inc. (Williams) entered the communications
business by pioneering the placement of fiber-optic cables in pipelines no
longer in use. Williams also pioneered the strategy of providing services solely
to other communications providers. By 1989, through a combination of
construction projects and acquisitions, Williams had completed the fourth
nationwide digital fiber-optic network, consisting of approximately 9,700 miles.
By 1994, WilTel, Williams' communications subsidiary, was one of the top four
providers of high capacity data services, one of the top five providers of long
distance voice services, and the first provider to offer nationwide frame relay
transmission capacity. In January 1995, Williams sold the WilTel network
business to LDDS Communications (now WorldCom). Williams excluded from the sale
an approximately 9,700 route mile single fiber network comprised of a single
fiber-optic strand and associated equipment along the original nationwide
network, WilTel's telecommunications equipment distribution business and Vyvx
Services. In January 1998, Williams reentered the communications network
business, announcing its plans to develop the Williams network.

     Until the closing of the initial public offering of a minority interest in
WCG stock on October 6, 1999, WCG was a wholly owned subsidiary of Williams. In
its initial public offering, WCG offered for sale 29,600,000 shares of its Class
A common stock to the public. The underwriters for the initial public offering,
Salomon Smith Barney Inc., Lehman Brothers Inc. and Merrill Lynch & Co.,
exercised their options and purchased 4,440,000 additional shares to cover
over-allotments. In separate private placements, SBC Communications Inc., Intel
Corporation, and Telefonos de Mexico, S.A. de C.V., respectively, acquired
20,226,812, 9,225,093 and 4,612,546 shares of WCG's Class A common stock.

     Williams owns 100 percent of WCG's outstanding Class B common stock, which
gives Williams approximately 98 percent of the voting power of WCG. In addition,
on February 26, 2001, Williams and WCG entered into an agreement under which
Williams transferred assets to WCG in exchange for 24,265,892 shares of WCG's
Class A Common Stock. Williams owns approximately 86 percent of the total
outstanding Class A and Class B common stock of WCG. As a majority-owned
subsidiary of Williams, WCG has in place with Williams agreements for the
provision of certain administrative and other services, for the lease of certain
property and facilities, for the sharing of tax liabilities and benefits, and
for the license of the Williams name and logo.

     Williams has announced that its board of directors has authorized its
management to take steps that may lead to a tax-free distribution of shares of
WCG's common stock held by Williams to its shareholders. Assuming that market
conditions and other factors continue to support such a tax-free spin-off,
Williams has announced that its board of directors would expect to vote during
the first part of 2001 to set a record date, the ratio of a share of WCG stock
that will be issued for each share of Williams stock, and to direct the
distribution of WCG shares.

                                        1
<PAGE>   3

     On January 29, 2001, WCG announced that it had reached an agreement with
Platinum Equity, LLC to sell its Houston-based enterprise services operating
segment, Williams Communications Solutions (Solutions). Under the terms of the
Sale and Purchase Agreement by and among Williams Communications, LLC, Williams
Learning Network, Inc., Williams Communications Solutions, LLC, Platinum Equity,
LLC, WCS Acquisition Corporation, and WCS Acquisition LLC, Platinum Equity will
acquire Solutions' operations in the United States and Mexico as well as the
Canadian professional services operations of Solutions. WCG will retain the
right to collect Solutions' receivables aged over ninety days at the time of the
closing, and Platinum Equity will act as the collection agent for these
receivables. WCG also announced its intent to sell the remaining Canadian
operations of Solutions in 2001.

     The principal executive offices of WCG are located at One Williams Center,
Tulsa, Oklahoma 74172 (telephone (918) 573-2000).

(b) FINANCIAL INFORMATION ABOUT SEGMENTS

     See Part II, Item 8 -- Financial Statements and Supplementary Data.

(c) NARRATIVE DESCRIPTION OF BUSINESS

     Substantially all operations of WCG are conducted through subsidiaries. The
term "WCG" also includes the operating subsidiaries where the context requires.
WCG's principal sources of cash are from external financings, public debt, and
public equity. WCG may also receive dividends and advances from its
subsidiaries, investments, payments by subsidiaries for services rendered, and
interest payments from subsidiaries on cash advances. The amount of dividends
available to WCG from subsidiaries largely depends upon each subsidiary's
earnings and operating capital requirements and contractual restrictions in each
subsidiary's credit arrangements.

     Following its decision to sell its Solutions segment, WCG operates through
three operating segments: Network, Broadband Media, and Strategic Investments.
Network owns or leases and operates a nationwide inter-city fiber-optic network,
which it is extending locally and globally to provide Internet, data, voice and
video services exclusively to communications service providers. Network also
includes a publicly traded Australian telecommunications company and various
other investments that drive bandwidth usage on the WCG network. Broadband Media
includes Vyvx(R) Services which provides live and non-live video transmission
services worldwide for news, sports, advertising and entertainment events and
investments in domestic broadband media communication companies. Strategic
Investments invests in both domestic and foreign companies that it believes
will, directly or indirectly, increase revenue opportunities for its other
segments. As of December 31, 2000, Strategic Investments' foreign investments
are all located in South America. WCG has formed strategic alliances with
communications companies to secure long-term, high-capacity commitments for
traffic on its network and to enhance its service offerings. The Solutions
segment has been treated as discontinued operations. Item 1(c) of this report is
formatted to reflect the continuing operations of the business.

                                    NETWORK

     WCG owns or leases and operates a nationwide inter-city fiber-optic
network, which it is extending locally and globally. It intends to make Network
the most efficient U.S.-based provider of advanced Internet, data, voice, and
video services to companies that use high-capacity communications services as an
integral part of their service offerings. These companies include long distance
carriers, local service providers, Internet service providers, application
service providers, digital subscriber line service providers, utilities, and
international carriers. WCG also offers rights of use in dark fiber, which is
fiber that it installs but for which it does not provide communications

                                        2
<PAGE>   4

transmission services. Network is building networks, or seeking strategic
relationships to provide services, in U.S. cities and in Asia, Australia, South
America, and Europe. Network has also made investments in companies that assist
it in improving, or create demand for capacity on, its network. Based on
currently announced plans, WCG's global network will include ownership interests
in or rights to use:

     - in excess of 41,000 miles of fiber-optic cable currently completed,
       connecting 125 U.S. cities;

     - fiber-optic cable networks within 50 of the largest U.S. cities;

     - approximately 150 data centers located in 125 U.S. cities;

     - 15,000 miles of dark fiber in Europe connecting the UK, France,
       Switzerland, Italy, Austria, Germany, Belgium, the Netherlands, Norway,
       Denmark, Finland, and Sweden;

     - operational border crossings between the U.S. and Mexico in California
       and Texas; and

     - in excess of 250 STM-1 equivalent circuits on 7 major undersea cable
       systems connecting the U.S. with Europe, Asia, and Australia.

REVENUES

     Network contributed approximately the following percentages to WCG's total
revenues for the past three years:

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES                                 YEAR
--------------                                 ----
<S>                                            <C>
84..........................................   2000
73..........................................   1999
55..........................................   1998
</TABLE>

STRATEGY

     Network's objective is to be the most efficient U.S.-based provider of
advanced high capacity Internet, data, voice, and video services to national and
international communications service providers. To achieve this objective, it
intends to:

     - Become the leading provider to communications carriers.  WCG's focus is
       on providing high-quality communications services to carriers as they
       seek to benefit from the growth in communications demand. It also offers
       its customers the flexibility to control their own service platforms so
       that they choose to buy services from WCG rather than build these
       capabilities themselves or purchase them from another carrier. WCG's
       focus on selling wholesale services to carriers works to its advantage
       because its customers do not see it as a competitive threat in the retail
       market.

     - Deploy a technologically advanced network.  WCG is combining advanced
       optical and electronic transmission and switching equipment with its
       innovative network design to offer highly flexible, efficient, and
       reliable network services to its customers. Its innovative network design
       provides high-quality network services to support voice, data, Internet,
       and video traffic at a lower investment than other currently deployed
       network architectures due to the elimination of several layers of costly
       equipment. WCG's research investment and technological position has
       enabled the creation of a multi-protocol/multi-service architecture
       supporting the full array of DWDM, SONET, ATM, and IP services. This
       multi-service platform positions WCG as a unique migration partner for
       incumbent through next generation service providers.

                                        3
<PAGE>   5

     - Expand local access services.  WCG is installing or otherwise acquiring
       interests in fiber-optic cable or other facilities within 50 of the
       largest U.S. cities. It is installing high-speed synchronous optical
       network (SONET) transport and dense wave division multiplexing (DWDM)
       equipment to offer a broad range of high-capacity or broadband services.
       This expansion will enable it to extend the high-capacity services of its
       network to virtually every major carrier hotel, network peering point,
       and managed content site within those cities. Enhancing the level of
       connectivity directly to these strategic targets re-enforces commercial
       relationships with customers by minimizing churn, reducing the time to
       deliver existing services, and using advanced technologies to promote new
       service creation to its customers.

     - Enhanced Internet Protocol (IP) Services.  WCG is installing 16 core
       carrier class IP router sites connected to key peering, managed content,
       and switching access points. This additional capability enables it to
       provide next generation products as an Internet infrastructure service
       provider to support emerging voice, data, Internet, and video service
       requirements.

     - Establish global connectivity.  WCG has or is pursuing ownership
       interests in, or rights to capacity on, various undersea and foreign
       fiber-optic cables. These cables will connect its U.S. network to Europe,
       South America, Asia, and Australia. Additionally, WCG pursues strategic
       relationships that (i) allow it to exchange dark fiber and/or capacity on
       its network for cost-effective access, dark fiber, and/or capacity on
       international networks or (ii) allow it to use its network construction
       and management experience to construct or manage international networks.
       WCG also intends to establish alliances with international carriers that
       will expand its capabilities throughout Europe and other key markets.

     - Pursue strategic alliances.  In order to increase revenues and decrease
       unit costs, WCG pursues strategic alliances with communications providers
       that offer the potential for long-term, high-capacity commitments for
       traffic on its network. To date, WCG has entered into strategic alliances
       with SBC, Intel, Telefonos de Mexico, KDDI, Winstar, and others to
       provide network services. Strategic alliances also allow it to combine
       its capabilities with those of its alliance partners in order to offer
       its customers a more complete product set, including local and
       international capacity and Internet access services.

     - Invest in technology and communications companies.  WCG invests in and
       works with companies that increase its access to new technologies that
       can result in substantial increases in the capacity, accessibility, or
       efficiency of its network. WCG also invests in companies that can
       facilitate its ability to offer complementary products or services to its
       customers.

     - Become a leader in bandwidth trading.  WCG has taken an approach to
       bandwidth trading that incorporates risk management strategies and
       portfolio management practices. WCG perceives its asset infrastructure,
       customer base, and market position as portfolios that can be leveraged to
       maximize value and mitigate risk. WCG is the only company participating
       in this industry that manages its network pricing function within its
       trading group.

                                        4
<PAGE>   6

PROPERTIES

  U.S. Inter-City Network

     In late 2000, Network substantially completed its U.S. inter-city core
network build, which connects 125 cities. The following table describes the U.S.
inter-city network infrastructure (numbers are approximate):

<TABLE>
<CAPTION>
                                                                     AVERAGE NUMBER   AVERAGE NUMBER
                            PLANNED     MILES IN    AVERAGE NUMBER     OF FIBERS         OF SPARE
THE WCG NETWORK           ROUTE MILES   OPERATION     OF FIBERS        RETAINED*         CONDUITS
---------------           -----------   ---------   --------------   --------------   --------------
<S>                       <C>           <C>         <C>              <C>              <C>
U.S. INTER-CITY
Single fiber
  network(1)............    14,400        9,700            1                1              N/A
Other wholly owned fiber
  builds................    13,100        5,400          106               28              1.8
Fiber builds under Asset
  Defeasance Program....     5,000        5,000          127               24              1.9
Fiber builds jointly
  owned(2)..............     1,300        1,300           43               12                0
Routes through dark
  fiber rights(3).......     7,900        6,600           13               10              0.3
                            ------       ------
           Total........    41,700       28,000
                            ======       ======
</TABLE>

<TABLE>
<CAPTION>
LOCAL NETWORK                        PLANNED   COMPLETED
-------------                        -------   ---------
<S>                                  <C>       <C>
Local builds in number of cities...    50         14
</TABLE>

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

 *  This is the average number of fibers in each category that Network expects
    to retain for its own use and not grant rights in dark fiber to others.

(1) As part of the agreements relating to the sale of the WilTel network
    business to LDDS (now WorldCom) in January 1995, Williams retained a
    9,700-mile single fiber network. In 1998, WCG entered into an agreement with
    WorldCom whereby it received an option to purchase one fiber-optic strand
    over approximately 7,700 miles of selected WorldCom routes. WCG has
    exercised its right to purchase 4,700 miles of these routes. The single
    fiber network, and all fiber-optic strands it purchases pursuant to the
    option, may be used only to transmit video or multimedia services, including
    Internet services, until July 1, 2001. After this date, these fiber-optic
    strands may be used for any purpose, including voice and data services.

(2) This category consists of Network's fiber rights in builds which have been
    jointly constructed, or rights in dark fiber obtained by WCG, Enron
    Communications, Inc., and Touch America, Inc. through a limited liability
    company, or LLC, in which WCG shares equal ownership and control. The LLC
    constructed the portion of the route between Portland and Las Vegas and
    obtained rights in dark fiber in the portion of the route between Las Vegas
    and Los Angeles and in the Detroit-Cleveland route. The LLC owns the right
    of way over some of the route it constructed, with each of WCG, Enron, and
    Touch America also contributing rights of way. The LLC granted rights in
    dark fibers on the completed routes to each of WCG, Enron, Touch America,
    and others. Network provides operational services to the LLC.

(3) This category consists of rights in dark fiber and conduits that Network has
    obtained or intends to obtain. Network has already obtained approximately
    7,900 route miles, all of which have had fiber-optic cable installed.
    Network manages the transmission equipment on the routes it acquired, and it
    typically pays for the maintenance of fiber-optic strands and rights of way.

                                        5
<PAGE>   7

     Network is currently installing new transmission equipment on its single
fiber network to increase its transmission capacity and ensure its compatibility
with the newer portions of the network. Due to advances in transmission
electronics, it is now possible to carry as much traffic on this single
fiber-optic strand as on 128 fiber-optic strands four years ago. In addition,
the single fiber network will provide additional routes for the network into
select major markets.

     Network leases capacity from both long distance and local
telecommunications carriers, including its competitors, in order to meet the
needs of its customers. Leases of capacity are distinguished from rights in dark
fiber in that capacity leases are for only a portion of the fiber capacity and
the lessor supplies and operates the equipment to transmit over the fiber.
Capacity leases are generally for terms of one month up to five years, but can
be longer. Network leases approximately 15 percent of its network capacity
currently in use. However, because it has more capacity available on its network
than it is currently using, the leased capacity it currently uses constitutes
approximately eight percent of the total capacity currently available on the
network. These leases are for areas where Network does not have on-network
portions, or its on-network is not currently sufficient to meet the expected
capacity. This includes capacity to provide service from Network's facility to
another provider's facility. These leases of capacity may contain minimum
commitments that Network will make in order to obtain better pricing. In some
cases, Network must obtain service from other carriers at costs that exceed its
revenues for providing the required service. In doing so, it attempts to balance
its off-network commitments with the expected requirements of its customers.

     In September 2000, Network acquired the long distance network assets of
Ameritech Communications, Inc., a subsidiary of SBC. The assets acquired are
located in the states of Illinois, Indiana, Michigan, Ohio, and Wisconsin, and
include a 2,000-mile fiber-optic network over four routes, indefeasible rights
of use in dark fiber, and 15 data centers.

     City-by-city buildout.  The following table sets forth Network's current
and future plans for its network build.

<TABLE>
<CAPTION>
                                                              ESTIMATED    APPROXIMATE   APPROXIMATE
                                                              COMPLETION      ROUTE      OPERATIONAL
FIBER BUILD SEGMENT                                              DATE         MILES         MILES
-------------------                                           ----------   -----------   -----------
<S>                                                           <C>          <C>           <C>
Albany - Boston.............................................   Complete         183           183
Atlanta - Jacksonville(1)...................................   Complete         355           355
China Cable: Bandon Connections.............................   Complete         293           293
Daytona - Orlando - Tampa...................................   Complete         153           153
Dallas - Houston(2).........................................   Complete         250           250
Denver - Salt Lake City(1)..................................   Complete         551           551
Detroit - Cleveland(2)......................................   Complete         172           172
Herndon, VA - Wash. D.C. - New York City(1).................   Complete         377           377
Houston - Atlanta - Washington(1)...........................   Complete       1,825         1,825
Houston - McAllen - Laredo - San Antonio(2).................   Complete         705           705
Jacksonville - Miami(1).....................................   Complete         332           322
Kansas City - Denver(1).....................................   Complete         635           635
L.A. - NYC(2)...............................................   Complete       4,370         4,370
LA - Phoenix - San Antonio - Austin - Houston...............   Complete       1,994         1,394
LA - Sacramento - Oakland - San Jose(3).....................   Complete         804           762
LA - San Diego(2)...........................................   Complete         150           150
Miami - Tampa - Tallahassee(1)..............................   Complete         540           540
Minneapolis - Kansas City(1)................................   Complete         452           452
New Orleans - Tallahassee...................................   Complete         471           471
Portland - Salt Lake City - LA(4)...........................   Complete       1,316         1,316
</TABLE>

                                        6
<PAGE>   8

<TABLE>
<CAPTION>
                                                              ESTIMATED    APPROXIMATE   APPROXIMATE
                                                              COMPLETION      ROUTE      OPERATIONAL
FIBER BUILD SEGMENT                                              DATE         MILES         MILES
-------------------                                           ----------   -----------   -----------
<S>                                                           <C>          <C>           <C>
SUSA - NEW(2)(5)............................................   Complete       4,700             0
SUSA - OLD(2)(5)............................................   Complete       9,700         9,700
ACI(6)......................................................    1Q 2001       1,997             0
Atlanta - Nashville - Cincinnati - Indianapolis - Chicago...    1Q 2001         985             0
Cleveland - New York City...................................    1Q 2001         748             0
Houston - Kansas City - St. Louis - Chicago.................    1Q 2001       1,452           812
New York - Boston (2 diverse routes)(7).....................    1Q 2001         562           294
Salt Lake City - Sacramento - San Francisco - Santa Clara...    1Q 2001         911           911
Chicago - Cleveland - Pittsburg - Harrisburg - Wash. D.C....    2Q 2001         882             0
China Cable San Luis Obispo/Manchester Connections..........    2Q 2001         654           289
Denver - Amarillo - Wichita Falls - Dallas(2)...............    2Q 2001         750             0
Minneapolis - Milwaukee - Chicago - Detroit(7)..............    2Q 2001       1,239           431
Portland - Seattle(7).......................................    2Q 2001         369           191
Sacramento - Portland(3)....................................    2Q 2001         688           150
TAT 14(8)...................................................    2Q 2001         155             0
</TABLE>

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

(1) These routes have been constructed under Network's asset defeasance program.

(2) Network has rights in dark fiber with no spare conduits along these routes.

(3) Network has obtained rights in 12 dark fibers on these routes along with two
    spare conduits. It will install, wholly own, and operate a fiber-optic cable
    within one of these conduits.

(4) These routes were jointly constructed or obtained by WCG, Enron, and Touch
    America with no spare conduits.

(5) As part of the agreements relating to the sale of the WilTel network
    business to LDDS (now WorldCom) in January 1995, Williams retained a
    9,700-mile single fiber network. In 1998, WCG entered into an agreement with
    WorldCom whereby it received an option to purchase one fiber-optic strand
    over approximately 7,700 miles of selected WorldCom routes. WCG has
    exercised its right to purchase 4,700 miles of these routes. The single
    fiber network, and all fiber-optic strands it purchases pursuant to the
    option, may be used only to transmit video or multimedia services, including
    Internet services, until July 1, 2001. After this date, these fiber-optic
    strands may be used for any purpose, including voice and data services.

(6) In September 2000, Network acquired the long distance network assets of
    Ameritech Communications, Inc., a subsidiary of SBC. The assets acquired are
    located in the states of Illinois, Indiana, Michigan, Ohio, and Wisconsin,
    and include a 2,000-mile fiber-optic network over four routes, indefeasible
    rights of use in dark fiber, and 15 data centers.

(7) In addition to constructing one route with two spare conduits, Network has
    obtained rights in 12 dark fibers along a different route between these
    cities.

(8) Under an agreement with Telia, the national communications service provider
    in Sweden, WCG obtained additional capacity on the TAT-14 cable system,
    which connects the United States with the United Kingdom, The Netherlands,
    Denmark, Germany, and France.

     Network design and technology.  Network is combining advanced optical and
electronic transmission equipment with its innovative network design to offer
more flexible and efficient network services to its customers. Some
characteristics of the network that it is constructing are as follows:

     - Multi-service platform.  A multi-service operating system allows
       Internet, data, voice and video services to be provided on a single
       asynchronous transfer mode, or ATM, operating

                                        7
<PAGE>   9

       system. Most other carriers use multiple platforms, or operating systems,
       which create distinct networks and organizations for each service
       provided. Due to its unified platform approach, Network hopes to achieve
       greater efficiency and lower costs.

     - ATM core switching.  ATM core switching is a packet switching and
       transmission technology based on sending various types of information,
       including voice, data, and video, in fixed-sized cells. Packet-based
       networks transport information compressed as "packets" over circuits
       shared simultaneously by several users. Newly developed equipment based
       on advanced communications standards enables packet-based networks to
       carry voice and data more efficiently, with greater predictability and at
       a lower cost than other networks.

     - Internet protocol network.  Network has upgraded its Internet protocol,
       or IP, network to operate substantially at OC-48 capacity over SONET
       technology.

     - Advanced fiber-optic cable.  Newer fiber-optic cable, including Corning's
       Enhanced LEAF(TM) fiber and Lucent's TruWave(TM) fiber, has a wider range
       of spectrum than previously deployed fibers over which to send
       wavelengths of light, enabling a greater number of wavelengths to be sent
       over long distances.

     - DWDM.  Dense wave division multiplexing is a technology that allows
       transmission of multiple waves of light over a single fiber-optic strand,
       thereby increasing network capacity. By using DWDM, Network is able to
       derive 80 bi-directional wavelengths, at OC-192 capacity per wavelength,
       which is a capacity of 10 gigabits per second, over a single fiber-optic
       strand with current technology. Network expects this equipment to
       increase capacity per fiber by 250 percent over the existing technology,
       while reducing the cost of transmission.

     - Use of optically meshed SONET instead of SONET rings.  The use of
       optically meshed SONET allows every location on the WCG network to be
       connected to multiple locations. Optically meshed SONET provides for more
       recovery options in the case of a network failure, permits rapid
       provisioning of customer services, and allows for full utilization of
       capacity. Most other networks use SONET rings, which automatically
       reverse signals at a specific point along a network in the event of a
       network failure, providing for only one recovery option. A SONET ring
       design also requires installation of up to twice as much capacity for the
       same amount of traffic as compared to Network's optically meshed SONET
       design.

     - Closer spacing of transmission electronics.  Network's spacing of
       transmission electronics at 40-mile intervals allows it to take advantage
       of the latest advances in DWDM and other advances in optical technology
       by reducing the distance over which light has to travel. Most other fiber
       networks space their electronics at 60-mile intervals.

     - Elimination of digital cross-connect system.  The ATM packet technologies
       that Network employs eliminate the need for a high-cost, high-maintenance
       digital cross-connect system. Circuit-based systems are the predecessor
       to the ATM packet technologies Network employs. The elimination of
       unnecessary equipment also reduces Network's operating and maintenance
       expenses.

     - Nortel DMS 250 switches.  Network uses the latest Nortel switching
       technology to efficiently carry traditional voice services on its ATM
       core network. Nortel DMS 250 voice switches have been installed in the
       metropolitan areas of Anaheim, San Francisco, Kansas City, Houston,
       Boston, Atlanta, Newark, Chicago (Broadview), and San Antonio. Network
       intends to install switches in the Dallas metropolitan area in 2001.

     Data centers.  As of December 31, 2000, Network had 146 data centers across
its network. Data centers are environmentally controlled, secure sites designed
to house transmission, routing
                                        8
<PAGE>   10

and switching equipment, and local operational staff, as well as space and power
for colocation customers. By colocating their own equipment in Network's
facilities, customers are able to minimize the use of expensive local loops from
local telephone companies to reach Network's backbone. The customer also
foregoes the capital and operating expense required to build and maintain its
own data centers. By expanding its network to include multiple data centers
within select major metropolitan areas, Network will provide an end-to-end
solution for its carrier customers.

     Conduit and fiber-optic cable.  The newer portions of the WCG network are
designed for expandability and flexibility and will contain multiple conduits
along approximately 70 percent of its routes. To construct its fiber-optic
cable, fiber-optic strands are placed inside small plastic tubes and bundles of
these tubes are wrapped with plastic and strengthened with metal. Network then
places these bundles inside the conduit, which is high-density polyethylene
hollow tubing 1 1/2 to 2 inches in diameter. The conduit is generally buried
approximately 42 inches underground along pipeline or other rights of way.
Network also uses steel casing in high-risk areas, including railroad crossings
and high-population areas, thereby providing for greater protection. The first
conduit contains a cable generally housing between 96 and 144 fibers, and the
second conduit, or third where constructed, serves as a spare. The spare
conduits allow for future technology upgrades, potential conduit sales, and
expansion of capacity at costs significantly below the cost of new construction.
After existing and anticipated leases of dark fiber, Network generally plans to
retain approximately 24 fibers for its own use on the constructed portions of
its network.

     Rights of way.  The WCG network is primarily constructed by digging
trenches along rights of way, or rights to use the property of others, which
Network obtains throughout the United States from various landowners. Where
feasible, Network constructs along Williams' pipeline rights of way and the
rights of way of other pipeline companies. WCG believes that use of pipeline
rights of way gives its network inherent advantages over other systems built
over more public rights of way, such as railroads, highways, telephone poles, or
overhead power transmission lines. These advantages include greater physical
protection of the fiber system and lower construction costs. Approximately 21
percent of its rights of way are along Williams' pipeline rights of way and the
remainder is along the rights of way of third parties. Rights of way from
unaffiliated parties are generally for terms of at least 20 years, and most
cover distances of less than one mile. Where necessary or economically
preferable, Network has other right of way agreements in place with highway
commissions, utilities, political subdivisions and others. Almost all of its
rights of way extend through at least 2018.

     Monitoring.  Network monitors its network 24 hours a day, seven days a
week, from its network management centers in Tulsa, Oklahoma, and St. Louis,
Missouri. Each network management center provides centralized network
surveillance, troubleshooting, and customer service. The system currently allows
technicians to detect a component malfunction in the WCG network, quickly
reroute the customer's traffic to an available alternate path, and effect an
expedited repair. Network expects this will reduce service costs and customer
downtime. It has also implemented a program that encourages people to phone a
toll-free number prior to breaking ground, backed up by its "call before you
dig" group to reduce the risk of damage to its conduit or fiber system.
Additionally, Network places above ground markers at frequent intervals along
the route of its network.

  Local Network Expansion

     In 2000, WCG announced plans to spend $421 million to extend the local
reach of its network. It intends to have in operation local services over its
network in 50 of the largest U.S. cities by December 31, 2003. As of December
31, 2000, it had in operation local services over its network in 14 U.S. cities
and intends to have in operation local services over its network to a total of
20 of the

                                        9
<PAGE>   11

largest U.S. cities by December 31, 2001. Network will add fiber and computer
equipment to extend the high capacity services of its nationwide inter-city
network to virtually every major carrier hotel and network peering point within
those cities. It expects construction to complete this year in six cities,
including San Diego, Salt Lake, Minneapolis, Baltimore, Santa Clara, and Miami.
In addition to the local network builds that it will perform, Network will use
86,000 local fiber miles over 3,200 route miles that it obtained in a fiber swap
with Metromedia Fiber Network. It expects this to provide it with connections to
an additional 250 points of presence in 18 cities. Currently, Network has
accepted significant builds completed in Boston, Chicago, Dallas, New York,
Philadelphia, San Francisco, Washington, D.C., Houston, and Los Angeles.

     Network will utilize wireless local loops obtained from Winstar. Currently
Network has accepted 72 hubs in 40 cities. It is also pursuing interconnection
agreements with certain local service providers to obtain, among other things,
access to unbundled network elements that it can use to provide enhanced local
services to its customers.

  Global Network Expansion

     Europe.  WCG has 20-year reciprocal buy/sell agreements with Telia, the
national communications service provider in Sweden, pursuant to which it will
receive rights to use dark fiber on Telia's planned 28,000-mile fiber-optic
network in Europe. Network has the ability to accept between two and 36 fiber
strands, depending on the route, across Telia's network. This network is
scheduled to connect approximately 35 of the largest European cities, with
completion scheduled by the end of 2001. Telia's network will consist of
existing fiber, fiber currently being installed, and fiber leased from others.

     Australia.  PowerTel, Ltd. has built, owns, and operates communications
networks connecting and serving the three Australian cities of Brisbane,
Melbourne, and Sydney with long distance and local services in the central
business districts of these cities. Each of the three Australian utilities
serving these cities has entered into a 20-year agreement with PowerTel that
allows PowerTel to use the utilities' ducts and to lay fiber-optic cable
alongside their rights of way between the cities. PowerTel's strategy is to
provide high-quality, low-cost local voice, data, and Internet services to the
commercial and carrier markets. WCG's total investment currently represents a 45
percent economic interest in PowerTel. WCG consolidates PowerTel's results of
operations with its own because it is entitled to appoint a majority of the
members of PowerTel's board of directors, and thereby exercises control over its
operations.

     China-U.S. cable and Japan-U.S. cable.  WCG acquired SBC's interests in
these two cables in June 2000. One interconnection point for the China-U.S.
cable is fully operational, and the second is expected to be operational by the
end of first quarter. The China-U.S. cable is a 16,000-mile loop system, with
capacity of 80 gigabits per second. The Japan-U.S. cable will operate initially
at 80 gigabits per second, and eventually, the cable can be expanded to 640
gigabits per second. The Japan-U.S. cable is scheduled to become fully
operational by the end of the third quarter of 2001.

     Asia-Pacific Cable Network (APCN-2).  A consortium of carriers is building
APCN-2, an intra-Asia 11,500-mile undersea cable project that will connect
China, Hong Kong, Japan, South Korea, Malaysia, the Philippines, Singapore, and
Taiwan. As an initial participant in the network build, WCG will acquire
significant capacity on APCN-2, which is scheduled to be in operation by first
quarter 2002. The cable will operate initially at 80 gigabits per second and can
be expanded to 2,560 gigabits per second. APCN-2 will intersect with the
China-U.S. and Japan-U.S. cables described above.

     TAT-14 cable system.  Under an agreement with Telia, the national
communications service provider in Sweden, WCG obtained additional capacity on
the TAT-14 cable system, which

                                        10
<PAGE>   12

connects the United States with the United Kingdom, The Netherlands, Denmark,
Germany, and France. TAT-14 is scheduled to become operational by the end of
second quarter of 2001 and will operate at 640 gigabits per second.

     Southern Cross Cable Network.  WCG acquired capacity on this network in
April 2000. Southern Cross is an undersea cable network linking Australia and
New Zealand with Hawaii and the West Coast of the United States. This cable was
completed in November 2000 and operates at 200 gigabits per second.

PRODUCTS AND SERVICES

     Network's products and services fall into seven categories:

     - packet-based data services

     - private line services

     - voice services

     - optical wave services

     - dark fiber and conduit rights

     - colocation and hosting services

     - network design and operational support.

     Packet-based data services.  These services provide efficient connectivity
for Internet, data, voice, and video networks at variable capacities to connect
two or more points. Specific packet-based data services include ATM, frame
relay, and Internet transport services. These services are provided over the WCG
network and enable it to bill based on service features and usage. In addition,
Network intends to introduce new services such as virtual private network,
wholesale dial, and wholesale digital subscriber line services over its network.

     Private line services.  Network provides customers with fixed amounts of
point-to-point capacity. These services are billed on fixed monthly fees,
regardless of usage.

     Voice services.  Network has deployed voice-switching capability, allowing
customers to originate and terminate long distance traffic. In addition, it has
entered into service agreements with a number of other domestic and
international carriers ensuring complete service beyond the cities served
directly by its network. Network currently offers its customers wholesale
origination, termination, and complete long distance services, as well as
calling card, directory assistance, operator assistance, international, and
toll-free services.

     Optical wave services.  In November 1999, WCG became one of the first
communications providers to begin offering optical wave services to customers.
These services allow a customer exclusive long-term use of a portion of the
transmission capacity of a fiber-optic strand rather than the entire fiber
strand. The capacity it uses to provide optical wave services is in addition to
the capacity used by it to provide its other services. Network is able to derive
from a single fiber strand with existing technology up to 320 bi-directional
wavelengths, at OC-48 capacity per wavelength. A purchaser of optical wave
services installs its own electrical interface, switching, and routing
equipment. Optical wave services allow a customer to purchase capacity in
smaller increments while retaining the control advantages of dark fiber.

     Dark fiber and conduit rights.  Network sells rights to use dark fiber and
related services. In addition, from time to time, it sells rights to conduit and
installs conduit for its customers. Purchasers of dark fiber rights typically
install their own electrical and optical transmission

                                        11
<PAGE>   13

equipment. Substantially all of its current and planned builds include laying
two spare conduits, and Network may sell rights to use at least one of them. A
purchaser of conduit rights typically lays its own cable inside the conduit.
Related services for both sales of rights for dark fiber and conduits include
colocation of customer equipment at Network's data centers and other network
equipment locations and maintenance of the purchased fiber or conduit. Payment
for dark fiber rights is generally made at the time of delivery and acceptance
of the fiber, although other payment options may be available. In addition,
ongoing payments for maintenance services are required.

     Colocation and hosting services.  Network provides its customers with
access to and space in its data centers to install their own equipment necessary
to connect to the WCG network. WCG believes that providing colocation services
on its network increases the sales of its other services by attracting Internet
and applications service providers. Its colocation services offer potential
customers reduced costs for capacity, reduced expenses compared to building and
operating their own facilities, rapid turn-up of circuits for additional
capacity, interconnection with its network and other networks, and improved
network performance.

     WCG also intends to provide hosting services, which include web sites on
the Internet, and storage of, and access to, data and other media content. This
will be provided on large computer servers owned by Network and located in its
data centers that can be used by its customers on a dedicated or shared basis.

     Network design and operational support.  Network helps its customers design
and operate their networks. It uses its network management centers to monitor
and operate portions of their networks. Network is deploying new management
tools, including its customer network management system, which will give its
customers the ability to monitor network performance and reconfigure their
capacity from their own network management centers on an essentially real-time
basis and the ability to increase or reduce bandwidth rapidly to better match
their needs. This customer network management system features equipment
inventory management, bandwidth inventory management, configuration management,
fault isolation management, and alarm monitoring.

CUSTOMERS

     Network's customers currently include regional Bell operating companies,
Internet service providers, application service providers, digital subscriber
line service providers, long distance carriers, utilities, international
carriers, and other communications services providers who desire high-speed
connectivity on a carrier services basis. Sales to SBC accounted for 24 percent
of Network's 2000 revenues; sales to Intermedia, including its subsidiary, Digex
Incorporated, accounted for 19 percent of Network's 2000 revenues; and sales to
Winstar accounted for 14 percent of its 2000 revenues. In September 2000,
WorldCom announced an agreement to purchase Intermedia.

     WCG has entered into strategic alliances with SBC, Intel, Telefonos de
Mexico, KDDI, Winstar, and others. It also has investments in Lightyear, XO
Communications, and UtiliCom and communications companies with operations in
Australia, Brazil, Chile, and Argentina. These alliances and investments help to
increase the volume of business and provide additional customers for Network.
WCG anticipates that over the next several years the distribution of its
revenues will shift in part as a result of increased usage of its services by
the companies with whom it has entered into strategic alliances. WCG does not
believe these alliances and investments will adversely impact its relationships
with its other customers. For more information about these strategic alliances,
see the section of entitled "Strategic Alliances" below.

                                        12
<PAGE>   14

SALES AND MARKETING

     Network's sales and marketing department is small and focused, resulting in
strong customer relationships and lower operating costs. This organization
consists of senior level management personnel and experienced sales
representatives with extensive knowledge of the industry and Network's products
and key contacts within the industry at various levels in the carrier
organizations.

COMPETITION

     The communications industry is highly competitive. Some competitors in the
markets of carrier services and fiber-optic network providers may have
personnel, financial, and other competitive advantages. In the market for
carrier services, Network competes primarily with the three traditional
nationwide carriers, AT&T, WorldCom, and Sprint, and other coast-to-coast and
regional fiber-optic network providers, such as Qwest, Level 3, Global Crossing
and Broadwing. Other companies have announced plans to construct significant
fiber-optic networks. Network also competes with numerous other service
providers that focus either on a specific product or set of products or within a
geographic region. Network competes primarily on the basis of pricing,
transmission quality, network reliability, and customer service and support.
Network has only recently begun to offer some of its services and products and,
as a result, it may have fewer and less well established customer relationships
than some of its competitors. Its services within local markets in the United
States face additional competitors, including the regional telephone companies
and other local telephone companies. Its services outside the United States also
face additional competitors, including national telephone companies in foreign
countries and carriers that own capacity on other submarine and regional
fiber-optic systems.

     Some of Network's competitors are expanding capacity on their existing
networks or developing new networks. The prices Network charges its customers
for transmission capacity on its network could decline due to installation by
Network and its competitors of fiber and related equipment that provides
substantially more transmission capacity than currently needed. If prices for
network services decline, WCG may experience a decline in revenues that would
have a material adverse effect on its operations.

INVESTMENTS

     WCG believes that its investments in and work with technology companies in
their development stages facilitates improvements in its network through the
rapid adoption and deployment of those technologies that offer the ability to
lower costs and substantially increase transmission speeds. WCG also invests in
companies that can facilitate its ability to offer complementary products or
services to its customers. It also invests in communications companies in order
to solidify commercial relationships, which may increase business on the WCG
network. WCG has investments, none of which exceed five percent of outstanding
common stock, in several public companies, including the following:

     Accelerated Networks.  Accelerated Networks, Inc. focuses on developing
integrated access devices. Their products support network carriers in
efficiently connecting many different types of customer services ranging from
Internet access, voice over Internet protocol, corporate remote access, virtual
private networks, and telephone service.

     Avici Systems.  Avici Systems, Inc. is a manufacturer of terabit routers.

