WILTEL COMMUNICATIONS GROUP INC - 10-Q Quarterly Report

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

FORM 1O-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NO. 000-50040

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

NEVADA 01-0744785
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

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

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

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

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

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

CLASS OUTSTANDING AT NOVEMBER 14, 2002
Common Stock, $0.01 par value 50,000,000 Shares

INDEX

PART I. FINANCIAL INFORMATION

1

WILTEL COMMUNICATIONS GROUP, INC.
FORWARD-LOOKING STATEMENTS

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

Forward-looking statements can be identified by words such as "anticipates,"
"believes," "expects," "planned," "scheduled," or similar expressions. Although
the Company believes these forward-looking statements are based on reasonable
assumptions, statements made regarding future results are subject to a number of
risks, assumptions, and uncertainties that could cause the Company's actual
results to differ materially from those projected. In addition, financial
projections included as an exhibit to the Second Amended Disclosure Statement
filed with the Bankruptcy Court should not be relied upon as fact as the Company
is currently developing new financial projections for the balance of 2002 and
all of 2003, which are subject to review and approval by the Company's new
management and board of directors. In addition to risk factors set forth in the
Company's other filings with the Securities and Exchange Commission ("SEC"), the
following important factors could cause actual results to differ materially from
any results projected, forecasted, estimated, or budgeted:

o The Company may not be able to obtain certain approvals from the Federal
Communications Commission in the time required by the Escrow Agreement
(discussed in Note 2 to the condensed consolidated financial
statements), which would cause an "unwind" of the investments made by
Leucadia National Corporation as well as other consequences described in
the Escrow Agreement.

o The Company might default on its obligations under the Exit Credit
Agreement which could include failing to achieve certain financial
covenants required by the Exit Credit Agreement.

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

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

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

o The possibility that uncertainty or adverse publicity concerning the
Company's recent bankruptcy, or negative perceptions about the industry
as a whole, could hinder the Company's ability to obtain new customers
or undermine its commercial relationship with existing customers.

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

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

o The Company's ability to collect proceeds from the sale of the Solutions
business, especially in light of ongoing disputes with Platinum Equity.

2

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

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

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

o Changes or uncertainties in the governmental regulations applicable to
the Company and the telecommunications industry.

o High levels of competition (including pricing and product offerings),
lack of customer diversification, and general uncertainties in the
telecommunications industry.

o Termination of the SBC Communications Inc. ("SBC") strategic alliance
or SBC's inability to obtain regulatory approval to provide
long-distance telecommunications services within markets in which it
currently provides local services. See Note 14 to the condensed
consolidated financial statements for further discussion.

o The potential loss of high-volume Network customers.

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

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

o Network's ability to timely turn up service requests, minimize service
interruptions and meet requirements of customer service level
agreements.

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

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

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

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

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

o The Company's ability to develop its brand.

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

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

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

o The effect of changes in accounting policies.

o The need to record additional impairment charges.

3

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

o The Company's ability to adopt an organizational structure that meets
its objectives including retaining and attracting key employees.

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

o The Company's ability to obtain insurance at economically justifiable
rates.

o The Company may not be able to benefit from the realization of its net
operating loss carryforwards. As of September 30, 2002, the Company has
fully reserved its deferred tax assets.

o Projections are necessarily speculative in nature, and it is often the
case that one or more significant assumptions in projections do not
materialize. Therefore, projections should not be relied upon as fact.

4

WILTEL COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See accompanying notes.

5

WILTEL COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes.

6

WILTEL COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes.

7

WILTEL COMMUNICATIONS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

On April 22, 2002, Williams Communications Group, Inc. ("WCG") and CG
Austria, Inc. (collectively, the "Debtors") commenced cases (collectively, the
"Chapter 11 Case") under chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York. As discussed in Note 2, pursuant to the terms of a plan of
reorganization, WilTel Communications Group, Inc. ("WilTel" and, together with
its direct and indirect subsidiaries, the "Company") emerged on October 15, 2002
as the successor to WCG.

As of September 30, 2002, WCG was a non-operating holding company whose
principal asset was 100% of the membership interest in Williams Communications,
LLC ("WCL"). In connection with the consummation of the Plan (as defined in Note
2), WCG transferred substantially all of its assets to WilTel on October 15,
2002. WCL is an operating company whose business comprises the Network and
Emerging Markets segments. In addition, WCL is the direct or indirect parent of
all the remaining subsidiaries of the Company, including CG Austria, Inc., a
non-operating holding company with direct and indirect interest in certain
foreign subsidiaries of the Company.

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

The interim condensed consolidated financial statements have been prepared
on a going concern basis of accounting, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
ability of the Company to continue as a going concern is dependent upon, among
other things, satisfying the terms of the Escrow Agreement (as defined and
discussed in Note 2), future profitable operations and the ability to generate
sufficient cash from its operations and financing arrangements to meet its
obligations. Management believes that execution of the Plan (as defined in Note
2) will provide sufficient liquidity to allow the Company to operate as a going
concern. Substantial doubt about the Company's ability to continue as a going
concern was expressed in an explanatory paragraph in WCG's report from its
independent public accountants that accompanied WCG's Annual Report on Form
10-K. The condensed consolidated interim financial statements do not include any
adjustments relating to recoverability and classification of recorded asset
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.

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

As a result of emerging from chapter 11 in October 2002, the Company will
implement fresh start accounting under the provisions of SOP 90-7 during fourth
quarter 2002. Under SOP 90-7, the reorganization fair value of the Company will
be allocated to its assets and liabilities, its accumulated deficit will be
eliminated, and new

8

WILTEL COMMUNICATIONS GROUP, INC.

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

equity will be issued according to the Plan (as defined in Note 2). In addition,
changes in accounting principles that would be required in the financial
statements within twelve months following emergence from chapter 11 will be
adopted in the Company's fresh start financial statements.

In conjunction with formulating its plan of reorganization, the Company has
been required to estimate its post-confirmation going concern value. The
Company's financial advisors have assisted in the valuation utilizing
methodologies representing the reorganized enterprise value assuming the
implementation of the business plan as well as other significant assumptions.
Based upon this analysis, upon emergence from chapter 11 the enterprise value
for the Company is estimated to range from $1.2 billion to $1.6 billion. The
indebtedness of the Company will be approximately $571 million, substantially
all of which is expected to be classified as long-term. After deducting this
amount from the enterprise value, the total equity value of the Company is
estimated to range from $0.6 billion to $1.0 billion assuming the release and
use of funds held in escrow.

The Company is in the process of obtaining an appraisal to assist in the
determination of the fair value of its long-lived assets and accordingly is
still evaluating the impact of adopting fresh start accounting. However, the
adoption of fresh start accounting will have a material effect on its financial
statements because of the revised valuation of the Company, the valuation of
assets and liabilities to fair value and the adoption of new accounting rules
upon emergence from chapter 11. See Note 2 for a pro forma presentation of the
impact of fresh start accounting based on preliminary estimates of fair value.

2. BANKRUPTCY PROCEEDINGS

On October 15, 2002, the Company emerged from proceedings under chapter 11
of title 11 of the United States Code (the "Bankruptcy Code") pursuant to the
terms of a plan of reorganization, which became effective on that date (the
"Effective Date"). The Debtors had filed petitions for relief under the
Bankruptcy Code with the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court") on April 22, 2002 (the "Petition
Date"). From the Petition Date through the Effective Date, the Debtors managed
their property as debtors in possession, subject to the supervision of the
Bankruptcy Court and in accordance with the provisions of the Bankruptcy Code.
On the Effective Date, the Company consummated certain transactions that
reflected the central components of its restructuring, including the
capitalization of WilTel, a newly formed Nevada corporation, with substantially
all of the assets of WCG. In addition, all outstanding securities of WCG were
cancelled and WilTel issued 50,000,000 shares of its common stock (the "WilTel
Stock") in the manner described below.