     Corvis.  Corvis Corporation is a manufacturer of long-haul optical
transmission equipment.

                                        13
<PAGE>   15

     GoConnect.  GoConnect is an Australian-based Internet media company with a
core business focused on interactive video advertising using proprietary
technology with free Internet service to gain an audience.

     ONI Systems.  ONI Systems is a manufacturer of optical networking DWDM
systems for local service providers.

     Sonus Networks.  Sonus Networks is a manufacturer of advanced open services
switch equipment, including equipment that delivers voice over Internet protocol
services.

     TMNG.  The Management Network Group, Inc. is a provider of strategic,
management, operational, and e-business consulting services to the
telecommunications industry.

     XO Communications.  XO Communications, Inc. provides a variety of
high-quality telecommunications services and high-speed Internet access to
business customers. WCG acquired these shares of XO Communications through a
recent merger of Concentric Network Corporation with XO Communications. WCG
previously owned shares of Concentric, which were converted into XO
Communications Class A common stock in the merger.

     WCG also has investments in several private companies, including Amber
Networks, Inc.; Charlotte's Networks, Inc.; Epoch Internet; Hostcentric, Inc.;
ipVerse, Inc.; Lightyear Communications, Inc.; Mahi Networks, Inc.; MariTEL;
Telica, Inc.; Tenor Networks, Inc.; UtiliCom Networks, LLC; and Zaffire, Inc.

                                BROADBAND MEDIA

     In first quarter of 2000, WCG formed its Broadband Media segment.
Substantially all of the operations of this segment are conducted by Vyvx
Services. Since 1989, Vyvx Services has provided worldwide transmission of live
and non-live media content, transmitting broadcast news, sports, advertising,
and special events over its integrated fiber-optic, satellite, and teleport
network. Vyvx Services serves the unique video needs of major broadcast networks
and their affiliate stations, professional sports leagues, media production
companies, and global advertising agencies. Vyvx Services transmits
approximately 80 percent of live major league sporting events, approximately 65
percent of live events and distributes approximately 35 percent of spot
advertising. Through Vyvx Services, WCG has gained experience in broadband
multimedia networks and established high-speed connections to major news and
sports venues throughout the United States. WCG provides services throughout the
United States, South America, and Asia using its network, four satellite earth
stations that it owns, and leased transmission capacity on satellites. WCG owns
approximately 600 servers that are located in television and radio stations
throughout the United States, which allow for online, real-time selection and
distribution of media content. Broadband Media also has investments in companies
that provide media content products and services.

REVENUES

     Broadband Media contributed approximately the following percentages to
WCG's total revenues for the past three years:

<TABLE>
<CAPTION>
               PERCENTAGE OF
               TOTAL REVENUES                  YEAR
               --------------                  ----
<S>                                            <C>
20..........................................   2000
27..........................................   1999
43..........................................   1998
</TABLE>

                                        14
<PAGE>   16

PRODUCTS AND SERVICES

     Broadband Media's primary products and services fall into two primary
categories:

     - video transmission services, which include broadcast quality transmission
       of live and non-live video content for the news, entertainment and sports
       markets;

     - media distribution services, which include distribution of video and
       audio spot advertisements and programs to television and radio stations.

STRATEGY

     Broadband Media's objective is to provide a wide variety of media-centric
products and services primarily to the media and entertainment industries, which
drives traffic on the WCG network. WCG intends to use its long-standing customer
relationships to provide high-quality communications services to broadcast
networks, cinematic production houses, and other carriers as they seek to
benefit from the growing demand for high capacity media and entertainment
products and services. In addition, WCG is initiating implementation of an
application infrastructure called MediaXtranet(SM) that will provide services to
facilitate the transmission and storage of media content for
business-to-business 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 full implementation of MediaXtranet,
if undertaken, would likely require substantial 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 and existing customer relationships
to expand its products and services to include the following:

     - media and entertainment content logging, storage, and portal-type access
       and distribution

     - media streaming for both audio and video services

     - optical distribution of cinematic and television broadcasts and
       advertisements

     - media and entertainment eCommerce transactional activities

     - Internet-based distribution of advertisements

CUSTOMERS

     Broadband Media sells only to media content service providers. It does not
compete with its media customers for retail end-users. It has approximately
2,000 customers, including major broadcast and cable television networks, news
services, professional and collegiate sports organizations, such as the National
Football League and the National Basketball Association, and advertising
agencies, television companies, and movie production companies. Approximately 43
percent of Broadband Media's total revenue in 2000 was derived from its top 10
customers. Broadband Media's largest customer, Fox Entertainment Group, Inc.,
accounted for approximately 13 percent of Broadband Media's 2000 total revenues.
Contracts with the largest customers are for terms that extend up to 10 years.
Most contracts with smaller customers are for one-year terms.

SALES AND MARKETING

     Broadband Media has 50 sales personnel located in offices in 12 cities
throughout the United States. Its office in Miami serves markets in South
America. It also has an office in Singapore that serves markets in Asia.
Thirty-nine of its sales people are focused on selling to those

                                        15
<PAGE>   17

customers who use video and media transmission services and 11 of its sales
people are focused on selling to those customers who use advertising
distribution services.

COMPETITION

     Vyvx Services is currently a market leader in transmission services for
major league and other sporting and live events and has a significant market
share of the advertising distribution services market. Competitors in
traditional video transmission and advertising distribution services include
Teleglobe, Triumph Communications, Inc., and Digital Generation Systems, Inc.

INVESTMENTS

     WCG believes that investing in companies that are developing new products
and services utilizing broadband media technology will help it better serve its
customers. Its investments include the following businesses:

     ChoiceSeat(TM).  CSI, Inc. deploys ChoiceSeat touch-screen display units
installed on stadium seats that provide access to statistics, different camera
angles, player- and venue-related information, and access to current information
from other sports events. WCG owns 100 percent of the outstanding common stock
and 28 percent of the outstanding preferred stock of CSI, which together
represent slightly less than a 50 percent economic and voting interest in CSI.
Other investors in CSI include Intel, Microsoft Corporation and Axalon
(Offshore) I, L.P.

     Others.  Broadband Media has also made investments in other domestic
companies, including SporTVision Systems, Inc., Xstream Sports, Inc. and
Pinnacle Systems, Inc.

                             STRATEGIC INVESTMENTS

     Through Strategic Investments, WCG invests in communications businesses
that it believes will increase revenue opportunities for the WCG network and
other business segments. The strategic investments currently include ownership
interests in the following communications companies located in Brazil, Chile,
and Argentina:

     ATL-Algar Telecom Leste S.A.  ATL was formed in March 1998 to acquire the
concession for B-band cellular licenses in the Brazilian states of Rio de
Janeiro and Espirito Santo. As of December 31, 2000, WCG owned 19 percent of the
outstanding common stock and 66 percent of the outstanding preferred stock of
ATL through WCG's ownership of Johi Representacoes Limitada and Williams
International ATL Ltd. Other investors in ATL include SBC, Algar Telecom, S.A.
and Telefonos de Mexico.

     In the first quarter of 2001, WCG granted an option to Telecom Americas,
Ltd., a joint venture among SBC, American Movil S.A. de C.V., and Bell Canada
International Inc., under which WCG granted an option to purchase WCG's
remaining interest in ATL for an agreed to price. The option was granted in
exchange for Telecom Americas paying WCG's portion of a required funding to ATL.
The option will expire at the end of first quarter 2001.

     ATL provides digital cellular services in the Brazilian states of Rio de
Janeiro and Espirito Santo, covering a population of approximately 16.1 million
inhabitants. ATL started commercial operations on January 15, 1999, and had
approximately 1.62 million subscribers as of December 31, 2000. ATL's only
cellular competitor in these areas is Tele Sudeste Celular Participacoes S.A., a
former subsidiary of Telebras currently controlled by a consortium led by
Telefonica de Espana. During first quarter of 2001, Brazil intends to auction
three additional frequency bands, which will result in increased competition
early in year 2002. Even with increased competition, WCG believes the Rio
concession to remain an attractive alternative due to its large established
customer base, the

                                        16
<PAGE>   18

low expected churn to new entrants and its proven high-quality, 100 percent
digital cellular network, offering a broad range of enhanced services, strong
name recognition and excellent customer service.

     Manquehue Net.  Manquehue Net, S.A. (formerly Telefonica Manquehue, S.A.)
is a high-capacity communications services provider within the Santiago, Chile,
metropolitan area. It provides Internet, data and voice services for its
approximately 75,000 business and residential customers as of December 31, 2000.
Manquehue Net was formed as a result of the merger of Metrocom S.A. with
Telefonica Manquehue in January 2000. Manquehue Net is installing an extensive
telecommunications duct infrastructure throughout Santiago, which had exceeded
more than 250,000 homes and businesses by the end of 2000. WCG owned a 19.9
percent equity interest in Metrocom S.A. until the merger. As a result of the
merger and subsequent investments by WCG and other shareholders, WCG now owns
16.5 percent of Manquehue Net.

     Silica Networks.  In May 2000, WCG acquired a 19.9 percent direct interest
in Silica Networks S.A. (formerly Southern Cone Communications Company, S.A.).
Manquehue Net also acquired a 30.1 percent interest in Silica Networks. The
4,300-kilometer (2,660-mile) Silica Networks' network initially will link the
major Argentine cities of Buenos Aires, Las Toninas, Rosario, Cordoba, Mendoza,
and Neuquen with the Chilean cities of Santiago and Valparaiso. When complete,
the system will link Argentina and Chile with cables to Peru, Colombia, Panama,
Venezuela, Brazil, and the Caribbean, and ultimately to the WCG U.S. network.

REVENUES

     Strategic Investments contributed approximately the following percentages
to WCG's total revenues for the past three years:

<TABLE>
<CAPTION>
               PERCENTAGE OF
               TOTAL REVENUES                  YEAR
               --------------                  ----
<S>                                            <C>
 -- *.......................................   2000
6...........................................   1999
14..........................................   1998
</TABLE>

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

* Beginning in 2000, Strategic Investments consisted only of investments in
  businesses accounted for either on an equity or cost basis.

                     STRATEGIC ALLIANCES AND RELATIONSHIPS

     WCG enters into strategic alliances with communications companies to secure
long-term, high-capacity commitments for traffic on the WCG network and to
enhance its service offerings. It currently has strategic relationships with
SBC, Intel, Telefonos de Mexico, KDDI, and Winstar. WCG intends to continue to
pursue additional strategic alliances.

     WCG has entered into, and will continue to enter into, strategic alliances
and strategic relationships with communications companies to secure long-term,
high-capacity commitments for traffic on the WCG network and to enhance its
service offerings. The most significant of these alliances are described below.

     SBC Communications Inc.  SBC is a major communications provider in the
United States. SBC currently provides local services in the south central and
Midwest regions of the United States and in California, Nevada, and Connecticut.
Concurrently with the WCG initial public offering, on October 6, 1999, SBC
acquired 20,226,812 shares of WCG Class A common stock, which represents
approximately 4.1 percent of the shares of capital stock outstanding as of
February 28,

                                        17
<PAGE>   19

2001. In connection with its purchase of this common stock at the time of the
initial public offering, SBC agreed to certain restrictions and will receive
certain privileges, including the following:

     - SBC has a right to acquire additional shares of WCG Class A common stock
       which cannot exceed a total ownership interest of 10 percent of all
       classes of WCG common stock outstanding on a combined basis until at
       least 2009.

     - SBC has agreed not to transfer to anyone except affiliates any of its
       shares of WCG common stock until April 2003, unless WCG has a change of
       control.

     - SBC has the right to nominate a member of the WCG board of directors at
       such time as SBC has more than a 5 percent equity interest in WCG and is
       allowed to offer long distance services in a state in its traditional
       exchange service area. Although SBC currently is not entitled to exercise
       this right, a director designated by SBC has been elected to, and is
       currently a member of, the WCG board of directors.

     - SBC has a right to maintain its equity interest in the WCG common stock,
       which will be forfeited if SBC fails to exercise this right twice.
       Following a second failure to exercise, SBC has a right to maintain its
       newly diluted position so long as it maintains at least a 3 percent
       equity interest.

     - SBC has the right to require WCG to register under the Securities Act its
       shares of WCG Class A common stock.

     WCG has an option to purchase all the shares of Class A common stock
acquired by SBC in the event of the termination of certain agreements with SBC.
Williams, so long as it has a 50 percent equity interest in WCG, has a right of
first purchase with respect to any shares of WCG common stock that SBC should
decide to offer. WCG has a right of first purchase with respect to any shares
not purchased by Williams.

     WCG has entered into agreements with SBC that provide that:

     - Until 2019, SBC must first seek to obtain from WCG domestic voice and
       data long distance services and select international wholesale services.

     - Until 2019, WCG must first seek to obtain from SBC select international
       wholesale services and various other services, including switched voice
       services such as toll-free, operator, calling card, and directory
       assistance services.

     - SBC and WCG will sell each other's products to their respective customers
       and provide installation and maintenance of communications equipment and
       other services.

     For the services each must seek to obtain from the other, the prices
generally will be equal to the cost of the product or service plus a specified
rate of return. However, these prices cannot be higher than prices charged to
other customers and in some circumstances cannot be higher than specific rates.
If either party can secure lower prices for comparable services that the other
party will not match, then that party is free to utilize the lowest cost
provider.

     Both WCG and SBC can provide services or products to other persons. Each
party may also sell or utilize the products or services purchased from the other
to provide products or services to other persons. However, if SBC establishes a
wholesale distribution channel to resell the network capacity purchased from WCG
to another provider of carrier services, WCG has the right to increase the price
it charges SBC for the services SBC resells in this manner. While the terms of
these agreements with SBC are intended to comply with restrictions on SBC's
provision of long distance services, various aspects of these arrangements have
not been tested under the Telecommunications Act.

                                        18
<PAGE>   20

     WCG and SBC have agreed to a mechanism for the development of projects that
would allow the interconnection of the SBC network with the WCG network based on
the unanimous decision of committees composed of an equal number of
representatives from WCG and SBC. If a committee does not approve a project,
both WCG and SBC have the right, subject to certain exceptions, to require the
other party to develop a project in exchange for payment of the direct costs and
cost of capital required to complete the project or pursue it on its own. In
addition, upon SBC receiving authorization from the FCC to provide long distance
services in any state in its traditional telephone exchange service region, SBC
has the option to purchase from WCG at net book value all voice or data
switching assets that are physically located in that state and of which SBC has
been the primary user. The option must be exercised within one year of the
receipt of authorization. WCG then has one year after SBC's exercise of the
option to migrate traffic, install replacement assets, and complete other
transition activities. This purchase option would not permit SBC to acquire any
rights of way that WCG uses for its network or other transport facilities that
it maintains. Upon termination of the alliance agreements with SBC, SBC has the
right in certain circumstances to purchase voice or data switching assets,
including transport facilities, of which SBC's usage represents 75 percent or
more of the total usage of these assets.

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

     - WCG begins to offer retail long distance voice transport or local
       exchange services on its network except in limited circumstances

     - WCG materially breached its agreements with SBC causing a material
       adverse effect on the commercial value of the relationship to SBC

     - WCG has a change of control without SBC's consent

     - SBC acquires an entity that owns a nationwide fiber-optic network in the
       United States and determines not to sell long distance assets to WCG

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

     - SBC has a change of control

     - there is a material breach by SBC of the agreements, causing a material
       adverse effect on the commercial value of the relationship to WCG

     Either party may terminate a particular provider agreement if the action or
failure to act of any regulatory authority materially frustrates or hinders the
purpose of that agreement. There is no monetary remedy for such a termination.

     In the event of termination due to its actions, WCG could be required to
pay SBC's transition costs of up to $200 million. Similarly, in the event of
termination due to SBC's actions, SBC could be required to pay WCG's transition
costs of up to $200 million, even though WCG's costs may be higher.

     In June 2000, the FCC authorized SBC to provide long distance service in
Texas. Under the terms of the strategic alliance with SBC, WCG is the preferred
provider of SBC's nationwide long distance voice and data services. WCG began
providing services in Texas in July 2000. More recently, the FCC authorized SBC
to provide long distance services in Kansas and Oklahoma beginning on March 7,
2001, although certain would-be competitors are challenging this order in the
federal courts.

     In June 2000, WCG acquired SBC's initial party interests in two undersea
communications cables between the United States and China and Japan,
respectively. In September 2000, WCG acquired the long distance network assets
of Ameritech Communications, Inc., a subsidiary of SBC.

                                        19
<PAGE>   21

The assets are located in the states of Illinois, Indiana, Michigan, Ohio, and
Wisconsin, and include a fiber-optic network, data centers, indefeasible rights
of use in dark fiber, and switches. In connection with this purchase of the
Ameritech assets, the services agreement with SBC was amended to require
Ameritech to buy services from WCG.

     WCG has entered into a services agreement with SBC by which WCG will
provide local transport services to SBC in six markets: New York, Boston,
Seattle, Phoenix, Atlanta, and Denver. This agreement provides for expansion of
the services in these markets and further expansion into additional markets.

     Intel Corporation.  Intel is a manufacturer of chips and other computer,
networking, and communications products. The Intel(R) Internet Media Services
business provides Internet web-hosting services by building and managing data
centers around the world that will support the web sites of third parties. At
the time of the WCG initial public offering, Intel acquired 9,225,093 shares of
WCG's common stock, which represents approximately two percent of the shares of
capital stock outstanding as of February 28, 2001.

     On May 24, 1999, WCG entered into a 10-year master alliance agreement with
Intel. WCG and Intel Internet Media Services will purchase services from one
another pursuant to a services agreement entered into on July 13, 1999. On the
same date WCG also entered into a sales representative agreement. Both
agreements are for a three-year term renewable for one-year terms thereafter.
WCG is currently providing domestic transport services to Intel and anticipates
that Intel will provide web-hosting services to WCG. Subject to meeting price,
quality of service, and other specifications, Intel Internet Media Services will
purchase a significant portion of its yearly domestic transport requirements
from WCG. In addition, in May 2000, Intel Internet Media Services agreed to use
the WCG network to deliver high-performance streaming media to its Internet
users. In connection with its purchase of the WCG common stock, Intel has agreed
not to transfer any of its shares of WCG common stock to anyone except
affiliates until April 2001, but this restriction will terminate if WCG has a
change of control. The transfer restriction does not prohibit Intel from selling
shares in future registered offerings initiated by WCG or from engaging in
hedging transactions. Intel also has the right to require WCG to register under
the Securities Act its shares of WCG Class A common stock.

     Telefonos de Mexico, S.A. de C.V.  Telefonos de Mexico, S.A. de C.V., the
largest communications provider in Mexico, currently provides long distance and
local services primarily in Mexico. At the time of the WCG initial public
offering, on October 6, 1999, Telefonos de Mexico acquired 4,612,546 shares of
WCG Class A common stock, which represents approximately one percent of the
shares of capital stock outstanding as of February 28, 2001. In connection with
its purchase of WCG common stock, Telefonos de Mexico has agreed to certain
restrictions and will receive certain privileges, including the following:

     - Telefonos de Mexico has a right to be notified and given an opportunity
       to acquire additional shares of WCG common stock which cannot exceed a
       total ownership interest of 10 percent of all classes of WCG common stock
       outstanding on a combined basis until at least 2009.

     - Telefonos de Mexico has agreed not to transfer to anyone, except
       affiliates, any of its shares of WCG common stock until April 2003,
       unless WCG had a change of control.

     - Telefonos de Mexico has agreed that WCG has the right, until April 2003,
       to repurchase WCG stock at market value less the underwriter's discount
       if the alliance agreement is terminated for any reason other than a
       breach by WCG.

     - Telefonos de Mexico also has the right to require WCG to register under
       the Securities Act its shares of WCG common stock.

                                        20
<PAGE>   22

     In addition, Williams, so long as it has a 50 percent equity interest in
WCG, has a right of first purchase with respect to any shares of WCG common
stock that Telefonos de Mexico should decide to offer. WCG also has a right of
first purchase with respect to any shares of common stock not purchased by
Williams.

     On May 25, 1999, WCG entered into an alliance agreement with Telefonos de
Mexico under which, subject to any necessary U.S. and Mexican regulatory
requirements:

     - Until 2019, Telefonos de Mexico must first seek to obtain select
       international wholesale services and various other services from WCG.

     - Until 2019, WCG must first seek to obtain select international wholesale
       services and various other services from Telefonos de Mexico.

     - WCG and Telefonos de Mexico will sell each other's products to their
       respective customers and will negotiate the terms under which both
       parties will provide installation and maintenance of communications
       equipment and other services for the other.

     For the services each must seek to obtain from the other, the prices
generally will be established to reflect the strategic relationship and
commitments made to each other, subject to any applicable law or regulations
establishing the prices. If either party can secure lower prices for comparable
services that the other party will not match, then that party is free to utilize
the lowest cost provider. Both WCG and Telefonos de Mexico can provide services
or products to other persons. Each party may also sell or utilize the products
or services purchased from the other to provide products or services to other
persons.

     Certain of the provisions relating to the preferred provider relationship
and competitive pricing requirements will not be implemented until changes to
the international settlement system currently in place pursuant to U.S. and
Mexican regulations occur. Due to Telefonos de Mexico's dominant position in
Mexico, the international settlement system requires that Telefonos de Mexico
split its switched traffic terminating in the United States on a basis
proportionate to that of U.S. carriers terminating switched traffic in Mexico.

     WCG and Telefonos de Mexico have agreed on a mechanism for the development
of mutually beneficial projects intended to interconnect the WCG network with
the Telefonos de Mexico network to provide seamless voice and data on both a
nationwide and international basis. Project decisions will be based on the
unanimous decision of committees composed of an equal number of representatives
from WCG and Telefonos de Mexico.

     Either party may terminate the alliance agreement if any of the following
occurs:

     - the action, or failure to act, of any regulatory authority or the passage
       of a law or regulation materially frustrates or hinders the purpose of
       any of the agreements

     - either party experiences a change of control

     One party may terminate the agreements if the other party materially
breaches them or is no longer able to deliver the products and services for a
period of 30 days.

     In addition, WCG has entered into an interconnection agreement with
Telefonos de Mexico and is negotiating additional agreements for the purchase
and sale of telecommunications services. Under the proposed agreements,
subsidiaries of Telefonos de Mexico will purchase internet transit services and
voice services from WCG. WCG also intends to negotiate broader services and
marketing agreements.

                                        21
<PAGE>   23

     KDDI America.  KDDI America, Inc. is a wholly owned subsidiary of DDI
Corporation, the largest international telecommunications company in Japan. In
June 2000, WCG entered into a comprehensive services agreement under which it
will interconnect its network with KDDI America. In addition, KDDI America will
first seek to obtain U.S. offered telecommunications services from WCG, and WCG
will first seek to obtain Japan-terminating telecommunications services from
KDDI America or DDI Corporation. WCG also agreed to collaborate with KDDI
America on a number of other matters, including colocation services, e-business
applications, and customer solutions.

     Winstar.  Winstar Communications, Inc. uses wireless technology to provide
high-capacity local exchange and Internet access services to companies located
generally in buildings not served by fiber-optic cable. WCG has entered into
agreements with Winstar under which:

     - Until 2023, WCG has a right to use approximately two percent of Winstar's
       wireless local capacity, which is planned to cover the top 50 U.S.
       markets, in exchange for payments equal to $400 million over a period of
       four years.

     - Until 2023, Winstar has a right to use four strands of WCG's fiber-optic
       cable over 15,000 route miles on the WCG network.

     - Winstar has an obligation to lease specified circuits from WCG for at
       least 20-year terms.

     - WCG has agreed to provide Winstar with colocation and maintenance
       services.

     - Winstar will pay WCG $644 million in equal monthly installments over a
       period of seven years ending in 2006, for providing the services noted
       above.

                                   SOLUTIONS

     On January 29, 2001, WCG announced a contract with Platinum Equity to sell
the operations of its Solutions business segment in the United States and
Mexico. In addition, it announced its intent to sell the remaining Canadian
operations of Solutions in 2001. Under the terms of the Sale and Purchase
Agreement by and among Williams Communications, LLC and certain of its
subsidiaries and Platinum Equity, LLC, dated as of January 29, 2001, Platinum
Equity will acquire Solutions' operations in the United States and Mexico as
well as the Canadian professional services operations of Solutions.

     Solutions installs, and maintains communications equipment and network
services that provide solutions for the comprehensive voice and data needs of
organizations of all sizes.

PRODUCTS AND SERVICES

     Solutions operates approximately 110 sales and service offices in the U.S.,
Canada, and Mexico staffed with approximately 1,000 sales personnel.
Approximately 100 of Solutions' sales personnel focus on large national and
government accounts. Solutions provides a comprehensive array of communications
products and services, including equipment sales and service, professional
services, and marketing of carrier services.

VENDOR RELATIONSHIPS

     Solutions has agreements with the suppliers of the products and providers
of the services it sells to its customers. These agreements provide for
Solutions to distribute, resale, or integrate products or act as agent for the
provider of services. Normally, Solutions receives volume discounts off the list
price of the product or service it purchases from its vendors. Solutions'
primary vendor relationships are with Nortel, Cisco, Lucent, and NEC, of which
Nortel is the largest.

                                        22
<PAGE>   24

CUSTOMERS

     Solutions provides products and services to approximately 100,000 customer
sites across a broad range of industries including businesses as well as
educational, governmental, and non-profit institutions. These customers consist
of small businesses (ten or more employees), small sites of larger companies,
and large enterprise campus sites. Solutions is not dependent on any one
customer or group of customers to achieve its desired results. Solutions' top 25
customers combined accounted for less than 25 percent of revenue during 2000,
with no one customer accounting for more than 1 percent.

COMPETITION

     Solutions' competition comes from communications equipment distributors,
network integrators, and manufacturers of equipment (including in some instances
those manufacturers whose products Solutions also sells). Solutions' competitors
include Norstan, Inc., Lucent, Siemens, Cisco Systems, and the equipment
divisions of GTE, Sprint, and the regional Bell operating companies. Solutions
operates in a highly competitive industry and faces competition from companies
that may have significantly greater financial, technical, and marketing
resources.

                               OTHER INFORMATION

EMPLOYEES

     As of December 31, 2000, WCG had a total of approximately 10,642 employees,
1,000 of whom were covered by collective bargaining agreements. The following
shows the number of employees broken down by segment:

<TABLE>
<S>                                                            <C>
Network.....................................................    2,611
Broadband Media.............................................      458
Strategic Investments.......................................       13
Corporate...................................................    1,308
Solutions...................................................    6,252
                                                               ------
           Total............................................   10,642
                                                               ======
</TABLE>

REGULATION

  General Regulatory Environment

     WCG is subject to federal, state, local, and foreign regulations that
affect its product offerings, competition, demand, costs, and other aspects of
its operations. U.S. federal laws and regulations generally apply to interstate
telecommunications, including international telecommunications that originate or
terminate in the United States, while state laws and regulations apply to
telecommunications terminating within the state of origination. A foreign
country's laws and regulations apply to telecommunications that originate or
terminate in that country. The regulation of the telecommunications industry is
changing rapidly and varies from state to state and from country to country.
WCG's operations are also subject to a variety of environmental, safety, health,
and other governmental regulations. WCG cannot guarantee that future regulatory,
judicial, or legislative activities will not have a material adverse effect on
it, or that domestic or international regulators or third parties will not raise
material issues with regard to its compliance or noncompliance with applicable
regulations.

     The Telecommunications Act seeks to promote competition in local and long
distance telecommunications services, including by allowing entities affiliated
with power utilities entry into

                                        23
<PAGE>   25

providing telecommunications services and by allowing, subject to specified
limitations and conditions, the regional Bell operating companies to enter the
long distance market. WCG believes that the regional Bell operating companies'
and other companies' entry into this market will provide opportunities for it to
sell dark fiber or lease high-volume long distance capacity.

     The Telecommunications Act allows a regional Bell operating company to
provide long distance services originating outside its traditional exchange
service area or from mobile services, and to own 10 percent or less of the
equity of a long distance carrier operating in its traditional service area. In
addition, Section 271 of the Telecommunications Act allows a regional Bell
operating company to provide long distance services originating in a state in
its traditional exchange service area if it satisfies several procedural and
substantive requirements. These include obtaining FCC approval upon a showing
that the regional Bell operating company has entered into, or under some
circumstances has offered to enter into, interconnection agreements which
satisfy a 14-point "checklist" of competitive requirements. On December 29,
1999, the FCC granted Bell Atlantic's petition to provide long distance service
in New York State and, by order dated, June 30, 2000, authorized SBC to offer
long distance services in Texas. More recently, the FCC granted SBC's petition
to provide long distance service in Kansas and Oklahoma, and that authorization
became effective on March 7, 2001. WCG expects that additional petitions for
entry will be filed and that the regional Bell operating companies will obtain
approval to provide long distance services in several other states within the
next two years.

     With certain exceptions, revenues derived from the provision of interstate
and international telecommunications services to domestic end-users, including
enhanced services providers, are subject to assessment for the FCC's Universal
Service Fund, which assists in ensuring the universal availability of basic
telecommunications services at affordable prices and other goals. The FCC
announced assessments for first quarter of 2001 of approximately 6.7 percent of
gross revenues subject to contribution. Some of WCG's services are subject to
these assessments, which could increase its costs, and it may also be liable for
assessments by state commissions for state universal service programs.

  Federal Regulation

     Under the FCC's rules, WCG is a non-dominant carrier. Generally, the FCC
has chosen not to closely regulate the charges or practices of non-dominant
carriers. Although the FCC has the power to impose more stringent regulatory
requirements on non-dominant carriers, WCG believes that the FCC is unlikely to
do so. WCG is subject to the regulatory requirements applicable to all common
carriers, such as providing services without unreasonable discrimination and
charging reasonable rates.

     Federal regulation affects the cost and thus the demand for long distance
services through regulation of interstate access charges, which are the local
telephone companies' charges for use of their exchange facilities in originating
or terminating interstate transmissions. The FCC, on May 31, 2000, ordered a
multi-year transition in the structure of interstate access charges, leading to
lower per-minute charges. Among some of the changes in that order, the FCC
increased non-usage sensitive charges on local lines, eliminated non-usage
sensitive charges on interexchange carriers, modified the productivity factor
used in part to determine price caps on access charges for some local telephone
companies, and created an explicit universal service component to recover some
implicit subsidies in access charges that were effectively eliminated by the
order. Some aspects of the FCC's access charge rules are subject to periodic
review, and the agency may adopt further changes in the structure and levels of
interstate access charges and other aspects intercarrier compensation in the
future.

                                        24
<PAGE>   26

     The FCC has adopted interconnection rules, including rules relating to
pricing, for the provision of unbundled network elements and wholesale services
by incumbent local telephone companies to competitive local telephone companies.
The agency also adopted rules governing the physical colocation of competitive
local telephone company equipment in certain of the incumbent local telephone
companies' buildings to access unbundled network elements. Pursuant to
interconnection agreements entered into with incumbent local telephone
companies, competitive carriers may use these network elements, services, and
colocation space to offer local services. Various aspects of these rules are
subject to appeal and the FCC may alter portions of the rules in the future.
These regulations affect growth opportunities for WCG and some of its customers
that provide demand for its services.

     The FCC has to date treated Internet service providers as enhanced service
providers rather than common carriers. As such, Internet service providers have
been generally exempt from various federal and state regulations, including the
obligation to pay access charges and contribute to universal service funds.

     The FCC has adopted rules for a multi-year transition to lower
international settlement payments by U.S. common carriers, leading to lower
rates for some international services and increased demand for these services
provided by some of WCG's customers. The result is likely to be increased demand
for capacity on the U.S. facilities, including its network, which provide these
services.

     The FCC commenced a transition period during which carriers must cancel
most tariffs for interstate long distance services and cease filing new tariffs
covering those services. By January 31, 2001, carriers were required to cancel
customer specific tariffs. The FCC has set a deadline of July 31, 2001, for
carriers to cancel tariffs covering most mass market interstate long distance
services. The FCC further required those carriers with corporate websites to
post information relating to the rates, terms, and conditions of such services
on their websites. These actions may significantly affect the ability of
Williams and its customers to rely on filed rates, terms, and conditions for
interstate long distance services, the way these services are offered to
customers, and the demand for such services. The FCC is considering the
extension of a similar detariffing process to international services.

  State Regulation

     The Telecommunications Act generally prohibits state and local governments
from enforcing any law, rule, or legal requirement that prohibits or has the
effect of prohibiting any person from providing any interstate or intrastate
telecommunications service. However, states retain jurisdiction to adopt
regulations necessary to preserve universal service, protect public safety and
welfare, ensure the continued quality of communications services, and safeguard
the rights of consumers.

     Generally, WCG must obtain and maintain certificates of authority from
regulatory bodies in states in which it offers intrastate services. In most
states, it must also file and obtain prior regulatory approval of tariffs for
its regulated intrastate services. Certificates of authority can generally be
conditioned, modified, or revoked by state regulatory authorities for failure to
comply with state law or regulations. Fines and other penalties also may be
imposed for such violations. WCG is currently authorized to provide intrastate
services, at least to some extent, in 50 states and the District of Columbia.
WCG believes that most states do not regulate its provision of dark fiber. If a
state did regulate its provision of dark fiber, WCG could be required to provide
dark fiber in that state pursuant to tariffs and at regulated rates.

     State regulatory commissions generally regulate the rates incumbent local
telephone companies charge for intrastate services, including intrastate access
services paid by providers of intrastate long

                                        25
<PAGE>   27

distance services. WCG's local and other intrastate services compete against the
regulated rates of these carriers and also use some of these services in
providing its services. Under the Telecommunications Act, state commissions have
jurisdiction to arbitrate and review negotiations between local telephone
companies and competitive local exchange carriers regarding the prices local
telephone companies charge for interconnection of network elements with, and
resale of, services by competitive local exchange carriers; however, the Supreme
Court has generally upheld the FCC's authority to adopt rules that the states
must apply when setting these prices. WCG is entering into interconnection
agreements with various incumbent local telephone companies and is considering
others. These regulations, therefore, also affect its plans to offer such
services. A state may also impose telecommunications taxes, and fees related to
the support for universal service, on providers of services in that state.

  Local Regulation

     WCG is occasionally required to obtain street use and construction permits
and licenses and/or franchises to install and expand its fiber-optic network
using municipal rights of way. Termination or failure to renew its existing
franchise or license agreements could have a material adverse effect on it. In
some municipalities where it has installed or anticipates constructing networks,
it is required to pay license or franchise fees based on a percentage of gross
revenue or on a per linear foot basis. WCG cannot guarantee that fees will
remain at their current levels following the expiration of existing franchises.
In addition, WCG could be at a competitive disadvantage if its competitors do
not pay the same level of fees as it does. However, the Telecommunications Act
requires municipalities to manage public rights of way in a competitively
neutral and non-discriminatory manner.

  Other

     WCG's operations are subject to a variety of federal, state, local, and
foreign environmental, safety, and health laws, and governmental regulations.
These laws and regulations govern matters such as the generation, storage,
handling, use, and transportation of hazardous materials, the emission and
discharge of hazardous materials into the atmosphere, the emission of
electromagnetic radiation, the protection of wetlands, historic sites, and
endangered species, and the health and safety of employees. Although a pending
rulemaking commenced by the California Public Utilities Commission seeks to
clarify and refine the agency's administration of environmental review for
communications projects, Williams continues to face uncertainty on the extent of
state regulatory authorizations and environmental review required to construct
communications facilities in that state.

     Although WCG monitors compliance with environmental, safety, and health
laws and regulations, it cannot give assurances that it has been or will be in
complete compliance with these laws and regulations. It may be subject to fines
or other sanctions imposed by governmental authorities if it fails to obtain
certain permits or violate the laws and regulations. No capital or other
expenditures for compliance with laws, regulations, or permits relating to the
environment, safety, and health were material in 2000.

     In addition, WCG may be subject to environmental laws requiring the
investigation and cleanup of contamination at sites it owns or operates or at
third-party waste disposal sites. These laws often impose liability even if the
owner or operator did not know of, or was not responsible for, the
contamination. Although it owns or operates numerous sites in connection with
its operations, it is not aware of any liability relating to contamination at
these sites or third-party waste disposal sites that could have a material
adverse effect on the company.

                                        26
<PAGE>   28

  Foreign Regulation

     The provision of telecommunications services in the countries in which WCG
operates and intends to operate is regulated. Telecommunications carriers are
generally required to obtain permits, licenses, or authorizations to initiate or
terminate communications in a country. The regulatory requirements vary from
country to country, although in some significant respects regulation in the
Western European markets is harmonized under the regulatory structure of the
European Union. Many regulatory systems have only recently faced the issues
raised by competition and are still in the process of development.
Telecommunications laws and regulations are changing generally to promote
competition and new offerings. However, future regulatory, judicial, or
legislative activities may have a material adverse effect on WCG, and
international regulators or third parties may raise material issues with regard
to its compliance or noncompliance with applicable regulations.

     Generally, WCG must obtain and maintain authorizations from regulatory
bodies in the countries in which it will offer telecommunications services. It
may need different authorizations or no authorizations, depending on whether it
constructs or leases its facilities, and whether it offers dark fiber, switched
voice, private line, data, video, or enhanced services in many of the countries
in which it plans to operate. WCG must also comply with environmental, planning,
and property laws in those countries where it constructs and/or operates
fiber-optic systems. In many countries, it must also file and obtain prior
regulatory approval of the rates, terms, and conditions for its services.
Authorizations can generally be conditioned, modified, or revoked by regulators
for failure to comply with applicable laws or regulations. Fines and other
penalties also may be imposed for violations. WCG expects to apply for and
acquire various authorizations to operate its foreign facilities and provide its
telecommunications services though it cannot guarantee that its licenses will
not be delayed or include burdensome conditions.

     Authorizations to operate as a new carrier are not available in some
countries, may be available in other countries with limitations on the number
and characteristics of carriers, and may not be required at all in other
countries. In addition, while some countries require complex applications
procedures for authorizations, some countries simply require registration with
or notification to the regulatory agency. Within a country, moreover, some
services or activities may require a full authorization while others may require
a simple registration or notification, or no filing at all. Authorizations and
regulations impose a range of restrictions on the carriers' operations,
corporate governance, and shareholders, with penalties for noncompliance,
including loss of license and monetary fines. For example, many countries place
limits on foreign ownership of telecommunications carriers and require
regulatory approval of transfers of control.

     In granting authorizations, regulators frequently establish service
obligations for the operator. Typical obligations include nondiscrimination,
build-out or service coverage, and interconnection obligations, as well as
requirements regarding the quality of service provided and the approval of new
service offerings. Many regulators also require licensed carriers to pay certain
fees or charges, including to cover the costs of regulation and to support the
availability of services, and these fees may in some cases be significant.

     Many national regulators require interconnection between carriers and
resolve disputes as to the reasonableness of particular interconnection
arrangements and pricing. Many regulators require a dominant carrier in the
market to offer competing carriers interconnection on reasonable and
nondiscriminatory terms and conditions, and a number of regulators are also
beginning to require incumbent carriers to unbundle their local loops, allowing
increasing competition in local services. In some countries, all
telecommunications carriers are required to provide interconnection to other
carriers. WCG may be required to provide interconnection to its foreign network
as well as access to its facilities for the installation of other carriers'
telecommunications equipment.

                                        27
<PAGE>   29

     WCG may also be required to obtain street use and construction permits and
licenses and/or franchises to install and expand its fiber-optic network using
public rights of way. In some countries where it has installed or anticipates
constructing networks, it may be required to pay license or franchise fees.

     Submarine telecommunications cable systems require national authorizations
from each country in which they land and operate. Cable landing authorizations
typically involve environmental reviews as well as approvals by
telecommunications authorities to provide international telecommunications
facilities and services. In addition, municipal and state permits may be
necessary. Any such authorization may be difficult to obtain or involve
burdensome conditions. Telecommunications carriers using capacity on the cables
usually need licenses from each country in which they operate and may need
different licenses to provide different services. For example, WCG will need,
and has applied for, a Public Telecommunications Operator license in the United
Kingdom before providing services over the TAT-14 undersea cable.

  Japan

     WCG's Japanese subsidiary, Williams Communications K.K., has obtained a
Type I license to land its interest in an undersea cable and to provide
telecommunications services in Japan over this undersea cable. Before providing
telecommunications services in Japan pursuant to its Type I license, WCG must
meet a number of regulatory requirements.

  Brazil

     A cellular concession was granted to ATL in 1998 for an initial term of 15
years, which may be renewed for equal periods at the discretion of the national
regulatory agency, Anatel. Currently, within each area, only two cellular
companies may operate. In 2000, the government announced plans to sell
additional licenses in each wireless market for personal communications service.
The cellular concessions and other regulations impose a range of restrictions on
the companies' operations, rates, services, corporate governance, and
shareholders, with penalties for noncompliance, including loss of license and
monetary fines.

  United Kingdom

     WCG's subsidiary in the United Kingdom, Williams Communications UK Limited,
has received a Public Telecommunications Operator license to provide
telecommunications services in the United Kingdom. This subsidiary intends to
apply to the Office of Telecommunications for "Annex II" interconnection status,
which will give it the right to interconnection with other carriers in the
United Kingdom. The Public Telecommunications Operator license requires WCG's
subsidiary to comply with a number of conditions, including but not limited to
interconnection with other telecommunications companies and payment of license
fees.

  Australia

     PowerTel holds a carrier license and is subject to regulation by the
Australian Competition and Consumer Commission and the Australian Communications
Authority. PowerTel does not have any service coverage obligations. PowerTel
does not require any further regulatory approval for new services provided on
its fiber-optic network.

     Under the regulations, access to particular regulated carriage services and
other services that facilitate the supply of those regulated services must be
provided between operators on non-discriminatory technical and operational terms
and, in some circumstances, at cost-based prices. Any transmission capacity of
two or more megabits per second is regulated on all routes except between
Sydney, Canberra, and Melbourne.

                                        28
<PAGE>   30

     The Australian Competition and Consumer Commission has decided to regulate
local call resale and local network unbundling. Regulation of interconnection at
the local exchange level potentially allows PowerTel and other competitors to
reduce their access costs by interconnecting with the Telstra Corporation
Limited network closer to the customer.

     PowerTel currently has entered into a facilities access agreement with
Telstra for access to Telstra's ducts, underground facilities, and equipment
buildings. PowerTel also obtains services from Telstra through wholesale/resale
products and negotiating an agreement covering Telstra's wireline and mobile
originating and terminating access services.

  Chile

     Chile currently has a competitive, multi-carrier system for long distance
and local services. There is no regulatory limit on the number of concessions
that could be granted to companies that would compete against Manquehue Net S.A.
The largest providers of local telecommunications services in Santiago are
Compania de Telecomunicaciones de Chile and CMET.

     Manquehue Net holds an intermediate service concession for the
installation, operation, and exploitation of a high-capacity fiber-optic cable
network in Santiago and the towns surrounding it. Intermediate services are
provided via networks to satisfy the transmission or exchange service
requirements of other telecommunications providers. The concession is for a
renewable 30-year term. Manquehue Net's concession provides for network
construction to end on December 23, 1998, and service to begin on January 23,
1999. The company requested an extension of these terms, which was granted by
the telecommunications authority but is pending before the Republic
Comptrollership's Office for formal amendment of the concession.

     The regulatory authority has declared that the conditions prevailing in the
local (including Santiago) markets for Manquehue Net require that maximum rates
to be determined for that company by the regulatory authority. Manquehue Net is
not subject to a maximum rate for intermediate services. The maximum rate
structure is determined every five years. Local providers must also give long
distance service providers equal access to their network connections.

  Settlement Costs for International Traffic

     International switched long distance traffic between two countries
historically is exchanged under correspondent agreements between carriers, each
owning network transmission facilities in their respective countries.
Correspondent agreements generally provide for, among other things, the
termination of switched traffic in, and return switched traffic to, the
carriers' respective countries at a negotiated accounting rate. Settlement
costs, typically one-half of the accounting rate, are reciprocal fees owed by
one international carrier to another for transporting traffic on its facilities
and terminating that traffic in the other country. The FCC and regulators in
foreign countries may regulate agreements between U.S. and foreign carriers.

     The FCC's international settlements policy governs the settlements between
U.S. carriers and their foreign corespondents and prevents foreign carriers from
discriminating among U.S. carriers in bilateral accounting rate negotiations.
The policy requires:

     - the equal division of accounting rates

     - non-discriminatory treatment of U.S. carriers

     - proportionate return of inbound traffic

     Agreements governed under the policy must be filed publicly with and
approved by the FCC. The policy applies only to U.S. carrier arrangements with
certain foreign carriers with market power

                                        29
<PAGE>   31

in their respective countries. For example, U.S. carrier arrangements with
Telefonos de Mexico continue to be subject to the policy, but U.S. carrier
arrangements with a Telefonos de Mexico competitor in Mexico are not subject to
the policy. The FCC also recently decided to exempt certain foreign routes from
the policy, depending upon the ability of U.S. carriers to terminate traffic on
those routes at rates substantially below benchmarks set by the agency. However,
Mexico is not currently an exempted route. Other countries have policies similar
to that of the FCC.

     Resale of international private lines allows carriers to bypass the
settlement rate system, and, therefore, bypass the need to negotiate accounting
rates with foreign carriers with market power and obtain termination of
international traffic in the United States and foreign countries at
substantially reduced rates. The FCC's private line resale policy currently
prohibits a carrier from reselling international private leased circuits to
provide switched services to or from a country unless certain conditions are
met.

     Currently, Mexican carriers other than Telefonos de Mexico can engage in
such resale under FCC rules, but the Mexican regulator has not permitted such
resale. If Mexico approves such resale but the FCC continues to restrict
Telefonos de Mexico from engaging in such resale, competitors of Telefonos de
Mexico would be permitted to engage in low-cost termination of traffic between
the United States and Mexico, but Telefonos de Mexico would be precluded from
doing so.

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:

     - Changes in general economic conditions in the United States and changes
       in federal or state laws and regulations to which WCG is subject,
       including tax, environmental, and employment laws and regulations.

     - Changes in foreign economies, currencies, laws and regulations, and
       political climates, especially in Australia and South America, where WCG
       has made direct investments, and in Europe and Asia where WCG plans to
       provide transmission services.

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

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

     - Termination of the SBC strategic alliance or SBC Communications'
       inability to obtain regulatory approval to provide long-distance
       communications services within markets in which it currently provides
       local services.

     - The successful completion of the sale of the Solutions business and
       collection of the proceeds from the sale and on the receivables retained.

     - Loss of a high volume Network customer.

                                        30
<PAGE>   32

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

     - Significant competition on pricing and product offerings for Network.

     - The fact that Williams owns a significant majority of WCG and the
       potential need at a future date to replace, at a potentially higher cost,
       administrative services currently provided by Williams.

     - The possible spin-off of shares of WCG's common stock held by Williams
       and the potential for amendments to the agreements between WCG and
       Williams that were entered into at the time of WCG's initial public
       offering.

     - The effect of changes in accounting policies.

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

     - The ability to attract and retain qualified employees.

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

     - 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.

     - The ability to develop the "Williams Communications" brand.

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

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

     - The ability to obtain additional capacity for the Williams network from
       other providers.

     - The ability to expand the Williams network as needed to remain
       competitive and to maintain the Williams network's leading-edge
       technology.

     - The ability to manage WCG's growth.

     - The ability, in a cost-effective way, to obtain and maintain necessary
       rights of way for the Williams network.

     - The ability to successfully market capacity on the Williams network.

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

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

     - The ability to successfully integrate any newly acquired businesses.

ITEM 2. PROPERTIES

     The WCG network and its component assets are the principal properties that
WCG currently operates. See Item 1(c), Narrative Description of
Business -- Properties, for a description of these properties. WCG leases
portions of the network and related equipment pursuant to its asset defeasance
program, which supplied funds to construct a portion of the network and purchase
equipment. The lease term is for five years with possible renewal for two
additional one-year terms. WCG has the rights to purchase or exchange the leased
property during the lease term as well as to

                                        31
<PAGE>   33

purchase the property at the end of the lease term. The price at which WCG may
purchase the property approximates its original cost. In the event WCG does not
purchase the property at the end of the initial lease term, it is obligated to
pay 89.9 percent of the original purchase cost of the property, reduced by
payments made throughout the lease term.

     The installed fiber-optic cable that is of the WCG network is laid under
various rights of way. WCG has agreements in place for substantially all of the
rights of way needed to complete its network. Almost all of its rights of way
extend through at least 2018.

     WCG owns or leases sites in approximately 125 U.S. cities on which it
locates or plans to locate transmission, routing and switching equipment. These
sites range in size from 2,000 square feet to 50,000 square feet and total
approximately 1,700,000 square feet. WCG also leases office space in various
locations, including from Williams. WCG leases from Williams approximately
1,200,000 square feet of office space in Tulsa, Oklahoma. On February 26, 2001,
Williams contributed to WCG in exchange for shares of Class A Common Stock the
Williams Technology Center, which is currently under construction and expected
to be complete in fourth quarter 2001. Upon completion, the Williams Technology
Center will provide approximately 700,000 square feet of office space and
accommodate up to 4,000 employees. Upon completion, WCG will be able to
terminate the majority of its Tulsa leases with Williams. Solutions occupies
approximately 192,000 square feet of office space in Houston, Texas, which it
subleases from Williams.

ITEM 3. 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 Williams Communications, LLC, a wholly owned operating subsidiary
of WCG, are named as defendants in putative nationwide class actions or putative
statewide class actions on behalf of all landowners on whose property the WCG
allegedly installed fiber-optic cable without the permission of the landowner.
WCG believes that installation of the cable containing the single fiber network
that crosses over or near the putative class members' land does not infringe on
their property rights. WCG also does not believe that the plaintiffs have
sufficient basis for certification of a nationwide or statewide class.

     It is likely that WCG will be subject to other putative class action suits
challenging its nationwide rights of way. WCG cannot quantify the impact of all
such claims at this time. Thus, WCG cannot be certain that the plaintiffs'
putative class actions, if successful, will not have a material adverse effect
upon its future financial position, results of operations or cash flows.

     On September 7, 2000, All-Phase Utility Corp. amended its complaint in a
matter originally filed June 28, 1999, against Williams Communications, LLC in
the United States District Court for Oregon, alleging actual damages of at least
$236.5 million from loss of profit from potential construction and lost revenue
from leases of fiber-optic cable and conduits plus punitive damages. All-Phase
alleges that a portion of Williams Communications, LLC's Eugene, Oregon to
Bandon, Oregon route is based on confidential information developed by All-Phase
and that WCG breached its non-disclosure agreement with All-Phase and violated
the Oregon Trade Secrets Act by using it. All-Phase also alleges that WCG
misrepresented its plans for the route and that, as a result, All-Phase lost the
opportunity to build its own line along the same route. On January 22, 2001, the
Court entered an Order granting Williams Communications, LLC's Motion for
Summary Judgment and dismissing the action. All-Phase did not appeal the Court's
Order.

     On December 20, 2000, the Women's Cooperative Trust Union filed a
derivative shareholder action in the United States District Court for the
Western District of Oklahoma against Williams,

                                        32
<PAGE>   34

WCG, and certain directors and officers alleging that certain named defendants
were involved in the purchase of shares of stock at a reduced price of two
corporations with which WCG had contracted for the purchase of telecommunication
equipment. The allegations include breach of fiduciary duty, waste of corporate
assets and usurpation of corporate opportunities. 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.

     On January 18, 2001, the attorneys representing Williams and WCG in their
corporate capacity, as well as the attorneys representing the individual
directors of Williams and WCG, filed Motions to Dismiss based upon failure to
make a demand on the Boards and failure to plead demand futility with
particularity. Counsel for Williams and WCG has also filed a motion requesting a
transfer of the venue from the Western District of Oklahoma to the Northern
District of Oklahoma. Defendants' motions remain pending.

SUMMARY

     WCG is a party to various other claims, legal actions and complaints
arising in the ordinary course of business. With the possible exception of the
putative class action suits described above, 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 will not have a materially adverse effect upon WCG's future
financial position, results of operations or cash flows.

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

     Not applicable.

                                        33
<PAGE>   35

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

     Williams Communications' Class A common stock is listed on the New York
Stock Exchange under the symbol "WCG." At the close of business on February 28,
2001, Williams Communications had approximately 707 holders of record of its
Class A common stock. No common stock cash dividends were made in 2000 or 1999.
In addition, management does not expect to pay cash dividends on common stock in
the foreseeable future as its current debt agreements place limitations on the
payment of cash dividends. It is management's intention to retain future
earnings, if any, to finance the operation and development of the business.
Future dividends, if any, will be determined by the board of directors and will
depend on the success of operations, capital needs, financial conditions,
contractual restrictions and other factors that the board of directors
considers. The high and low sales price ranges (composite transactions) are
listed for the four quarters of 2000 and fourth quarter 1999, the first quarter
that Williams Communications' Class A Common Stock was traded.

<TABLE>
<CAPTION>
                                               HIGH     LOW
                                              ------   ------
<S>                                           <C>      <C>
2000
  First Quarter.............................  $61.81   $26.75
  Second Quarter............................  $51.31   $30.31
  Third Quarter.............................  $33.69   $18.06
  Fourth Quarter............................  $21.13   $ 9.50
1999
  Fourth Quarter............................  $35.44   $23.25
</TABLE>

                                        34
<PAGE>   36

ITEM 6. SELECTED FINANCIAL DATA

     The following financial data as of December 31, 2000 and 1999 and for the
three years ended December 31, 2000 are an integral part of, and should be read
in conjunction with, the consolidated financial statements and notes thereto.
All other amounts have been prepared from the company's financial records.
Information concerning significant trends in the financial condition and results
of operations is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages F-2 through F-12 of this report.

<TABLE>
<CAPTION>
                                            2000         1999         1998        1997        1996
                                         ----------   ----------   ----------   ---------   --------
                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                      <C>          <C>          <C>          <C>         <C>
Revenues (1,2).........................  $  839,077   $  601,456   $  375,339   $ 244,161   $141,599
Loss from operations (2, 3)............    (448,671)    (246,495)    (141,164)   (103,501)    (8,978)
Loss from continuing operations (2,
  3)...................................    (277,688)    (328,312)    (146,579)    (56,410)   (11,867)
Income (loss) from discontinued
  operations(2)........................    (540,000)     (31,389)     (39,150)     26,367      8,353
Net loss...............................    (817,688)    (359,701)    (185,729)    (30,043)    (3,514)
Preferred stock dividends and
  amortization of preferred stock
  issuance costs(4)....................      (4,956)          --           --          --         --
Net loss attributable to common
  stockholders.........................    (822,644)    (359,701)    (185,729)    (30,043)    (3,514)
Basic and diluted loss per share (2,
  5):
  Loss from continuing operations
     attributable to common
     stockholders......................        (.61)        (.79)        (.37)       (.15)      (.03)
  Income (loss) from discontinued
     operations........................       (1.16)        (.08)        (.10)        .07        .02
  Net loss attributable to common
     stockholders......................       (1.77)        (.87)        (.47)       (.08)      (.01)
Common dividends paid per share........          --           --           --          --         --
Total assets as of December 31(2)......   7,409,285    6,057,703    2,022,136     981,223    614,892
Long-term debt as of December 31(6)....   4,526,706    2,965,385      615,352         292        697
Redeemable cumulative convertible
  preferred stock as of December
  31(4)................................     240,722           --           --          --         --
Total stockholders' equity as of
  December 31(5).......................   1,213,272    2,112,600    1,007,682     868,502    527,253
</TABLE>

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

(1) See Note 1 for a discussion of changes in WCG's method of accounting for
    revenue recognition associated with leasing its fiber-optic network which
    impact revenues.

(2) See Notes 1 and 2 for a discussion of WCG's sale of the domestic and Mexican
    operations of Solutions in first quarter 2001. The sale was accounted for as
    a disposal of a business segment, and accordingly the operating results and
    financial position of the segment for the current and prior periods reflect
    Solutions as discontinued operations.

(3) See Notes 1 and 4 for a discussion of changes in WCG's method of accounting
    for revenue recognition associated with leasing its fiber-optic network and
    asset sales which affect losses from continuing operations.

(4) See Note 11 for a discussion of WCG's issuance of redeemable cumulative
    convertible preferred stock.

(5) See Notes 1, 12 and 19 for a discussion of WCG's stockholders' equity and
    common shares outstanding.

(6) See Notes 10 and 19 for a discussion of WCG's long-term debt.

                                       F-1
<PAGE>   37

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     On January 25, 2001, Williams Communications Group's (WCG) 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 (see Note 2). WCG's
continuing operations are organized into three operating segments as follows:
Network, Broadband Media and Strategic Investments.

RESULTS OF OPERATIONS

     The table below summarizes the consolidated results of operations of WCG:

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                            ----------------------------------
                                                               2000        1999        1998
                                                            ----------   ---------   ---------
                                                                      (IN THOUSANDS)
<S>                                                         <C>          <C>         <C>
Revenues:
  Network.................................................  $  705,020   $ 438,509   $ 206,184
  Broadband Media.........................................     168,761     162,849     161,192
  Strategic Investments...................................          --      35,435      52,499
  Eliminations............................................     (34,704)    (35,337)    (44,536)
                                                            ----------   ---------   ---------
     Total revenues.......................................     839,077     601,456     375,339
Operating expenses:
  Cost of sales...........................................     823,272     526,040     294,382
  Selling, general and administrative.....................     270,071     199,615     140,965
  Provision for doubtful accounts.........................       9,959       1,066       2,360
  Depreciation and amortization...........................     185,024      86,718      50,564
  Other...................................................        (578)     34,512      28,232
                                                            ----------   ---------   ---------
     Total operating expenses.............................   1,287,748     847,951     516,503
                                                            ----------   ---------   ---------
Loss from operations......................................    (448,671)   (246,495)   (141,164)
Net interest expense......................................    (221,116)    (96,421)     (5,263)
Investing income (loss)...................................     333,273       2,734      (7,167)
Minority interest in loss of consolidated subsidiaries....      24,492       9,044       2,050
Other income (loss), net..................................         227        (359)        178
                                                            ----------   ---------   ---------
Loss before income taxes..................................    (311,795)   (331,497)   (151,366)
Benefit from income taxes.................................      34,107       3,185       4,787
                                                            ----------   ---------   ---------
Loss from continuing operations...........................  $ (277,688)  $(328,312)  $(146,579)
                                                            ==========   =========   =========
</TABLE>

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Consolidated results

     WCG's loss from continuing operations improved $50.6 million, or 15%, due
to an increase in investing income of $330.6 million, an increase of $30.9
million related to the tax benefit and a change in minority interest results of
$15.5 million. These items were partially offset by an increase in loss from
operations of $202.2 million and an increase in net interest expense of $124.7
million.

     Network and Broadband Media accounted for $237.0 million and $6.0 million
of the increase in loss from operations, respectively. Strategic Investments'
loss from operations decreased by $40.8 million.

                                       F-2
<PAGE>   38

Network

     The table below summarizes the results of operations of Network:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                             ---------------------------------
                                                                2000        1999        1998
                                                             ----------   ---------   --------
                                                                      (IN THOUSANDS)
<S>                                                          <C>          <C>         <C>
Revenues:
  Dark fiber...............................................  $   62,397   $ 109,258   $ 64,100
  Capacity and other.......................................     587,504     261,254     90,081
  PowerTel.................................................      20,844      34,545     11,248
  Intercompany.............................................      34,275      33,452     40,755
                                                             ----------   ---------   --------
     Total revenues........................................     705,020     438,509    206,184
Operating expenses:
  Cost of sales............................................     726,125     415,191    167,303
  Selling, general and administrative......................     221,281     138,748     58,233
  Provision for doubtful accounts..........................       8,752         989        136
  Depreciation and amortization............................     154,288      51,454     14,159
  Other....................................................        (526)         25        410
                                                             ----------   ---------   --------
     Total operating expenses..............................   1,109,920     606,407    240,241
                                                             ----------   ---------   --------
Loss from operations.......................................  $ (404,900)  $(167,898)  $(34,057)
                                                             ==========   =========   ========
Equity earnings............................................  $    4,421   $   1,020   $     --
                                                             ==========   =========   ========
Income from investments....................................  $  281,403   $      --   $     --
                                                             ==========   =========   ========
</TABLE>

     Network's revenues increased $266.5 million, or 61%, primarily due to a
$311.6 million increase related to data and voice services provided to its
customers as the traffic increases on its network. Approximately 50% of the
increase in data and voice revenues is attributable to SBC Communications, Inc.
(SBC), due in part to a decision by the Federal Communications Commission
announced at the end of second quarter 2000 allowing it to sell long-distance
service in Texas. The increase in revenues is partially offset by $46.9 million
lower revenues from dark fiber transactions entered into prior to June 30, 1999
and accordingly accounted for as sales type leases. PowerTel revenues decreased
$13.7 million in 2000 as a result of the sale of its mobile phone business in
second quarter 2000, the change in focus from the reseller services arena to
developing and serving facilities-based carriers which typically yields higher
margins and the impact of a decreasing foreign currency exchange rate.

     Network's cost of sales exceeded revenues by $21.1 million in 2000. In
1999, Network had a gross profit of $23.3 million. Cost of sales increased
$310.9 million, or 75%, primarily due to a $203.5 million increase related to
data and voice off-net capacity and local access connection costs in support of
the revenue increase described above, $63.8 million of higher operating and
maintenance costs to support the increased revenues and future revenue streams,
$52.0 million of lease expense attributable to WCG's operating lease agreement
covering a portion of WCG's fiber optic network, $16.2 million of higher ad
valorem taxes reflecting the increased asset base associated with the network
build-out and $12.9 million of higher leasing costs for equipment collocation
space and data centers. The increase in costs is partially offset by $12.2
million lower costs associated with PowerTel and $25.1 million lower costs of
sales associated with the reduced level of dark fiber transactions accounted for
as sales-type leases.

     Network's selling, general and administrative expenses increased $82.6
million, or 59%, primarily due to adding resources and infrastructure required
to support its growing customer base.

                                       F-3
<PAGE>   39

     Network's provision for doubtful accounts increased $7.8 million primarily
due to the growth in its customer base and general market conditions primarily
in the last six months of the year.

     Network's depreciation and amortization increased $102.8 million primarily
as a result of placing an additional 8,000 route miles in operation since
December 31, 1999.

     Network's equity earnings increased $3.4 million primarily due to earnings
from investments acquired in fourth quarter 1999 and increased earnings
primarily related to a telecommunications joint venture.

     Income from investments in 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 net gains of $93.7 million related to
the sales of certain marketable equity securities partially offset by a loss of
$27.0 million related to write-downs of certain cost-based and equity-method
investments resulting from management's estimate of the other than temporary
decline in the value of these investments.

BROADBAND MEDIA

     The table below summarizes the results of operations of Broadband Media:

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Revenues....................................................  $168,761   $162,849   $161,192
Operating expenses:
  Cost of sales.............................................   131,851    122,915    135,819
  Selling, general and administrative.......................    42,033     40,568     43,319
  Provision for doubtful accounts...........................     1,207       (160)     1,925
  Depreciation and amortization.............................    30,269     29,866     25,574
  Other.....................................................       (48)       254      2,141
                                                              --------   --------   --------
     Total operating expenses...............................   205,312    193,443    208,778
                                                              --------   --------   --------
Loss from operations........................................  $(36,551)  $(30,594)  $(47,586)
                                                              ========   ========   ========
Equity losses...............................................  $(10,697)  $     --   $     --
                                                              ========   ========   ========
</TABLE>

     Broadband Media's revenues increased $6.0 million, or 4%, as a result of
higher revenues from both media distribution and video transmission services,
partially offset by a decrease in transponder revenues.

     Broadband Media's gross profit decreased to $36.9 million in 2000 from
$39.9 million in 1999. Gross margin decreased to 22% in 2000 from 25% in 1999.
Cost of sales increased $9.0 million, or 7%, as a result of an increase in media
distribution and video transmission service revenues, an increase in resources
to support these services and costs associated with the development of digital
broadband media capabilities.

     Broadband Media's equity losses of $10.7 million in 2000 were due to WCG
applying the equity method of accounting to an investment beginning in first
quarter 2000 that was previously consolidated in 1999, as WCG's ownership fell
below 50% and WCG no longer exercised control over the operations. In fourth
quarter 2000, WCG's share of the cumulative losses attributable to this equity
method investment exceeded Broadband Media's investment balance. As a result,
WCG has suspended recording equity losses related to this investment.

                                       F-4
<PAGE>   40

STRATEGIC INVESTMENTS

     The table below summarizes the results of operations of Strategic
Investments:

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Revenues....................................................  $     --   $ 35,435   $ 52,499
Operating expenses:
  Cost of sales.............................................        --     23,271     35,796
  Selling, general and administrative.......................     6,757     20,299     39,413
  Provision for doubtful accounts...........................        --        237        299
  Depreciation and amortization.............................       467      5,398     10,831
  Other.....................................................        (4)    34,233     25,681
                                                              --------   --------   --------
     Total operating expenses...............................     7,220     83,438    112,020
                                                              --------   --------   --------
Loss from operations........................................  $ (7,220)  $(48,003)  $(59,521)
                                                              ========   ========   ========
ATL and other equity losses.................................  $(14,021)  $(37,460)  $ (7,908)
                                                              ========   ========   ========
Income from investments.....................................  $ 12,733   $  9,397   $     --
                                                              ========   ========   ========
</TABLE>

     Strategic Investments sold its audio and video conferencing services and
closed-circuit video broadcasting services business in 1999 for which WCG
recognized a pre-tax loss of $28.4 million, included in other operating expense.
The remaining portion of WCG's learning content business was also sold in 1999.
Strategic Investments also abandoned a business that provided wireless remote
monitoring and meter reading equipment and related services to industrial and
commercial customers in 1999. As a result, in 2000, Strategic Investments had no
revenues or cost of sales and significantly reduced selling, general and
administrative expenses and depreciation and amortization expenses. The costs
incurred in 2000 represent costs associated with managing WCG's equity and
cost-based investments in this business segment.

     Strategic Investments' equity losses decreased $23.5 million, or 63%,
primarily due to WCG's decreased equity ownership of ATL, which contributed
$22.9 million to the decrease in equity losses and lower losses from ATL
operations, which contributed an additional $1.7 million.

     Strategic Investments' income from investments increased $3.3 million, or
35%. Strategic Investments' income from investments in 2000 represents a $16.5
million gain related to the sale of part of its interest in ATL and receipt of a
$3.7 million dividend from a cost-based investment partially offset by a
write-down of a cost-based investment of $7.5 million. The ATL gain resulted
from a series of transactions in first quarter 2000 in which WCG sold a portion
of its 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. Strategic
Investments' income from investments in 1999 represents dividends received from
a cost-based investment.

CONSOLIDATED NON-OPERATING COSTS

     WCG's net interest expense in 2000 increased $124.7 million from 1999 as a
result of increased borrowings at higher interest rates to finance operations
and capital expenditures, partially offset by increased interest capitalized
related to assets under construction. WCG's total debt has increased $1.5
billion from December 31, 1999 to December 31, 2000, which primarily reflects
the $1.0 billion principal amount of senior redeemable notes issued in August
2000 and the borrowing of the $525.0 million term loan under the credit facility
in September 2000.

                                       F-5
<PAGE>   41

     WCG's interest and other investing income in 2000 increased $29.6 million
due to interest earned on short-term investments, which were purchased with
proceeds from the October 1999 offerings and concurrent investments, the August
2000 debt offering and the borrowing of the term loan under the credit facility
in September 2000.

     The change in minority interest increased $15.5 million due to an increase
in PowerTel's net loss.

     WCG's tax benefit increased $30.9 million primarily due to changes in
various temporary differences including changes in deferred revenue balances
that resulted in a fully reserved net deferred tax asset as of December 31, 2000
as compared to a net deferred tax liability position as of December 31, 1999
(see Note 5).

DISCONTINUED OPERATIONS

     On January 25, 2001, WCG's board of directors authorized a plan for its
management to divest the Solutions segment. On January 29, 2001, WCG signed an
agreement to sell the domestic and Mexican operations of the Solutions segment
to Platinum Equity, LLC. This sale is expected to close at the end of first
quarter 2001. WCG plans to divest its remaining Canadian operations later in
2001.

     Summarized results of discontinued operations are as follows:

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                           ------------------------------------
                                                              2000         1999         1998
                                                           ----------   ----------   ----------
                                                                      (IN THOUSANDS)
<S>                                                        <C>          <C>          <C>
Revenues.................................................  $1,370,483   $1,431,655   $1,367,404
Operating losses:
  Loss before income taxes...............................  $ (117,057)  $  (35,975)  $  (39,460)
  Benefit (provision) from income taxes..................     (17,864)       4,586          310
  Cumulative effect of change in accounting principle....     (25,377)          --           --
                                                           ----------   ----------   ----------
                                                             (160,298)     (31,389)     (39,150)
Estimated loss on disposal:
  Estimated loss on sales, including exit costs..........    (361,702)          --           --
  Estimated operating losses from January 1, 2001 to
     anticipated disposal date...........................     (18,000)          --           --
                                                           ----------   ----------   ----------
                                                             (379,702)          --           --
                                                           ----------   ----------   ----------
Loss from discontinued operations........................  $ (540,000)  $  (31,389)  $  (39,150)
                                                           ==========   ==========   ==========
</TABLE>

     Solutions' operating losses increased $128.9 million from 1999. The
increase in Solutions' operating losses is a result of a decrease in gross
profit of $63.3 million, or 17%, due to decreased revenues consistent with the
overall slow down in the telecommunications equipment distribution industry
combined with increased installation and service costs, an increase in the
provision for doubtful accounts of $35.5 million reflecting an increase in aged
receivables and the uncertainty of collections associated with receivables
retained from the sale of Solutions, a cumulative effect of a change in
accounting principle of $25.4 million, partially offset by a decrease in
selling, general and administrative expenses of $28.7 million, or 8%, primarily
due to a decrease in payroll related expenses including a decrease in
commissions associated with lower revenues.

                                       F-6
<PAGE>   42

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

CONSOLIDATED RESULTS

     WCG's loss from continuing operations increased $181.7 million due to an
increase in loss from operations of $105.3 million and an increase in net
interest expense of $91.1 million, partially offset by an increase in investing
income of $9.9 million and a change in minority interest results of $6.9
million.

     Network accounted for $133.8 million of the increase in loss from
operations. Broadband Media and Strategic Investments' loss from operations
decreased by $17.0 million and $11.5 million, respectively.

NETWORK

     Network's revenues increased $232.3 million primarily due to a $154.0
million increase in revenues from voice and data services provided to its
customers, $44.9 million of increased revenues from dark fiber leases for
transactions entered into prior to June 30, 1999 and accordingly accounted for
as sales-type leases, $23.3 million of increased capacity and other revenues
attributable to PowerTel, acquired on August 14, 1998 and a $15.8 million
increase in revenues from consulting and outsourcing services.

     Network's gross profit decreased to $23.3 million in 1999 from $38.9
million in 1998. Cost of sales increased $247.9 million primarily due to $99.4
million of higher off-net capacity costs incurred prior to the completion of
WCG's fiber optic network, $49.4 million of higher operating and maintenance
expenses, $28.8 million related to costs associated with dark fiber leases
accounted for as sales-type leases, $23.6 million of higher local-access
connection costs, $21.0 million increase related to the PowerTel acquisition,
$16.6 million of higher costs associated with consulting and outsourcing
services and $5.0 million of higher leasing costs for equipment colocation space
in data centers.

     Network's selling, general and administrative expenses increased $80.5
million due to an increase in the number of employees and the expansion of the
infrastructure to support the network under construction at that time including
$19.8 million of costs associated with the development of voice services in 1999
and a $17.0 million increase related to the PowerTel acquisition.

     Network's depreciation and amortization increased $37.3 million with $4.9
million of the increase related to the acquisition of PowerTel and the remaining
increase due to completion of various segments of its network.

BROADBAND MEDIA

     Broadband Media's gross profit increased to $39.9 million in 1999 from
$25.4 million in 1998. Gross margin increased to 25% in 1999 from 16% in 1998.
Cost of sales decreased $12.9 million, or 10%, primarily due to a decrease in
transponder costs of $6.9 million and intercompany transfer pricing costs of
$6.3 million.

     Broadband Media's selling, general and administrative expenses decreased
$2.7 million, or 6%, primarily due to a decrease in number of employees from
facility consolidations.

     Broadband Media's depreciation and amortization increased $4.3 million, or
17%, primarily due to an increase of $4.0 million in depreciation and
amortization related to a stadium seat touch-screen display business.

                                       F-7
<PAGE>   43

STRATEGIC INVESTMENTS

     Strategic Investments' revenues decreased $17.1 million, or 33%, primarily
attributable to an $18.3 million decrease in revenues related to the July 31,
1999 sale of the audio and video conferencing services and closed-circuit video
broadcasting services businesses.

     Strategic Investments' gross profit decreased to $12.2 million in 1999 from
$16.7 million in 1998. Gross margin increased to 34% in 1999 from 32% in 1998.
Cost of sales decreased $12.5 million, or 35%, primarily due to a $14.2 million
decrease related to the July 31, 1999 sale of the audio and video conferencing
services and closed-circuit video broadcasting services businesses.

     Strategic Investments' selling, general and administrative expenses
decreased $19.1 million, or 48%, primarily due to a $13.9 million decrease
related to the July 31, 1999 sale of the audio and video conferencing services
and closed-circuit video broadcasting services businesses.

     Strategic Investments' depreciation and amortization decreased $5.4
million, or 50%, primarily due to a $4.0 million decrease related to the sale of
the audio and video conferencing services and closed-circuit video broadcasting
services businesses.

     Strategic Investments' other operating expense in 1999 includes a $28.4
million charge related to the sale of the audio and video conferencing and
closed-circuit video broadcasting services businesses and a $5.5 million charge
related to abandoning a business that provided wireless monitoring, meter
reading equipment and related services. Other operating expense in 1998 includes
$23.2 million of charges related to abandoning a venture involved in the
technology and transmission of business information for news and educational
purposes.

     Strategic Investments' equity losses increased $29.6 million primarily due
to increased depreciation and amortization and financing costs incurred by ATL.

     Strategic Investments' income from investments in 1999 of $9.4 million was
due to dividends received from a cost-based investment.

CONSOLIDATED NON-OPERATING COSTS

     Net interest expense in 1999 increased $91.1 million as a result of
increased borrowings at higher interest rates in 1999 than 1998, partially
offset by increased capitalization of interest related to assets under
construction. The funding for 1999 was provided primarily from external sources
while the 1998 funding was provided primarily by Williams. The average interest
rates as of December 31, 1999 and 1998 on WCG's long-term debt were 10.1% and
5.8%, respectively.

     Interest and other investing income in 1999 increased $29.1 million
primarily due to increased short-term investments, which were purchased with
proceeds from the October 1999 offerings and concurrent investments.

     The change in minority interest increased $6.9 million attributable to an
increase in PowerTel's net loss.

     In 1999, WCG recorded a tax benefit of $3.2 million compared to $4.8
million in 1998. In 1999 and 1998, the expected benefit was largely offset by
operating losses allocated to Williams under the tax sharing agreement.

DISCONTINUED OPERATIONS

     Solutions' operating losses decreased $7.8 million, or 20%, from 1998. The
decrease in Solutions' operating losses resulted from an increase in gross
profit of $16.9 million, or 5%, attributable to an increase in revenues
primarily due to higher demand for voice equipment, an increase in minority
interest in loss of consolidated subsidiary of $8.9 million, or 65%, relating to
an

                                       F-8
<PAGE>   44

increase in Solutions' net loss and an decrease in other operating expenses of
$5.4 million, or 90%, due to a 1998 charge related to the abandonment of
capitalized software costs in favor of new systems. These items are partially
offset by an increase in selling general and administrative expenses of $10.8
million, or 3%, resulting from higher technological and infrastructure support
costs associated with business integration issues and the implementation of new
systems and processes, an increase in depreciation and amortization of $9.2
million, or 25%, primarily attributable to the new systems implemented in 1999
and an increase in the provision for doubtful accounts of $8.1 million, or 42%,
associated with billing and collection issues.

LIQUIDITY AND CAPITAL RESOURCES

     Cash used in operating activities was $176.9 million in 2000 which includes
cash received from dark fiber transactions of $219.4 million. WCG anticipates
that, excluding the impact of dark fiber transactions, its operating activities
will result in negative cash flow at least through the end of 2002 and that
capital expenditures, debt service obligations and other cash needs will
continue to exceed cash from operations as WCG expands and enhances its network.