OVERVIEW OF THE CHAPTER 11 CASE

Described below is a summary of certain significant agreements and important
events that have occurred in and following the Chapter 11 Case. The summary does
not purport to be complete and is qualified in its entirety by reference to all
of the provisions of the Plan (as defined below) and the material transaction
documents, including those filed with the Securities and Exchange Commission as
exhibits to WCG's Current Report on Form 8-K filed October 11, 2002 and the
Company's Current Report on Form 8-K filed October 24, 2002.

An immediate effect of the filing of the Chapter 11 Case was the imposition
of the automatic stay under section 362 of the Bankruptcy Code, which, with
limited exceptions, enjoined the commencement or continuation of: (i) all
collection efforts by creditors; (ii) enforcement of liens against any assets of
the Debtors; and (iii) litigation against the Debtors. Following emergence, the
Company is continuing to resolve proofs of claims filed in the Chapter 11 Cases.
On the Effective Date, the automatic stay imposed by the Bankruptcy Code was
terminated.

9

WILTEL COMMUNICATIONS GROUP, INC.

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

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

On May 17, 2002, the Bankruptcy Court entered an order (the "Cash Collateral
Order") granting the Debtors' motion pursuant to sections 105(a), 361, 363,
503(b), and 507(b) of the Bankruptcy Code and Bankruptcy Rule 4001(b) for an
order (i) authorizing use of the cash collateral of the lenders (the "Lenders")
under WCG's Amended and Restated Credit Agreement dated as of September 8, 1999
(the "Credit Agreement") and (ii) granting adequate protection and
administrative expense priority to the Lenders. Pursuant to the Cash Collateral
Order, the Debtors were authorized to use the Lenders' cash collateral pursuant
to an established budget.

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

Plan of Reorganization

On July 30, 2002, pursuant to section 1125 of Bankruptcy Code, the Debtors
filed a disclosure statement with respect to the First Amended Joint Plan of
Reorganization of the Debtors dated July 26, 2002, proposed by the Debtors, the
Committee, and Leucadia National Corporation ("Leucadia"). On August 13, 2002,
the Bankruptcy Court entered an order approving the second amended disclosure
statement as containing "adequate information" of a kind and in sufficient
detail adequate to enable a hypothetical reasonable investor typical of the
holders of claims or equity interests to make an informed judgment about the
plan of reorganization.

On September 30, 2002, the Bankruptcy Court, under the supervision of the
Honorable Burton R. Lifland, U.S. Bankruptcy Judge, approved and entered an
order confirming the Second Amended Joint Chapter 11 Plan of Reorganization of
the Debtors, dated August 12, 2002 (the "Plan") subject to certain conditions
including gaining necessary Federal Communications Commission ("FCC") regulatory
approvals to transfer control of licenses from WCG to the Company.

The Plan and the transactions contemplated therein represent the culmination
of many months of investigations and negotiations undertaken by and among WCG
and each of its primary creditor constituencies. Through the Plan, the
interdependent requirements of the Settlement Agreement (filed as an exhibit to
WCG's Current Report on Form 8-K filed July 31, 2002 and described in greater
detail below) and a prepetition Restructuring Agreement were meshed in a manner
that the Debtors believe maximized value and recoveries for all parties in
interest. By implementing both the Settlement Agreement and the Restructuring
Agreement, the Plan provided the certainty and resolution of potential claims of
and against WCG necessary to raising the $150 million new investment from
Leucadia that allowed WCG to further reduce its secured debt without sacrificing
working capital (see below for a discussion of the escrow agreement and the
pending release of the $150 million investment).

Settlement Agreement

A global settlement was implemented with TWC, the Committee, and Leucadia,
which provided for, among other things, (a) the mutual release of each of the
parties, (b) the purchase by Leucadia of TWC's unsecured claims against WCG
(approximately $2.35 billion face amount) for $180 million, (c) the satisfaction
of such TWC claims and a $150 million investment in the Company by Leucadia in
exchange for 44% of the WilTel

10

WILTEL COMMUNICATIONS GROUP, INC.

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

Stock, and (d) modification of WCG's sale and subsequent leaseback transaction
covering the WCG headquarters building (the "Headquarters Building") and
modification of the TWC Continuing Contracts. An order approving the Settlement
Agreement was issued on August 23, 2002.

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

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

Purchase of Headquarters Building

Pursuant to an agreement between WCG and TWC, among others, dated July 26,
2002 and amended by the First Amendment to the Real Property Purchase and Sale
Agreement dated as of October 15, 2002 (collectively, the "Real Property
Purchase and Sale Agreement"), WCG will purchase the Headquarters Building and
certain related real and personal property for the aggregate amount of
approximately $145 million (the "Purchase Price"). The Settlement Agreement also
resolved WCG's defaults under the sale and subsequent leaseback transaction as a
result of WCG's bankruptcy filing, and avoids any threat or risk that WCG would
be evicted or otherwise lose possession of its headquarters.

The Purchase Price consists of one promissory note for $100 million and one
promissory note for approximately $45 million issued by Williams Technology
Center, LLC ("WTC"), the Company and WCL to TWC (the "OTC Notes"). The
obligations of WTC, the Company and WCL under the OTC Notes may be subject to
reduction, depending on the disposition of certain aircraft leases described in
greater detail in the Real Property Purchase and Sale Agreement (the "Aircraft
Dry Leases"). WTC's, the Company's and WCL's obligations under the OTC Notes
will be secured by and pursuant to a mortgage agreement (the "OTC Mortgage"),
under which WTC granted a first priority mortgage lien and security interest in
all of its right, title and interest in, to and under the Headquarters Building
and such related real and personal property to TWC. The Settlement Agreement
also contemplates that the Lenders receive a second priority mortgage lien and
security interest in these same assets. The Real Property Purchase and Sale
Agreement also provides that the OTC Notes will be secured in part by a second
lien and security interest in 66% of the beneficial interest of WilTel
Communications Pty Limited, an Australian corporation, which owns certain
interests in PowerTel Limited, an Australian corporation. As described in the
Real Property Purchase and Sale Agreement, WCL, WTC, and the Company are
obligors under the OTC Notes, and the OTC Mortgage as set forth in the Real
Property Purchase and Sale Agreement. See Note 12 for a further discussion of
the OTC Notes' terms.

The Real Property Purchase and Sale Agreement further provides that if,
within one year after the date of the Settlement Agreement, WTC exchanges or
disposes of or enters into an agreement to exchange or dispose of any or all of
the Headquarters Building or the related real or personal property for an
aggregate sales price in an amount greater than $150 million, WTC shall be
required to prepay the OTC Notes in full and pay to TWC an

11

WILTEL COMMUNICATIONS GROUP, INC.

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

amount equal to the product of (i) 50% multiplied by (ii) the excess of the
aggregate sales price over (A) $150 million less (B) the amount equal to (x) the
aggregate consideration received by TWC in connection with the disposition of
the Aircraft Dry Leases or (y) the amount of proceeds received by WCG in
connection with the refinancing of the aircraft currently subject to the
Aircraft Dry Leases pursuant to the terms of the Real Property Purchase and Sale
Agreement.

As described below, consummation of the transactions contemplated by the
Real Property Purchase and Sale Agreement is conditioned upon satisfaction of
the terms of the Escrow Agreement.

TRANSACTIONS ON THE EFFECTIVE DATE

The Bankruptcy Court approved the Plan at a hearing before the Bankruptcy
Court on September 30, 2002 (the "Confirmation Hearing"). The order confirming
the Plan was signed by the Bankruptcy Court on September 30, 2002 (the
"Confirmation Order"), and the Confirmation Order was entered on the docket of
the Bankruptcy Court on September 30, 2002. WCG reported the confirmation on its
Current Report on Form 8-K dated October 11, 2002 (the "Confirmation Date 8-K").
The Confirmation Order was subject to certain conditions including gaining
necessary FCC regulatory approvals to transfer control of licenses from WCG to
the Company. Prior to the Effective Date, WCG, WCL and the Company applied to
and received from the FCC special temporary authority to transfer control of all
of the licenses to the Company. The granting of the special temporary authority
from the FCC allowed the Company to emerge from the Bankruptcy Code proceedings
on the Effective Date subject to an escrow agreement described below.

On the Effective Date, pursuant to the Plan and the Confirmation Order,
WilTel emerged as the successor to WCG. Also pursuant to the Plan and the
Confirmation Order, on the Effective Date an aggregate of 22,000,000 shares of
WilTel Common Stock ("Shares") were issued to Leucadia and an aggregate of
27,000,000 Shares were issued to a grantor trust (the "Residual Trust") among
WCG, the Company and Wilmington Trust Corporation, as trustee (the "Residual
Trustee"). A copy of the Plan is filed as Exhibit A to Exhibit 99.2 to WCG's
Current Report on Form 8-K, filed on August 23, 2002 and is incorporated herein
by reference. Modifications to the Plan are filed as Exhibit 99.3 to the
Confirmation Date 8-K, and are incorporated herein by reference. A copy of the
Confirmation Order is filed as Exhibit 99.1 to the Confirmation Date 8-K and is
incorporated herein by reference. The Residual Trust is filed as Exhibit 99.1 to
WilTel's Current Report on Form 8-K, filed on October 24, 2002 (the "Effective
Date 8-K").

Shares were issued to Leucadia under the Plan in two distributions. First,
pursuant to a Purchase and Sale Agreement, dated as of July 26, 2002, between
Leucadia and TWC (as amended on October 15, 2002, the "Purchase Agreement"),
Leucadia acquired certain claims against WCG (the "TWC Assigned Claims") for a
purchase price of $180 million by delivering into escrow pursuant to an Escrow
Agreement, dated as of October 15, 2002, among the Company, Leucadia, TWC and
The Bank of New York, as Escrow Agent (the "Escrow Agreement"), a letter of
credit issued by Fleet Bank (the "TWC Letter of Credit"). Pursuant to the
Purchase Agreement and the Escrow Agreement, 11,775,000 Shares were issued to
Leucadia in satisfaction of the TWC Assigned Claims in accordance with the Plan.
The Purchase Agreement is filed as Exhibit 99.5 to WCG's Current Report on Form
8-K, filed on July 31, 2002, and is incorporated herein by reference. Amendment
No. 1 to the Purchase Agreement is filed as Exhibit 99.2 to the Effective Date
8-K and is incorporated herein by reference. The Escrow Agreement is filed as
Exhibit 99.3 to the Effective Date 8-K and is incorporated herein by reference.

Second, pursuant to an Investment Agreement by and among Leucadia, WCG and
WCL, dated as of July 26, 2002 (as amended on September 30, 2002 and October 15,
2002, the "Investment Agreement"), Leucadia invested $150 million in the Company
by paying the Company $1,000 and delivering into escrow pursuant to the Escrow
Agreement, a letter of credit issued by JP Morgan Chase Bank (the "Company
Letter of Credit"), in exchange for

12

WILTEL COMMUNICATIONS GROUP, INC.

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

which 10,225,000 Shares were issued to Leucadia in accordance with the Plan. The
Investment Agreement is filed as Exhibit 99.4 to WCG's Current Report on Form
8-K, filed on July 31, 2002, and is incorporated herein by reference. The First
Amendment to the Investment Agreement is filed as Exhibit 99.4 to the Effective
Date 8-K and is incorporated herein by reference. Amendment No. 2 to the
Investment Agreement is filed as Exhibit 99.5 to the Effective Date 8-K and is
incorporated herein by reference.

In accordance with the terms of the Escrow Agreement, if the Company
receives FCC Approval (as defined in the Escrow Agreement) for the transfer of
control of the licenses issued to, WCL prior to February 28, 2003, the proceeds
of the Company Letter of Credit will be paid to the Escrow Agent for
disbursement to the Company in accordance with the terms of the Escrow
Agreement, and the proceeds of the TWC Letter of Credit will be paid to the
Escrow Agent for disbursement to TWC. The receipt of the necessary FCC Approval
and giving notices required by the Escrow Agreement prior to February 28, 2003
are the only conditions of the Escrow Agreement. As of November 13, 2002, the
Company has received approvals from the FCC to transfer both the domestic and
international Section 214 licenses from WCG to WCL. The remaining approvals
relate to cable landing, earth stations and microwave licenses. The Company
believes that it will receive the related approvals from the FCC prior to
February 28, 2003. If the Company does not deliver notice of FCC Approval on or
before February 28, 2003, in accordance with the terms of the Escrow Agreement,
then (a) the Company Letter of Credit and the TWC Letter of Credit will either
expire by their respective terms on March 14, 2003, or will be returned to
Leucadia, and (b) the purchase of the 10,225,000 Shares from the Company for
$150 million and the TWC Assigned Claims from TWC for $180 million by Leucadia
will be unwound. If such an unwind were to occur, the Company would not receive
the $150 million contemplated by the Leucadia investment; and therefore, in
order to maintain sufficient liquidity to execute on its business plan, the
Company would need to pursue certain asset sales allowed by the Second Amended
and Restated Credit and Guaranty Agreement ("Exit Credit Agreement") for working
capital requirements. In addition, 10,225,000 Shares would be returned to the
Company and 11,775,000 Shares would be returned to the Escrow Agent for
distribution to TWC in accordance with the terms of the Escrow Agreement. Should
that distribution to TWC occur, it is anticipated that TWC would hold
approximately 30% of the outstanding Common Stock of WilTel.

Capitalization, Corporate Governance and Leucadia Agreements

WilTel was incorporated in the State of Nevada, while WCG continues to exist
as a separate corporate entity in the State of Delaware in order to liquidate
any residual assets and wind up its affairs. On the Effective Date, WCG
transferred substantially all of its assets to allow WilTel the benefits of
incorporating in Nevada and permit WilTel to operate the reorganized business
unimpeded by concerns related to claims and assets which remained with WCG in
bankruptcy. CG Austria continues to exist as a separate corporate entity,
incorporated in the State of Delaware, and owned solely by WCL.

Pursuant to the Plan and a Stockholders Agreement, dated October 15, 2002,
between Leucadia and the Company (the "Stockholders Agreement"), Leucadia
designated four members of the Company's nine member Board of Directors and four
members of the initial reorganized Board of Directors of the Company were
designated by the Official Committee of Unsecured Creditors of WCG. The ninth
seat on the Board of Directors was allocated to the Chief Executive Officer of
the Company. Accordingly, the current members of the Board of Directors are J.
Patrick Collins, Ian M. Cumming, William H. Cunningham, Michael Diament, Alan J.
Hirschfield, Jeffrey C. Keil, Michael P. Ressner, Joseph S. Steinberg, and Jeff
Storey. Messrs. Cumming, Steinberg, Hirschfeld and Keil were designated by
Leucadia, and Messrs. Collins, Cunningham, Diament and Ressner were designated
by the Official Committee of Unsecured Creditors of WCG. As of October 31, 2002,
Mr. Storey is the newly-elected Chief Executive Officer of the Company.