     In July 2000, Williams announced that its board of directors had authorized
its management to pursue a course of action that, if successful, would lead to a
complete separation of WCG from Williams' energy business. In August 2000,
Williams announced that the Internal Revenue Service (IRS) had issued a
favorable ruling on a proposed tax-free distribution of WCG's Class B common
stock to Williams' stockholders. In November 2000, Williams then announced that
its board of directors had authorized its management to continue to pursue a
tax-free spin-off of WCG to Williams' shareholders. Williams further announced
that, assuming market conditions and other factors continue to support this
action, its board of directors expects to vote during the first part of 2001 to
set a record date and establish the ratio of shares of WCG's stock to be
distributed and to direct the distribution of WCG's shares. In order for
Williams and its stockholders to receive the benefit of the ruling, a spin-off
must be completed by August 2001, unless the IRS consents to an extension of
time. The terms of WCG's long-term credit facility require Williams to hold at
least 75% of the voting power of WCG's outstanding voting stock or at least 65%
of WCG's issued and outstanding capital. Accordingly, WCG will be required to
seek the consent of its lenders pursuant to a tax-free spin-off.

CASH SOURCES

     As of December 31, 2000, WCG has $609.1 million of cash and short-term
investments. Included in this short-term investment portfolio are marketable
equity securities classified as available for sale with a market value of $311.8
million as of December 31, 2000.

     WCG received net proceeds from the sale of senior redeemable notes in a
private placement in August 2000 and the sale of preferred stock in a private
placement in September 2000 of approximately $970.6 million and $240.5 million,
respectively. WCG also borrowed $525 million in a term loan under its long-term
credit facility in September 2000.

     As of December 31, 2000, WCG has $525 million remaining on its $1.05
billion commitment under its credit facility which consists of a $525 million
seven-year multi-draw amortizing term loan facility and a $525 million six-year
senior reducing revolving credit facility. As discussed above, WCG borrowed the
$525 million term loan under its credit facility in September 2000. WCG may
borrow under the revolving portion of its credit facility throughout its
six-year term.

     In first quarter 2001, WCG announced that it received a commitment to
increase its existing credit facility by $950 million, bringing the total size
of its credit facility to $2 billion. WCG expects to complete this transaction
in first quarter 2001, subject to the approval of its current lenders and
completion of certain other transactions.
                                       F-9
<PAGE>   45

     In first quarter 2001, Williams and WCG entered into an agreement that,
among other things, resulted in the transfer of ownership of a building under
construction from Williams to WCG, the transfer of ownership of aircraft from
Williams to WCG, conversion of the $975.6 million Williams 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 views the agreement with Williams as a key step of a financing plan
to prepare for a possible tax-free spin-off from Williams. WCG continues to
evaluate several credit mechanisms, some of which may involve support from
Williams, with a goal of continuing to provide capital and cash necessary to
execute its growth plan and business strategy.

     In January 2001, WCG announced that it would sell its interest in
Solutions. WCG expects to realize at least $350 million and could realize up to
$450 million in cash over time from the sale of the entire Solutions segment,
excluding disposition costs. The ultimate cash proceeds are primarily dependant
upon WCG's success in collecting certain receivables retained from the sale of
Solutions and the value realized from the sale of Solutions' Canadian
operations.

     In first quarter 2001, WCG granted an option to Telecom Americas, Ltd., a
joint venture between SBC, American Movil S.A. de C.V. and Bell Canada
International, Inc., to purchase WCG's interest in ATL for an agreed to price.
The option was granted in exchange for Telecom Americas, Ltd. paying WCG's
portion of required funding to ATL. The option will expire at the end of first
quarter 2001.

CASH USES

     WCG's primary anticipated cash need is funding Network's capital
expenditures. In 2000, WCG spent $3.3 billion on capital expenditures primarily
to construct and light its 33,000 mile nationwide intercity network. WCG
currently estimates to spend approximately $2 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.

     In third quarter 2000, PowerTel entered into a 70 million Australian dollar
bridge financing facility agreement ($39.2 million as of December 31, 2000). The
facility agreement, which bears interest at a fixed-rate of 9.70% and is due
March 31, 2001, has been fully utilized as of December 31, 2000. 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
expects to replace its existing facility with a long-term bank facility in first
quarter 2001. The bank facility and equity rights offering are expected to fully
fund PowerTel for the foreseeable future.

     In fourth quarter 2000, ATL closed a financing arrangement with a Brazilian
development bank, which provided ATL an additional 528 million reais in
additional local currency funding (approximately $270 million as of December 31,
2000), of which WCG has guaranteed approximately $100 million of this financing.
ATL is currently seeking to refinance and upsize its non-secured local
debentures to finance its on-going, day-to-day operations and future capital
needs. In addition, ATL will utilize committed funds from Telecom Americas,
Ltd., a joint venture between SBC, American Movil S.A. de C.V. and Bell Canada
International, Inc., to fund its last license payment due in April 2001.
Although ATL endeavors to obtain financing without loans, additional credit
support or additional contributions from WCG, some financing arrangements
currently under consideration would require limited credit support from the
shareholders of ATL.

     Under its asset defeasance program, WCG made annual lease payments totaling
approximately $52.3 million in 2000 and expects that in 2001 it will pay
approximately $60 million.

                                       F-10
<PAGE>   46

     As of December 31, 2000, WCG's outstanding long-term debt consisted of
$975.6 million principal amount under the Williams note, $3.0 billion principal
amount of its 10.70% to 11.875% senior redeemable notes due 2007 to 2010 and a
$525 million term loan under its credit facility due 2006. WCG made principal
payments of $12.5 million in 2000 under the Williams note. WCG paid $318.8
million in interest related to the Williams note, senior redeemable notes and
the credit facility in 2000. As discussed above, in first quarter 2001, the
Williams note was converted to paid in capital.

     Scheduled interest payment obligations under the senior redeemable notes
and the credit facility total approximately $397 million in 2001 with no
principal payment obligations scheduled to occur 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 would
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 order to meet its future cash requirements, WCG may issue additional
debt or equity securities, secure additional credit facilities, sell or dispose
of existing businesses or investments, sell or lease dark fiber or access to its
conduits, or seek funds from other sources. WCG may not be able to secure any
such financing, if and when it is needed, on terms acceptable to WCG or at all.
If WCG is unable to obtain the necessary funds, it may be forced to scale back
or defer its planned capital expenditures, which could delay its growth.

     Over the period 2001 and 2002, it is estimated that WCG's cash requirements
will total approximately $3 billion. This includes approximately $4 billion of
capital spending and approximately $1 billion of debt service obligations,
partially offset by an estimated $2 billion of cash from operations and
investing activities. These cash requirements will be funded primarily through
the utilization of existing cash and marketable securities, as well as
additional debt and credit facilities. These additional debt and credit
facilities are expected to be in place by mid-year 2001. Based on the current
capital program, WCG is expected to achieve free cash flow in 2003.

INFLATION

     Inflation has not significantly affected WCG's operations during the past
three years.

ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" 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 has completed its implementation efforts as of
December 31, 2000 and adopted these standards effective January 1, 2001. The
derivatives identified in the implementation process consisted of a cashless
collar on a portion of WCG's marketable equity securities portfolio as well as
an interest rate swap and foreign currency hedge held by an equity investee. The
cashless collar does not qualify as a hedge under SFAS No. 133 as amended.
Therefore, changes in the market value of the cashless collar will be realized
in the income statement while changes in the market value of the underlying
security will

                                       F-11
<PAGE>   47

be reflected in accumulated other comprehensive income. The initial impact of
these standards on WCG's results of operations and financial position was not
material.

     The Financial Accounting Standards Board (FASB) issued Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation." This
interpretation modifies the current practice of accounting for certain stock
award agreements and was generally effective beginning July 1, 2000. The initial
impact of this interpretation on WCG's results of operations and financial
position was not material.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." Among other things, SAB No. 101 clarifies certain conditions
regarding the culmination of an earnings process and customer acceptance
requirements in order to recognize revenue. The initial impact of this SAB on
WCG's results of continued operations and financial position was not material.

     The FASB issued Interpretation No. 43, "Real Estate Sales, an
interpretation of SFAS No. 66," in June 1999. This interpretation considers dark
fiber as integral equipment and accordingly title must transfer to a lessee in
order for a lease transaction to be accounted for as a sales-type lease. After
June 30, 1999, the effective date of FASB Interpretation No. 43, sales-type
lease accounting is not appropriate for indefeasable rights of use, or IRUs,
since IRUs generally do not transfer title to the fibers under lease to the
lessee. Therefore, these transactions are being accounted for as operating
leases unless title to the fibers under lease transfers to the lessee or the
agreement was entered into prior to June 30, 1999. The effect of this
interpretation on 2000 and 1999 results was to decrease revenues by $189.9
million and $11.0 million, respectively, and increase net loss by $53.0 million
and $4.4 million, respectively.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

     WCG's interest rate risk exposure relates primarily to its short-term
investments and debt portfolio.

     Short-term investments excluding marketable equity securities total $83.4
million as of December 31, 2000 and consist primarily of commercial paper. WCG's
interest and other investing income is subject to interest rate risk resulting
from potential future increases in interest rates on comparable investment
securities. To mitigate the impact of fluctuations in interest rates, WCG
instructs the managing financial institutions to invest only in highly liquid
instruments with short-term maturity dates. These investments were purchased
with a portion of the proceeds from the sale of senior redeemable notes in
August 2000 and borrowing of the credit facility in September 2000.

     WCG's debt portfolio as of December 31, 2000 consists of a long-term credit
facility, a note payable to Williams and fixed-rate senior redeemable notes.
Borrowings under the long-term credit facility and note payable to Williams are
influenced by changes in short-term LIBOR interest rates. To mitigate the impact
of fluctuations in interest rates, WCG targets to maintain a significant portion
of its debt portfolio in fixed-rate debt. None of WCG's market risk sensitive
instruments require it to manage or hedge the risks related to interest rate
movements, and WCG currently does not mitigate the risk through the use of
interest rate swaps or other derivative instruments. However, in the future WCG
may choose to manage its risk associated with interest rate movements through an
appropriate balance of fixed- and variable-rate obligations. To maintain an
effective balance of fixed- and variable-rate obligations, WCG may elect to
enter into specific interest rate swaps or other derivative instruments as
deemed necessary.

                                       F-12
<PAGE>   48

     In August 2000, WCG issued approximately $1.0 billion of senior redeemable
notes in a private placement. The senior redeemable notes consist of $575.0
million of 11.70% and $425.0 million of 11.875% fixed-rate senior redeemable
notes due August 1, 2008 and August 1, 2010, respectively.

     In September 2000, WCG borrowed the $525 million term loan under the credit
facility, which otherwise would have expired. Outstanding borrowings under the
credit facility currently bear interest at LIBOR plus 2.25%.

     In first quarter 2001, WCG announced that it received a commitment to
increase its existing credit facility by $950 million, bringing the total size
of its credit facility to $2 billion. WCG expects to complete this transaction
in first quarter 2001, subject to the approval of its current lenders and
completion of certain other transactions.

     In first quarter 2001, Williams and WCG entered into an agreement that,
among other things, resulted in conversion of the Williams note into paid in
capital and the issuance of 24.3 million shares of WCG's common stock to
Williams.

     The following tables provide information as of December 31, 2000 and 1999
about WCG's market rate risk sensitive instruments. For short-term investments
excluding marketable equity securities and long-term debt, the table presents
principal cash flows and weighted-average interest rates by expected maturity
dates. The Williams note has been excluded in 2000 table below due to the
conversion of the Williams note into paid in capital in first quarter 2001 (see
Note 19). In addition, the PowerTel bridge financing facility has been excluded
due to the proceeds received from the PowerTel equity offering in first quarter
2001 (see Note 19).

<TABLE>
<CAPTION>
                                                                                                FAIR VALUE
                                                                                               DECEMBER 31,
                             2001     2002     2003     2004     2005    THEREAFTER   TOTAL        2000
                            ------   ------   ------   ------   ------   ----------   ------   ------------
                                                         (DOLLARS IN MILLIONS)
<S>                         <C>      <C>      <C>      <C>      <C>      <C>          <C>      <C>
ASSETS
  Short-term
    investments...........  $   83   $   --   $   --   $   --   $   --     $   --     $   83      $   83
  Average interest rate...     6.4%
LIABILITIES
  Fixed rate long-term
    debt, including
    current portions
    High yield public
      debt................  $   --   $   --   $   --   $   --   $   --     $3,000     $3,000      $2,237
    Average interest
      rate................    11.1%    11.1%    11.1%    11.1%    11.1%      11.1%
  Variable rate long-term
    debt, including
    current portions
    Long-term credit
      facility............  $   --   $   20   $   92   $  138   $  157     $  118     $  525      $  525
    Average interest
      rate................   LIBOR    LIBOR    LIBOR    LIBOR    LIBOR      LIBOR
                             +2.25    +2.25    +2.25    +2.25    +2.25      +2.25
</TABLE>

                                       F-13
<PAGE>   49

<TABLE>
<CAPTION>
                                                                                                FAIR VALUE
                                                                                               DECEMBER 31,
                             2000     2001     2002     2003     2004    THEREAFTER   TOTAL        1999
                            ------   ------   ------   ------   ------   ----------   ------   ------------
                                                         (DOLLARS IN MILLIONS)
<S>                         <C>      <C>      <C>      <C>      <C>      <C>          <C>      <C>
ASSETS
  Short-term
    investments...........  $1,420   $   --   $   --   $   --   $   --     $   --     $1,420      $1,420
  Average interest rate...     5.8%
LIABILITIES
  Variable rate note
    payable to Williams...  $   12   $   25   $   25   $   25   $   25     $  876     $  988      $  988
  Average interest rate...   LIBOR    LIBOR    LIBOR    LIBOR    LIBOR      LIBOR
                             +2.25    +2.25    +2.25    +2.25    +2.25      +2.25
  Fixed rate long-term
    debt, including
    current portions
    High yield public
      debt................  $   --   $   --   $   --   $   --   $   --     $2,000     $2,000      $2,079
    Average interest
      rate................    10.8%    10.8%    10.8%    10.8%    10.8%      10.8%
</TABLE>

FOREIGN CURRENCY RISK

     WCG has international investments, primarily in Australia and South
America, that could affect its financial results if the investments incur a
permanent decline in value as a result of changes in foreign currency exchange
rates and the economic conditions in foreign countries.

     WCG has a preferred stock investment in a Brazilian telecommunications
venture totaling $292 million and $317 million as of December 31, 2000 and 1999,
respectively. The Brazilian economy experienced a 7% reduction in the value of
the Brazilian real against the U.S. dollar from December 31, 1999 through
December 31, 2000 compared to a 33% reduction in the value of the Brazilian real
against the U.S. dollar from December 31, 1998 through December 31, 1999.
However, as of December 31, 2000 and 1999, management believes the fair value of
this investment approximated the carrying value. An additional 20% change in the
value of the Brazilian real and the U.S. dollar could result in up to a $58
million change in the value of WCG's investment as of December 31, 2000. This
analysis assumes a direct correlation between the fluctuation of the Brazilian
real and the value of the investment. The ultimate duration and severity of the
conditions in Brazil remain uncertain, as does the long-term impact of WCG's
interest in this venture.

     The net assets of WCG's foreign operations which are consolidated are
located in various other countries throughout the world and approximate 7% and
4% of WCG's total net assets as of December 31, 2000 and 1999, respectively.
These foreign operations, whose functional currency is the local currency, do
not have significant transactions or financial instruments denominated in other
currencies. However, these investments do have the potential to impact WCG's
financial position due to fluctuations in these local currencies arising from
the process of remeasuring the local functional currency into the U.S. dollar. A
20% change in the respective functional currencies against the U.S. dollar could
have changed WCG's stockholders' equity by approximately $16 million and $17
million as of December 31, 2000 and 1999, respectively.

     In first quarter 2000, WCG advanced approximately $150 million to ATL,
denominated in Brazilian reais, which subjects WCG to foreign currency
fluctuations. The value of the advance is $132.6 million based on the exchange
rate of the Brazilian real to the U.S. dollar as of December 31, 2000.

     Management historically has not utilized derivatives or other financial
instruments to hedge the risk associated with the movement in foreign
currencies. However, management continually monitors fluctuations in these
currencies and will consider the use of derivative financial instruments or
employment of other investment alternatives if cash flows or investment returns
so warrant.

                                       F-14
<PAGE>   50

EQUITY PRICE RISK

     Equity price risk primarily arises from investments in publicly traded
telecommunications-related companies. These investments are carried at fair
value and approximate 4% and 5% of WCG's total assets as of December 31, 2000
and December 31, 1999, respectively. These investments do have the potential to
impact WCG's financial position due to movements in the price of these equity
securities. Prior to January 1, 2000, WCG had not utilized derivatives or other
financial instruments to hedge the risk associated with the movement in the
price of these equity securities. However, WCG has entered into derivative
instruments in 2000 which will expire by first quarter 2002 and as of December
31, 2000, provided protection to the exposure to changes in the price of certain
marketable equity securities. These derivative instruments covered approximately
24% of WCG's marketable equity securities portfolio as of December 31, 2000. It
is reasonably possible that the prices of the equity securities in WCG's
marketable equity securities portfolio could experience a 30% increase or
decrease in the near term. Assuming a 30% increase or decrease in prices, the
value of WCG's marketable equity securities portfolio as of December 31, 2000,
which is included in short-term investments in WCG's Consolidated Balance Sheet,
would increase or decrease by approximately $94 million or $74 million,
respectively.

                                       F-15
<PAGE>   51

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<S>                                                           <C>
  Report of Ernst & Young LLP, Independent Auditors.........  F-17
  Consolidated Statements of Operations for the years ended
     December 31, 2000, 1999 and 1998.......................  F-18
  Consolidated Balance Sheets as of December 31, 2000 and
     1999...................................................  F-19
  Consolidated Statements of Stockholders' Equity for the
     years ended December 31, 2000, 1999 and 1998...........  F-20
  Consolidated Statements of Cash Flows for the years ended
     December 31, 2000, 1999 and 1998.......................  F-21
  Notes to Consolidated Financial Statements................  F-22
  Quarterly Financial Data (Unaudited)......................  F-56
</TABLE>

                                       F-16
<PAGE>   52

                         REPORT OF INDEPENDENT AUDITORS

To the Stockholders of
Williams Communications Group, Inc.

     We have audited the accompanying consolidated balance sheets of Williams
Communications Group, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Williams
Communications Group, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.

     As discussed in Note 1 to the consolidated financial statements, effective
July 1, 1999, the Company changed its method of accounting for revenue
recognition associated with leasing its fiber-optic network.

                                            ERNST & YOUNG LLP

Tulsa, Oklahoma
February 28, 2001

                                       F-17
<PAGE>   53

                      WILLIAMS COMMUNICATIONS GROUP, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                        ----------------------------------------
                                                            2000          1999          1998
                                                        ------------   -----------   -----------
                                                        (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                     <C>            <C>           <C>
Revenues:
  Related parties.....................................   $  184,077     $  16,706     $  11,964
  Other...............................................      655,000       584,750       363,375
                                                         ----------     ---------     ---------
           Total revenues.............................      839,077       601,456       375,339
Operating expenses:
  Cost of sales.......................................      823,272       526,040       294,382
  Selling, general and administrative.................      270,071       199,615       140,965
  Provision for doubtful accounts.....................        9,959         1,066         2,360
  Depreciation and amortization.......................      185,024        86,718        50,564
  Other...............................................         (578)       34,512        28,232
                                                         ----------     ---------     ---------
           Total operating expenses...................    1,287,748       847,951       516,503
                                                         ----------     ---------     ---------
Loss from operations..................................     (448,671)     (246,495)     (141,164)
Interest accrued......................................     (387,816)     (135,939)      (16,445)
Interest capitalized..................................      166,700        39,518        11,182
Investing income:
  Interest and other..................................       59,434        29,777           741
  Equity losses.......................................      (20,297)      (36,440)       (7,908)
  Income from investments.............................      294,136         9,397            --
Minority interest in loss of consolidated
  subsidiaries........................................       24,492         9,044         2,050
Other income (loss), net..............................          227          (359)          178
                                                         ----------     ---------     ---------
Loss before income taxes..............................     (311,795)     (331,497)     (151,366)
Benefit from income taxes allocated from Williams.....       34,107         3,185         4,787
                                                         ----------     ---------     ---------
Loss from continuing operations.......................     (277,688)     (328,312)     (146,579)
Loss from discontinued operations.....................     (540,000)      (31,389)      (39,150)
                                                         ----------     ---------     ---------
Net loss..............................................     (817,688)     (359,701)     (185,729)
Preferred stock dividends and amortization of
  preferred stock issuance costs......................       (4,956)           --            --
                                                         ----------     ---------     ---------
Net loss attributable to common stockholders..........   $ (822,644)    $(359,701)    $(185,729)
                                                         ==========     =========     =========
Basic and diluted loss per share:
  Loss from continuing operations attributable to
     common stockholders..............................   $     (.61)    $    (.79)    $    (.37)
  Loss from discontinued operations...................        (1.16)         (.08)         (.10)
                                                         ----------     ---------     ---------
  Net loss attributable to common stockholders........   $    (1.77)    $    (.87)    $    (.47)
                                                         ==========     =========     =========
  Weighted average shares outstanding.................      464,145       412,620       395,435
</TABLE>

                            See accompanying notes.

                                       F-18
<PAGE>   54

                      WILLIAMS COMMUNICATIONS GROUP, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 AS OF DECEMBER 31,
                                                              ------------------------
                                                                 2000          1999
                                                              -----------   ----------
                                                                   (IN THOUSANDS)
<S>                                                           <C>           <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $   213,888   $  483,853
  Short-term investments....................................      395,184    1,419,762
  Receivables less allowance of $21,501,000 ($8,843,000 in
     1999)..................................................      291,706      119,476
  Net assets of discontinued operations.....................      288,384      797,364
  Deferred income taxes.....................................           --       39,031
  Other.....................................................       17,252       12,011
                                                              -----------   ----------
Total current assets........................................    1,206,414    2,871,497
Investments.................................................      619,852      786,046
Property, plant and equipment, net..........................    5,138,984    2,047,672
Goodwill and other intangibles, net.........................      103,231      108,273
Other assets and deferred charges...........................      340,804      244,215
                                                              -----------   ----------
Total assets................................................  $ 7,409,285   $6,057,703
                                                              ===========   ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $   419,863   $  234,859
  Deferred income...........................................      107,931       72,550
  Accrued liabilities.......................................      401,858      381,061
  Long-term debt due within one year -- The Williams
     Companies, Inc. .......................................           --       12,500
                                                              -----------   ----------
Total current liabilities...................................      929,652      700,970
Long-term debt:
  The Williams Companies, Inc. .............................      975,610      975,610
  Other.....................................................    3,551,096    1,989,775
Deferred income taxes.......................................           --      123,136
Other liabilities and deferred income.......................      453,905       76,921
Minority interest in consolidated subsidiaries..............       45,028       78,691
Contingent liabilities and commitments......................           --           --
6.75% redeemable cumulative convertible preferred stock;
  $0.01 par value per share; 500.0 million shares
  authorized; 5.0 million shares and no shares outstanding
  in 2000 and 1999, respectively; aggregate liquidation
  preference of $250,000,000................................      240,722           --
Stockholders' equity:
  Class A common stock, $0.01 par value, 1 billion shares
     authorized, 68.2 million shares outstanding in 2000 and
     1999...................................................          682          682
  Class B common stock, $0.01 par value, 500 million shares
     authorized, 395.4 million shares outstanding in 2000
     and 1999...............................................        3,954        3,954
  Capital in excess of par value............................    2,659,136    2,659,927
  Accumulated deficit.......................................   (1,494,549)    (676,861)
  Accumulated other comprehensive income....................       44,049      124,898
                                                              -----------   ----------
Total stockholders' equity..................................    1,213,272    2,112,600
                                                              -----------   ----------
Total liabilities and stockholders' equity..................  $ 7,409,285   $6,057,703
                                                              ===========   ==========
</TABLE>

                            See accompanying notes.

                                       F-19
<PAGE>   55

                      WILLIAMS COMMUNICATIONS GROUP, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                  ACCUMULATED
                                                      CAPITAL IN                     OTHER
                                             COMMON   EXCESS OF    ACCUMULATED   COMPREHENSIVE
                                             STOCK    PAR VALUE      DEFICIT     INCOME (LOSS)     TOTAL
                                             ------   ----------   -----------   -------------   ----------
                                                                     (IN THOUSANDS)
<S>                                          <C>      <C>          <C>           <C>             <C>
Balance, December 31, 1997.................  $3,954   $  996,395   $  (128,368)    $ (3,479)     $  868,502
  Net loss.................................     --            --      (185,729)          --        (185,729)
  Other comprehensive income (loss):
     Net unrealized appreciation on
       marketable equity securities........     --            --            --       29,977          29,977
     Foreign currency translation
       adjustments.........................     --            --            --       (1,792)         (1,792)
                                                                                                 ----------
  Comprehensive loss.......................                                                        (157,544)
  Capital contributions from The Williams
     Companies, Inc. ......................     --       299,493            --           --         299,493
  Noncash dividends to The Williams
     Companies, Inc. ......................     --            --        (2,799)          --          (2,799)
  Other....................................     --            30            --           --              30
                                             ------   ----------   -----------     --------      ----------
Balance, December 31, 1998.................  3,954     1,295,918      (316,896)      24,706       1,007,682
  Net loss.................................     --            --      (359,701)          --        (359,701)
  Other comprehensive income (loss):
     Net unrealized appreciation on
       marketable equity securities........     --            --            --      113,198         113,198
     Foreign currency translation
       adjustments.........................     --            --            --      (13,006)        (13,006)
                                                                                                 ----------
  Comprehensive loss.......................                                                        (259,509)
  Capital contributions from The Williams
     Companies, Inc. ......................     --        91,290            --           --          91,290
  Net proceeds from equity offering........    681     1,467,926            --           --       1,468,607
  Conversion of Williams stock based awards
     to WCG stock based awards.............     --         5,316            --           --           5,316
  Recharacterization of amounts due to The
     Williams Companies, Inc. .............     --      (200,000)           --           --        (200,000)
  Stock award transactions.................      1          (523)           --           --            (522)
  Other....................................     --            --          (264)          --            (264)
                                             ------   ----------   -----------     --------      ----------
Balance, December 31, 1999.................  4,636     2,659,927      (676,861)     124,898       2,112,600
  Net loss.................................     --            --      (817,688)          --        (817,688)
  Other comprehensive loss:
     Net unrealized depreciation of
       marketable equity securities, net of
       reclassification adjustment for
       gains realized in net loss..........     --            --            --      (51,609)        (51,609)
     Foreign currency translation
       adjustments.........................     --            --            --      (29,240)        (29,240)
                                                                                                 ----------
  Comprehensive loss.......................                                                        (898,537)
  Stock award transactions.................     --         4,877            --           --           4,877
  Preferred stock dividends and
     amortization of preferred stock
     issuance costs........................     --        (4,956)           --           --          (4,956)
  Other....................................     --          (712)           --           --            (712)
                                             ------   ----------   -----------     --------      ----------
Balance, December 31, 2000.................  $4,636   $2,659,136   $(1,494,549)    $ 44,049      $1,213,272
                                             ======   ==========   ===========     ========      ==========
</TABLE>

                            See accompanying notes.

                                       F-20
<PAGE>   56

                      WILLIAMS COMMUNICATIONS GROUP, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                              --------------------------------------
                                                                 2000          1999          1998
                                                              -----------   -----------   ----------
                                                                          (IN THOUSANDS)
<S>                                                           <C>           <C>           <C>
OPERATING ACTIVITIES
Net loss from continuing operations.........................  $  (277,688)  $  (328,312)  $ (146,579)
Adjustments to reconcile net loss to net cash provided by
  (used in) operating activities:
  Depreciation and amortization.............................      185,024        86,718       50,564
  Benefit from deferred income taxes........................      (36,134)       (3,293)      (4,133)
  Provision for loss on property............................           --         5,500           --
  Provision for loss on investment..........................       34,515         1,640       23,150
  Provision for doubtful accounts...........................        9,959         1,066        2,360
  Equity losses.............................................       20,297        36,440        7,908
  Loss on sales of property and other assets................          730        29,168       10,310
  Gain on sales of investments..............................     (110,220)           --           --
  Gain on conversion of common stock investment.............     (214,732)           --           --
  Minority interest in loss of consolidated subsidiaries....      (24,492)       (9,044)      (2,050)
  Cash provided by (used in) changes in:
     Receivables............................................     (183,021)       23,631     (105,791)
     Other current assets...................................       (6,685)       (8,023)     (12,790)
     Accounts payable.......................................      196,296        82,011       93,746
     Current deferred income................................       53,511        43,624       26,231
     Accrued liabilities....................................      (68,146)      155,319       (1,837)
     Long-term deferred income..............................      267,228        60,072           --
     Other..................................................      (23,375)       31,961       (2,329)
                                                              -----------   -----------   ----------
Net cash provided by (used in) operating activities.........     (176,933)      208,478      (61,240)
FINANCING ACTIVITIES
Proceeds from long-term debt................................    1,670,588     4,357,809           --
Payments on long-term debt..................................     (110,000)   (2,369,367)        (887)
Proceeds from issuance of common stock, net of expenses.....        4,166     1,468,085           --
Proceeds from issuance of preferred stock, net of
  expenses..................................................      240,500            --           --
Debt issue costs............................................      (28,701)      (78,098)          --
Capital contributions from The Williams Companies, Inc. ....           --        91,290      299,493
Contribution to subsidiary from minority interest
  shareholders..............................................           --        37,588           --
Changes in due to/from The Williams Companies, Inc. ........      (12,500)      173,767      711,440
                                                              -----------   -----------   ----------
Net cash provided by financing activities...................    1,764,053     3,681,074    1,010,046
INVESTING ACTIVITIES
Property, plant and equipment:
  Capital expenditures......................................   (3,304,970)   (1,591,701)    (352,723)
  Proceeds from sales.......................................       34,453        60,318       40,012
Purchase of investments.....................................   (1,472,432)   (2,383,037)    (226,489)
Proceeds from sales of investments..........................    2,908,015       598,635           --
Proceeds from sale of business..............................          200        49,452       10,000
Other.......................................................        8,669            --       12,604
                                                              -----------   -----------   ----------
Net cash used in investing activities.......................   (1,826,065)   (3,266,333)    (516,596)
Net cash used in discontinued operations....................      (31,020)     (174,724)    (398,907)
                                                              -----------   -----------   ----------
Increase (decrease) in cash and cash equivalents............     (269,965)      448,495       33,303
Cash and cash equivalents at beginning of period............      483,853        35,358        2,055
                                                              -----------   -----------   ----------
Cash and cash equivalents at end of period..................  $   213,888   $   483,853   $   35,358
                                                              ===========   ===========   ==========
</TABLE>

                            See accompanying notes.

                                       F-21
<PAGE>   57

                      WILLIAMS COMMUNICATIONS GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF THE BUSINESS -- BASIS OF PRESENTATION -- SUMMARY OF SIGNIFICANT
   ACCOUNTING POLICIES

NATURE OF THE BUSINESS

     Williams Communications Group, Inc. (WCG), through its wholly-owned
operating subsidiary, Williams Communications, Inc. (WCI), owns, operates and is
extending a nationwide fiber-optic network focused on providing voice, data,
Internet and video services to communications services providers. WCG also
provides integrated fiber-optic, satellite and teleport video transmission
services for the broadcast industry.

     The Williams Companies, Inc. (Williams) owns 100% of WCG's outstanding
Class B common stock which gives Williams approximately 98% of the voting power
of WCG. In addition, Williams and WCG entered into an agreement that, among
other things, transferred assets and converted the Williams note into paid in
capital in exchange for 24,265,892 shares of WCG's Class A common stock (see
Note 19). After this agreement, Williams owns approximately 86% of the total
outstanding Class A and Class B common stock of WCG. Williams has announced that
its board of directors has authorized its management to take steps that may lead
to a tax-free distribution of shares of WCG's common stock held by Williams to
its shareholders.

BASIS OF PRESENTATION

     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, assets and liabilities
and cash flows segregated and reported as discontinued operations in the
accompanying consolidated financial statements (see Note 2). The notes to the
consolidated financial statements reflect the continuing operations of WCG
unless otherwise indicated.

     WCG is organized into three operating segments as follows: Network,
Broadband Media and Strategic Investments. Network owns or leases and operates a
nationwide intercity fiber-optic network, which it is extending locally and
globally to provide Internet, data, voice and video services exclusively to
communications service providers. Network also includes a publicly traded
Australian telecommunications company and various other investments that drive
bandwidth usage on the WCG network. Broadband Media includes Vyvx Services which
provides live and non-live video transmission services worldwide for news,
sports, advertising and entertainment events and investments in domestic
broadband media communication companies. Strategic Investments invests in both
domestic and foreign companies that it believes will, directly or indirectly,
increase revenue opportunities for its other segments. As of December 31, 2000,
Strategic Investments' foreign investments are all located in South America. WCG
has formed strategic alliances with communications companies to secure
long-term, high-capacity commitments for traffic on its network and to enhance
its service offerings.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of WCG, its
majority-owned subsidiaries and a subsidiary that WCG controls but owns less
than 50% of the voting common stock. Companies which WCG does not control and
owns 20% to 50% of the voting common stock,

                                       F-22
<PAGE>   58
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

or otherwise has the ability to exercise significant influence over the
operating and financial policies of the company, are accounted for under the
equity method of accounting.

     WCG has a 45% interest as of December 31, 2000 (41% and 22% as of December
31, 1999 and 1998, respectively) in PowerTel Limited (PowerTel), which is
located in Australia, accounted for under the principles of consolidation. WCG
consolidates PowerTel as WCG has control over PowerTel's operations despite its
less than 50% ownership because WCG is entitled to appoint a majority of the
members of PowerTel's board of directors and thereby exercise control over its
operations.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

REVENUE RECOGNITION

  Network

     Capacity and management services revenues are recognized monthly as the
services are provided. Amounts billed in advance of the service month are
recorded as deferred income.

     Grants of indefeasible rights of use, or IRUs, of constructed but unlit
fiber, or dark fiber, in exchange for cash, are accounted for as leases. IRUs
are evaluated for sales-type lease accounting which results in certain lease
transactions being accounted for as sales at the time of acceptance of the fiber
by the customer. IRUs that do not meet the criteria for a sales-type lease are
accounted for as an operating lease, and the cash received is recognized as
revenue over the term of the IRU. In accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 43, "Real Estate Sales, an
interpretation of Statement of Financial Accounting Standards (SFAS) No. 66,"
issued in June 1999, dark fiber is considered integral equipment and accordingly
title must transfer to a lessee in order for a lease transaction to be accounted
for as a sales-type lease. After June 30, 1999, the effective date of FASB
Interpretation No. 43, sales-type lease accounting is not appropriate for IRUs
since IRUs generally do not transfer title to the fibers under lease to the
lessee. Therefore, these transactions are accounted for as operating leases
unless title to the fibers under lease transfers to the lessee or the agreement
was entered into prior to June 30, 1999. The effects of this interpretation on
2000 and 1999 results were to decrease revenues by $189.9 million and $11.0
million, respectively, and increase net loss by $81.6 million and $4.4 million,
respectively.

     Payments received for the installation of conduit under joint build
construction contracts are generally recorded as a recovery of the applicable
construction costs.

  Broadband Media

     Transmission and media distribution services revenues are recognized
monthly as the services are provided. Amounts billed in advance of the service
month are recorded as deferred income.

                                       F-23
<PAGE>   59
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CASH AND CASH EQUIVALENTS

     Cash and cash equivalents include demand and time deposits, certificates of
deposit and other marketable securities with maturities of three months or less
when acquired.

     Certain items which meet the definition of cash equivalents, but are part
of a larger pool of investments managed by financial institutions, are included
in short-term investments.

INVESTMENTS

     Debt and marketable equity securities are classified as available-for-sale.
The carrying amount of these investments is reported at fair value with net
unrealized appreciation or depreciation reported as a component of other
comprehensive income.

     The cost of investments sold is based on the specific identification method
with gross realized gains and losses included in income from investments. For
investments with declines in fair value below their cost basis, which are
determined to be other than temporary, the cost basis of the investment is
written down to its fair value with the realized loss included in income from
investments.

PROPERTY, PLANT AND EQUIPMENT

     Property and equipment is recorded at cost. Depreciation is computed
primarily on the straight-line method over estimated useful lives.

GOODWILL AND OTHER INTANGIBLES

     Goodwill and other intangibles are amortized on a straight-line basis over
the estimated period of benefit ranging from five to twenty years. Accumulated
amortization as of December 31, 2000 and 1999 was $38.7 million and $33.2
million, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

     WCG evaluates its long-lived assets, including related intangibles, of
identifiable business activities for impairment when events or changes in
circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. The determination of whether an impairment
has occurred is based on management's estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of the assets. If
an impairment has occurred, the amount of the impairment recognized is
determined by estimating the fair value for the assets and recording a provision
for loss if the carrying value is greater than fair value.

     For assets identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the cost to sell to
determine if an impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.

FINANCING COSTS

     Costs incurred to obtain financing through the issuance of WCG's senior
redeemable notes and its long-term credit facility are included in other assets
and deferred charges and amortized over the life of the debt. Costs incurred to
obtain financing through the issuance of WCG's redeemable

                                       F-24
<PAGE>   60
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

cumulative convertible preferred stock are included as a reduction to the
carrying value of the preferred stock and amortized over the life of the
preferred stock.

INCOME TAXES

     WCG's operations are included in the Williams' consolidated federal income
tax return. A tax sharing agreement exists between WCG and Williams to allocate
and settle among themselves the consolidated federal income tax liability (see
Note 5). Deferred income taxes are allocated from Williams using the liability
method and are provided on all temporary differences between the financial basis
and allocated tax basis of WCG's assets and liabilities. Valuation allowances
are established to reduce deferred tax assets to an amount that will more likely
than not be realized.

EARNINGS PER SHARE

     Basic earnings per share are based on the sum of the average number of
common shares outstanding and deferred shares. Diluted earnings per share
include any dilutive effect of stock options and convertible preferred stock.
For the periods presented, diluted loss per share is the same as the basic
calculation as the inclusion of any stock options and convertible preferred
stock would be antidilutive. Stock options and convertible preferred stock of
0.5 million shares and 5.0 million shares, respectively, as of December 31, 2000
and stock options of 8.0 million shares as of December 31, 1999 were excluded
from the computation of diluted loss per common share. As of December 31, 1999
and 1998 no convertible preferred stock was excluded from the computation of
diluted loss per common share as preferred stock was not issued until 2000.
Additionally, as of December 31, 1998, no stock awards were excluded from the
computation of diluted loss per common share, as WCG had not granted any WCG
common stock awards during those periods.