Pursuant to the articles of incorporation of WilTel (the "Charter"), it
authorized 200 million shares of WilTel Stock, of which 50,000,000 was issued
under the Plan and outstanding, and 100 million

13

WILTEL COMMUNICATIONS GROUP, INC.

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

shares of preferred stock, of which no shares were issued and outstanding.
Leucadia may not acquire or agree to acquire any Company security
except in connection with: (1) the New Investment, (2) prior approval by a
majority of the members of the Company Board of Directors that are independent
or by holders of a majority of the Company voting securities that are not owned
by Leucadia voting together as a single class, (3) for certain other
acquisitions so long as Leucadia would not hold in excess of 49% of the Company
voting securities following such acquisition, and (4) after the second
anniversary of the Effective Date.

Pursuant to the Plan, and as filed with the Secretary of State of the State
of Nevada, the Charter prohibits the issuance of non-voting equity securities
and imposes certain restrictions on the transfer of the Corporation Securities
(as defined in the Charter) with respect to persons who are, or become,
five-percent shareholders of the Company (the "Five-percent Ownership
Limitation"). The Five-percent Ownership Limitation provides that any transfer
of, or agreement to transfer, Corporation Securities prior to the end of the
effectiveness of the restriction (as described below) shall be prohibited if
either (y) the transferor holds five percent or more of the total fair market
value of the Corporation Securities (a "Five-percent Shareholder") or (z) to
the extent that, as a result of such transfer (or any series of transfers of
which such transfer is a part), either (1) any person or group of persons shall
become a Five-percent Shareholder, or (2) the holdings of any Five-percent
Shareholder shall be increased, excluding issuances of WilTel Stock under the
Plan (any such transaction a "Five-percent Transaction"). Each certificate
representing shares of WilTel Stock bears a legend that re-states the
applicable provisions of the Charter (Article IV, Sections 3.C, 3.D, and 3.E).

The Five-percent Ownership Limitation on transfers will not apply to: (i)
certain transactions approved by the WilTel Board; (ii) an acquisition by
Leucadia of shares of the Corporation Securities that, as a percentage
of the total shares outstanding, is not greater than the difference between 49%
and the percentage of the total shares outstanding acquired by Leucadia or any
of its subsidiaries in the Plan plus any additional Corporation Securities
acquired by Leucadia and its subsidiaries; and (iii) certain other transactions
specified in the Charter if, prior to the transaction, the WilTel Board or a
duly authorized committee thereof determines in good faith upon request of the
transferor or transferee that the transaction meets certain specified criteria.

14

WILTEL COMMUNICATIONS GROUP, INC.

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

The By-Laws of the Company (the "By-Laws") were adopted on the Effective
Date in accordance with the Plan. The Board of Directors of the Company
subsequently amended the By-Laws on October 15, 2002.

Leucadia has entered into a Registration Rights Agreement with the Company
by which the Company has granted Leucadia certain rights to obligate the Company
to register for sale under the Securities Act of 1933, the Shares owned by
Leucadia or its affiliates, including the Shares issued pursuant to the Plan.

Leucadia and the Company have entered into a Stockholder Rights and Co-Sale
Agreement (the "Co-Sale Agreement") by which, among other things, certain
persons are eligible to participate on proposed issuances or actual issuances of
Rights Securities (as defined in the Co-Sale Agreement) to Leucadia until the
fifth anniversary of the Effective Date. In addition, certain holders of the
Company's securities would be eligible to participate in any transfer (other
than Exempt Transactions, as defined in the Co-Sale Agreement, and transfers to
affiliates of Leucadia) by Leucadia of 33% or more of the shares of Company
Common Stock outstanding until the fifth anniversary of the Effective Date. For
more information regarding the rights available to holders of the Company's
securities, refer to the Co-Sale Agreement, including, among other provisions,
the definition of an "Initial Holder" under the Co-Sale Agreement that includes
a requirement that each such holder submit an affidavit to the Company (included
in the Co-Sale Agreement) within ninety days of the Effective Date.

On October 28, 2002, Leucadia purchased in a private transaction 1.7 million
shares of WilTel's Stock as reported on Schedule 13-D filed on October 30, 2002,
which brings Leucadia's ownership interest in WilTel to 47.4% (44% of which is
subject to the terms of the Escrow Agreement). In addition, Leucadia has
appointed four directors, including its Chairman of the Board and its President,
to the nine member Board of Directors of the Company.

Additional Effective Date Transactions

In addition, the following transactions, among others, occurred on the
Effective Date pursuant to the Plan (capitalized terms used but not defined
herein have the meaning ascribed to them in the Plan):

(a) WilTel issued 1,000,000 shares (or 2%) of WilTel Stock to WCG for
distribution in the event of a settlement or judgment, if any, with
respect to holders of Securities Fund Channeled Actions.

(b) WCG transferred all of its assets, other than the Residual Assets, to
WilTel.

(c) WCG issued the Residual Share to the Residual Trust.

(d) All of the Restated Credit Documents were executed and delivered and
became effective, and $350 million was paid to the Lenders thereunder.

(e) Each of the transactions that comprise the TWC Settlement occurred or
were implemented and became binding and effective in all respects
(subject to the Escrow Agreement), including:

(1) TWC contributed the TWC Contributed Distribution for the benefit of
holders of Class 5/6 Channeled Actions;

(2) documents to effect the sale by Williams Headquarters Building
Company of the Building Purchase Assets to WTC pursuant to the Real
Property Purchase and Sale Agreement were deposited into escrow with
The Bank of New York, as Escrow Agent, for distribution at such time
as the $330 million proceeds of the Leucadia New Investment and
purchase of TWC Assigned Claims are released to the Company and TWC,
respectively, pursuant to the terms of the Escrow Agreement;

15

WILTEL COMMUNICATIONS GROUP, INC.

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

(3) all of the releases contemplated by the TWC Settlement became
binding and effective, including releases whereby WCG, WCG's current
and former directors and officers, and the Committee released TWC
and its current and former directors, officers, and agents; in
addition, TWC released WCG and WCG's current and former directors
and officers, including the claims TWC alleges it has against WCG's
non-debtor subsidiaries; and

(4) all other transactions contemplated under the TWC Settlement were
consummated.

(f) The Company and TWC entered into a Stockholders Agreement and
Registration Rights Agreement which will become effective, if at all, at
such time as Leucadia is required to surrender its WilTel Stock to the
Company and TWC in accordance with the terms of the Escrow Agreement.

(g) As contemplated by the Settlement Agreement, the Confirmation Order
provides an injunction with respect to (a) channeling all personal
claims of WCG's unsecured creditors against TWC and deeming them
satisfied from the consideration provided by TWC under the Settlement
Agreement; and (b) channeling all remaining securities actions against
WCG's officers and directors to a "fund" consisting of up to 2% of
WilTel's common stock and the right to collect under WCG's director and
officer liability insurance policies.