FOREIGN CURRENCY TRANSLATION

     The functional currency of WCG is the U.S. dollar. The functional currency
of WCG's foreign operations is the applicable local currency for each foreign
subsidiary and equity method investee, including the Australian dollar,
Brazilian real and Chilean peso. Assets and liabilities of foreign subsidiaries
and equity investees are translated at the spot rate in effect at the applicable
reporting date, and the combined statements of operations and WCG's share of the
results of operations of its equity affiliates are translated at the average
exchange rates in effect during the applicable period. The resulting cumulative
translation adjustment is recorded as a separate component of other
comprehensive income.

     Transactions denominated in currencies other than the functional currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transactions gains and losses
which are reflected in the statement of operations.

RECENT ACCOUNTING STANDARDS

     SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" 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

                                       F-25
<PAGE>   61
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized in earnings. The ineffective portion of a derivative's change in fair
value will be recognized immediately in earnings. WCG has completed its
implementation efforts as of December 31, 2000 and adopted these standards
effective January 1, 2001. The derivatives identified in the implementation
process consisted of a cashless collar on a portion of WCG's marketable equity
securities portfolio as well as an interest rate swap and foreign currency hedge
held by an equity investee. The cashless collar does not qualify as a hedge
under SFAS No. 133 as amended. Therefore, changes in the market value of the
cashless collar will be realized in the income statement while changes in the
market value of the underlying security will be reflected in accumulated other
comprehensive income. The initial impact of these standards on WCG's results of
operations and financial position was not material.

     The FASB issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." This interpretation modifies the current practice
of accounting for certain stock award agreements and was generally effective
beginning July 1, 2000. The initial impact of this interpretation on WCG's
results of operations and financial position was not material.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." Among other things, SAB No. 101 clarifies certain conditions
regarding the culmination of an earnings process and customer acceptance
requirements in order to recognize revenue. The initial impact of this SAB on
WCG's results of continued operations and financial position was not material.

RECLASSIFICATIONS

     Certain prior year amounts have been reclassified to conform with the
current presentation.

2. DISCONTINUED OPERATIONS

     On January 25, 2001, WCG's board of directors authorized a plan for its
management to divest the Solutions segment. On January 29, 2001, WCG signed an
agreement to sell the domestic and Mexican operations of the Solutions segment
to Platinum Equity, LLC. This sale is expected to close at the end of first
quarter 2001. WCG plans to divest its remaining Canadian operations later in
2001.

                                       F-26
<PAGE>   62
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Summarized results of discontinued operations are as follows:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                            ------------------------------------
                                               2000         1999         1998
                                            ----------   ----------   ----------
                                                       (IN THOUSANDS)
<S>                                         <C>          <C>          <C>
Revenues..................................  $1,370,483   $1,431,655   $1,367,404
Operating losses:
  Loss before income taxes................  $ (117,057)  $  (35,975)  $  (39,460)
  Benefit (provision) from income taxes...     (17,864)       4,586          310
  Cumulative effect of change in
     accounting principle.................     (25,377)          --           --
                                            ----------   ----------   ----------
                                              (160,298)     (31,389)     (39,150)
Estimated loss on disposal:
  Estimated loss on sale, including exit
     costs................................    (361,702)          --           --
  Estimated operating losses from January
     1, 2001 to anticipated disposal
     date.................................     (18,000)          --           --
                                            ----------   ----------   ----------
                                              (379,702)          --           --
                                            ----------   ----------   ----------
Loss from discontinued operations.........  $ (540,000)  $  (31,389)  $  (39,150)
                                            ==========   ==========   ==========
</TABLE>

     The results of discontinued operations exclude certain corporate costs that
were previously allocated to the Solutions segment of $25.6 million, $15.7
million and $6.9 million for 2000, 1999 and 1998, respectively. These costs have
been reallocated to the remaining segments. The results of discontinued
operations include charges from Williams of $15.2 million, $13.7 million and
$12.4 million for 2000, 1999 and 1998, respectively.

     Prior to January 1, 2000, WCG's revenue recognition policy on Solutions'
new systems sales and upgrades had been to recognize revenues under the
percentage of completion method. A portion of the revenues on the contracts were
initially recognized upon delivery of equipment with the remaining revenues
under the contract being recognized over the installation period based on the
relationship of incurred labor to total estimated labor. In light of the new
guidance issued in SAB No. 101, effective January 1, 2000, WCG changed its
method of accounting for new systems sales and upgrades from the percentage of
completion method to the completed contract method. The provisions of SAB No.
101 permit WCG to treat this change in accounting principle as a cumulative
effect adjustment consistent with rules issued under Accounting Principles Board
(APB) Opinion No. 20. The cumulative effect of the accounting change resulted in
a charge to the 2000 loss on discontinued operations of $25.4 million (net of
income tax benefits of $14.9 million and minority interest of $17.2 million).

                                       F-27
<PAGE>   63
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Net assets of discontinued operations as of December 31 are as follows:

<TABLE>
<CAPTION>
                                                          2000        1999
                                                        --------   ----------
                                                           (IN THOUSANDS)
<S>                                                     <C>        <C>
Current assets:
  Cash................................................  $ 19,961   $   10,448
  Accounts receivable, net............................   414,250      480,237
  Costs (and estimated earnings in 1999) in excess of
     billings.........................................   101,121      166,738
  Inventories.........................................    78,489       85,855
  Other...............................................    19,937       13,160
                                                        --------   ----------
                                                         633,758      756,438
Property, plant and equipment, net....................   109,170      101,791
Other assets..........................................   239,737      259,299
                                                        --------   ----------
                                                         982,665    1,117,528
Current liabilities:
  Accounts payable....................................    92,369       77,479
  Deferred income.....................................    35,702       39,887
  Accrued liabilities.................................   127,539      110,876
  Billings in excess of costs (and estimated earnings
     in 1999).........................................    51,403       50,712
  Accrual for loss on disposal of discontinued
     operations.......................................   379,702           --
  Current portion of long-term debt...................     2,985        2,165
                                                        --------   ----------
                                                         689,700      281,119
Other liabilities.....................................     4,581       39,045
                                                        --------   ----------
                                                         694,281      320,164
                                                        --------   ----------
Net assets............................................  $288,384   $  797,364
                                                        ========   ==========
</TABLE>

3. SEGMENT DISCLOSURES

     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 Williams.
Intercompany sales are generally accounted for as if the sales were to
unaffiliated third parties, that is, at current market prices.

                                       F-28
<PAGE>   64

                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following tables present certain financial information concerning WCG's
reportable segments. 1999 and 1998 segment loss has been restated to include
certain corporate costs which were previously allocated to the Solutions segment
(see Note 2).

<TABLE>
<CAPTION>
                                                                            BROADBAND      STRATEGIC
                                                               NETWORK        MEDIA       INVESTMENTS   ELIMINATIONS     TOTAL
                                                              ----------   ------------   -----------   ------------   ----------
                                                                                        (IN THOUSANDS)
<S>                                                           <C>          <C>            <C>           <C>            <C>
DECEMBER 31, 2000
Revenues:
  External customers:
     Dark fiber.............................................  $   62,397     $     --      $     --       $     --     $   62,397
     Capacity and other.....................................     608,348      168,332            --             --        776,680
                                                              ----------     --------      --------       --------     ----------
  Total external customers..................................     670,745      168,332            --             --        839,077
  Intercompany..............................................      34,275          429            --        (34,704)            --
                                                              ----------     --------      --------       --------     ----------
Total segment revenues......................................  $  705,020     $168,761      $     --       $(34,704)    $  839,077
                                                              ==========     ========      ========       ========     ==========
Costs of sales:
  Dark fiber................................................  $   42,207     $     --      $     --       $     --     $   42,207
  Capacity and other........................................     683,489       97,576            --             --        781,065
  Intercompany..............................................         429       34,275            --        (34,704)            --
                                                              ----------     --------      --------       --------     ----------
Total cost of sales.........................................  $  726,125     $131,851      $     --       $(34,704)    $  823,272
                                                              ==========     ========      ========       ========     ==========
Segment loss:
  Loss from operations......................................  $ (404,900)    $(36,551)     $ (7,220)      $     --     $ (448,671)
  Equity earnings (losses)..................................       4,421      (10,697)      (14,021)            --        (20,297)
  Income from investments...................................     281,403           --        12,733             --        294,136
  Add back -- allocated charges from Williams...............       7,011        1,634           580             --          9,225
                                                              ----------     --------      --------       --------     ----------
Total segment loss..........................................  $ (112,065)    $(45,614)     $ (7,928)      $     --     $ (165,607)
                                                              ==========     ========      ========       ========     ==========
Equity method investments...................................  $   15,335     $     --      $ 77,454       $     --     $   92,789
Additions to long-lived assets..............................  $3,358,980     $ 37,113      $  2,506       $     --     $3,398,599
Depreciation and amortization...............................  $  154,288     $ 30,269      $    467       $     --     $  185,024
</TABLE>

                                       F-29
<PAGE>   65

                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                           BROADBAND    STRATEGIC
                                                               NETWORK       MEDIA     INVESTMENTS   ELIMINATIONS     TOTAL
                                                              ----------   ---------   -----------   ------------   ----------
                                                                                       (IN THOUSANDS)
<S>                                                           <C>          <C>         <C>           <C>            <C>
DECEMBER 31, 1999
Revenues:
  External customers:
     Dark fiber.............................................  $  109,258   $     --     $     --       $     --     $  109,258
     Capacity and other.....................................     295,799    161,324       35,075             --        492,198
                                                              ----------   --------     --------       --------     ----------
  Total external customers..................................     405,057    161,324       35,075             --        601,456
  Intercompany..............................................      33,452      1,525          360        (35,337)            --
                                                              ----------   --------     --------       --------     ----------
Total segment revenues......................................  $  438,509   $162,849     $ 35,435       $(35,337)    $  601,456
                                                              ==========   ========     ========       ========     ==========
Costs of sales:
  Dark fiber................................................  $   67,306   $     --     $     --       $     --     $   67,306
  Capacity and other........................................     347,437     91,083       20,214             --        458,734
  Intercompany..............................................         448     31,832        3,057        (35,337)            --
                                                              ----------   --------     --------       --------     ----------
Total cost of sales.........................................  $  415,191   $122,915     $ 23,271       $(35,337)    $  526,040
                                                              ==========   ========     ========       ========     ==========
Segment loss:
  Loss from operations......................................  $ (167,898)  $(30,594)    $(48,003)      $     --     $ (246,495)
  Equity earnings (losses)..................................       1,020         --      (37,460)            --        (36,440)
  Income from investments...................................          --         --        9,397             --          9,397
  Add back -- allocated charges from Williams...............       3,827        973          189             --          4,989
                                                              ----------   --------     --------       --------     ----------
Total segment loss..........................................  $ (163,051)  $(29,621)    $(75,877)      $     --     $ (268,549)
                                                              ==========   ========     ========       ========     ==========
Equity method investments...................................  $   14,416   $     --     $ 42,572       $     --     $   56,988
Additions to long-lived assets..............................  $1,640,520   $ 39,776     $  3,069       $     --     $1,683,365
Depreciation and amortization...............................  $   51,454   $ 29,866     $  5,398       $     --     $   86,718
</TABLE>

                                       F-30
<PAGE>   66

                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                         BROADBAND    STRATEGIC
                                                              NETWORK      MEDIA     INVESTMENTS   ELIMINATIONS     TOTAL
                                                              --------   ---------   -----------   ------------   ---------
                                                                                     (IN THOUSANDS)
<S>                                                           <C>        <C>         <C>           <C>            <C>
DECEMBER 31, 1998
Revenues:
  External customers:
     Dark fiber.............................................  $ 64,100   $     --     $     --       $     --     $  64,100
     Capacity and other.....................................   101,329    157,861       52,049             --       311,239
                                                              --------   --------     --------       --------     ---------
  Total external customers..................................   165,429    157,861       52,049             --       375,339
  Intercompany..............................................    40,755      3,331          450        (44,536)           --
                                                              --------   --------     --------       --------     ---------
Total segment revenues......................................  $206,184   $161,192     $ 52,499       $(44,536)    $ 375,339
                                                              ========   ========     ========       ========     =========
Costs of sales:
  Dark fiber................................................  $ 38,500   $     --     $     --       $     --     $  38,500
  Capacity and other........................................   128,551     98,082       29,249             --       255,882
  Intercompany..............................................       252     37,737        6,547        (44,536)           --
                                                              --------   --------     --------       --------     ---------
Total cost of sales.........................................  $167,303   $135,819     $ 35,796       $(44,536)    $ 294,382
                                                              ========   ========     ========       ========     =========
Segment loss:
  Loss from operations......................................  $(34,057)  $(47,586)    $(59,521)      $     --     $(141,164)
  Equity losses.............................................        --         --       (7,908)            --        (7,908)
  Add back -- allocated charges from Williams...............     1,409      1,048          762             --         3,219
                                                              --------   --------     --------       --------     ---------
Total segment loss..........................................  $(32,648)  $(46,538)    $(66,667)      $     --     $(145,853)
                                                              ========   ========     ========       ========     =========
Equity method investments...................................  $    129   $     --     $ 48,304       $     --     $  48,433
Additions to long-lived assets..............................  $430,748   $ 35,767     $ 15,600       $     --     $ 482,115
Depreciation and amortization...............................  $ 14,159   $ 25,574     $ 10,831       $     --     $  50,564
</TABLE>

                                       F-31
<PAGE>   67
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                      TOTAL ASSETS
                                          ------------------------------------
                                                      DECEMBER 31,
                                          ------------------------------------
                                             2000         1999         1998
                                          ----------   ----------   ----------
                                                     (IN THOUSANDS)
<S>                                       <C>          <C>          <C>
Network.................................  $6,025,728   $2,651,192   $  909,139
Broadband Media.........................     210,840      228,778      178,473
Strategic Investments...................     506,813      403,470      263,103
Corporate...............................     377,520    1,976,899       17,392
Discontinued Operations.................     288,384      797,364      654,029
                                          ----------   ----------   ----------
  Total assets..........................  $7,409,285   $6,057,703   $2,022,136
                                          ==========   ==========   ==========
</TABLE>

     Corporate consists primarily of cash and cash equivalents, short-term
investments and unamortized debt expense.

     The following geographic area data includes revenues from external
customers based on product shipment origin for the years ended December 31 and
long-lived assets based upon physical location as of December 31.

<TABLE>
<CAPTION>
                                             2000         1999          1998
                                          ----------   ----------     --------
                                                     (IN THOUSANDS)
<S>                                       <C>          <C>            <C>
Revenues from external customers:
  United States.........................  $  815,122   $  561,844     $347,307
  Other.................................      23,955       39,612       28,032
                                          ----------   ----------     --------
Total...................................  $  839,077   $  601,456     $375,339
                                          ==========   ==========     ========
Long-lived assets:
  United States.........................  $5,166,086   $2,202,913     $827,607
  Other.................................     313,242      120,034       46,966
                                          ----------   ----------     --------
Total...................................  $5,479,328   $2,322,947     $874,573
                                          ==========   ==========     ========
</TABLE>

     Long-lived assets are comprised of property, plant and equipment, goodwill
and other intangible assets and certain other noncurrent assets.

     In 2000, three of Network's customers exceeded 10% of WCG's revenues with
sales from each customer of approximately $170 million, $133 million and $101
million, respectively. In 1999, two of Network's customers exceeded 10% of WCG's
revenues with sales from each customer of approximately $102 million and $65
million, respectively. In 1998, one of Network's customers exceeded 10% of WCG's
revenues with sales of approximately $42 million.

4. ASSET SALES AND WRITE-OFFS

     In second quarter 1999, management determined that the businesses that
provide audio and video conferencing services and closed-circuit video
broadcasting services for businesses were held for sale. On June 30, 1999, WCG
signed an agreement, which closed effective July 31, 1999, with Genesys, S.A. to
sell its business which provides audio and video conferencing services. In
addition, on July 31, 1999, WCG signed and closed an agreement with Cyberstar
L.P. to sell its business which provides closed-circuit video broadcasting
services for businesses. The proceeds from these transactions totaled
approximately $50 million. Included in 1999 other operating expenses and
Strategic Investments' segment loss is a pre-tax loss of $28.4 million,
including an additional

                                       F-32
<PAGE>   68
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$1.7 million in fourth quarter 1999, consisting of a $24.5 million impairment of
the assets to fair value based on the net sales proceeds and exit costs of $3.9
million consisting of contractual obligations related to the sales of these
businesses. These transactions resulted in an income tax provision of
approximately $7.9 million, which reflects the impact of goodwill not deductible
for tax purposes. Loss from operations related to these assets for 1999 and 1998
were $10.2 million and $22.6 million, respectively.

     Included in 1998 other operating expenses and Strategic Investments'
segment loss is a $23.2 million loss related to abandoning an investment in a
venture involved in the technology and transmission of business information for
news and educational purposes. The loss occurred as a result of WCG's
re-evaluation and decision to exit the venture as WCG decided against making
further investments in the venture. WCG abandoned its entire ownership interest
in the venture in 1998. The loss primarily consists of $17 million to write off
the entire carrying amount of the investment and $5 million from recognition of
contractual obligations that will continue after the abandonment. WCG's share of
losses from the venture accounted for under the equity method was $3.7 million
in 1998.

5. BENEFIT FROM INCOME TAXES ALLOCATED FROM WILLIAMS

     WCG's operations are included in Williams' consolidated federal income tax
return. WCG has a tax sharing agreement with Williams under which the amount of
federal income taxes allocated to WCG is generally determined as though WCG were
filing a separate federal consolidated income tax return. Under the terms of the
tax sharing agreement, any loss or other similar tax attribute realized for
periods prior to WCG's October 1999 initial public offering will be allocated
solely to Williams. WCG will be responsible for any taxes resulting to Williams
if the loss or similar tax attribute is reduced by audit or otherwise. For any
loss or other similar tax attribute realized after WCG's October 1999 initial
public offering, WCG will receive the benefit of the loss or other similar tax
attribute from Williams only if WCG is able to carry forward the loss or other
similar tax attribute against its hypothetical separate return tax calculation
for a period in which WCG remains a member of Williams' consolidated federal
income tax group. If WCG ceases to be a member of Williams' consolidated federal
income tax return, WCG will retain only its allocable share under applicable law
of any consolidated loss or other similar tax attribute realized after the
initial public offering to the extent that it has not been treated as utilizing
such loss or attribute on a hypothetical separate tax return basis under the tax
sharing agreement. Similar concepts apply to allocate the state unitary,
combined or consolidated, income tax liability.

                                       F-33
<PAGE>   69
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The benefit (provision) from income taxes allocated from Williams includes:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                             --------------------------------
                                               2000        1999         1998
                                             --------     -------      ------
                                                      (IN THOUSANDS)
<S>                                          <C>          <C>          <C>
Current:
  Federal.................................   $ (1,849)    $    --      $   --
  State...................................       (178)       (108)        654
  Foreign.................................         --          --          --
                                             --------     -------      ------
                                               (2,027)       (108)        654
Deferred:
  Federal.................................     37,323      (2,293)      2,004
  State...................................     10,909      (2,584)      2,129
  Foreign.................................    (12,098)      8,170          --
                                             --------     -------      ------
                                               36,134       3,293       4,133
                                             --------     -------      ------
Total benefit from income taxes allocated
  from Williams...........................   $ 34,107     $ 3,185      $4,787
                                             ========     =======      ======
</TABLE>

     The U.S. and foreign components of loss before income taxes are as follows:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                            ---------------------------------
                                              2000        1999        1998
                                            ---------   ---------   ---------
                                                     (IN THOUSANDS)
<S>                                         <C>         <C>         <C>
United States.............................  $(294,381)  $(288,453)  $(143,394)
Foreign...................................    (17,414)    (43,044)     (7,972)
                                            ---------   ---------   ---------
Total loss before taxes...................  $(311,795)  $(331,497)  $(151,366)
                                            =========   =========   =========
</TABLE>

     WCG's undistributed earnings from non U.S. subsidiaries in 2000, 1999 and
1998 have been accounted for as if fully repatriated.

     Reconciliations from the benefit from income taxes at the federal statutory
rate to the benefit from income taxes allocated from Williams are as follows:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                            ---------------------------------
                                              2000         1999        1998
                                            ---------    --------     -------
                                                     (IN THOUSANDS)
<S>                                         <C>          <C>          <C>
Benefit at statutory rate.................  $ 109,128    $116,024     $52,978
Reductions (increases) in taxes resulting
  from:
  State income taxes......................      6,191      (1,750)      1,809
  Foreign operations......................      1,080     (10,867)     (4,323)
  Goodwill amortization...................       (986)     (4,248)     (2,355)
  Non-deductible costs related to asset
     sales................................         --     (16,765)         --
  Change in federal valuation allowance...   (127,239)     (5,283)      7,639
  Tax benefits (provisions) allocated to
     Williams.............................     54,148     (74,877)    (51,527)
  Other -- net............................     (8,215)        951         566
                                            ---------    --------     -------
Benefit from income taxes allocated from
  Williams................................  $  34,107    $  3,185     $ 4,787
                                            =========    ========     =======
</TABLE>

                                       F-34
<PAGE>   70
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Significant components of deferred tax assets and liabilities as of
December 31 are as follows:

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              ---------   --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Deferred tax assets:
  Deferred revenues.........................................  $ 195,973   $ 30,856
  Investments...............................................     23,511     15,071
  Net operating loss carryforward allocated from Williams...     93,773     25,253
  Other.....................................................     79,726     36,796
                                                              ---------   --------
                                                                392,983    107,976
Valuation allowance.........................................   (141,994)    (2,751)
                                                              ---------   --------
Total deferred tax assets...................................    250,989    105,225
Deferred tax liabilities:
  Property, plant and equipment.............................    150,576     80,488
  Securities available for sale.............................     58,167     89,589
  Other.....................................................     42,246     19,253
                                                              ---------   --------
Total deferred tax liabilities..............................    250,989    189,330
                                                              ---------   --------
Net deferred tax liability..................................  $      --   $ 84,105
                                                              =========   ========
</TABLE>

     As of December 31, 2000, WCG had $28.0 million and $154.9 million of
federal net operating losses which will expire in 2020 and 2021, respectively,
$58.0 million of foreign net operating losses that carry forward indefinitely
and various state net operating losses. Valuation allowances have been
established that reduce the deferred tax assets to amounts that will more likely
than not be utilized. Uncertainties that may affect the utilization of the loss
carryforwards include future operating results, tax law changes and expiration
of carryforward periods. The valuation allowance increased in 2000 and 1999
primarily due to the net operating loss and increase in deferred revenues.

     If WCG had filed a separate federal income tax return for all periods
presented, the benefit for income taxes for 2000, 1999 and 1998 would reflect
additional benefit from the carryback or carryforward of federal net operating
losses that would have been recognized by WCG on a separate return basis. The
deferred federal income tax benefit for 2000 would have remained the same and
for 1999 and 1998 would have increased by $66.4 million and $5.6 million,
respectively, to reflect the benefit of a deferred tax asset for the federal net
operating loss carryforward generated in both years.

     Cash refunds for income taxes were $0.5 million in 2000. Cash payments for
income taxes (net of refunds) were $0.8 million in both 1999 and 1998.

6. EMPLOYEE BENEFIT PLANS

     Substantially all of WCG's employees are covered by noncontributory defined
benefit pension plans. Effective August 1, 1997, separate plans were established
for the Williams Communications Solutions, LLC (Solutions LLC) union employees
and Solutions LLC salaried employees. WCG is retaining the salaried employees
plans after the sale of Solutions to Platinum Equity, LLC. However, no future
service benefits will be accrued in these plans. As of December 31, 2000,
substantially all of the remaining WCG employees are covered by Williams'
noncontributory defined benefit pension plans in which WCG is included. WCG is
also included in Williams' health care plan that provides postretirement medical
benefits to certain retired employees. Effective

                                       F-35
<PAGE>   71
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

January 1, 2001, separate noncontributory defined benefit pension plans were
established for WCG employees currently covered under Williams' plans.

     Contributions for pension and postretirement medical benefits related to
WCG's participation in the Williams plans were $2.1 million, $2.8 million and
$1.7 million in 2000, 1999 and 1998, respectively. The change in contributions
from year to year is due to a change in the rate of pension contributions during
the periods.

     The following table presents the changes in benefit obligations and plan
assets for pension benefits for the Solutions LLC retained salaried employees
plans for the years indicated. It also presents a reconciliation of the funded
status of these benefits to the amount recognized in the accompanying
consolidated balance sheet as of December 31 of each year indicated.

<TABLE>
<CAPTION>
                                                           2000       1999
                                                         --------   --------
                                                           (IN THOUSANDS)
<S>                                                      <C>        <C>
Change in benefit obligation:
  Benefit obligation at beginning of year..............  $ 38,512   $ 45,837
  Service cost.........................................     3,877      4,875
  Interest cost........................................     3,526      2,954
  Actuarial (gain) loss................................    10,437    (14,271)
  Benefits paid........................................      (821)      (883)
                                                         --------   --------
Benefit obligation at end of year......................    55,531     38,512
                                                         --------   --------
Change in plan assets:
  Fair value of plan assets at beginning of year.......    47,856     40,767
  Actual return on plan assets.........................    (1,996)     7,972
  Benefits paid........................................      (821)      (883)
                                                         --------   --------
Fair value of plan assets at end of year...............    45,039     47,856
                                                         --------   --------
Funded status..........................................   (10,492)     9,344
Unrecognized net actuarial (gain) loss.................     3,156    (13,994)
Unrecognized prior service credit......................      (671)      (951)
                                                         --------   --------
Net accrued benefit cost...............................  $ (8,007)  $ (5,601)
                                                         ========   ========
Included in the accompanying consolidated balance sheet
  as follows:
  Prepaid benefit cost.................................  $     --   $     --
  Accrued benefit cost.................................    (8,007)    (5,601)
                                                         --------   --------
Net accrued benefit cost...............................  $ (8,007)  $ (5,601)
                                                         ========   ========
</TABLE>

                                       F-36
<PAGE>   72
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Net pension expense for the Solutions LLC plans consisted of the following:

<TABLE>
<CAPTION>
                                                 2000       1999       1998
                                               --------   --------   --------
                                                       (IN THOUSANDS)
<S>                                            <C>        <C>        <C>
Components of net periodic pension expense:
  Service cost...............................  $  3,877   $  4,875   $  4,233
  Interest cost..............................     3,526      2,954      2,612
  Expected return on plan assets.............    (4,531)    (4,006)    (3,652)
  Amortization of prior service credit.......      (280)      (280)      (280)
  Recognized net actuarial gain..............      (186)      (154)       (83)
                                               --------   --------   --------
Net periodic pension expense.................  $  2,406   $  3,389   $  2,830
                                               ========   ========   ========
</TABLE>

     The following are the weighted-average assumptions utilized as of December
31 of the year indicated:

<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                              -------------
                                                              2000    1999
                                                              -----   -----
<S>                                                           <C>     <C>
Discount rate...............................................   7.5%    8.0%
Expected return on plan assets..............................  10.0    10.0
Rate of compensation increase...............................   5.0     5.0
</TABLE>

     Williams maintains various defined contribution plans in which WCG is
included. WCG's costs related to these plans were $8.1 million, $5.1 million and
$4.2 million in 2000, 1999 and 1998, respectively. These costs increased from
1999 to 2000 primarily due to the growth in the eligible employee base.

     Included in selling, general and administrative expenses for 1998 is an
accrual of $11.5 million related to the modification of WCG's employee benefit
program associated with vesting of paid time off. In December 1998, WCG
increased the number of days in the new paid time off policy and changed the
benefits with regard to sick pay.

7. INVESTMENTS

     Investments as of December 31 consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------   ----------
<S>                                                           <C>        <C>
SHORT-TERM INVESTMENTS:
Commercial paper............................................  $ 82,153   $  516,877
Debt securities mutual fund.................................       765      354,891
Auction securities consisting primarily of asset-backed and
  corporate debt securities.................................        --      334,290
Other debt securities and time deposits.....................       514      213,704
                                                              --------   ----------
                                                                83,432    1,419,762
Marketable equity securities................................   311,752           --
                                                              --------   ----------
  Short-term investments....................................  $395,184   $1,419,762
                                                              ========   ==========
</TABLE>

                                       F-37
<PAGE>   73
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------   ----------
<S>                                                           <C>        <C>
LONG-TERM INVESTMENTS:
Equity method:
  ATL -- common stock.......................................  $ 23,683   $   42,572
  Others....................................................    69,106       14,416
                                                              --------   ----------
                                                                92,789       56,988
Cost method:
  ATL -- preferred stock....................................   292,048      317,048
  Others....................................................   101,271      114,654
                                                              --------   ----------
                                                               393,319      431,702
Advances to investees:
  ATL.......................................................   132,606          850
  Other.....................................................     1,138        8,397
                                                              --------   ----------
                                                               133,744        9,247
Marketable equity securities................................        --      288,109
                                                              --------   ----------
     Long-term investments..................................  $619,852   $  786,046
                                                              ========   ==========
</TABLE>

  Short-term investments excluding marketable equity securities

     Short-term investments excluding marketable equity securities consist
primarily of debt securities that mature within one year, with the exception of
the mutual fund which does not have a maturity. The carrying amounts of these
investments are reported at fair value, which approximate cost.

     Interest and other investing income consists primarily of interest income
related to debt securities.

  Marketable equity securities

     Marketable equity securities are classified as current or noncurrent assets
based on management's plans for holding or disposing of these investments. The
carrying amounts of the marketable equity securities are reported at fair value.
The aggregate cost of these investments was $170.6 million and $57.7 million as
of December 31, 2000 and 1999, respectively. Gross unrealized gains and losses
were $179.4 million and $38.2 million as of December 31, 2000, respectively.
Gross unrealized gains were $230.4 million as of December 31, 1999, as the
carrying amount exceeded cost for each marketable equity security investment.
None of the gross unrealized losses as of December 31, 2000 were considered by
management to be other than temporary.

     WCG has entered into cashless collar derivative instruments in 2000 which
will expire by first quarter 2002. As of December 31, 2000, these derivative
instruments were accounted for as hedges of WCG's exposure to changes in the
price of its investments in certain marketable equity securities. Changes in the
fair value of the hedged marketable equity securities and the impact of the
associated derivative instruments are reflected in accumulated other
comprehensive income. The derivative instruments impact realized gains or losses
from the sale of the hedged marketable equity security. Effective January 1,
2001, the cashless collar does not qualify as a hedge under SFAS No. 133 as
amended. WCG received cash proceeds of $85.1 million from the early termination
of derivative instruments treated as hedges of certain marketable equity
securities in 2000. The cash proceeds were recorded as a reduction in the basis
of the underlying marketable equity security.

                                       F-38
<PAGE>   74
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     WCG sold portions of its investments in certain marketable equity
securities for gross realized gains and losses of $108.3 million and $14.6
million, respectively, in 2000. WCG also recognized a gain of $214.7 million in
2000 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 first quarter 2001, WCG liquidated a portion of its marketable equity
securities portfolio, yielding proceeds of $25.4 million and a gain of $24.4
million. As of February 28, 2001, the value of WCG's marketable equity
securities portfolio has depreciated approximately $90 million since December
31, 2000.

  Equity and cost method investments and advances to investees

     Cash dividends of $8.0 million were received from investments in companies
carried on the equity basis in 2000. No dividends were received from these
investments in 1999 or 1998.

     WCG recognized a loss of $34.5 million in 2000 related to a write-down of
certain cost-based and equity-method investments resulting from management's
estimate that the decline in the value of these investments was other than
temporary.

     Other cost investments in the table above include eighteen investments and
thirteen investments as of December 31, 2000 and 1999, respectively, consisting
primarily of common stock investments in various privately-held companies in the
telecommunications industry.

     Williams granted WCG an option to acquire Williams' entire equity and debt
interest in Algar Telecom S/A, a Brazilian telecommunications company, at
Williams' net book value. The option was exercisable at any time from January 1,
2000 to January 1, 2001. The option expired on January 1, 2001.

     Prior to March 1999, WCG owned 30% of the preferred shares in ATL and
through participation in a limited liability company owned 30% of the common
stock. In March 1999, WCG purchased from Algar Telecom for $265 million an
additional 43% of the preferred shares and 19% of the common stock of ATL. The
purchase price of ATL common stock exceeded the related share of the net assets
by $35 million which is being amortized over 15 years.

     In a series of transactions in first quarter 2000, WCG sold to an entity
jointly owned by SBC Communications, Inc. (SBC) and Telefonos de Mexico S.A. de
C.V., 7% and 30% of ATL's total preferred shares and common stock, respectively.
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. As of December 31, 2000, WCG owns 66% of the preferred shares and 19% of
the common stock of ATL.

     As of December 31, 2000, WCG's ownership of 66% and 19% of the preferred
shares and common stock of ATL, respectively, are pledged as collateral for a
U.S. dollar denominated $521 million loan from Ericsson Project Finance AB to
ATL.

                                       F-39
<PAGE>   75
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment as of December 31 is summarized as follows:

<TABLE>
<CAPTION>
                                         DEPRECIABLE LIVES      2000         1999
                                         -----------------   ----------   ----------
                                            (IN YEARS)           (IN THOUSANDS)
<S>                                      <C>                 <C>          <C>
Fiber..................................       25-30          $  851,184   $  167,283
Optronics..............................       7-10              910,647      328,696
Right-of-way...........................       20-40             680,446       53,717
Computer equipment.....................         3                89,640       58,295
General office furniture and
  fixtures.............................        3-5               36,962       24,665
Buildings and leasehold improvements...   30 or life of         286,119       96,781
                                              lease
Construction in progress...............  Not applicable       2,313,128    1,419,283
Other..................................      Various            301,794       73,852
                                                             ----------   ----------
                                                              5,469,920    2,222,572
  Less accumulated depreciation and
     amortization......................                        (330,936)    (174,900)
                                                             ----------   ----------
                                                             $5,138,984   $2,047,672
                                                             ==========   ==========
</TABLE>

     In connection with its fiber build projects, WCG periodically enters into
various agreements to obtain the use of property rights from Williams' pipeline
companies in exchange for telecommunications services. Under these agreements,
WCG commits to provide various levels and types of services as consideration for
the rights of way obtained. As of December 31, 2000 and 1999, such commitments
were not material.

     Depreciation expense was $176.1 million, $73.6 million and $39.1 million,
respectively in 2000, 1999 and 1998.

9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

     WCG's cash accounts reflect credit balances to the extent checks written
have not been presented for payment. The amounts of these credit balances
included in accounts payable are $138.9 million and $91.3 million as of December
31, 2000 and 1999, respectively.

     Accrued liabilities as of December 31 consist of the following:

<TABLE>
<CAPTION>
                                                           2000       1999
                                                         --------   --------
                                                           (IN THOUSANDS)
<S>                                                      <C>        <C>
Construction costs.....................................  $199,540   $262,860
Interest...............................................   104,084     51,147
Other..................................................    98,234     67,054
                                                         --------   --------
                                                         $401,858   $381,061
                                                         ========   ========
</TABLE>

                                       F-40
<PAGE>   76
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. LONG-TERM DEBT

WILLIAMS

     Long-term debt due to Williams as of December 31 consists of the following:

<TABLE>
<CAPTION>
                                                           2000       1999
                                                         --------   --------
                                                           (IN THOUSANDS)
<S>                                                      <C>        <C>
Williams note..........................................  $975,610   $988,110
Less current maturities................................        --    (12,500)
                                                         --------   --------
Long-term debt.........................................  $975,610   $975,610
                                                         ========   ========
</TABLE>

  Williams note

     Prior to WCG's initial public offering, WCG historically received capital
contributions and interest-bearing advances from Williams in order to fund
operations. In September 1999, previous non-capital borrowings from Williams
were converted into a seven-year note payable bearing interest at an annual rate
based upon WCG's credit rating. The interest rate is based on LIBOR plus 2.25%.
As of December 31, 2000, WCG had locked in varying rates for three months, with
a weighted average interest rate of 8.875%.

     The Williams note ranks senior to WCG's senior redeemable notes. It ranks
equal to WCG's long-term credit facility except to the extent its credit
facility is secured and as set forth in an inter-creditor agreement entered into
between Williams and the credit facility lenders. Under the intercreditor
agreement, Williams has agreed that the Williams note will be subordinated to
rights of the lenders in any bankruptcy, insolvency, liquidation or dissolution
of the borrower and in the event of default under our credit facility, with some
expectations.

     In first quarter 2001, Williams and WCG entered into an agreement that,
among other things, resulted in the conversion of the Williams note into paid in
capital and the issuance of WCG's common stock to Williams (see Note 19).

THIRD PARTIES

     Long-term debt (excluding amounts due to Williams) as of December 31
consists of the following:

<TABLE>
<CAPTION>
                                                          2000         1999
                                                       ----------   ----------
                                                           (IN THOUSANDS)
<S>                                                    <C>          <C>
Senior redeemable notes, 10.70% -- 11.875%, due
  2007 -- 2010.......................................  $2,986,598   $1,988,883
Credit facility......................................     525,000           --
Other................................................      39,498          892
                                                       ----------   ----------
Long-term debt.......................................  $3,551,096   $1,989,775
                                                       ==========   ==========
</TABLE>

  Senior redeemable notes

     In August 2000, WCG issued approximately $1.0 billion of senior redeemable
notes, which consisted of $575.0 million of 11.70% and $425.0 million of 11.875%
fixed-rate senior redeemable notes due August 1, 2008 and August 1, 2010,
respectively. Proceeds from the debt issued were approximately $997.0 million
before underwriter commissions of $23.4 million. Interest on the notes

                                       F-41
<PAGE>   77
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

is payable in arrears on February 1 and August 1 each year beginning February 1,
2001. WCG may repay the notes at varying redemption premiums or make-whole
prices, as defined.

     In September 1999, WCG issued $2.0 billion in senior redeemable notes,
which consisted of $1.5 billion of 10.875% and $500 million of 10.70% fixed-rate
senior redeemable notes due October 1, 2009 and October 1, 2007, respectively.
Proceeds from the debt issued were $1,988.7 million before underwriter
commissions of $50.0 million. Interest on the notes is payable in cash
semiannually in arrears on October 1 and April 1, which commenced on April 1,
2000. WCG may repay the notes at varying redemption premiums or make-whole
prices, as defined.

     These notes are senior unsecured obligations of WCG, ranking equally with
all of WCG's existing and future senior unsecured debt. The notes will be senior
to all of WCG's subordinated debt and junior to any existing or future secured
debt.

  Long-term credit facility

     In September 1999, WCI entered into a $1.05 billion credit facility with
various banks. The 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 (through WCI) may borrow under the term
loan facility during a one-year period beginning on the commencement date of the
credit facility and may borrow under the revolving credit facility throughout
its six-year term. 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. The interest rate under this
facility is based on a variable rate of LIBOR plus 2.25%. As of December 31,
2000, WCG had a locked in six month rate of 9.02%. In first quarter 2000,
Williams was removed as a guarantor under this credit facility.