(h) Pursuant to the Settlement Agreement, TWC transferred to WCG all of its
rights in the "WilTel" and "WilTel Turns Up Worldwide" marks, and in
exchange WCG agreed to amend the term of the Trademark License
Agreement, dated April 23, 2001, between TWC and WCG, to two years
following the Effective Date, at which time the Company would no longer
have the right to use the "Williams" mark, the "Williams Communications"
mark, and certain other "Williams" related marks. The transfer of these
rights was effectuated through an Assignment of Rights Agreement between
Williams Information Services Corporation ("WISC") and WCL pursuant to
which WISC agreed to grant, sell, and convey to WCL all of its right,
title, and interest in the United States and Canada to the trademarks
"WilTel" and "WilTel Turns Up Worldwide."

(i) WCG has various administrative service and support contracts with TWC.
The Settlement Agreement provides for the continuation of only those
contracts between WCG and the TWC entities that WCG views as favorable
(the "TWC Continuing Contracts"), as well as modification to certain of
those TWC Continuing Contracts to waive any rights to an unfavorable
alteration of contract terms due to the New Investment or the
transactions contemplated by the Plan.

(j) All other payments, deliveries and other distributions to be made
pursuant to the Plan or the Restated Credit Documents on or as soon as
practicable after the Effective Date were made or duly provided for.

ADOPTION OF FRESH START ACCOUNTING

An estimate of the effect of fresh start accounting and the escrow release
as of September 30, 2002 is presented below. For purposes of this presentation,
the Company assumed an equity valuation of $750 million and indebtedness of $571
million, which would yield an enterprise value of $1.3 billion. However, the
final enterprise value could range from $1.2 billion to $1.6 billion. The fresh
start accounting adjustments are based on preliminary valuation information and
will change based upon receiving a final appraisal for long-lived assets, the
final fair value determinations for other assets and liabilities and completing
the analysis of the impact of adopting new accounting standards. In addition,
the pro forma presentation does not include the effect of October 2002 financial
results. Therefore, the final reorganization fair value that will be allocated
to the Company's assets and liabilities as of October 31, 2002 will be different
from the pro forma amounts presented below. The Company

16

WILTEL COMMUNICATIONS GROUP, INC.

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

chose to adopt fresh start accounting on October 31, 2002 to coincide with its
normal monthly financial closing cycle.

New Investment: Recognizes the $150 million investment by Leucadia as a
subscription receivable until the proceeds placed in escrow are released.

Debt Restructuring: Includes the $350 million prepayment on the credit
facility and the discharge of liabilities subject to compromise.

Fresh Start: Represents preliminary adjustments to the carrying value of
assets and liabilities to fair value and the estimated effect of adopting
Statement of Financial Accounting Standards ("SFAS") 143, "Accounting for Asset
Retirement Obligations".

Escrow Release: Assumes the release of funds from escrow prior to February
28, 2003, resulting in the receipt of the $150 million Leucadia investment.

17

WILTEL COMMUNICATIONS GROUP, INC.

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

3. DEBTORS' FINANCIAL INFORMATION

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

CONDENSED COMBINED BALANCE SHEET
DEBTORS IN POSSESSION
(UNAUDITED)

18

WILTEL COMMUNICATIONS GROUP, INC.

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

CONDENSED COMBINED STATEMENTS OF OPERATIONS
DEBTORS IN POSSESSION
(UNAUDITED)

19

WILTEL COMMUNICATIONS GROUP, INC.

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

CONDENSED COMBINED STATEMENT OF CASH FLOWS
DEBTORS IN POSSESSION
(UNAUDITED)

RECEIVABLE FROM WHOLLY-OWNED SUBSIDIARY

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

EMPLOYEE NOTES RECEIVABLE

In the course of the spin-off from TWC, WCG inherited a long-established
loan program from TWC under which TWC extended loans to its executives to
purchase TWC stock (the "Executive Loans"). At the time of the spin-off, six
executives had outstanding loans with TWC. As part of the spin-off, the
Executive Loans were transferred to WCG. On October 10, 2002, the Bankruptcy
Court approved a settlement agreement between WCG and John C. Bumgarner, a
former officer of WCG who participated in the TWC loan program. The agreement

20

WILTEL COMMUNICATIONS GROUP, INC.

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

provided that WCG would settle a $6.9 million executive loan plus accrued
interest in return for the loan's collateral of TWC and WCG stock and
approximately $7 million of face value of WCG's senior redeemable notes. WCG
recognized a loss of approximately $7 million in the three and nine months ended
September 30, 2002 related to the agreement. See Note 16 for further details.

LIABILITIES SUBJECT TO COMPROMISE

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

Senior Redeemable Notes

The Senior Redeemable Notes were unsecured obligations of WCG. On April 1,
2002, WCG did not make interest payments totaling approximately $91 million due
under the terms of one of the Senior Redeemable Notes indentures. The failure to
make that payment resulted in a default under that indenture. In addition, the
filing of WCG's voluntary petition under chapter 11 resulted in a default under
each of the indentures governing the Senior Redeemable Notes. The senior
redeemable noteholders received WilTel Stock in accordance with the Plan.

ADP Claims

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

Senior Reset Note

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

REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK

The Company paid its preferred stock dividends through January 2002. As of
the commencement of the Chapter 11 Case, WCG ceased accruing dividends on its
preferred stock. In July 2002, approximately 1.7 million shares of preferred
stock were converted into approximately 3.0 million shares of its common stock
at the request of a preferred stockholder. Each share of preferred stock
converted into 1.7610 shares of common stock.

21

WILTEL COMMUNICATIONS GROUP, INC.

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

Because of the priority requirements of the Bankruptcy Code, the holders of the
preferred stock received no distribution under the Plan and the preferred stock
was cancelled upon consummation of the Plan.

CLASS A COMMON STOCK

Because of the priority requirements of the Bankruptcy Code, the holders of
WCG common stock received no distribution under the Plan and the common stock
was cancelled upon consummation of the Plan.

REORGANIZATION ITEMS, NET -- DEBTORS

As discussed in Note 2, in March 2002, certain provisions of the indenture
related to the Trust Notes were amended. The amendment, among other things,
provided that TWC would make the required March and September 2002 interest
payments totaling approximately $115 million on behalf of WCG to WCG Note Trust,
and WCG would not be required to reimburse TWC for these interest payments.
Since the interest accrued on these notes was not a claim in the Chapter 11
Case, WCG recognized a gain of $4.1 million and $73.9 million for the three and
nine months ended September 30, 2002, respectively, in accordance with SOP 90-7.

In second quarter 2002, WCG wrote off deferred financing costs and debt
discounts associated with liabilities subject to compromise in accordance with
SOP 90-7 since the deferred financing costs and debt discount do not have a
remaining useful life due to the Chapter 11 Case.

As discussed in Note 16, WCG has retention bonus agreements in place in
which WCG has recorded $21.2 million in reorganization expense for the three and
nine months ended September 30, 2002 primarily related to taxes on the retention
bonus agreements, inasmuch as the Company has committed to pay pursuant to those
agreements an aggregate of up to $20 million for taxes incurred by the
beneficiaries of those agreements.

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

4. SEGMENT REVENUES AND INCOME (LOSS)

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

22

WILTEL COMMUNICATIONS GROUP, INC.

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

23

WILTEL COMMUNICATIONS GROUP, INC.

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

24

WILTEL COMMUNICATIONS GROUP, INC.

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

As discussed in Note 2, the WCG's Chairman of the Board of Directors
("Chairman") and Chief Executive Officer ("CEO") resigned on October 15, 2002.
The Company has historically designated the Chairman and CEO as its chief
operating decision maker as defined in SFAS 131, "Disclosures About Segments of
An Enterprise and Related Information". As of October 31, 2002, the Chairman is
a separate position from the CEO position. As a result of this change along with
other organizational changes, during fourth quarter 2002, the Company will be
evaluating whether changes to the segment definition and the measure of segment
profit and loss are warranted.

5. ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET

Asset impairments and restructuring charges, net for the three months ended
September 30, 2002 primarily include $2.2 million of charges related to the
early termination of a lease agreement. Asset impairments and restructuring
charges, net for the nine months ended September 30, 2002 primarily include
$12.3 million for workforce reductions of approximately 750 employees and $2.2
million related to the early termination of a lease agreement.

In October 2002, the Company announced it would further reduce its current
workforce by eliminating approximately 300 positions across the Company between
now and the end of the year. The Company estimates severance expense of
approximately $9 million in fourth quarter 2002 related to these workforce
reductions. However, the Company continues to evaluate the size of its current
workforce and further reductions are likely.

During third quarter 2002, the Company compared estimated future net cash
flows associated with its long-lived assets with the remaining basis of such
long-lived assets on a going concern basis, and determined its remaining basis
in its long-lived assets was recoverable through future cash flows. Estimates of
future net cash flows used for potential impairment analysis are consistent with
estimates used by the financial advisors to arrive at enterprise value and
include assumptions regarding decreased prices for the Company's products and
services, significant increases in sales quantities in periods beyond 2002 and
that the Company has adequate liquidity. It is anticipated that the adoption of
fresh start accounting will result in a reduction in its carrying value of
long-lived assets by approximately $2.3 billion as a result of the enterprise
value that was determined in conjunction with formulating the plan of
reorganization. The enterprise value is based on a discounted cash flow
methodology whereas the impairment test utilizes undiscounted cash flows. This
is the primary reason no impairment is necessary at September 30, 2002 but yet a
reduction in the carrying value of long-lived assets will be necessary at the
adoption of fresh start accounting.

Asset impairments and restructuring charges for the three and nine months
ended September 30, 2001 include an impairment charge of $150.0 million related
to excess optronics, an impairment charge of $30.0 million representing the
write-off of project costs that would not be completed because of funding
constraints and/or personnel reductions and an impairment charge of $11.3
million related to goodwill associated with its satellite operations.

25

WILTEL COMMUNICATIONS GROUP, INC.

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

6. OTHER OPERATING INCOME, NET

Transactions included in segment loss

The Company recorded other operating expense, net of $0.7 million for the
three months ended September 30, 2002 and other operating income, net of $18.2
million for the nine months ended September 30, 2002 which includes cash
settlement gains of $17.8 million for the nine months ended September 30, 2002
related to various agreements.

For the nine months ended September 30, 2001, the Company recorded other
operating income of $8.0 million in second quarter 2001 relating to a settlement
of a claim.

Transactions excluded from segment loss

Other operating income of $3.6 million for the three months ended September
30, 2002 represents a credit resulting from the determination that remaining
liabilities accrued for exit costs established in previous years related to
various business sales and abandonments were no longer required.

Other operating expense, net of $25.0 million for the nine months ended
September 30, 2002 includes a $35.0 million accrual for contingent liabilities
partially offset by a $3.6 million credit discussed above, a settlement gain of
$3.5 million and income of $2.9 million related to revisions of estimated costs
associated with the sale of SUSA fiber in fourth quarter 2001.

7. INVESTING INCOME (LOSS)

Income (loss) from investments

The Company incurred no income from investments for the three months ended
September 30, 2002 and income from investments was not significant for the nine
months ended September 30, 2002.

The Company entered into an agreement with America Movil, S.A. de C.V. in
second quarter 2001 to sell its remaining economic interest in Algar Telecom
Leste, S.A. ("ATL"). The agreement closed in third quarter 2001 and WCG received
$309.6 million in cash with an additional $90.0 million received from America
Movil in 2002. The Company recognized a gain from the sale of $45.1 million.

The Company sold portions of its investments in certain marketable equity
securities for gross realized gains of $61.9 million and gross realized losses
of $40.5 million for the nine months ended September 30, 2001.

The Company recognized a loss of $42.0 million and $135.7 million for the
three and nine months ended September 30, 2001, respectively, related to
write-downs of certain investments resulting from management's determination
that the decline in the value of these investments was other than temporary.

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

26

WILTEL COMMUNICATIONS GROUP, INC.

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

Equity losses

In third quarter 2001, the Company incurred equity losses of $20.0 million
related to an investment entered into in third quarter 2001 with iBEAM
Broadcasting Corp. ("iBEAM"). Under the terms of the agreement, the Company
invested $20 million in cash and agreed to provide $10 million of future
services to iBEAM in exchange for convertible preferred stock of iBEAM
representing approximately a 49% ownership of iBEAM. In October 2001, WCG
entered into an agreement to purchase substantially all assets and assume
certain liabilities of iBEAM, including substantially all of iBEAM's customer
contracts and facility and equipment leases, for $25 million. The transaction
included a loan of operating funds from the Company to ensure uninterrupted
operations of iBEAM until consummation of the asset sale, at which time the
loan was repaid from the proceeds of the sale. Concurrently, iBEAM announced
that it had commenced a case under the Bankruptcy Code. The Company's agreement
to purchase the iBEAM assets and the related loan were subject to Bankruptcy
Court approval, and the purchase of assets was further subject to an auction to
be conducted under the auspices of the Bankruptcy Court. On November 1, 2001,
the Bankruptcy Court approved the WCG loan and established procedures for the
auction. In third quarter 2001 and until approval of the purchase was obtained
from the Bankruptcy Court, the Company accounted for its investment in iBEAM
under the equity method of accounting.

8. REORGANIZATION ITEMS, NET

As discussed in Note 2, in March 2002, certain provisions of the indenture
related to the Trust Notes were amended. The amendment, among other things,
provided that TWC would make the required March and September 2002 interest
payments totaling approximately $115 million on behalf of WCG to WCG Note Trust,
and WCG would not be required to reimburse TWC for these interest payments.
Since the interest accrued on these notes was not a claim in the Chapter 11
Case, the Company recognized a gain of $4.1 million and $73.9 million for the
three and nine months ended September 30, 2002, respectively, in accordance with
SOP 90-7.

In second quarter 2002, the Company wrote off deferred financing costs and
debt discounts associated with liabilities subject to compromise and a portion
of the deferred financing costs associated with the Credit Agreement to
reorganization items in accordance with SOP 90-7 since the deferred financing
costs and debt discount do not have a remaining useful life due to the Chapter
11 Case.

As discussed in Note 16, the Company has retention bonus agreements in place
in which the Company has recorded $21.2 million in reorganization expense for
the three and nine months ended September 30, 2002 primarily related to taxes on
the retention bonus agreements, inasmuch as the Company has committed to pay
pursuant to those agreements an aggregate of up to $20 million for taxes
incurred by the beneficiaries of those agreements. In addition, the

27

WILTEL COMMUNICATIONS GROUP, INC.

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

Company recorded $12.7 million for the three and nine months ended September 30,
2002 pursuant to an employee incentive program that was adopted to retain
employees during the Company's restructuring process.

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

The Company recognized interest income of $1.3 million and $2.3 million for
the three and nine months ended September 30, 2002, respectively, on accumulated
cash that the Company did not disburse as a result of the Chapter 11 Case.