     Term loans must be repaid in installments beginning in the fourth year of
the term loan facility: 15% of the term loans must be repaid during the fourth
year, 25% during the fifth year, 30% during the sixth year and 30% during the
seventh year. The commitments under the revolving credit facility will be
permanently reduced by 20% in the fourth year, by 30% in the fifth year, and by
50% in the sixth year. WCG must repay amounts borrowed under the revolving
credit facility to the extent these amounts are in excess of the remaining
commitments. In addition, WCG is required to ratably prepay the term loans or
reduce its revolving loan commitments in certain circumstances, as defined,
based on excess cash flows or proceeds received from asset sales that are not
otherwise reinvested back into WCG's core business operations.

     The credit facility ranks senior to WCG's senior redeemable notes and equal
to the Williams note.

     At any time within two years of the effective date of the long-term credit
facility, WCG may request one or more additional credit facilities from the
long-term credit facility lenders. These facilities could be in the aggregate
amount of not less than $100 million or more than $500 million. The terms and
conditions of any additional facilities have not been agreed to and would have
to be negotiated.

  Other

     In third quarter 2000, PowerTel entered into a 70 million Australian dollar
bridge financing facility agreement ($39.2 million as of December 31, 2000). The
facility agreement, which bears

                                       F-42
<PAGE>   78
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest at a fixed-rate of 9.70% and is due in March 31, 2001, has been fully
utilized as of December 31, 2000.

     For financial statement reporting purposes as of December 31, 2000, the
PowerTel bridge financing facility which otherwise would have been classified as
current debt obligations has been reclassified to long-term debt based on
proceeds received from the equity offering in first quarter 2001 (see Note 19).
In addition, WCG has reclassified its current portion of the Williams note as
long-term based on the conversion of the Williams note into paid in capital in
first quarter 2001 (see Note 19).

     Aggregate minimum maturities, considering the reclassification of current
obligations as previously described, for each of the next five years are as
follows (in thousands):

<TABLE>
<S>                                               <C>
2001............................................  $       --
2002............................................      19,863
2003............................................      92,005
2004............................................     137,812
2005............................................     157,500
Thereafter......................................   3,118,125
                                                  ----------
                                                  $3,525,305
                                                  ==========
</TABLE>

     Cash payments for interest, net of amounts capitalized, were $152.1
million, $46.8 million and $2.4 million in 2000, 1999 and 1998, respectively,
including commitment fees relating to the credit facility of $9.0 million and
$3.6 million in 2000 and 1999, respectively. No commitment fees were paid in
1998.

     WCG's debt agreements contain restrictive covenants and require it to meet
certain financial ratios and tests. These agreements restrict WCG's ability to
borrow additional money, pay dividends or other distributions to stockholders,
make investments, create liens on assets and sell assets. Debt restrictions
limit the ability of WCI, the wholly owned operating subsidiary of WCG, to
transfer funds to its parent, WCG. As of December 31, 2000, WCI had restricted
net assets of $1.2 billion. However, these debt restrictions allow WCI to
transfer funds to its parent, WCG, for regularly scheduled interest payments
with respect to the senior redeemable notes, as well as certain other payments
as outlined in the long-term credit facility agreement. The long-term credit
facility expires in September 2006. Restricted net assets of equity method
investees was $34.2 million as of December 31, 2000.

11. REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK

     In September 2000, WCG issued 5,000,000 shares of 6.75% redeemable
cumulative convertible preferred stock at a liquidation preference of $50.00 per
share for proceeds of approximately $240.5 million, net of issuance costs of
$9.5 million. Each share of preferred stock is convertible into 1.7610 shares of
WCG's Class A common stock, based on a conversion price of $28.39.

     WCG may redeem all or any part of the shares of preferred stock at any time
on or after October 15, 2005 at a redemption price of 103.38% and, under
specified circumstances, before that date. The preferred stock will be subject
to mandatory redemption on October 15, 2012 at 100% of the liquidation
preference, plus accumulated and unpaid dividends to the date of redemption.

                                       F-43
<PAGE>   79
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The preferred stock ranks senior to WCG's Class A and B common stock with
respect to dividend rights and rights upon liquidation, winding up and
dissolution. The preferred stock is junior in right of payment of all debt
obligations of WCG.

     Dividends on the preferred stock are cumulative from the date of issue and
will be payable on January 15, April 15, July 15, and October 15 of each year,
beginning on January 15, 2001, at the annual rate of 6.75%. The terms of WCG's
credit facility and senior redeemable notes currently restrict it from paying
cash dividends. During any periods when WCG is restricted from paying cash
dividends, it expects to pay preferred stock dividends by delivering shares of
its common stock to the transfer agent for the preferred stock, which will
resell those shares of common stock. The proceeds from the sale of its common
stock will then be used to pay cash dividends to the holder of shares of
preferred stock.

     The holders of the preferred stock are entitled to vote with the holders of
WCG's Class A common stock on all matters submitted for a vote of holders of
Class A common stock. Each holder of the preferred stock will be entitled to a
number of votes equal to the number of shares of Class A common stock into which
the shares of preferred stock are convertible on the record date of the vote.

12. STOCKHOLDERS' EQUITY

     In connection with the initial public equity offering in September 1999,
WCG converted its existing 1,000 shares of common stock outstanding to
395,434,965 shares of newly created Class B common stock all of which are owned
by Williams. In the equity offering, WCG sold 34,040,000 Class A common shares.
Concurrent with the equity offering, WCG privately sold 34,064,451 shares of
Class A common stock to investors as follows: SBC of $438.5 million for a 4.36%
ownership in WCG, to Intel, $200 million for a 2.0% ownership in WCG and to
Telefonos de Mexico, $100 million for a 1.0% ownership in WCG. The remaining
equity proceeds received represented a 7.34% ownership. Williams retained an
85.3% ownership in the form of Class B common stock.

     Class A and Class B common stock have identical rights with the exception
of voting, conversion and transfer rights. Class A common stock receives one
vote per share while Class B common stock receives ten votes per share. Class B
common stock can be converted into Class A common stock on a share-for-share
basis at the option of the owner at any time, or automatically upon transfer to
a person or entity which is not a permitted transferee. A permitted transferee
includes Williams, its direct and indirect subsidiaries, any person or entity in
which Williams or any successor beneficially owns, directly or indirectly, at
least 50% of the equity or the voting securities, any successor of any of the
foregoing and stockholders of Williams who receive Class B common stock in a
tax-free spin-off.

                                       F-44
<PAGE>   80
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. ACCUMULATED OTHER COMPREHENSIVE INCOME

     The table below presents changes in the components of accumulated other
comprehensive income (loss).

<TABLE>
<CAPTION>
                                              UNREALIZED       FOREIGN
                                             APPRECIATION     CURRENCY
                                            (DEPRECIATION)   TRANSLATION
                                            OF SECURITIES    ADJUSTMENTS     TOTAL
                                            --------------   -----------   ---------
                                                         (IN THOUSANDS)
<S>                                         <C>              <C>           <C>
Balance as of December 31, 1997...........    $  (2,348)      $ (1,131)    $  (3,479)
Current period change:
  Pre-income tax amount...................       45,306         (1,792)       43,514
  Income tax expense......................      (15,329)            --       (15,329)
                                              ---------       --------     ---------
                                                 29,977         (1,792)       28,185
                                              ---------       --------     ---------
Balance as of December 31, 1998...........       27,629         (2,923)       24,706
Current period change:
  Pre-income tax amount...................      189,023        (13,006)      176,017
  Income tax expense......................      (75,825)            --       (75,825)
                                              ---------       --------     ---------
                                                113,198        (13,006)      100,192
                                              ---------       --------     ---------
Balance as of December 31, 1999...........      140,827        (15,929)      124,898
Current period change:
  Pre-income tax amount...................      222,140        (29,240)      192,900
  Reclassification adjustment for gains
     realized in net loss.................     (308,419)            --      (308,419)
  Income tax benefit......................       34,670             --        34,670
                                              ---------       --------     ---------
                                                (51,609)       (29,240)      (80,849)
                                              ---------       --------     ---------
Balance as of December 31, 2000...........    $  89,218       $(45,169)    $  44,049
                                              =========       ========     =========
</TABLE>

14. STOCK-BASED COMPENSATION

     WCG and Williams have several plans providing for Williams and WCG
common-stock-based awards to WCG's employees and employees of its subsidiaries.
The plans permit the granting of various types of awards including, but not
limited to, stock options, stock-appreciation rights, restricted stock and
deferred stock. Awards may be granted for no consideration other than prior and
future services or based on certain financial performance targets being
achieved. The purchase price per share for stock options and the grant price for
stock-appreciation rights may not be less than the market price of the
underlying stock on the date of grant. Depending upon terms of the respective
Williams plans, stock options become exercisable after three to five years,
subject to accelerated vesting if certain future stock prices or specific
financial performance targets are achieved. Stock options granted under the WCG
Plan are exercisable at such times and are subject to such restrictions and
conditions as the board of directors shall in each instance approve, which need
not be the same for each grant or for each participant. Current vesting terms
include 5 year cliff vesting, of which some are subject to accelerated vesting
if certain future stock prices or specific financial performance targets are
achieved, 3 year cliff vesting and 3 year staged vesting in thirds. Stock
options in all plans expire ten years after grant. As of December 31, 2000 and
1999, 36 million shares of WCG Class A common stock were reserved for issuance
pursuant to existing and future

                                       F-45
<PAGE>   81
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock awards, of which 16.7 million shares and 27.6 million shares,
respectively, were available for future grants.

     Williams' and WCG's employee stock-based awards are accounted for under
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Williams' and WCG's fixed plan common stock options
generally do not result in compensation expense because the exercise price of
the stock options equals the market price of the underlying stock on the date of
grant.

     In conjunction with the initial public offering of WCG stock, options
granted in 1998 and 1999 under the WCG Plan were converted from Williams to WCG
options when market prices were $37.63 and $23.00, respectively. In accordance
with APB Opinion No. 25, this resulted in a new measurement date, and related
expense of $0.4 million and $0.9 million was recognized in 2000 and 1999,
respectively. The remaining value of the option conversion will be amortized
over the various vesting periods of the converted stock options.

     Pro forma net income and earnings per share, assuming WCG had applied the
fair-value method of SFAS No. 123, "Accounting for Stock-Based Compensation," in
measuring compensation cost beginning with 1998 employee stock-based awards, are
as follows:

<TABLE>
<CAPTION>
                                  2000                    1999                    1998
                          ---------------------   ---------------------   ---------------------
                          PRO FORMA   REPORTED    PRO FORMA   REPORTED    PRO FORMA   REPORTED
                          ---------   ---------   ---------   ---------   ---------   ---------
<S>                       <C>         <C>         <C>         <C>         <C>         <C>
Net loss (thousands)....  $(941,478)  $(817,688)  $(379,174)  $(359,701)  $(195,129)  $(185,729)
Net loss per share......  $   (2.04)  $   (1.77)  $    (.92)  $    (.87)  $    (.49)  $    (.47)
</TABLE>

     Pro forma amounts include compensation expense related to discontinued
operations of approximately $36.0 million, $6.2 million and $3.1 million in
2000, 1999 and 1998, respectively. Pro forma amounts for 1999 include the
remaining total compensation expense for Williams plans awards made in 1998 and
the total compensation expense from Williams plans awards in 1999, as these
awards fully vested in 1999 as a result of the accelerated vesting provisions.
Pro forma amounts in 1998 include the remaining total compensation expense from
the awards made in 1997, as these awards fully vested in 1998 as a result of the
accelerated vesting provision. Since compensation expense from stock options is
recognized over the future years' vesting period for pro forma disclosure
purposes, and additional awards generally are made each year, pro forma amounts
may not be representative of future years' amounts.

                                       F-46
<PAGE>   82
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The fair value of the stock options was estimated at the date of grant
using a Black-Scholes option valuation model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because Williams' and WCG's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options. The following weighted-average assumptions were used in the
Black-Scholes model:

<TABLE>
<CAPTION>
                                                                 WCG               WILLIAMS
                                                          -----------------   -------------------
                                                           2000      1999       1999       1998
                                                          -------   -------   --------   --------
<S>                                                       <C>       <C>       <C>        <C>
Expected life of the stock options......................  5 years   5 years   5 years    5 years
Volatility of the expected market price of underlying
  common stock..........................................       71%       60%       28%        25%
Risk-free interest rate.................................      6.3%      6.0%      5.6%       5.3%
Expected dividend yield.................................        0%        0%      1.5%       2.0%
</TABLE>

                                       F-47
<PAGE>   83

                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following summary provides information on stock options in both WCG and
Williams (NYSE: WMB) common stock granted:
<TABLE>
<CAPTION>
                                                   2000                                         1999
                                  ---------------------------------------   ---------------------------------------------
                                       WCG PLAN          WILLIAMS PLANS                       WCG PLAN
                                  ------------------   ------------------   ---------------------------------------------
                                            WEIGHTED             WEIGHTED      WCG       WEIGHTED      WMB       WEIGHTED
                                            AVERAGE              AVERAGE     OPTIONS     AVERAGE     OPTIONS     AVERAGE
                                    WCG     EXERCISE     WMB     EXERCISE     AFTER      EXERCISE     BEFORE     EXERCISE
                                  OPTIONS    PRICE     OPTIONS    PRICE     CONVERSION    PRICE     CONVERSION    PRICE
                                  -------   --------   -------   --------   ----------   --------   ----------   --------
                                                                  (OPTIONS IN THOUSANDS)
<S>                               <C>       <C>        <C>       <C>        <C>          <C>        <C>          <C>
Outstanding -- Beginning of
 year...........................   8,035     $22.70     4,845     $27.33                                470       $30.50
Granted.........................                                                                         24       $37.38
Canceled........................                                                                        (56)      $31.81
Converted from WMB to WCG.......                                                716       $18.87       (438)      $30.71
Granted.........................  12,836     $37.55        --     $   --      7,623       $23.05
Exercised.......................     (39)    $19.14    (1,307)    $26.66         (3)      $15.35
Net intercompany transfers......                          209     $29.09
Canceled........................  (2,412)    $31.98       (47)    $37.27       (301)      $22.60
                                  ------               ------                 -----                    ----
Outstanding -- End of year......  18,420     $31.84     3,700     $27.54      8,035       $22.70         --
                                  ======     ======    ======     ======      =====       ======       ====
Exercisable --
 End of year....................   4,611     $42.51     3,693     $27.53        334       $20.86
                                  ======     ======    ======     ======      =====       ======
Weighted-average grant date fair
 value of options granted during
 the year where:
 Market price = exercise
   price........................             $23.93               $   --                  $13.13
 Market price > exercise
   price........................                                                          $14.24

<CAPTION>
                                         1999                           1998
                                  ------------------   ---------------------------------------
                                    WILLIAMS PLANS          WCG PLAN          WILLIAMS PLANS
                                  ------------------   ------------------   ------------------
                                            WEIGHTED             WEIGHTED             WEIGHTED
                                            AVERAGE              AVERAGE              AVERAGE
                                    WMB     EXERCISE     WMB     EXERCISE     WMB     EXERCISE
                                  OPTIONS    PRICE     OPTIONS    PRICE     OPTIONS    PRICE
                                  -------   --------   -------   --------   -------   --------
                                                     (OPTIONS IN THOUSANDS)
<S>                               <C>       <C>        <C>       <C>        <C>       <C>
Outstanding -- Beginning of
 year...........................   5,378     $23.87                          4,911     $19.39
Granted.........................
Canceled........................
Converted from WMB to WCG.......
Granted.........................     900     $39.92      490      $30.55     1,729     $31.87
Exercised.......................  (1,383)    $21.92                         (1,093)    $15.58
Net intercompany transfers......
Canceled........................     (50)    $31.16      (20)     $31.94      (169)    $29.13
                                  ------                 ---                ------
Outstanding -- End of year......   4,845     $27.33      470      $30.50     5,378     $23.87
                                  ======     ======      ===      ======    ======     ======
Exercisable --
 End of year....................   4,831     $27.30                          3,754     $20.41
                                  ======     ======                         ======     ======
Weighted-average grant date fair
 value of options granted during
 the year where:
 Market price = exercise
   price........................             $11.55               $ 8.19               $ 8.19
 Market price > exercise
   price........................
</TABLE>

                                       F-48
<PAGE>   84

                      WILLIAMS COMMUNICATIONS GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The following summary provides information on stock options in WCG and
Williams common stock issued to WCG employees outstanding and exercisable as of
December 31, 2000:

<TABLE>
<CAPTION>
                                              STOCK OPTIONS OUTSTANDING                STOCK OPTIONS EXERCISABLE
                                    ---------------------------------------------   -------------------------------
                                                                       WEIGHTED
                                                                        AVERAGE
                                                        WEIGHTED       REMAINING                        WEIGHTED
                                       OPTIONS          AVERAGE       CONTRACTUAL      OPTIONS          AVERAGE
RANGE OF EXERCISE PRICES:           (IN THOUSANDS)   EXERCISE PRICE      LIFE       (IN THOUSANDS)   EXERCISE PRICE
-------------------------           --------------   --------------   -----------   --------------   --------------
<S>                                 <C>              <C>              <C>           <C>              <C>
WCG Plan:
  $10.88 - $18.44.................         917           $14.55       9.78 years           23            $14.89
  $19.25 - $24.13.................       7,201           $22.48       8.84 years        1,073            $22.65
  $27.00 - $29.38.................       3,768           $27.35       9.59 years           --                --
  $33.09 - $37.63.................         734           $34.73       9.42 years           --                --
  $48.75..........................       5,800           $48.75       9.21 years        3,515            $48.75
                                        ------                                          -----
                                        18,420           $31.84       9.18 years        4,611            $42.51
                                        ======                                          =====
Williams Plans:
  $5.00 to $30.00.................       2,336           $22.29       7.31 years        2,336            $22.29
  $30.75 to $40.50................       1,364           $36.54       8.80 years        1,357            $36.57
                                        ------                                          -----
                                         3,700           $27.54       7.87 years        3,693            $27.53
                                        ======                                          =====
</TABLE>

     The following summary provides information on deferred shares of Williams
and WCG common stock granted to WCG employees:

<TABLE>
<CAPTION>
                                                                                         WCG COMMON
                                                                                         STOCK UNDER
                                                 WILLIAMS COMMON STOCK                    WCG PLAN
                                    -----------------------------------------------   -----------------
                                     2000          1999                 1998           2000      1999
                                    ------   -----------------   ------------------   -------   -------
                                     WCG      WCG     WILLIAMS     WCG     WILLIAMS
                                     PLAN     PLAN     PLANS      PLAN      PLANS         WCG PLAN
                                    ------   ------   --------   -------   --------   -----------------
<S>                                 <C>      <C>      <C>        <C>       <C>        <C>       <C>
Deferred shares granted...........  13,290   10,000    36,258    165,000   109,565    527,829   462,589
Weighted-average grant date fair
  value of shares granted.........  $37.63   $33.00    $39.82    $ 31.59   $ 31.59    $ 25.17   $ 23.00
</TABLE>

     $3.8 million, $5.2 million and $1.2 million were recognized as expense for
deferred shares in 2000, 1999 and 1998, respectively. Deferred shares may be
granted in the year following performance or in return for future performance.
The expense is recognized in the performance year.

     In conjunction with the initial public offering, 255,000 deferred shares
granted under the Williams and WCG Plans in 1998 were converted from Williams to
WCG stock based upon the relative market prices at the conversion date. The
market prices of the Williams and WCG stock were $37.625 and $23.00,
respectively, at the conversion date. At that time 25% of the shares became
fully vested. In accordance with APB Opinion No. 25, this resulted in a new
measurement date, and related expense of $1.1 million and $2.2 million included
in 2000 and 1999, respectively. The remaining value of the deferred share
conversion will be amortized over the vesting periods of the converted stock.

                                       F-49
<PAGE>   85
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. LEASES

LESSEE:

     Future minimum annual rentals under noncancellable operating leases as of
December 31, 2000 are payable as follows:

<TABLE>
<CAPTION>
                                             OFF-NETWORK
                                 PROPERTY     CAPACITY
                                  RENTAL    AND EQUIPMENT    OTHER       TOTAL
                                 --------   -------------   --------   ----------
                                                  (IN THOUSANDS)
<S>                              <C>        <C>             <C>        <C>
2001...........................  $ 31,430     $145,603      $ 12,972   $  190,005
2002...........................    27,239       99,294        12,939      139,472
2003...........................    26,174       72,524        11,595      110,293
2004...........................    25,836       32,817        10,427       69,080
2005...........................    26,238       31,594        10,328       68,160
Thereafter.....................   132,765      233,282       138,607      504,654
                                 --------     --------      --------   ----------
Total minimum annual rentals...  $269,682     $615,114      $196,868   $1,081,664
                                 ========     ========      ========   ==========
</TABLE>

     In 1998, WCG entered into an operating lease agreement covering a portion
of its fiber-optic network. The total cost of the network assets covered by the
lease agreement was $750 million. The lease terms are expected to total five
years, and if renewed, could total seven years. Under the terms of the lease
agreement, WCG cannot sublease the assets without the prior written consent of
the lessor. Through December 31, 2000, WCG has not requested nor has the lessor
granted such consent.

     WCG has an option to purchase the covered network assets during the lease
term at an amount approximating the lessor's cost. Williams provides a residual
value guarantee equal to a maximum of 89.9% of the transaction. The residual
value guarantee is reduced by the present value of the actual lease payments. In
the event that WCG does not exercise its purchase option, WCG expects the fair
market value of the covered network assets to substantially reduce Williams'
payment under the residual value guarantee. WCG's disclosures for future minimum
annual rentals under noncancellable operating leases do not include amounts for
the residual value guarantee.

     Total capacity expense incurred from leasing from a third party's network
(off-network capacity expense) was $332.3 million, $201.1 million and $110.8
million in 2000, 1999 and 1998, respectively. All other rent expense was $49.5
million, $33.1 million and $19.8 million in 2000, 1999 and 1998, respectively.
Included in other rent expense are charges for office space leased from Williams
of $5.7 million, $2.5 million and $1.5 in 2000, 1999 and 1998, respectively.

LESSOR:

     Prior to June 30, 1999, WCG had granted IRUs for dark fiber to third
parties that are accounted for as sales-type leases. The lease term is typically
for 20 to 25 years and the lessee can renew the leases at no cost for an
additional period of 10 to 20 years. The lessee generally prepays the lease upon
acceptance. As of December 31, 2000, all cash from sales-type leases has been
received except for $50.9 million, which will be collected in 2001. Due to the
initial term of the IRUs and lessee renewal options, WCG has not recorded any
residual value for these leases. Subsequent to June 30, 1999, WCG has granted
IRUs for dark fiber that have been accounted for as operating leases.

                                       F-50
<PAGE>   86
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     WCG also provides colocation and maintenance services under dark fiber IRUs
and to other third parties leasing space in WCG's facilities. Future minimum
annual revenues for dark fiber IRUs accounted for as an operating lease and
colocation and maintenance services are as follows:

<TABLE>
<CAPTION>
                                                DARK     COLOCATION   MAINTENANCE
                                               FIBER      SERVICES     SERVICES
                                              --------   ----------   -----------
                                                        (IN THOUSANDS)
<S>                                           <C>        <C>          <C>
2001........................................  $ 51,348    $ 18,939     $ 21,449
2002........................................    25,969      21,223       24,313
2003........................................    28,404      21,413       25,630
2004........................................    28,404      21,413       25,630
2005........................................    28,404      21,413       25,630
Thereafter..................................   397,656     299,782      358,820
                                              --------    --------     --------
                                              $560,185    $404,183     $481,472
                                              ========    ========     ========
</TABLE>

16. RELATED PARTY TRANSACTIONS

     Williams charges its subsidiaries, including WCG, for certain corporate
administrative expenses, which are directly identifiable or allocable to the
subsidiaries. Details of such charges are as follows:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                               ------------------------------
                                                 2000       1999       1998
                                               --------   --------   --------
                                                       (IN THOUSANDS)
<S>                                            <C>        <C>        <C>
Direct costs, charged from Williams.........    $26,999    $16,253    $ 7,957
Allocated charges from Williams.............      9,225      4,989      3,219
                                               --------   --------   --------
                                                $36,224    $21,242    $11,176
                                               ========   ========   ========
</TABLE>

     The above costs are reflected in selling, general and administrative
expenses in the accompanying consolidated statements of operations. Direct costs
charged from Williams represent the direct costs of goods or services provided
by Williams at WCG's request as well as the cost of centralized administrative
services. Williams allocates its cost of centralized administrative services
based on a logical representation of the benefits received, such as allocating
Williams' human resources department based on employee headcount. Allocated
charges from Williams represent an allocation of general corporate charges based
on a three factor formula which considers operating results, property, plant and
equipment and payroll. In management's estimation, the allocation methodologies
used are reasonable and the direct and allocated charges approximate amounts
that would have been incurred on a stand-alone basis.

     Included in WCG's revenues are charges to Williams and its subsidiaries and
affiliates of $14.6 million, $14.3 million and $12.0 million in 2000, 1999 and
1998, respectively. These charges include managing Williams' internal telephone
operations of $10.4 million, $10.0 million and $7.7 million in 2000, 1999 and
1998, respectively and managing microwave frequencies for Williams' gas
pipelines of $3.8 million, $4.3 million and $4.3 million in 2000, 1999 and 1998,
respectively.

                                       F-51
<PAGE>   87
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Amounts due to or from affiliates consist of normal course receivables and
payables resulting from the use of each others' services. A summary of these
receivables and payables as of December 31 are as follows:

<TABLE>
<CAPTION>
                                                            2000      1999
                                                           -------   -------
                                                            (IN THOUSANDS)
<S>                                                        <C>       <C>
Due from affiliates -- SBC...............................  $24,658   $ 1,274
                                                           =======   =======
Due to affiliates -- Williams............................  $68,456   $44,648
                                                           =======   =======
</TABLE>

     Interest expense to Williams was $86.7 million, $54.9 million and $16.9
million in 2000, 1999 and 1998, respectively. Interest paid to Williams was
$82.5 million and $20.5 million in 2000 and 1999, respectively. No amounts were
paid to Williams for interest in 1998.

     Effective in January 2000, SBC is a related party by an appointment of an
officer of SBC as an outside member of WCG's board of directors. SBC purchases
domestic voice and data long distance and local transport services from WCG.
Revenues from SBC were $169.5 million and $2.5 million in 2000 and 1999,
respectively. There were no revenues from SBC in 1998. WCG purchases local
transport services, platform services such as toll-free, operator, calling card
and directory assistance services and international services such as transport
and switched-voice services from SBC. These purchases from SBC were $51.7
million, $13.2 million and $17.7 million in 2000, 1999 and 1998, respectively.

     In a series of transactions in first quarter 2000, WCG sold to an entity
jointly owned by SBC and Telefonos de Mexico, 7% and 30% of ATL's total
preferred shares and common stock, respectively (see Note 7).

     In June 2000, WCG acquired SBC's interests in undersea communications
cables between the United States and China, and between the United States and
Japan, for a purchase price of approximately $111.4 million.

     In September 2000, WCG acquired the long distance network assets of
Ameritech Communications, Inc., a subsidiary of SBC, for a purchase price of
$145 million. These assets are located in the states of Illinois, Indiana,
Michigan, Ohio and Wisconsin and include a 2,200 mile fiber-optic network over
four routes, indefeasible rights of use in dark fiber and 15 data centers.

17. COMMITMENTS AND CONTINGENCIES

  Commitments

     WCG has entered into various telecommunications equipment agreements with
six suppliers totaling $1.9 billion which expire at varying dates by the end of
third quarter 2002. As of December 31, 2000, WCG had $1.2 billion remaining on
these agreements. Purchases under these agreements totaled $442 million, $212
million and $84 million in 2000, 1999 and 1998, respectively.

     In 1998, WCG entered into an agreement with Winstar Communications, Inc.
(Winstar) for a 25 year indefeasible right to use approximately 2% of Winstar's
wireless local capacity in exchange for payments equal to $400 million. Winstar
intends to construct 270 hubs by the end of 2001, and WCG will have the ability
to use all of these hubs for a period of 25 years. Winstar has constructed
approximately 170 hubs, or antenna sites, which are currently available to WCG
as of December 31, 2000. WCG will pay Winstar a total of $400 million over four
years as Winstar completes construction of the hubs. WCG will amortize the $400
million to be capitalized on a straight-line

                                       F-52
<PAGE>   88
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

basis over the 25-year usage term. As of December 31, 2000, WCG has paid Winstar
approximately $250 million.

     In fourth quarter 2000, ATL closed a financing arrangement with a Brazilian
development bank, which provided ATL an additional 528 million reais in
additional local currency funding (approximately $270 million as of December 31,
2000), of which WCG has guaranteed approximately $100 million of this financing.

  Litigation

     WCG and WCI are named as defendants in putative nationwide class actions or
putative statewide class actions on behalf of all landowners on whose property
WCG allegedly installed fiber-optic cable without the permission of the
landowner. WCG believes that installation of the cable containing the single
fiber network that crosses over or near the putative class members' land does
not infringe on their property rights. WCG also does not believe that the
plaintiffs have sufficient basis for certification of a nationwide or statewide
class.

     On September 7, 2000, All-Phase Utility Corp. amended its complaint in a
matter originally filed June 28, 1999, against Williams Communications, LLC in
the United States District Court for Oregon, alleging actual damages of at least
$236.5 million from loss of profit from potential construction and lost revenue
from leases of fiber-optic cable and conduits plus punitive damages. All-Phase
alleges that a portion of Williams Communications, LLC's Eugene, Oregon to
Bandon, Oregon route is based on confidential information developed by All-Phase
and that WCG breached its non-disclosure agreement with All-Phase and violated
the Oregon Trade Secrets Act by using it. All-Phase also alleges that WCG
misrepresented its plans for the route and that, as a result, All-Phase lost the
opportunity to build its own line along the same route. On January 22, 2001, the
Court entered an Order granting Williams Communications, LLC's Motion for
Summary Judgment and dismissing the action. All-Phase did not appeal the Court's
Order.

     It is likely that WCG will be subject to other putative class action suits
challenging its nationwide rights of way. WCG cannot quantify the impact of all
such claims at this time. Thus, WCG cannot be certain that the plaintiffs'
putative class actions, if successful, will not have a material adverse effect
upon its future financial position, results of operations or cash flows.

     WCG is a party to various other claims, legal actions and complaints
arising in the ordinary course of business. Other than the putative class action
suits described above, 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 will not have a
materially adverse effect upon WCG's future financial position, results of
operations or cash flows.

18. FINANCIAL INSTRUMENTS

FAIR VALUE METHODS

     The following methods and assumptions were used by WCG in estimating its
fair value disclosures for financial instruments:

          Cash and cash equivalents:  The carrying amounts reported in the
     balance sheet approximate fair value due to the short-term maturity of
     these instruments.

          Short-term investments and marketable equity securities:  In
     accordance with SFAS No. 115, these securities are classified as available
     for sale and are reported at fair value, with

                                       F-53
<PAGE>   89
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     net unrealized appreciation or depreciation reported as a component of
     other comprehensive income. As of December 31, 2000 and 1999 short-term
     investments excluding marketable equity securities had a carrying amount of
     $83.4 million and $1,419.8 million, respectively, which approximated cost.
     Marketable equity securities had a carrying amount of $311.8 million and
     $288.1 million as of December 31, 2000 and 1999, respectively, with
     associated aggregate costs of $170.6 million and $57.7 million,
     respectively.

          Investments -- cost method and advances to investees:  Fair value is
     estimated to approximate historically recorded amounts as the investments
     are primarily in nonpublicly traded companies for which it is not
     practicable to estimate the fair value.

          Long-term debt:  WCG's long-term debt from affiliates consists
     primarily of variable rate borrowings which was converted into paid in
     capital in first quarter 2001 (see Note 19). The fair value of WCG's
     long-term debt from third parties is valued using indicative year-end
     traded bond market prices for publicly traded issues, while the long-term
     credit facility is a variable rate borrowing for which the carrying amount
     approximates the fair value. As of December 31, 2000 and 1999 long-term
     debt from third parties, including the current portion, had carrying
     amounts of $3.6 billion and $2.0 billion, respectively, with associated
     fair value amounts of $2.8 billion and $2.1 billion, respectively. WCG used
     the expertise of outside investment banking firms to establish the fair
     value of long-term debt from third parties. As of December 31, 2000 and
     1999, 66% and 67%, respectively of WCG's total long-term debt was publicly
     traded.

          Redeemable cumulative convertible preferred stock:  Fair value is
     based on the prices of similar securities with similar terms and credit
     ratings as the preferred stock is not publicly-traded. As of December 31,
     2000 the preferred stock had a carrying value of $240.7 million with an
     associated fair value amount of $142 million. WCG used the expertise of
     outside investment banking firms to establish the fair value of redeemable
     cumulative convertible preferred stock.

CONCENTRATION OF CREDIT RISK

     WCG's cash equivalents and short-term investments excluding marketable
equity securities consist of high-quality securities placed with various major
financial institutions with high credit ratings. WCG's investment policy limits
its credit exposure to any one issuer/obligor.

     WCG's customers include numerous corporations. WCG serves a wide range of
customers, of which four customers comprise of 28% of its net accounts
receivable balance as of December 31, 2000. While sales to these various
customers are generally unsecured, the financial condition and creditworthiness
of customers are routinely evaluated.

19. SUBSEQUENT EVENTS

     In first quarter 2001, Williams and WCG entered into an agreement that,
among other things, resulted in the transfer of ownership of a building under
construction from Williams to WCG, the transfer of ownership of aircraft from
Williams to WCG, conversion of the Williams 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.

     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

                                       F-54
<PAGE>   90
                      WILLIAMS COMMUNICATIONS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

dollars per share for each four shares held. WCG's ownership in PowerTel
essentially remained unchanged at 45% subsequent to the equity rights offering.

     In first quarter 2001, WCG granted an option to Telecom Americas, Ltd., a
joint venture between SBC, American Movil S.A. de C.V. and Bell Canada
International, Inc., to purchase WCG's interest in ATL for an agreed to price.
The option was granted in exchange for Telecom Americas, Ltd. paying WCG's
portion of a required funding to ATL. The option will expire at the end of first
quarter 2001.

                                       F-55
<PAGE>   91

                      WILLIAMS COMMUNICATIONS GROUP, INC.
                      QUARTERLY FINANCIAL DATA (UNAUDITED)

     Summarized quarterly financial data are as follows (thousands, except per
share amounts) and reflect the treatment of the Solutions segment as
discontinued operations as described in Note 1 of Notes to Consolidated
Financial Statements.

<TABLE>
<CAPTION>
                                                   FIRST      SECOND       THIRD      FOURTH
2000                                              QUARTER     QUARTER     QUARTER     QUARTER
----                                             ---------   ---------   ---------   ---------
<S>                                              <C>         <C>         <C>         <C>
Revenues.......................................  $ 163,374   $ 179,353   $ 209,314   $ 287,036
Cost of sales..................................    181,004     183,808     214,325     244,135
Loss from operations...........................   (105,235)   (107,053)   (121,129)   (115,254)
Income (loss) from continuing operations.......    (86,158)     14,462    (150,283)    (55,709)
Income (loss) from discontinued operations.....    (35,458)    (18,373)        340    (486,509)
Net loss.......................................   (121,616)     (3,911)   (149,943)   (542,218)
Basic and diluted loss per common share:
  Income (loss) from continuing operations
     attributable to common stockholders.......       (.18)        .03        (.32)       (.13)
  Loss from discontinued operations............       (.08)       (.04)         --       (1.05)
  Net loss attributable to common
     stockholders..............................       (.26)       (.01)       (.32)      (1.18)
</TABLE>

<TABLE>
<CAPTION>
                                                   FIRST      SECOND       THIRD       FOURTH
1999                                              QUARTER     QUARTER     QUARTER     QUARTER
----                                              --------   ---------    --------    --------
<S>                                               <C>        <C>          <C>         <C>
Revenues.......................................   $164,149   $ 142,416    $135,687    $159,204
Cost of sales..................................    142,909     120,098     124,847     138,186
Loss from operations...........................    (40,165)    (77,245)    (58,911)    (70,174)
Loss from continuing operations................    (69,852)   (124,080)    (84,407)    (49,973)
Income (loss) from discontinued operations.....     (6,189)        356      (1,506)    (24,050)
Net loss.......................................    (76,041)   (123,724)    (85,913)    (74,023)
Basic and diluted loss per common share:
  Loss from continuing operations attributable
     to common stockholders....................       (.17)       (.31)       (.22)       (.11)
  Loss from discontinued operations............       (.02)         --          --        (.05)
  Net loss attributable to common
     stockholders..............................       (.19)       (.31)       (.22)       (.16)
</TABLE>

     The sum of losses per share for the four quarters may not equal the total
loss per share for the year due to changes in the average common shares
outstanding.

     First quarter 2000 loss from discontinued operations and net loss includes
a $25.4 million cumulative effect of change in accounting principle related to
the implementation of Staff Accounting Bulletin No. 101 as the Solutions segment
changed its method of accounting for new systems sales and upgrades revenue from
the percentage of completion method to the completed contract method. Second
quarter 2000 loss from continuing operations and net loss includes a gain of
$214.7 million WCG recognized from the conversion of its shares of common stock
of Concentric Network Corporation into shares of common stock of XO
Communications, Inc. pursuant to a merger of those companies (see Note 7). Third
quarter and fourth quarter 2000 loss from continuing operations and net loss
includes $20.0 million and $14.5 million in charges, respectively, related to
the write-down of certain cost-based and equity-method investments (see Note 7).
Fourth quarter 2000 loss from continuing operations and net loss includes an
income tax benefit of $148 million reflecting a change in estimate of the total
year impact of the application of the tax sharing agreement with Williams
including approximately $50 million of tax matters resolved in fourth quarter
pertaining to items such as deferred revenue estimates and mid-quarter
depreciation convention methods for which uncertainties as to the application of
the tax sharing agreement and

                                       F-56
<PAGE>   92

the related impact of these items existed as of September 30, 2000. Fourth
quarter 2000 loss from discontinued operations and net loss includes a provision
for the loss on sale of $360 million expected on the ultimate disposition of the
Solutions segment.

     Second quarter 1999 loss from operations includes a $26.7 million pre-tax
loss related to the sales of the businesses that provide audio and video
conferencing services and closed-circuit video broadcasting services. These
transactions resulted in an income tax provision of $7.9 million, reflecting the
impact of goodwill not deductible for tax purposes (see Note 4). Third quarter
1999 loss from operations includes a $2.6 million charge related to the impact
of converting Williams options and shares to WCG options and shares in
conjunction with the initial public offering. Fourth quarter 1999 loss from
operations includes $1.7 million in additional expenses related to the sale of
the audio and video conferencing and closed-circuit broadcasting services
businesses (see Note 4). In addition, fourth quarter 1999 loss from operations
includes a $5.5 million pre-tax loss related to abandoning a venture in
Strategic Investments involved in providing wireless remote monitoring and meter
reading equipment and related services (see Note 4). Fourth quarter 1999 net
loss includes $9.4 million of dividends received from a cost-based international
telecommunications investment.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

     None.

                                       F-57
<PAGE>   93

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                                   DIRECTORS

     Keith E. Bailey is the Chairman of the Board, President, and Chief
Executive Officer of Williams. Mr. Bailey has held various officer level
positions with Williams and its subsidiaries since 1975 and has served as a
director of Williams since 1988. Mr. Bailey is Chairman of the Board of WCG and
has been a director since 1994. Mr. Bailey's term as a director expires at the
annual stockholders' meeting in 2002.

     Howard E. Janzen has been a director of WCG since 1994. He was elected
Co-Chairman and Chief Operating Officer effective February 1997, and President
and Chief Executive Officer effective May 1998. From April 1993 to December
1994, Mr. Janzen served as Senior Vice President and General Manager of Williams
Gas Pipelines Central, Inc., an affiliate of Williams. Mr. Janzen has also held
various other management and officer level positions with Williams since 1979.
Mr. Janzen also serves on the board of directors of BOK Financial Corporation.
Mr. Janzen's term as a director expires at the annual stockholders' meeting in
2002.

     John C. Bumgarner, Jr. is the Senior Vice President of Corporate
Development and Planning of Williams and President of Williams International
Company, a subsidiary of Williams. Mr. Bumgarner has held various officer level
positions with Williams since 1977. Mr. Bumgarner has been a director of WCG
since 1997 and was named Senior Vice President, Strategic Investments of WCG in
May 1999. Mr. Bumgarner's term as a director expires at the annual stockholders'
meeting in 2001.

     Michael P. Johnson, Sr. is the Senior Vice President of Human Resources of
Williams and has been since May 1999. Prior to joining Williams in December 1998
as Vice President of Human Resources, Mr. Johnson was a vice president of human
resources with Amoco Corporation, where he held various officer level positions
since 1991. Mr. Johnson has been a director of WCG since May 1999. Mr. Johnson's
term as a director expires at the annual stockholders' meeting in 2003.

     Ross K. Ireland is Senior Executive Vice President for SBC Communications
Inc. and has served in various officer level positions with SBC or its
subsidiaries since 1991. Mr. Ireland has been a director of WCG since January
25, 2001. Mr. Ireland's term as a director will expire at the annual
stockholders meeting in 2001.

     Robert W. Lawless has been the President of The University of Tulsa since
May 1996. Previously, he served as president and chief executive officer of
Texas Tech University and Texas Tech University Health Sciences Center from 1989
to 1996. From 1982 to 1989 he served, first as vice president -- finance and
chief financial officer, then as executive vice president and chief operations
officer, for Southwest Airlines in Dallas, Texas. He currently serves as
Independent Director, Four Salomon Brothers Mutual Funds, and Tuition Plan, Inc.
He also is a member of the NCAA Division I Board of Directors; the NCAA
Executive Committee; Hillcrest Healthcare System Board of Trustees; the
Metropolitan Tulsa Chamber of Commerce Board of Directors; and the Board of
Directors of the National Association of Independent Colleges and Universities.
Mr. Lawless has been a director of WCG since July 2000. Mr. Lawless' term as a
director will expire at the annual stockholders meeting in 2001.

     Steven J. Malcolm is the President and Chief Executive Officer of Williams
Energy Services, LLC, a subsidiary of Williams. Mr. Malcolm has held various
management and officer level positions with subsidiaries of Williams since 1984.
Mr. Malcolm has been a director of WCG since 1998. Mr. Malcolm's term as a
director expires at the annual stockholders' meeting in 2001.

                                      III-1
<PAGE>   94

     H. Brian Thompson was Chairman and Chief Executive Officer of Global
TeleSystems Group, Inc. from March 1999 to September 2000. From January to March
1999, he served as non-executive chairman of Telecom Eireann, Ireland's
incumbent telephone company. From June to December 1998, Mr. Thompson served as
Vice Chairman of Qwest Communications International Inc. after its merger with
LCI International. From 1991 to June 1998, Mr. Thompson served as Chairman and
Chief Executive Officer of LCI International. Mr. Thompson also serves as a
member of the board of directors of Bell Canada International Inc. and PageNet
do Brazil, as co-chairman of the Global Information Infrastructure Commission,
and as chairman of the Advisory Committee for Telecommunications for Ireland's
Department of Public Enterprise. Mr. Thompson has been a director of WCG since
October 1999. Mr. Thompson's term as a director will expire at the annual
stockholders' meeting in 2001.

     Cuba Wadlington, Jr. is President and Chief Operating Officer of Williams
Gas Pipeline Company, a subsidiary of Williams. From 1995 to 1999, Mr.
Wadlington was Senior Vice President and General Manager of Transcontinental Gas
Pipe Line Corporation, a subsidiary of Williams. Mr. Wadlington also serves on
the board of directors of Sterling Bank. Mr. Wadlington has been a director of
WCG since January 2000. Mr. Wadlington's term as a director expires at the
annual stockholders' meeting in 2003.

                               EXECUTIVE OFFICERS

     The names, ages, positions, and earliest election dates of the executive
officers of WCG are:

<TABLE>
<CAPTION>
NAME                                AGE   POSITIONS AND OFFICES CURRENTLY HELD        OFFICER SINCE
----                                ---   ------------------------------------        -------------
<S>                                 <C>   <C>                                         <C>
Keith E. Bailey...................  58    Chairman of the Board                         12/01/94
Howard E. Janzen..................  47    President & Chief Executive Officer           12/01/94*
Scott E. Schubert.................  47    Senior Vice President & Chief Financial       06/07/99
                                          Officer
Frank M. Semple...................  49    Senior Vice President-Network                 07/01/97
John C. Bumgarner, Jr. ...........  58    Senior Vice President-Strategic               12/01/94
                                          Investments
Patti L. Schmigle.................  42    Senior Vice President-Solutions               11/01/97
Kenneth R. Epps...................  44    Senior Vice President-Strategic Marketing     03/01/99
Matthew W. Bross..................  40    Senior Vice President-Chief Technology        03/01/99
                                          Officer
Gerald L. Carson..................  61    Senior Vice President-Human Resources         02/12/97
Bob F. McCoy......................  58    Senior Vice President-Law                     11/01/99
Ken Kinnear.......................  39    Vice President, Controller, & Chief           05/18/00
                                          Accounting Officer
</TABLE>

     Except for Scott E. Schubert, Kenneth R. Epps, and Matthew W. Bross, all of
the above officers have been employed by WCG or one of its subsidiaries as
officers or otherwise for more than five years and have had no other employment
during the period. Prior to joining WCG, Mr. Schubert was Vice President of
Global Accounting Services and Finance of BP Amoco, where he had been employed
for 23 years, including the last six years as an officer of Amoco prior to its
merger with British Petroleum. Before joining WCG in February 1999, Mr. Epps
served as Vice President of Emerald Solutions, Inc., a start-up information
technology firm, from 1998 to 1999. Prior to that he was with AT&T for 13 years.
Prior to joining WCG, Mr. Bross served as Chief Executive Officer of Critical
Technologies, a company Mr. Bross founded in 1991, until May 1997 when that
company was acquired by WCG.
---------------

* Mr. Janzen was elected Co-Chairman and Chief Operating Officer effective
  02/12/97, and President and Chief Executive Officer effective 05/01/98.

                                      III-2
<PAGE>   95

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the Securities Exchange Act of 1934 requires WCG's
directors, executive officers, and persons who beneficially own more than 10
percent of WCG's stock to file certain reports with the SEC and the New York
Stock Exchange concerning their beneficial ownership of WCG's equity securities.
The SEC regulations also require that a copy of all such Section 16(a) forms
filed must be furnished to WCG by the executive officers, directors, and greater
than 10 percent stockholders. Based on a review of the copies of such forms and
amendments thereto received by WCG with respect to 2000, WCG is not aware of any
late filings.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

     The following table provides certain summary information concerning
compensation of the Company's Chief Executive Officer and each of the four other
most highly-compensated executive officers of the Company for the three fiscal
years ended December 31, 2000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                              ANNUAL COMPENSATION              LONG-TERM COMPENSATION
                                           --------------------------   -------------------------------------
                                                                                              STOCK OPTIONS
                                                                            RESTRICTED          SHARES(4)
NAME AND PRINCIPAL                                         BONUS           STOCK AWARDS      ----------------      ALL OTHER
POSITION                            YEAR    SALARY    (YR. EARNED)(1)   (YR. EARNED)(2)(3)     WCG      WMB     COMPENSATION(5)
------------------                  ----   --------   ---------------   ------------------   -------   ------   ---------------
<S>                                 <C>    <C>        <C>               <C>                  <C>       <C>      <C>
Howard E. Janzen..................  2000   $500,000      $446,393           $       --       100,000       --       $11,466
 President, Chief Executive         1999    451,538       226,616               97,122       300,000   10,000        10,905
 Officer                            1998    400,000       126,000            2,609,000(6)         --   30,000        12,050
Delwin L. Bothof..................  2000   $230,000      $ 97,062           $       --        28,600       --       $11,466
 Senior Vice President, Domestic    1999    220,039        52,377               22,449        70,000    7,500        10,905
 Strategic Investments              1998    210,000        46,857              658,832(7)         --   15,000        12,800
Patti L. Schmigle.................  2000   $250,000      $ 89,307           $  385,000(8)     97,700       --       $11,466
 Senior Vice President and          1999    222,431        41,748               17,893        87,250    7,500        10,767
 Chief Operating Officer,           1998    182,000        42,998              337,803(7)         --   15,000        10,815
 Solutions
Scott E. Schubert.................  2000   $272,961      $107,726           $  385,000(8)     81,800       --       $11,466
 Senior Vice-President and          1999    144,231        61,831               26,499        80,000    7,500         8,077
 Chief Financial Officer, WCG       1998         --            --                   --            --       --            --
Frank M. Semple...................  2000   $300,000      $169,962           $  385,000(8)    125,000       --       $11,466
 Senior Vice President and          1999    264,000        82,050               35,165       100,000    7,500        10,905
 Chief Operating Officer, Network   1998    240,000        91,350              677,900(7)         --   15,000        12,800
</TABLE>

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

(1) Excludes 1999 and 1998 executive incentive compensation program awards
    required to be converted to deferred stock amounts that are included in the
    Restricted Stock Awards column.

(2) Amounts reported in this column are the dollar value as of the date of grant
    of the Company's deferred stock awards under the terms of the Company's 1999
    Stock Plan and Williams deferred stock awards under the terms of The
    Williams Companies, Inc. 1996 Stock Plan and The Williams Companies, Inc.
    Stock Plan for Nonofficer Employees. Amounts shown include the value of
    awards granted pursuant to the executive incentive compensation program.
    Such awards are converted to deferred stock using the three-month average
    stock price of the Company's stock for the 1999 awards and the 52-week
    average stock price of Williams stock for the 1999 and 1998 awards as
    follows: Mr. Janzen -- for 1999, 3,417 shares valued at $97,122 and for
    1998, 1,769 shares valued at $54,000; Mr. Bothof -- for 1999, 790 shares
    valued at $22,449 and for 1998, 658 shares valued at $20,082; Ms.
    Schmigle -- for 1999, 630 shares valued at $17,893, for 1998, 604 shares
    valued at $18,428; Mr. Schubert -- for 1999, 3,108 shares valued at $26,499;
    Mr. Semple -- for 1999, 1,237 shares valued at $35,165, and for 1998, 1,283
    shares valued at $39,150. Distribution of mandatorily deferred stock under
    the 1999

                                      III-3
<PAGE>   96

    and 1998 executive incentive compensation programs will occur approximately
    three years after the date of grant. Dividend equivalents are paid on
    Williams deferred stock at the same time and at the same rate as dividends
    are paid to stockholders generally; dividend equivalents are not paid on the
    Company's stock.

(3) The aggregate number and market value of the Company's deferred shares held
    and of Williams deferred shares held, respectively, at the end of the fiscal
    year, were as follows: Mr. Janzen, 101,569 shares valued at $1,193,436;
    1,769 shares valued at $70,649; Mr. Bothof, 25,328 shares valued at
    $297,604; 658 shares valued at $26,279; Ms. Schmigle, 32,899 shares valued
    at $386,563; 604 shares valued at $24,122; Mr. Schubert, 44,848 shares
    valued at $526,964, 13,290 shares valued at $530,769; Mr. Semple, 63,104
    shares valued at $741,472; 9,916 shares valued at $396,020. Aggregate market
    value was calculated using $11.7500 per share, the closing price of the
    Company's Common Stock and $39.9375 per share, the closing price of
    Williams' Common Stock reported in the table entitled "New York Stock
    Exchange Composite Transactions" contained in The Wall Street Journal for
    December 29, 2000.

(4) The Company's Common Stock is designated WCG. Executives also hold Common
    Stock of The Williams Companies, Inc., designated WMB.

(5) Amounts reported in this column represent the value of contributions made by
    Williams to defined contribution plans, on behalf of each of Williams
    Communications' executive officers named in the table.

(6) This amount includes a Williams deferred stock award of 80,000 shares
    granted for retention purposes on May 21, 1998 under The Williams Companies,
    Inc. 1996 Stock Plan with a closing market value on the date of grant of
    $2,555,000. Previously this award was valued using the average of the high
    and low stock prices on the date of grant. At the time of the equity
    offering, September 30, 1999, this deferred award was converted to the
    Company's deferred stock under the terms of the Williams Communications
    Group, Inc. 1999 Stock Plan. Twenty-five percent of these deferred shares
    vested on that date.

(7) Amounts include the dollar value as of the date of grant of Williams
    deferred stock under the terms of the Williams Communications Stock Plan.
    Amounts represent the closing market value of stock awards granted on May
    21, 1998 as follows: Mr. Bothof, 20,000 shares valued at $638,750; Ms.
    Schmigle, 10,000 shares valued at $319,375; and Mr. Semple, 20,000 shares
    valued at $638,750. Previously these awards were valued using the average of
    the high and low stock prices on the date of grant. At the time of the
    equity offering, September 30, 1999, these deferred awards were converted to
    the Company's deferred stock under the terms of the Williams Communications
    Group, Inc. 1999 Stock Plan. Twenty-five percent of these deferred shares
    vested on that date.

(8) Amounts represent dollar value on the date of grants of 20,000 shares each
    of the Company's deferred stock awarded for retention purposes on September
    22, 2000 under the Company's 1999 Stock Plan to Ms. Schmigle, and Messrs.
    Schubert and Semple.

                    STOCK OPTION GRANTS IN LAST FISCAL YEAR

     The following table provides certain information concerning the grant of
the Company's stock options during the last fiscal year to the named executive
officers:

WILLIAMS COMMUNICATIONS OPTION GRANTS IN LAST FISCAL YEAR

     The grant date present value is determined using the Black-Scholes option
pricing model and is based on assumptions about future stock price volatility
and dividend yield. The model does not take into account that the stock options
are subject to vesting restrictions and that executives cannot sell their
options. The calculations assume an expected volatility of 71 percent, a
weighted average risk-
                                      III-4
<PAGE>   97

free rate of return of 6.28 percent, a dividend yield of 0 percent and an
exercise date at the end of the contractual term in 2010. The actual value, if
any, that may be realized by an executive will depend on the market price of the
Company's Common Stock on the date of exercise. The dollar amounts shown are not
intended to forecast possible future appreciation in the Company's stock price.

          (2) These stock options immediately vested on the grant date of
     03/16/00 in recognition of the efforts and achievements of the Company.

          (3) These stock options will vest in thirds on September 22, 2001,
     September 22, 2002 and September 22, 2003, respectively.

OPTION EXERCISES AND FISCAL YEAR-END VALUES

     The following tables provide certain information on stock option exercises
of the Company's stock and The Williams Companies, Inc. stock, respectively, in
2000 by the named executive officers and the value of such officers' unexercised
options at December 31, 2000.

     AGGREGATED OPTION EXERCISES OF THE COMPANY'S STOCK IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                                  VALUE OF UNEXERCISED
                                                    NUMBER OF UNEXERCISED        IN-THE-MONEY OPTIONS AT
                          SHARES                 OPTIONS AT FISCAL YEAR-END        FISCAL YEAR-END(1)
                         ACQUIRED      VALUE     ---------------------------   ---------------------------
NAME                    ON EXERCISE   REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                    -----------   --------   -----------   -------------   -----------   -------------
<S>                     <C>           <C>        <C>           <C>             <C>           <C>
Howard E. Janzen......       0           $0        125,000        275,000          $0             $0
Delwin L. Bothof......       0           $0         36,934         61,666          $0             $0
Patti L. Schmigle.....       0           $0         56,034        128,916          $0             $0
Scott E. Schubert.....       0           $0         40,134        121,666          $0             $0
Frank M. Semple.......       0           $0         77,500        147,500          $0             $0
</TABLE>

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

(1) Based on the closing price of the Company's Common Stock reported in the
    table entitled "New York Stock Exchange Composite Transactions" contained in
    The Wall Street Journal for December 29, 2000 ($11.7500 per share), less the
    exercise price. The values shown reflect the value of options accumulated
    over periods of up to ten years. Such values had not been realized at that
    date and may not be realized. In the event the options are exercised, their
    value will depend on the market price of the Company's Common Stock on the
    date of exercise.

       AGGREGATED OPTION EXERCISES OF WILLIAMS STOCK IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                                   VALUE OF UNEXERCISED
                                                     NUMBER OF UNEXERCISED        IN-THE-MONEY OPTIONS AT
                         SHARES                   OPTIONS AT FISCAL YEAR-END        FISCAL YEAR-END(1)
                        ACQUIRED       VALUE      ---------------------------   ---------------------------
NAME                   ON EXERCISE    REALIZED    EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                   -----------   ----------   -----------   -------------   -----------   -------------
<S>                    <C>           <C>          <C>           <C>             <C>           <C>
Howard E. Janzen.....    60,002      $1,677,559     120,002             0       $1,626,295       $     0
Delwin L. Bothof.....    20,000      $  363,125      32,500             0       $  245,000       $     0
Patti L. Schmigle....    10,500      $  304,500      99,000             0       $1,796,156       $     0
Scott E. Schubert....         0      $        0       2,500         5,000       $    5,781       $11,563
Frank M. Semple......         0      $        0     162,500             0       $3,248,750       $     0
</TABLE>

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

(1) Based on the closing price of Williams' Common Stock reported in the table
    entitled "New York Stock Exchange Composite Transactions" contained in The
    Wall Street Journal for December 29, 2000 ($39.9375 per share), less the
    exercise price. The values shown reflect the value of options accumulated
    over periods of up to ten years. Such values had not been

                                      III-5
<PAGE>   98

    realized at that date and may not be realized. In the event the options are
    exercised, their value will depend on the market price of Williams Common
    Stock on the date of exercise.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth the number of shares of Class A common
stock, Class B common stock, and preferred stock and the percentage represented
by that number of shares for each person who is known to WCG to own beneficially
5 percent or more of WCG's Class A Common Stock, Class B common stock, or
preferred stock as of February 28, 2001. WCG obtained certain information in the
table on common stock ownership from filings made with the Securities and
Exchange Commission.

<TABLE>
<CAPTION>
                                                                     NUMBER OF    PERCENT
TITLE OF CLASS                          NAME AND ADDRESS              SHARES      OF CLASS
--------------                          ----------------            -----------   --------
<S>                            <C>                                  <C>           <C>
Class A Common stock.........  Telefonos de Mexico, S.A. de C.V.      4,612,546      5.0%
                               Marque Via 198-102
                               Col. Cuauhtenoc
                               Mexico 06594 D.F. Mexico
Class A Common stock.........  Intel Corporation                      9,225,093      9.9%
                               2200 Mission College Boulevard
                               Santa Clara, California 95052
Class A Common stock.........  SBC Communications Inc.               20,226,812     21.8%
                               175 East Houston
                               San Antonio, Texas 78205
Class A common stock.........  The Williams Companies, Inc.          24,265,892     26.1%
                               One Williams Center
                               Tulsa, Oklahoma 74172
Class B common stock.........  The Williams Companies, Inc.         395,434,965    100.0%
                               One Williams Center
                               Tulsa, Oklahoma 74172
Preferred stock..............  Fidelity Investments                     600,000     12.0%
                               82 Devonshire Street
                               Boston, Massachusetts 02110
Preferred stock..............  Citadel Investment Partners              600,000     12.0%
                               225 W. Washington Street
                               9th Floor
                               Chicago, Illinois 60606
</TABLE>

                                      III-6
<PAGE>   99

     The following table sets forth, as of January 31, 2001, the amount of WCG's
Class A common stock beneficially owned by each of WCG's directors, each of its
executive officers named in the Summary Compensation Table, and by all directors
and executive officers as a group.

<TABLE>
<CAPTION>
                                                                 SHARES
                                                SHARES OF      UNDERLYING
                                                  COMMON         OPTIONS
                                               STOCK OWNED     EXERCISABLE             PERCENT
                                               DIRECTLY OR       WITHIN                  OF
NAME OF INDIVIDUAL OR GROUP                   INDIRECTLY(1)    60 DAYS(2)     TOTAL     CLASS
---------------------------                   --------------   -----------   -------   -------
<S>                                           <C>              <C>           <C>       <C>
Keith E. Bailey.............................           0               0           0       *
Delwin L. Bothof............................      27,594          53,601      81,195       *
John C. Bumgarner, Jr. .....................      41,474               0      41,474       *
Ross K. Ireland.............................           0               0           0       *
Howard E. Janzen............................     123,318         125,000     248,318       *
Michael P. Johnson, Sr. ....................         303               0         303       *
Robert W. Lawless...........................       4,000           5,333       9,333       *
Steven J. Malcolm...........................         303               0         303       *
Patti L. Schmigle...........................      36,185          56,034      92,219       *
Scott E. Schubert...........................      71,249          40,134     111,383       *
Frank M. Semple.............................      68,768          77,500     146,268       *
H. Brian Thompson...........................       3,729          22,000      25,729       *
Cuba Wadlington, Jr. .......................         303               0         303       *
All directors and executive officers as a
  group (18 persons)(3).....................     522,483         439,317     961,800     1.0%
</TABLE>

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

(1) Includes shares held under the terms of incentive and investment plans as
    follows: Mr. Bothof, 25,328; Mr. Bumgarner, 14,171; Mr. Janzen, 101,872,
    including 303, over which he has sole voting and investment power; Ms.
    Schmigle, 33,202, including 303, over which she has sole voting and
    investment power; Mr. Schubert, 44,848; and Mr. Semple, 63,407, including
    303, over which he has sole voting and investment power.

(2) The Securities and Exchange Commission deems a person to have beneficial
    ownership of all shares that that person has the right to acquire within 60
    days. The shares indicated represent stock options granted under the
    company's Stock Plans. Shares subject to option cannot be voted.

(3) Does not include security ownership of Mr. J. Cliff Eason, who ceased being
    a director on January 24, 2001; Mr. Lawrence C. Littlefield, who ceased
    being an executive officer on February 15, 2000; Mr. Jack D. McCarthy, who
    ceased being a director on October 17, 2000, and Mr. Roy A. Wilkens, who
    ceased being a director on December 31, 2000.

     No director or officer owns beneficially any securities of WCG's
subsidiaries other than directors' qualifying shares.

                                      III-7
<PAGE>   100

     The following table sets forth, as of January 31, 2001, the amount of The
Williams Companies, Inc. Common Stock beneficially owned by each of the
Company's directors, each of the executive officers named in the Summary
Compensation Table and by all directors and nominees and executive officers as a
group.

<TABLE>
<CAPTION>
                                                              SHARES
                                             SHARES OF      UNDERLYING
                                               COMMON         OPTIONS
                                            STOCK OWNED     EXERCISABLE                PERCENT
                                            DIRECTLY OR       WITHIN                     OF
NAME OF INDIVIDUAL OR GROUP                INDIRECTLY(1)    60 DAYS(2)       TOTAL      CLASS
---------------------------                --------------   -----------    ---------   -------
<S>                                        <C>              <C>            <C>         <C>
Keith E. Bailey..........................    2,167,710         150,000     2,317,710       *
Delwin L. Bothof.........................      100,000          32,500       132,500       *
John C. Bumgarner, Jr. ..................    1,070,102          60,000     1,130,102       *
Ross K. Ireland..........................            0               0             0       *
Howard E. Janzen.........................      218,904         120,002       338,906       *
Michael P. Johnson, Sr. .................       23,204          55,250        78,454       *
Robert W. Lawless........................        1,000               0         1,000       *
Steven J. Malcolm........................       75,226         202,938       278,164       *
Patti L. Schmigle........................       18,558         103,250(3)    121,808       *
Scott E. Schubert........................       30,873           2,500        33,373       *
Frank M. Semple..........................      179,089         162,500       341,589       *
H. Brian Thompson........................        5,000               0         5,000       *
Cuba Wadlington, Jr. ....................      147,970         224,102       372,072       *
All directors and executive officers as a
  group (18 persons)(4)..................    4,318,953       1,346,085     5,665,038     1.4%
</TABLE>

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

 *  Less than 1 percent.

(1) Includes shares held under the terms of incentive and investment plans as
    follows: Mr. Bailey, 253,009, including 181,681 over which he has sole
    voting and investment power; Mr. Bothof, 12,091, including 11,433 over which
    he has sole voting and investment power; Mr. Bumgarner, 427,654, including
    228,973 over which he has sole voting and investment power; Mr. Janzen,
    62,002, including 60,233 over which he has sole voting and investment power;
    Mr. Johnson, 22,900, including 1,553 over which he has sole voting and
    investment power; Mr. Malcolm, 53,268, including 33,852 over which he has
    sole voting and investment power; Ms. Schmigle, 16,287, including 14,936
    over which she has sole voting and investment power, and including 747
    shares held by Ms. Schmigle's spouse and of which Ms. Schmigle disclaims
    beneficial ownership; Mr. Schubert, 14,873, including 1,583 over which he
    has sole voting and investment power; Mr. Semple, 65,676, including 55,760
    over which he has sole voting and investment power; and Mr. Wadlington,
    116,199, including 105,371 over which he has sole voting and investment
    power.

(2) The Securities and Exchange Commission deems a person to have beneficial
    ownership of all shares that that person has the right to acquire within 60
    days. The shares indicated represent stock options granted under the
    Company's Stock Plans. Shares subject to option cannot be voted.

(3) Includes 4,250 options held by Ms. Schmigle's spouse and of which Ms.
    Schmigle disclaims beneficial ownership.

(4) Does not include security ownership of Mr. J. Cliff Eason, who ceased being
    a director on January 24, 2001; Mr. Lawrence C. Littlefield, who ceased
    being an executive officer on February 15, 2000; Mr. Jack D. McCarthy, who
    ceased being a director on October 17, 2000, and Mr. Roy A. Wilkens, who
    ceased being a director on December 31, 2000.

                                      III-8
<PAGE>   101

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                           STOCK OPTION LOAN PROGRAM
 1985, 1990 AND 1996 STOCK PLANS AND 1996 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS

     There is no provision for loans in the Williams Communications Group, Inc.
1999 Stock Plan; however, the stock option loan programs for The Williams
Companies, Inc. 1996 Stock Plan, The Williams Companies, Inc. 1996 Stock Plan
for Non-Employee Directors, The Williams Companies, Inc. 1990 Stock Plan, and
The Williams Companies 1985 Stock Plan provide that loans using stock
certificates as collateral may be either for a three- or five-year term.
Interest payments are due annually during the term of the loan and interest
rates are based on the minimum applicable federal rates required to avoid
imputed income. The principal amount is due at the end of the loan term,
provided, however, that a participant may request, prior to the end of a loan
term, a new loan that may be granted at the discretion of the company.
Participants who leave the company during the loan period are required to pay
the loan balance and any accrued interest within 30 days of termination.

<TABLE>
<CAPTION>
                                                                                       AMOUNT
                                INTEREST   TOTAL INTEREST OVER   LARGEST AMOUNT     OUTSTANDING
NAME                              RATE        TERM OF LOAN       DUE DURING 2000      2/28/01
----                            --------   -------------------   ---------------   --------------
<S>                             <C>        <C>                   <C>               <C>
Keith E. Bailey...............    6.28%      $    50,641.92      $   163,499.92    $           --
Keith E. Bailey...............    6.58%      $    71,656.20      $   220,941.09    $           --
Keith E. Bailey...............    6.42%      $    67,673.84      $   253,517.81    $           --
Keith E. Bailey...............    6.80%      $    49,588.48      $   241,628.36    $           --
Keith E. Bailey...............    6.80%      $    59,459.20      $   221,858.04    $           --
Keith E. Bailey...............    6.80%      $    36,162.67      $   113,593.32    $   107,529.89
Keith E. Bailey...............    5.68%      $   406,609.84      $ 1,513,046.81    $ 1,444,869.99
Keith E. Bailey...............    5.57%      $ 1,026,811.18      $ 3,892,296.45    $ 3,720,129.75
Keith E. Bailey...............    5.54%      $ 1,670,829.99      $ 6,366,043.25    $ 6,085,893.09
Keith E. Bailey...............    6.45%      $   484,833.60      $ 2,632,327.91    $ 2,531,723.45
Keith E. Bailey...............    6.53%      $ 1,786,619.91      $ 9,424,339.42    $ 9,216,326.17
           Total..............               $ 5,710,886.83      $25,043,092.38    $23,106,472.34
Delwin L. Bothof..............    5.42%      $   241,045.04      $ 1,562,790.13    $ 1,495,429.60
Delwin L. Bothof..............    4.67%      $    69,781.32      $   628,020.00    $   604,529.26
           Total..............               $   310,826.36      $ 2,190,810.13    $ 2,099,958.86
John C. Bumgarner, Jr.........    5.91%      $   203,927.62      $ 1,170,111.16    $           --
John C. Bumgarner, Jr.........    6.46%      $   104,168.11      $ 1,223,601.85    $ 1,182,329.70
John C. Bumgarner, Jr.........    5.42%      $   559,102.89      $ 3,624,884.80    $ 3,468,642.31
John C. Bumgarner, Jr.........    5.42%      $   373,329.60      $ 2,420,443.18    $ 2,316,115.48
           Total..............               $ 1,240,528.22      $ 8,439,040.99    $ 6,967,087.49
Gerald L. Carson..............    5.59%      $   190,927.04      $   694,643.65    $   663,813.23
           Total..............               $   190,927.04      $   694,643.65    $   663,813.23
James R. Herbster.............    6.74%      $    17,864.37      $    56,582.88    $    53,587.53
James R. Herbster.............    6.49%      $   119,416.00      $   391,883.17    $   371,860.57
James R. Herbster.............    5.93%      $    77,115.43      $   275,508.90    $   262,578.83
           Total..............               $   214,395.80      $   723,974.95    $   688,026.93
Howard E. Janzen..............    5.70%      $    80,997.64      $   500,003.83    $           --
Howard E. Janzen..............    5.69%      $    87,092.51      $   323,543.31    $   308,940.39
Howard E. Janzen..............    5.77%      $    38,864.87      $   142,486.55    $   135,970.05
Howard E. Janzen..............    4.71%      $    25,451.88      $   112,692.14    $   108,898.77
Howard E. Janzen..............    4.71%      $    27,328.23      $   120,999.99    $   116,926.94
Howard E. Janzen..............    4.71%      $    54,070.99      $   239,407.68    $   231,348.85
</TABLE>

                                      III-9
<PAGE>   102

<TABLE>
<CAPTION>
                                                                                       AMOUNT
                                INTEREST   TOTAL INTEREST OVER   LARGEST AMOUNT     OUTSTANDING
NAME                              RATE        TERM OF LOAN       DUE DURING 2000      2/28/01
----                            --------   -------------------   ---------------   --------------
<S>                             <C>        <C>                   <C>               <C>
Howard E. Janzen..............    4.83%      $   114,621.70      $   492,021.37    $   478,329.58
Howard E. Janzen..............    5.37%      $   101,999.39      $   391,455.23    $   383,183.51
Howard E. Janzen..............    6.71%      $   173,152.09      $   541,837.88    $   521,699.39
Howard E. Janzen..............    6.71%      $   178,617.93      $   558,941.91    $   538,167.73
Howard E. Janzen..............    6.62%      $   180,651.86      $   564,828.35    $   551,616.25
Howard E. Janzen..............    5.87%      $   163,847.67      $   559,241.97    $   559,239.28
           Total..............               $ 1,226,696.76      $ 4,547,460.21    $ 3,934,320.74
Lawrence C. Littlefield.......    5.54%      $   109,692.00      $   696,564.03    $           --
           Total..............               $   109,692.00      $   696,564.03    $           --
Jack D. McCarthy..............    6.23%      $   107,056.32      $   365,091.24    $   347,141.00
Jack D. McCarthy..............    6.23%      $   108,144.83      $   368,803.37    $   350,670.59
Jack D. McCarthy..............    6.23%      $   106,111.35      $   361,868.64    $   344,076.85
Jack D. McCarthy..............    5.59%      $    28,721.07      $   120,963.92    $   115,595.15
Jack D. McCarthy..............    5.59%      $    29,013.10      $   122,193.81    $   116,770.48
Jack D. McCarthy..............    5.59%      $    28,467.56      $   119,896.19    $   114,574.81
Jack D. McCarthy..............    6.42%      $    97,467.41      $   323,130.32    $   306,787.80
Jack D. McCarthy..............    6.42%      $   100,999.44      $   334,839.90    $   317,905.19
Jack D. McCarthy..............    6.42%      $    66,565.13      $   220,681.05    $   209,519.97
Jack D. McCarthy..............    5.59%      $    26,566.90      $   125,456.11    $   119,887.99
Jack D. McCarthy..............    5.59%      $    27,529.63      $   130,002.43    $   124,232.50
Jack D. McCarthy..............    5.59%      $    18,143.80      $    85,679.94    $    81,877.21
Jack D. McCarthy..............    4.83%      $   301,392.00      $ 1,308,278.41    $ 1,257,743.63
Jack D. McCarthy..............    6.21%      $     8,504.25      $    66,784.97    $    63,745.52
Jack D. McCarthy..............    6.21%      $    12,452.27      $    97,789.33    $    93,338.83
Jack D. McCarthy..............    6.21%      $     7,340.67      $    57,647.24    $    55,023.64
Jack D. McCarthy..............    6.80%      $    17,328.98      $   130,353.80    $   124,719.18
Jack D. McCarthy..............    6.80%      $    31,942.00      $   196,709.05    $   188,206.23
Jack D. McCarthy..............    6.80%      $    32,266.77      $   198,709.10    $   190,119.84
Jack D. McCarthy..............    6.80%      $    31,300.96      $   192,761.35    $   184,429.16
Jack D. McCarthy..............    6.33%      $    10,769.73      $   108,151.74    $   106,693.44
Jack D. McCarthy..............    6.33%      $     7,355.16      $    73,861.97    $    72,866.02
Jack D. McCarthy..............    6.33%      $    50,571.34      $   227,602.36    $   224,533.37
           Total..............               $ 1,256,010.67      $ 5,337,256.24    $ 5,110,458.40
Frank M. Semple...............    5.42%      $   181,654.27      $ 1,171,318.14    $ 1,120,831.17
           Total..............               $   181,654.27      $ 1,171,318.14    $ 1,120,831.17
William G. von Glahn..........    5.83%      $    64,363.20      $   371,056.51    $           --
William G. von Glahn..........    5.83%      $     1,287.26      $     7,486.97    $           --
William G. von Glahn..........    5.83%      $     1,287.26      $     7,486.97    $           --
William G. von Glahn..........    5.83%      $     6,296.40      $    36,621.00    $           --
William G. von Glahn..........    5.91%      $     6,240.96      $    35,388.08    $           --
William G. von Glahn..........    6.23%      $    11,961.60      $    65,179.78    $           --
William G. von Glahn..........    6.23%      $    11,662.56      $    63,550.27    $           --
William G. von Glahn..........    5.54%      $    23,156.31      $   141,611.91    $           --
William G. von Glahn..........    5.54%      $    32,907.60      $   201,245.68    $           --
William G. von Glahn..........    5.59%      $    32,418.94      $   152,049.60    $           --
William G. von Glahn..........    5.59%      $     3,431.31      $    15,451.40    $           --
William G. von Glahn..........    5.59%      $     3,619.26      $    16,264.64    $           --
William G. von Glahn..........    5.39%      $     4,632.86      $    39,012.43    $           --
</TABLE>

                                      III-10
<PAGE>   103

<TABLE>
<CAPTION>
                                                                                       AMOUNT
                                INTEREST   TOTAL INTEREST OVER   LARGEST AMOUNT     OUTSTANDING
NAME                              RATE        TERM OF LOAN       DUE DURING 2000      2/28/01
----                            --------   -------------------   ---------------   --------------
<S>                             <C>        <C>                   <C>               <C>
William G. von Glahn..........    5.39%      $     4,831.80      $    40,637.94    $           --
William G. von Glahn..........    5.39%      $     3,092.09      $    20,221.45    $           --
William G. von Glahn..........    5.48%      $    76,281.60      $   489,427.21    $   468,110.15
William G. von Glahn..........    5.57%      $    55,700.00      $   211,139.97    $   201,800.71
William G. von Glahn..........    5.54%      $   113,547.84      $   432,629.58    $   413,590.86
William G. von Glahn..........    5.28%      $    40,757.26      $   184,239.99    $   176,493.59
William G. von Glahn..........    5.82%      $   200,208.00      $   728,041.60    $   694,472.48
William G. von Glahn..........    5.98%      $    45,448.00      $   161,089.57    $   153,469.28
William G. von Glahn..........    6.20%      $       551.17      $     3,910.45    $           --
William G. von Glahn..........    6.20%      $       551.17      $     3,910.45    $           --
William G. von Glahn..........    5.74%      $     6,485.13      $    71,837.34    $    68,568.04
William G. von Glahn..........    6.20%      $    18,494.68      $    84,960.02    $    80,801.75
William G. von Glahn..........    6.71%      $   235,558.58      $   735,450.65    $   709,727.32
           Total........................     $ 1,004,772.84      $ 4,319,901.46    $ 2,967,034.18
           Grand Total..................     $11,446,390.79      $53,164,062.18    $46,658,003.34
</TABLE>

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

* Includes information for James R. Herbster and Jack D. McCarthy, who are
  former directors, and for Delwin L. Bothof, Lawrence C. Littlefield, and
  William G. von Glahn, who are former executive officers.