9. BENEFIT (PROVISION) FOR INCOME TAXES

The provision for income taxes includes:

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

The tax benefit (provision) for all periods is significantly different than
the benefit expected from applying the federal statutory rate to pre-tax losses
primarily due to a valuation allowance established for the Company's net
deferred tax assets. The valuation allowance fully reserves the Company's net
deferred tax assets, primarily resulting from net operating loss carryforwards,
as the Company does not believe it is more likely than not that the net deferred
tax asset will be realized. During the nine months ended September 30, 2001,
reductions to the fair value of marketable equity securities reduced the
associated deferred tax liabilities creating additional net deferred tax assets
for which the utilization has not yet been demonstrated. The tax provision
recorded for the nine months ended September 30, 2001 results from a valuation
allowance created to fully reserve these additional net deferred tax assets.

Effective with the spin-off of WCG from TWC in April 2001, the existing tax
sharing agreement with TWC was amended to address pre-spin-off tax attributes.
Under the amendment, TWC retained all rights and obligations with respect to tax
attributes of WCG for all periods prior to WCG's initial public offering, and
WCG provided certain indemnifications to TWC with respect to tax matters
relating to periods prior to the spin-off. In August 2002, the tax sharing
agreement was replaced by the Tax Cooperation Agreement which provides that,
upon emergence from bankruptcy, the Company has no responsibility for
indemnification of TWC for pre-spinoff tax items.

28

WILTEL COMMUNICATIONS GROUP, INC.

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

10. LOSS PER SHARE

For the periods presented, diluted loss per common share is the same as the
basic calculation as the inclusion of any stock options and convertible
preferred stock would be antidilutive since the Company reported a net loss for
these periods. Stock options and convertible preferred stock of 5.9 million
shares and 7.8 million shares for the three and nine months ended September 30,
2002, respectively, and 9.2 million shares and 11.2 million shares for the three
and nine months ended September 30, 2001, respectively, have been excluded from
the computation of diluted loss per common share. As discussed in Note 2, WCG's
common and preferred stock was cancelled and 50 million WilTel common shares
were issued upon consummation of the Plan.

11. NOTES RECEIVABLE

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

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

In April 2002, Platinum Equity LLC paid $30 million ($21 million in
principal and $9 million in interest) on its $75 million promissory note from
the sale of Solutions in 2001. Platinum Equity LLC has not paid the remaining
$54 million in principal plus $3 million of accrued interest, which was due in
September 2002. See Note 14 for further discussion of the Platinum Equity LLC
dispute.

12. DEBT AND OTHER FINANCING ARRANGEMENTS NOT SUBJECT TO COMPROMISE

Debt consisted of the following:

- ----------
* As of September 30, 2002

The senior redeemable notes, trust notes and ADP are subject to compromise
and are discussed in Note 3.

Senior Redeemable Notes

In third quarter 2001, a wholly-owned subsidiary of WCG purchased $419.3
million of WCG's senior redeemable notes in the open market at an average price
of 44% of face value. The purchase resulted in an

29

WILTEL COMMUNICATIONS GROUP, INC.

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

extraordinary gain of $223.7 million (net of a zero provision for income taxes)
including the recognition of deferred costs and debt discounts related to the
purchased senior redeemable notes.

Credit Agreement

WCL is the obligor under the Credit Agreement and has pledged substantially
all of its assets to secure its obligations under that agreement. In addition,
WCL's obligations are guaranteed by WilTel and secured by substantially all of
the assets of the Company. In connection with the Restructuring Agreement, WCL
and the Consenting Lenders entered into an amendment of the Credit Agreement
(the "Interim Amendment"). The Interim Amendment was effective until the Debtors
consummated a chapter 11 plan of reorganization containing the terms and
conditions contemplated in the Restructuring Agreement (a "Restructuring
Agreement Plan"). Key provisions of the Interim Amendment were:

o A waiver under the Credit Agreement of all defaults and events of
default occurring prior to April 22, 2002, so long as there was no
occurrence of a subsequent default, as well as the amendment of certain
other provisions of the Credit Agreement to avoid the occurrence of
events of default as a result of the commencement of the Chapter 11
Case.

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

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

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

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

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

o a breach of the Restructuring Agreement by WCG or WCL or the
occurrence of a termination event (as defined in the Restructuring
Agreement).

In accordance with the conditions provided for under the Interim Amendment,
WCL prepaid $250 million leaving a balance of $725 million as of September 30,
2002. On October 15, 2002, WCL and the credit facility lenders entered into the
Exit Credit Agreement as the Debtors had satisfied all of the conditions
provided for in the Restructuring Agreement Plan. WCL paid $350 million upon the
effectiveness of the Exit Credit Agreement leaving a balance of $375 million.
The Exit Credit Agreement combined the term loans under the previous Credit
Agreement into one loan. The loan will be repaid in installments beginning in
June 2005 through September 2006 and will bear interest at either the Prime rate
plus a margin of 3.50% or the LIBOR plus a margin of 4.50%. In October 2002, WCL
locked in a rate of 6.34% for three months based on the LIBOR. The Exit Credit
Agreement does not provide for revolving loans for WCL. Among other things, the
Exit Credit Agreement provides for:

o A security interest in all of the domestic assets of the Company except
for those assets secured under the sale and subsequent leaseback to TWC;
upon consummation of the purchase of the Headquarters Building (see Note
2), the lenders will have a second priority mortgage lien on the assets
secured by the OTC Notes.

o The Company meeting certain financial targets as defined.

o Aggregate dollar limitations on certain activities such as indebtedness,
investments and capital expenditures.

o The ability for WCL to request up to $45 million in cash-collateralized
letters of credit, less the amount of cash deposits and pledges made to
third parties in an amount not to exceed $30 million. The total of cash
collateralized letters of credit, plus cash deposits and pledges made
to third parties, outstanding as of September 30, 2002 was $40.4
million.

30

WILTEL COMMUNICATIONS GROUP, INC.

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

Although the Company was required to be in compliance with the covenants
under the Interim Credit Agreement in order to enter into the Exit Credit
Agreement and expects to remain in compliance with its covenants, the Company
cannot provide assurance that it will stay in compliance with the covenants
under the Exit Credit Agreement due in part to the currently distressed
telecommunications market.

Sale and subsequent leaseback to TWC

In September 2001, the Company sold Headquarters Building and other
ancillary assets to TWC for approximately $276 million in cash. Concurrent with
the sale, the Company leased the Headquarters Building for a period of ten years
and other ancillary assets for a period of three to ten years with varying
payment terms. As discussed in Note 2, the sale and subsequent leaseback
agreement will be terminated and replaced with secured debt of approximately
$145 million as contemplated in the Settlement Agreement. The debt will be in
two notes: (1) a $100 million note at a fixed annual interest rate of 7.0% with
equal monthly payments for the first 90 months (based on a 360 month
amortization schedule) with the entire remaining unpaid principal balance due
and payable on April 1, 2010 and (2) an approximately $45 million note with
accrued interest paid in kind ("PIK Interest") and capitalized once annually,
with the original principal balance, all capitalized PIK Interest, and all
accrued PIK Interest (totaling $74.4 million at maturity) due and payable on
December 29, 2006. The second note carries a fixed interest rate of 10.0%
through 2003, and each year thereafter the interest rate increases 2.0%
resulting in an interest rate of 16% in the final year of 2006.

On April 25, 2002, TWC notified the Company that the commencement of the
Chapter 11 Case is an event of default under certain agreements with TWC
including the sale and subsequent leaseback agreements. However, any claim TWC
may have had against WCG with respect to the filing of the Chapter 11 Case was
released on the Effective Date.