     Williams agreed to loan Scott E. Schubert, in connection with his
employment agreement, approximately $4,000,000 to provide funds to exercise
options granted by his former employer. Currently Mr. Schubert has three such
loans outstanding, the first two of which were made on June 22, 1999, in the
principal amount of $1,200,000 and bearing an interest rate of 4.98 percent and
in the principal amount of $800,000 and bearing an interest rate of 5.37 percent
and the third of which was made on February 29, 2000 in the principal amount of
$2,000,000 and bearing an interest rate of 6.56 percent.

     John C. Bumgarner, a director and President, Strategic Investments, of the
Company, owns real estate and leases a portion of it to subsidiaries of the
Company for use as office space. In 2000, payments under these leases
approximated $1,089,000. These leases remain in place, and the Company expects
its subsidiaries to make similar payments approximating $92,276 per month for
the term of the leases.

     Ross K. Ireland, a director of WCG, is Senior Executive Vice President for
SBC Communications Inc. An SBC subsidiary purchases wholesale long distance
service from WCG. Revenues from SBC totaling $169,446,000 for the year ended
December 31, 2000 represent 20.2% of total WCG revenues.

     Included in WCG's revenues are charges to Williams and its subsidiaries and
affiliates for managing their internal telephone operations of approximately
$10,400,000, $10,000,000, and $7,700,000 for 2000, 1999, and 1998, respectively.
Charges are for communications services that WCG obtains from WorldCom and
resells internally. The agreement with WorldCom, which was entered into at the
time Williams sold its business to them, provides for certain amounts of service
on the WorldCom network for a 35-year term. WCG receives services on the portion
of the network which WorldCom owns at no cost, and on portions which WorldCom
leases at its cost. WCG resells these communication services to Williams and its
subsidiaries and affiliates at market rates.

     In addition, WCG's revenues include charges to Williams' gas pipelines for
managing microwave frequencies of approximately $3,800,000, $4,300,000, and
$4,300,000 for 2000, 1999, and 1998, respectively. WCG owns portions of these
microwave frequencies, which it acquired from and

                                      III-11
<PAGE>   104

leases to the gas pipelines. These leases are for a 10-year term, and the rental
payments are equal to WCG's purchase cost plus a market rate of return.

     Williams has entered into agreements with WCG for the provision of
administrative and other services to WCG, for the lease of certain property and
facilities, for the sharing of tax liabilities and benefits, and the license of
the Williams name and logo. WCG paid Williams approximately $36,200,000 and
$21,200,000 in 2000 and 1999, respectively, for these items.

     SBC Communications Inc., which owns approximately 21.8 percent of the
outstanding shares of WCG's Class A common stock, has entered into a series of
agreements with WCG under which SBC must first seek to obtain domestic voice and
data long distance services from WCG for 20 years; WCG must first seek to obtain
select international wholesale services and various other services, including
toll-free, operator, calling card, and directory assistance services, from SBC
for 20 years; and WCG and SBC will sell each other's products to their
respective customers and provide installation and maintenance of communications
equipment and other services. During 2000 and 1999, WCG paid $51,700,000 and
$13,200,000, respectively, to SBC pursuant to these agreements, and SBC paid
$169,500,000 and $2,500,000, respectively to WCG.

     WCG has entered into an agreement with SBC pursuant to which WCG will
provide SBC with local transport service in New York, Boston, and Denver, and
with colocation services in New York, Seattle, and Miami. Subject to best
pricing, quality of service, and other requirements, WCG and SBC have agreed to
give each other a right of first refusal to provide telecommunications services
where WCG or SBC has such services available.

     In addition, in June 2000, WCG acquired SBC's interests in undersea
communications cables between the United States and China, and between the
United States and Japan, for a purchase price of approximately $111,400,000,
which was determined based on arm's length negotiations. SBC originally paid
$87,880,524.16 for its interests in the cables.

     In September 2000, WCG acquired the long distance network assets of
Ameritech Communications, Inc., a subsidiary of SBC, for a purchase price of
$145,000,000, which was determined based on arm's length negotiations. SBC
purchased the assets as part of a larger transaction and allocated $154,000,000
of the purchase price to these assets.

     A subsidiary of Intel Corporation, which owns approximately 9.9 percent of
the outstanding shares of WCG's Class A common stock, has entered into a 10-year
master alliance agreement with WCG under which each will purchase services from
the other and work together to create a co-marketing arrangement. The services
WCG provides include domestic transport services, and Intel provides Web-hosting
services. Subject to WCG's meeting price, quality of service, and other
specifications, Intel will purchase a significant portion of its yearly domestic
transport requirements from WCG.

     Telefonos de Mexico, S.A. de C.V., which owns approximately 5.0 percent of
the outstanding shares of WCG's Class A common stock, has entered into
agreements with WCG under which Telefonos de Mexico must first seek to obtain
select international wholesale services and various other services from WCG for
20 years, and WCG must first seek to obtain select international wholesale
services and various other services from Telefonos de Mexico for 20 years. In
addition, Telefonos de Mexico and WCG have entered into an interconnection
agreement and are negotiating additional agreements for the purchase and sale of
telecommunications services.

     During the first quarter of 2000, in a series of transactions involving SBC
and Telefonos de Mexico, WCG sold a portion of its investment in ATL, which
reduced its economic interest in ATL to 50 percent. WCG sold seven percent of
its interest in ATL's preferred shares and 30 percent of its interest in ATL's
common stock, together representing a 15 percent economic interest in ATL. The
purchase price of approximately $168 million was determined based on arm's
length negotiations. WCG originally paid approximately $30 million for the
interest it sold.

                                      III-12
<PAGE>   105

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

<TABLE>
<S>                        <C>
(a)(1) and (a)(2)          The Financial statements and financial statement schedules
                           listed in the Index to Consolidated Financial Statements
                           below are filed as part of this Annual report.
</TABLE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Covered by report of independent auditors:
  Consolidated statements of operations for the three years
     ended December 31, 2000................................  F-18
  Consolidated balance sheets at December 31, 2000 and
     1999...................................................  F-19
  Consolidated statements of stockholders' equity for the
     three years ended December 31, 2000....................  F-20
  Consolidated statements of cash flows for the three years
     ended December 31, 2000................................  F-21
  Notes to consolidated financial statements................  F-22
  Schedules for the three years ended December 31, 2000:
      I -- Condensed financial information of registrant....   V-1
     II -- Valuation and qualifying accounts................   V-4
Not covered by report of independent auditors:
  Quarterly financial data (unaudited)......................  F-56
</TABLE>

All other schedules have been omitted since the required information is not
present or is not present in amount sufficient to require submission of the
schedules, or because the information required is included in the financial
statements and notes thereto.

<TABLE>
<S>                        <C>
(a)(3); and (c)            The documents in the Exhibit List below are filed as part of
                           this annual report.
</TABLE>

                                  EXHIBIT LIST

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
          3.1*           -- Restated Certificate of Incorporation of the Company
                            (filed as Exhibit 3.1 to the Current Report on Form 8-K
                            dated October 1, 1999 (the "October 1999 8-K"))
          3.2*           -- Restated By-laws of the Company (filed as Exhibit 3.2 to
                            the October 1999 8-K)
          4.1*           -- Specimen certificate of common stock (filed as Exhibit
                            4.1 to Registration Statement No. 333-76007 on Form S-1
                            relating to an equity offering (the "Equity Registration
                            Statement"), dated April 9, 1999)
          4.2*           -- Certificate of designation of Series A Junior
                            Participating Preferred Stock (filed as Exhibit 4.1 to
                            the October 1999 8-K)
          4.3*           -- Specimen certificate of Class B common stock (filed as
                            Exhibit 4.2 to the Equity Registration Statement dated
                            April 9, 1999)
          4.4*           -- Indenture governing notes dated October 6, 1999 between
                            the Company and The Bank of New York, Trustee (filed as
                            Exhibit 4.2 to the October 1999 8-K)
</TABLE>

                                       IV-1
<PAGE>   106

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
          4.5*           --Indenture dated as of August 8, 2000 between the Company
                            and The Bank of New York, as trustee relating to the
                            11.70% Senior Redeemable Notes due 2008 and the 11.875%
                            Senior Redeemable Notes due 2010 (filed as Exhibit 4.1 to
                            the S-4 dated October 12, 2000 (the "October 2000 S-4"))
          4.6*           --Registration Rights Agreement dated as of August 8, 2000
                            between the Company and the initial purchasers (filed as
                            Exhibit 4.2 to the October 2000 S-4)
          4.7*           --Certificate of Designation of 6.75% Redeemable Cumulative
                            Convertible Preferred Stock (filed as Exhibit 4.4 to the
                            October 2000 S-4)
         10.1*           -- Securities Purchase Agreement among Williams
                            Communications Group, Inc., The Williams Companies, Inc.
                            and Telefonos de Mexico, S.A. de C.V., dated May 25, 1999
                            (filed as Exhibit 10.1 to the Equity Registration
                            Statement, Amendment No. 1, dated May 27, 1999)
         10.2*           -- Amended and Restated Alliance Agreement Between Telefonos
                            de Mexico, S.A. de C.V. and Williams Communications,
                            Inc., dated May 25, 1999 (filed as Exhibit 10.2 to the
                            Equity Registration Statement, Amendment No. 8, dated
                            September 29, 1999)
         10.3*           -- Securities Purchase Agreement dated as of May 24, 1999 by
                            and among Williams Communication Group, Inc., The
                            Williams Companies, Inc. and Intel Corporation (filed as
                            Exhibit 10.3 to the Equity Registration Statement,
                            Amendment No. 3, dated July 12, 1999)
         10.4*           -- Master Alliance Agreement Between Intel Internet Data
                            Services and Williams Communications, Inc., dated as of
                            May 24, 1999 (filed as Exhibit 10.4 to the Equity
                            Registration Statement, Amendment No. 1, dated May 27,
                            1999)
         10.5*           -- Fiber Lease Agreement between Metromedia Fiber Network
                            Services, Inc. and Williams Communications, Inc., dated
                            September 16, 1999 (filed as Exhibit 10.5 to the Equity
                            Registration Statement, Amendment No. 8, dated September
                            29, 1999)
         10.6*           -- Fiber Lease Agreement between Williams Communications,
                            Inc. and Metromedia Fiber National Network Services,
                            Inc., dated September 16, 1999 (filed as Exhibit 10.6 to
                            the Equity Registration Statement, Amendment No. 8, dated
                            September 29, 1999)
         10.7*           -- Shareholders Agreement by and among Metrogas S.A.,
                            Williams International Telecom (Chile) Limited, and
                            Metrocom S.A., dated March 30, 1999 and Letter Agreement
                            dated March 30, 1999 (filed as Exhibit 10.8 the Equity
                            Registration Statement, Amendment No. 3, dated July 29,
                            1999)
         10.8*           -- Share Purchase Agreement by and Among Lightel, S.A.
                            Technologia de Informacao, Williams International ATL
                            Limited, Johi Representacoes Ltda and ATL-Algar Telecom
                            Leste, S.A., dated as of March 25, 1999 (filed as Exhibit
                            10.9 to the Equity Registration Statement, Amendment No.
                            1, dated May 27, 1999)
</TABLE>

                                       IV-2
<PAGE>   107

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.9*           -- Master Alliance Agreement between SBC Communications Inc.
                            and Williams Communications, Inc. dated February 8, 1999
                            (filed as Exhibit 10.10 the Equity Registration
                            Statement, Amendment No. 1, dated May 27, 1999)
         10.10*          -- Transport Services Agreement dated February 8, 1999,
                            between Southwestern Bell Communication Services, Inc.
                            and Williams Communications, Inc. (filed as Exhibit 10.11
                            to the Equity Registration Statement, Amendment No. 1,
                            dated May 27, 1999)
         10.11*          -- Securities Purchase Agreement dated February 8, 1999,
                            between SBC Communications Inc. and Williams
                            Communications Group, Inc. (filed as Exhibit 10.12 to the
                            Equity Registration Statement, Amendment No. 1, dated May
                            27, 1999)
         10.12*          -- Amended and Restated Lease for Bank of Oklahoma Tower, as
                            of January 1, 1999, by and between Williams Headquarters
                            Building Company and The Williams Companies, Inc. (filed
                            as Exhibit 10.14 the Equity Registration Statement,
                            Amendment No. 1, dated May 27, 1999)
         10.13*          -- Lease as of January 1, 1999, for Williams Technology
                            Center, by and between Williams Headquarters Building
                            Company and Williams Communications Group, Inc. (filed as
                            Exhibit 10.15 to the Equity Registration Statement,
                            Amendment No. 1, dated May 27, 1999)
         10.14*          -- Lease as of January 1, 1999, for Williams Resource
                            Center, by and between Williams Headquarters Building
                            Company and Williams Communications Group, Inc. (filed as
                            Exhibit 10.16 the Equity Registration Statement,
                            Amendment No. 1, dated May 27, 1999)
         10.15*          -- Wireless Fiber IRU Agreement by and between WinStar
                            Wireless, Inc. and Williams Communications, Inc.,
                            effective as of December 17, 1998 (filed as Exhibit 10.17
                            to the Equity Registration Statement, Amendment No. 1,
                            dated July 12, 1999)
         10.16*          -- IRU Agreement between WinStar Wireless, Inc. and Williams
                            Communications, Inc., dated December 17, 1998 (long
                            haul), together with Clarification Agreement effective as
                            of December 17, 1998 and Side Agreement dated March 31,
                            1999 (filed as Exhibit 10.18 to the Equity Registration
                            Statement, Amendment No. 1, dated May 27, 1999)
         10.17*          -- UtiliCom Networks, Inc. Note and Warrant Purchase
                            Agreement dated December 15, 1998. (filed as Exhibit
                            10.19 to the Equity Registration Statement, Amendment No.
                            3, dated July 12, 1999)
         10.18*          -- Consolidated IRU Agreement by and among IXC Carrier,
                            Inc., Vyvx, Inc. and The WilTech Group, dated December 9,
                            1998 and Amendment No. 4, dated December 22, 1998 (filed
                            as Exhibit 10.20 to the Equity Registration Statement,
                            Amendment No. 2, dated July 6, 1999)
         10.19*          -- Stock Purchase Agreement for CNG Computer Networking
                            Group Inc. by and among The Sellers (1310038 Ontario
                            Inc., George Johnston, Hayden Marcus, The H. Marcus
                            Family Trust and Gary White), WilTel Communications
                            (Canada), Inc. and Williams Communications Solutions,
                            LLC, dated October 13, 1998 (filed as Exhibit 10.21 to
                            the Equity Registration Statement, Amendment No. 6, dated
                            August 18, 1999)
</TABLE>

                                       IV-3
<PAGE>   108

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.20*          -- Preferred Stock Purchase by and among UniDial Holdings,
                            Inc. and Williams Communications, Inc., dated October 2,
                            1998 (filed as Exhibit 10.22 to the Equity Registration
                            Statement, Amendment No. 6, dated August 18, 1999)
         10.21*          -- Amended and Restated Lease between State Street Bank &
                            Trust Co. of Connecticut, National Association, as
                            Lessor, and Williams Communications, Inc., as Lessee, as
                            of September 2, 1998 (filed as Exhibit 10.23 to the
                            Equity Registration Statement, Amendment No. 3, dated
                            July 12, 1999)
         10.22*          -- Amended and Restated Participation Agreement dated as of
                            September 2, 1998, among Williams Communications, Inc.;
                            State Street Bank & Trust Company of Conn., National
                            Association, as Trustee; Note Holders and Certificate
                            holders; APA Purchasers; State Street Bank & Trust Co.,
                            as Collateral Agent; and Citibank, N.A., as agent, with
                            Citibank, N.A. and Bank of Montreal as Co-Arrangers;
                            Royal Bank of Canada, as Documentation Agent; and Bank of
                            America, The Chase Manhattan Bank and Toronto Dominion,
                            as Managing Agents (filed as Exhibit 10.24 to the Equity
                            Registration, Amendment No. 1, dated May 27, 1999)
         10.23*          -- Capacity Purchase Agreement between Williams
                            Communications, Inc. and Intermedia Communications, Inc.,
                            dated January 5, 1998 and Amendment dated August 5, 1998
                            (filed as Exhibit 10.25 to the Equity Registration
                            Statement, Amendment No. 6, dated August 18, 1999)
         10.24*          -- Settlement and Release Agreement by and between WorldCom
                            Network Services, Inc. and Williams Communications, Inc.,
                            dated July 1, 1998 (filed as Exhibit 10.26 to the Equity
                            Registration Statement, Amendment No. 6, dated August 18,
                            1999)
         10.25*          -- Umbrella Agreement by and between DownTown Utilities Pty
                            Limited, WilTel Communications Pty Limited, Spectrum
                            Network Systems Limited, CitiPower Pty, Energy Australia,
                            South East Queensland Electricity Corporation Limited,
                            Williams Holdings of Delaware Inc. and Williams
                            International Services Company, dated June 19, 1998
                            (filed as Exhibit 10.27 to the Equity Registration
                            Statement, Amendment No. 1, dated May 27, 1999)
         10.26*          -- Carrier Services Agreement between Vyvx, Inc. and U S
                            WEST Communications, Inc., dated January 5, 1998, and
                            Amendment No. 1, dated June 14, 1999 (filed as Exhibit
                            10.28 to the Equity Registration Statement, Amendment No.
                            1, dated May 27, 1999)
         10.27*          -- Distributorship Agreement by and between Northern Telecom
                            Limited and WilTel Communications, L.L.C., dated January
                            1, 1998 (filed as Exhibit 10.29 to the Equity
                            Registration Statement, Amendment No. 6, dated August 18,
                            1999)
         10.28*          -- Common Stock and Warrant Purchase Agreement by and among
                            Concentric Network Corporation and Williams
                            Communications Group, Inc., dated July 25, 1997 (filed as
                            Exhibit 10.30 to the Equity Registration, Amendment No.
                            1, dated May 27, 1999)
</TABLE>

                                       IV-4
<PAGE>   109

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.29*          -- Note and Warrant Purchase Agreement by and among
                            Concentric Network Corporation and Williams
                            Communications Group, Inc., dated June 19, 1997 (filed as
                            Exhibit 10.31 to the Equity Registration Statement,
                            Amendment No. 3, dated July 12, 1999)
         10.30*          -- Limited Liability Company Agreement of WilTel
                            Communications, LLC, by and between Williams
                            Communication Group, Inc. and Northern Telecom, Inc.,
                            dated April 30, 1997 (filed as Exhibit 10.32 to the
                            Equity Registration Statement, Amendment No. 6, dated
                            August 18, 1999)
         10.31*          -- Share Purchase Agreement for TTS Meridian Systems Inc. by
                            and among Northern Telecom Limited, WilTel
                            Communications, LLC and 1228966 Ontario Inc., dated April
                            30, 1997 (filed as Exhibit 10.33 to the Equity
                            Registration Statement, Amendment No. 6 dated August 18,
                            1999)
         10.32*          -- Formation Agreement by and between Northern Telecom, Inc.
                            and Williams Communications Group, Inc., dated April 1,
                            1997 (filed as Exhibit 10.34 to the Equity Registration
                            Statement, Amendment No. 6, dated August 18, 1999)
         10.33*          -- Purchase Agreement among ABC Industria e Comercio
                            S.A.-ABC INCO, Lightel S.A. Tecnologia da Informacao,
                            Algar S.A.-Empreendimentos e Participacoes and Williams
                            International Telecom Limited, dated January 21, 1997
                            (filed as Exhibit 10.35 to the Equity Registration
                            Statement, Amendment No. 1, dated May 27, 1999)
         10.34*          -- Subscription and Shareholders Agreement among Lightel
                            S.A. Tecnologia da Informacao, Algar S.A.-Empreendimentos
                            e Participacoes and Williams International Telecom
                            Limited, dated January 21, 1997 (filed as Exhibit 10.36
                            to the Equity Registration Statement, Amendment 1, dated
                            May 27, 1999)
         10.35*          -- Sublease Agreement as of June 1, 1996, by and between
                            Transcontinental Gas Pipeline Company and Williams
                            Telecommunications Systems, Inc. (filed as Exhibit 10.37
                            to the Equity Registration Statement, Amendment No. 1,
                            dated May 27, 1999)
         10.36*          -- System Use and Service Agreement between WilTel, Inc. and
                            Vyvx, Inc. effective as of January 1, 1994 (filed as
                            Exhibit 10.38 to the Equity Registration Statement,
                            Amendment No. 1, dated May 27, 1999)
         10.37*          -- Administrative Services Agreement dated September 30,
                            1999 between the Company and its Subsidiaries as
                            identified therein and The Williams Companies, Inc.
                            ("TWC") and its Subsidiaries as identified therein (filed
                            as Exhibit 10.1 to the October 1999 8-K)
         10.38*          -- Service Agreement September 30, 1999 between Williams
                            Information Services Corporation ("WISC") and the Company
                            (filed as Exhibit 10.2 to the October 1999 8-K)
         10.39*          -- Tax Sharing Agreement dated September 30, 1999 between
                            TWC and the Company (filed as Exhibit 10.3 to the October
                            1999 8-K)
         10.40*          -- Indemnification Agreement dated September 1, 1999 between
                            TWC and the Company (filed as Exhibit 10.4 to the October
                            1999 8-K)
</TABLE>

                                       IV-5
<PAGE>   110

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.41*          -- Rights Agreement between the Company and The Bank of New
                            York, Rights Agent, dated as of September 30, 1999 (filed
                            as Exhibit 10.5 to the October 1999 8-K)
         10.42*          -- Registration Rights Agreement dated September 30, 1999
                            between TWC and the Company (filed as Exhibit 10.6 to the
                            October 1999 8-K)
         10.43*          -- Separation Agreement dated September 30, 1999 between TWC
                            and the Company (filed as Exhibit 10.7 to the October
                            1999 8-K)
         10.44*          -- Call option agreement by and among Williams Holdings of
                            Delaware, Inc., Williams International Company, Williams
                            International Telecom Limited, and Williams
                            Communications Group, Inc. dated May 27, 1999 (filed as
                            Exhibit 10.46 to the Equity Registration Statement,
                            Amendment No. 1, dated May 27, 1999)
         10.45*          -- Cross License Agreement dated September 30, 1999 between
                            WISC, TWC and the Company (filed as Exhibit 10.8 to the
                            October 1999 8-K)
         10.46*          -- Technical, Management and Administrative Service
                            Agreement dated May 27, 1999 between Williams
                            International Company and the Company (filed as Exhibit
                            10.9 to the October 1999 8-K)
         10.47*          -- The Williams Companies, Inc. 1996 Stock Plan (filed as
                            Exhibit 10.49 to the Equity Registration Statement,
                            Amendment No. 1, dated May 27, 1999)
         10.48*          -- The Williams Companies, Inc. Stock Plan for Nonofficer
                            Employees (filed as Exhibit 10.50 to the Equity
                            Registration Statement, Amendment No. 1, dated May 27,
                            1999)
         10.49*          -- Williams Communications Stock Plan (filed as Exhibit
                            10.51 to the Equity Registration Statement, Amendment No.
                            1, dated May 27, 1999)
         10.50*          -- Williams Communications Group, Inc. 1999 Stock Plan
                            (filed as Exhibit 10.52 to the Equity Registration
                            Statement, Amendment No. 3, dated July 12, 1999)
         10.51*          -- Williams Pension Plan (filed as Exhibit 10.53 to the
                            Equity Registration Statement, Amendment No. 1, dated May
                            27, 1999)
         10.52*          -- Solutions LLC Pension Plan (filed as Exhibit 10.54 to the
                            Equity Registration Statement, Amendment No. 1, dated May
                            27, 1999)
         10.53*          -- Williams Communications Change in Control Severance Plan
                            (filed as Exhibit 10.55 to the Equity Registration
                            Statement, Amendment No. 3, dated July 12, 1999)
         10.54*          -- Stock Purchase Agreement by and between Williams Communi-
                            cations, Inc. Conferencing Acquisition Corporation and
                            Genesys, S.A. dated as of June 30, 1999 (filed as Exhibit
                            10.56 to the Equity Registration Statement, Amendment No.
                            6, dated August 18, 1999)
         10.55*          -- Loan agreement dated as of September 8, 1999 between
                            Williams Communications, Inc. and The Williams Companies,
                            Inc. (filed as Exhibit 10.57 to the Equity Registration
                            Statement, Amendment No. 8, dated September 29, 1999)
</TABLE>

                                       IV-6
<PAGE>   111

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.56*          -- Williams Communications, Inc. Senior Credit Facilities
                            Commitment Letter, dated June 2, 1999. (filed as Exhibit
                            10.58 to the Equity Registration Statement, Amendment No.
                            4, July 14, 1999)
         10.57*          -- Credit Agreement dated as of September 8, 1999 among
                            Williams Communications, Inc., Williams Communications
                            Group, Inc., the Lenders party thereto, Bank of America,
                            N.A. as Administrative Agent, and The Chase Manhattan
                            Bank as Syndication Agent (filed as Exhibit 10.60 to the
                            Equity Registration Statement, Amendment No. 8, dated
                            September 29, 1999)
         10.58*          -- Intercreditor Agreement dated as of September 8, 1999
                            among The Williams Companies, Inc., Williams
                            Communications Group, Inc., Williams Communications, Inc.
                            and Bank of America, N.A. as Administrative Agent (filed
                            as Exhibit 10.61 the Equity Registration Statement,
                            Amendment No. 8, dated September 29, 1999)
         10.59*          -- Subsidiary Guarantee dated as of September 8, 1999 of
                            each of Critical Connections, Inc., WCS Communications
                            Systems, Inc., WCS Microwave Services, Inc., WCS, Inc.,
                            Williams Communications of Virginia, Inc., Williams
                            International Ventures Company, Williams Learning
                            Network, Inc., Williams Local Network, Inc. and Williams
                            Wireless, Inc., in favor of Bank of America, N.A. as
                            Administrative Agent (filed as Exhibit 10.62 to the
                            Equity Registration Statement, Amendment No. 8, dated
                            September 29, 1999)
         10.60*          -- Securities Purchase Agreement Amendment and Addendum
                            dated as of September 24, 1999, among Williams
                            Communications Group, Inc., The Williams Companies, Inc.
                            and SBC Communications, Inc. (filed as Exhibit 10.64 to
                            the Equity Registration Statement, Amendment No. 8, dated
                            September 29, 1999)
         10.61*          -- Amendment No. 1 dated as of December 31, 1999 to Credit
                            Agreement dated as of September 8, 1999 among WCI, the
                            Company, the Lenders party thereto, and Bank of America,
                            N.A., The Chase Manhattan Bank, Bank of Montreal and The
                            Bank of New York, as agents thereunder (filed as Exhibit
                            10.60.1 to the Quarterly Report on Form 10-Q for the
                            quarterly period ended June 30, 2000, as filed on August
                            10, 2000)
         10.62*          -- Amendment No. 2 dated as of December 31, 1999 to Credit
                            Agreement dated as of September 8, 1999 among WCI, the
                            Company, the Lenders party thereto, and Bank of America,
                            N.A., The Chase Manhattan Bank, Bank of Montreal and The
                            Bank of New York, as agents thereunder (filed as Exhibit
                            10.60.2 to the Quarterly Report on Form 10-Q for the
                            quarterly period ended June 30, 2000, as filed on August
                            10, 2000)
         10.63*          -- Amended and Restated Credit Agreement dated as of
                            September 1, 2000 to the Credit Agreement dated as of
                            September 8, 1999, among WCI, the Company, the lenders
                            party thereto and Bank of America, N.A., The Chase
                            Manhattan Bank, Bank of Montreal and The Bank of New
                            York, as agents thereunder (filed as Exhibit 10.63 to the
                            October 2000 S-4)
</TABLE>

                                       IV-7
<PAGE>   112

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.64           -- Sale and Purchase Agreement by and among Williams
                            Communi-cations, LLC, Williams Learning Network, Inc.,
                            Williams Communi-cations Solutions, LLC, Platinum Equity,
                            LLC, WCS Acquisition Corporation, and WCS Acquisition
                            LLC, dated as of January 29, 2001
         12              -- Statement re: Computation of Ratios
         21              -- Subsidiaries of the registrant
         23              -- Consent of Ernst & Young LLP
         24              -- Power of Attorney
</TABLE>

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

 *   Previously filed with the Securities and Exchange Commission as part of the
     filing indicated, and incorporated herein by reference.

(b)  On October 30, 2000, WCG filed a Current Report on Form 8-K to report
     unaudited quarterly third quarter revenues.

(d)  The financial statements of partially-owned companies are not presented
     herein since none of them individually, or in the aggregate, constitute a
     significant subsidiary.

                                       IV-8
<PAGE>   113

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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)

                                            By:    /s/ SHAWNA L. GEHRES
                                              ----------------------------------
                                                       Shawna L. Gehres
                                                       Attorney-in-fact

Dated: March 12, 2001

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                      SIGNATURE                        TITLE
                      ---------                        -----
<C>                                                    <S>
                /s/ KEITH E. BAILEY*                   Chairman of the Board
-----------------------------------------------------
                   Keith E. Bailey

                /s/ HOWARD E. JANZEN*                  President and Chief Executive Officer
-----------------------------------------------------  (principal executive officer)
                  Howard E. Janzen

               /s/ SCOTT E. SCHUBERT*                  Chief Financial Officer
-----------------------------------------------------  (principal financial officer)
                  Scott E. Schubert

                  /s/ KEN KINNEAR*                     Chief Accounting Officer
-----------------------------------------------------  (principal accounting officer)
                     Ken Kinnear

             /s/ JOHN C. BUMGARNER, JR.*               Director
-----------------------------------------------------
               John C. Bumgarner, Jr.

                /s/ ROSS K. IRELAND*                   Director
-----------------------------------------------------
                   Ross K. Ireland

               /s/ MICHAEL P. JOHNSON*                 Director
-----------------------------------------------------
                 Michael P. Johnson

             /s/ DR. ROBERT W. LAWLESS*                Director
-----------------------------------------------------
                Dr. Robert W. Lawless

                /s/ STEVEN J. MALCOM*                  Director
-----------------------------------------------------
                  Steven J. Malcom

               /s/ H. BRIAN THOMPSON*                  Director
-----------------------------------------------------
                  H. Brian Thompson
</TABLE>
<PAGE>   114

<TABLE>
<CAPTION>
                      SIGNATURE                        TITLE
                      ---------                        -----

<C>                                                    <S>

              /s/ CUBA WADLINGTON, JR.*                Director
--------------------------------------------------
                Cuba Wadlington, Jr.

* By:          /s/ SHAWNA L. GEHRES
     ---------------------------------------------
                  Shawna L. Gehres
                  Attorney-in-fact
</TABLE>

Dated: March 12, 2001
<PAGE>   115

                      WILLIAMS COMMUNICATIONS GROUP, INC.

          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                             (DOLLARS IN THOUSANDS)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              2000        1999        1998
                                                            ---------   ---------   ---------
<S>                                                         <C>         <C>         <C>
Interest accrued..........................................  $(271,532)  $ (52,630)  $      --
Intercompany interest income..............................    271,532      52,630          --
                                                            ---------   ---------   ---------
Loss from continuing operations before equity in net loss
  of wholly-owned subsidiary..............................         --          --          --
Equity in net loss of wholly-owned subsidiary.............   (277,688)   (328,312)   (146,579)
Loss from continuing operations...........................   (277,688)   (328,312)   (146,579)
Loss from discontinued operations.........................   (540,000)    (31,389)    (39,150)
                                                            ---------   ---------   ---------
Net loss..................................................   (817,688)   (359,701)   (185,729)
Preferred stock dividends and amortization of preferred
  stock issuance costs....................................     (4,956)         --          --
                                                            ---------   ---------   ---------
Net loss attributable to common stockholders..............  $(822,644)  $(359,701)  $(185,729)
                                                            =========   =========   =========
</TABLE>

BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              ------------------------
                                                                 2000          1999
                                                              -----------   ----------
<S>                                                           <C>           <C>
ASSETS
  Current assets............................................  $        --   $       --
  Investments:
     Equity in wholly-owned subsidiary......................   (1,450,499)    (551,962)
     Receivable from wholly-owned subsidiary................    5,925,310    4,649,333
  Unamortized debt issue costs..............................       74,633       55,259
                                                              -----------   ----------
          Total assets......................................  $ 4,549,444   $4,152,630
                                                              ===========   ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities:
     Interest accrued.......................................  $   104,118   $   51,147
     Preferred stock dividends accrued......................        4.734           --
  Long-term debt............................................    2,986,598    1,988,883
  6.75% redeemable cumulative convertible preferred stock...      240,722           --
  STOCKHOLDERS' EQUITY:
     Class A common stock...................................          682          682
     Class B common stock...................................        3,954        3,954
     Capital in excess of par value.........................    2,659,136    2,659,927
     Accumulated deficit....................................   (1,494,549)    (676,861)
     Accumulated other comprehensive income.................       44,049      124,898
                                                              -----------   ----------
          Total stockholders' equity........................    1,213,272    2,112,600
                                                              -----------   ----------
          Total liabilities and stockholders' equity........  $ 4,549,444   $4,152,630
                                                              ===========   ==========
</TABLE>

                                       V-1
<PAGE>   116

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                         -------------------------------------
                                                            2000          1999         1998
                                                         -----------   -----------   ---------
<S>                                                      <C>           <C>           <C>
Net cash provided by operating activities..............  $        --   $        --   $      --
Financing Activities
  Change in receivable from wholly-owned subsidiary....   (1,214,869)   (3,491,517)   (299,493)
  Proceeds from long-term debt.........................      996,982     1,988,735          --
  Proceeds from issuance of common stock, net of
     expenses..........................................        4,166     1,468,085          --
  Proceeds from issuance of preferred stock, net of
     expenses..........................................      240,500            --          --
  Debt issue costs.....................................      (26,779)      (56,593)         --
  Capital contributions from The Williams Companies,
     Inc...............................................           --        91,290     299,493
                                                         -----------   -----------   ---------
                                                                  --            --          --
                                                         -----------   -----------   ---------
Increase in cash and cash equivalents..................           --            --          --
Cash and cash equivalents at beginning of period.......           --            --          --
                                                         -----------   -----------   ---------
Cash and cash equivalents at end of period.............  $        --   $        --   $      --
                                                         ===========   ===========   =========
</TABLE>

                                       V-2
<PAGE>   117

                WILLIAMS COMMUNICATIONS GROUP, INC. -- (PARENT)

          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                    NOTES TO CONDENSED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

     Williams Communications Group, Inc. -- (Parent) (WCG (Parent)) owns 100% of
the equity of its operating subsidiary, Williams Communications, Inc. (WCI). In
WCG (Parent)'s financial statements, WCG (Parent)'s investment in the equity of
wholly-owned subsidiary is stated at cost plus equity in undistributed losses of
WCI since the date of acquisition. WCG (Parent)'s share of net loss of its
wholly-owned unconsolidated subsidiary is included in consolidated net loss
using the equity method. On January 25, 2001, WCG (Parent)'s board of directors
authorized a plan for its management to divest the Solutions segment.
Accordingly, Solutions has been accounted for as a disposal of a business
segment with the associated operating results segregated and reported as
discontinued operations in the accompanying Condensed Financial Information of
Registrant. WCG (Parent) financial statements should be read in conjunction with
Williams Communications Group, Inc.'s consolidated financial statements.

2. RECEIVABLE FROM WHOLLY-OWNED SUBSIDIARY

     WCG's receivable from WCI consists of an eight-year promissory note entered
into on November 1, 1999. The note consists of $3.0 billion of interest-bearing
advances to WCI which bear interest at a rate equal to WCG's senior redeemable
notes described below and $2.9 billion of non-interest bearing advances to WCI.

3. LONG-TERM DEBT

     Long-term debt as of December 31 consists of the following:

<TABLE>
<CAPTION>
                                                          2000         1999
                                                       ----------   ----------
                                                           (IN THOUSANDS)
<S>                                                    <C>          <C>
Senior redeemable notes, 10.70% -- 11.875%, due
  2007 -- 2010.......................................  $2,986,598   $1,988,883
</TABLE>

4. GUARANTEE

     In September 1999, WCI entered into a $1.05 billion long-term credit
facility with various banks. WCG (Parent) is a guarantor under this long-term
credit facility. As of December 31, 2000, $525.0 million was outstanding under
this facility. The long-term credit facility restricts WCI's ability to transfer
funds and pay dividends to WCG (Parent). However, these restrictions allow WCI
to transfer funds to WCG (Parent) for regularly scheduled interest payments with
respect to the senior redeemable notes, as well as certain other payments as
outlined in the long-term credit facility agreement. The long-term credit
facility expires in September 2006.

5. DIVIDENDS FROM SUBSIDIARY

     WCG (Parent) did not receive any cash dividends in 2000, 1999 and 1998,
respectively, from its subsidiary, WCI.

                                       V-3
<PAGE>   118

                      WILLIAMS COMMUNICATIONS GROUP, INC.

              SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS(A)
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                        ADDITIONS
                                                  ---------------------
                                                  CHARGED TO
                                      BEGINNING   COSTS AND
                                       BALANCE     EXPENSES    OTHER(C)   DEDUCTIONS(B)   ENDING BALANCE
                                      ---------   ----------   --------   -------------   --------------
<S>                                   <C>         <C>          <C>        <C>             <C>
Allowance for doubtful accounts(d):
  2000..............................   $8,843       $9,959      $6,650       $3,951          $21,501
  1999..............................    1,536        1,066       9,275        3,034            8,843
  1998..............................    1,831        2,360          --        2,655            1,536
</TABLE>

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

(a) Deducted from related assets.

(b) Represents balances written off, net of recoveries and reclassifications.

(c) Primarily relates to billing adjustments recorded in revenues and
    adjustments in 1999 from exiting the sale of receivables program.

(d) Reflects the continuing operations of WCG as described in Note 1 to the
    Consolidated Financial Statements.

                                       V-4
<PAGE>   119

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.64           -- Sale and Purchase Agreement by and among Williams
                            Communications, LLC, Williams Learning Network, Inc.,
                            Williams Communications Solutions, LLC, Platinum Equity,
                            LLC, WCS Acquisition Corporation, and WCS Acquisition
                            LLC, dated as of January 29, 2001
         12              -- Statement re: Computation of Ratios
         21              -- Subsidiaries of the registrant
         23              -- Consent of Ernst & Young LLP
         24              -- Power of Attorney
</TABLE>