Other

In February 2002, the Company advanced PowerTel 16 million Australian
dollars (or $8.3 million) in the form of a subordinated loan in order to satisfy
certain conditions of the restructuring plan with PowerTel's bank group due to
PowerTel's violation of two covenant requirements for the three months ending
December 31, 2001. In March 2002, as part of an approved restructuring plan with
its bank group, PowerTel received waivers from its bank group related to the
covenant violations. In addition, the bank facility was reduced by 50 million
Australian dollars to 100 million Australian dollars. Under the approved
restructuring plan, beginning September 1, 2002, subject to meeting certain
covenants with its lenders, PowerTel had access to its remaining bank facility.
In September 2002, PowerTel met its covenant requirements and borrowed an
additional 4.5 million Australian dollars bringing the total outstanding balance
under the bank facility to 75.5 million Australian dollars (or $41.0 million) at
September 30, 2002. However, there can be no assurance that PowerTel can remain
in compliance with, and it may not be able to meet, its covenant requirements in
the near term. WilTel is currently evaluating various options for maximizing its
total return from its investment in PowerTel.

31

WILTEL COMMUNICATIONS GROUP, INC.

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

13. COMPREHENSIVE LOSS

Comprehensive loss is as follows:

14. CONTINGENCIES

LITIGATION

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

Williams' Securities Litigation

On January 29, 2002, the first of numerous putative federal securities class
actions was filed in the U.S. District Court for the Northern District of
Oklahoma, against WCG, TWC, Keith Bailey, the former Chairman of TWC, Howard
Janzen, the former Chairman, President and CEO of WCG, and Scott Schubert, the
CFO of WCG. In June 2002, the Court bifurcated the case into two subclasses -
one for purchasers of WCG securities and one for purchasers of TWC securities.
In September 2002, the putative WCG subclass complaint was amended raising
additional allegations and adding as defendants certain present and former
officers of WCG and the accounting firm of Ernst & Young LLP. The putative WCG
subclass amended complaint indicates that the action is purportedly brought on
behalf of all persons who purchased or otherwise acquired securities of WCG
between July 24, 2000 and April 22, 2002.

As described in Note 2 above, the Confirmation Order provides an injunction
with respect to (a) channeling all personal claims of WCG's unsecured creditors
against TWC and deeming them satisfied from the consideration provided by TWC
under the Settlement Agreement; and (b) channeling all remaining securities
actions against WCG's officers and directors to a "fund" consisting of up to 2%
of WilTel's common stock and the right to collect under the Company's director
and officer liability insurance policies.

32

WILTEL COMMUNICATIONS GROUP, INC.

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

Right of Way Class Action Litigation

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

The Company and other major carriers are seeking to settle the class action
claims referenced above relating to the railroad rights of way through an agreed
class action. These companies initially sought approval of a settlement in a
case styled Zografos et. al. vs. Qwest Communications Corp., et. al., filed in
the U.S. District Court for the District of Oregon on January 31, 2002. On July
12, 2002, the Oregon Court dismissed the action. Thereafter, on September 4,
2002, an existing case styled Smith, et al. v. Sprint, et al., pending in the
United States District Court for the Northern District of Illinois, was amended
to join the Company and two other telecommunications companies as defendants. On
that same day, the plaintiffs and defendants jointly asked the Court to
preliminarily approve a nationwide class action settlement agreement. A
scheduling order has been entered by the Court and a hearing on the motion for
preliminary approval has been scheduled for April 1, 2003. If approved, the
settlement would settle the majority of the putative nationwide and statewide
class actions referenced above.

Platinum Equity Dispute

On August 28, 2001, Platinum Equity LLC sent formal notice that it believes
the Company owes it approximately $47 million arising from a recalculation of
the net working capital of the domestic, Mexican, and Canadian professional
services operations of the Solutions segment sold to Platinum Equity. Pursuant
to the provisions of the sale agreement, the parties submitted the dispute to
binding arbitration before an independent public accounting firm. Both parties
have completed submission of information to the arbitrator and are in the
process of responding to the arbitrator's final questions. The amount currently
in dispute is approximately $55 million. The Company denies that a material
adjustment to the net working capital calculation is required. A final decision
is expected by December 31, 2002.

In September 2002, Platinum Equity filed suit against the Company alleging
various breaches of representations and warranties related to the sale of the
Solutions segment and requesting declatory action with respect to its right to
set-off its damages for such breaches against its payment to the Company of
approximately $57 million related to a promissory note from its purchase of the
business. Platinum Equity then failed to make this payment. The Company denies
the allegations and, in October 2002, the Company notified Platinum Equity that
it was in default for its non-payment to the Company. The Company will avail
itself of all available legal rights and remedies to collect the entire unpaid
note balance from Platinum Equity.

Thoroughbred Technology and Telecommunications, Inc. vs. WCL

On July 24, 2001, Thoroughbred Technology and Telecommunications, Inc.
("TTTI") filed suit against WCL in the U.S. District Court for the Northern
District of Georgia for claims that include breach of contract with respect to a
fiber-optic fiber installation project that TTTI was constructing for itself and
others, including WCL. TTTI seeks specific performance that includes payment of
in excess of $36 million in damages plus pre-judgment interest and to require
WCL to take title to a three (3) conduit system constructed between Cleveland,
Ohio and Boyce, Virginia.

33

WILTEL COMMUNICATIONS GROUP, INC.

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

WCL alleges various defenses, including significant warranty and breach of
contract claims on the part of TTTI. On May 9, 2002, the Court granted TTTI's
motion for partial summary judgment on the issue of WCL's liability, finding
that WCL did not have the right to terminate the contract. WCL's warranty and
breach of contract claims remain pending. The Court's order stated the amount of
damages would not be established until a ruling is made regarding the remaining
claims of both parties. However, TTTI filed a motion with the Court seeking to
require WCL to close on the Cleveland to Boyce transaction and to enter judgment
in TTTI's favor for in excess of $38 million. WCL counterclaims, if proven, will
reduce the amount of any potential judgment that TTTI may obtain. WCL recently
filed a Motion for Partial Summary Judgment contending that (1) WCL properly
rejected the Cleveland to Boyce 3 conduit system and (2) TTTI is liable to WCL
for its breaches of the construction related requirements of the Agreement. TTTI
has indicated its intention to raise additional claims in the litigation against
WCL in the stated amount of as much as $43 million. The discovery period of the
lawsuit has closed and both TTTI and WCL have filed separate motions for partial
summary judgment which remain pending with the Court.

Oklahoma Department of Securities Investigation

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

Summary

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

OTHER

SBC

SBC, the Company's largest customer (comprising 37 percent of Network's
revenues for the year ended December 31, 2001 as disclosed in the Company's 2001
Annual Report on Form 10-K), may terminate its provider agreements with the
Company if any of the following occurs:

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

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

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

On September 25, 2002, the United States Bankruptcy Court for the Southern
District of New York approved a stipulation agreement (the "Stipulation
Agreement") between the Company and SBC, conditioned upon the consummation of
the Plan. Specifically, the approved Stipulation Agreement satisfactorily
resolves change of control issues related to the Company's spin-off from TWC. It
also provided for the necessary SBC approval of the Plan. At the same time, SBC
and WCL executed amendments to the alliance

34

WILTEL COMMUNICATIONS GROUP, INC.

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

agreement that make a number of changes that would assure SBC that WCL will
continue to provide quality service to SBC. Although the Plan was consummated,
which seemingly satisfied the condition to the Stipulation Agreement described
above, SBC notified the Company prior to the Effective Date that it believes the
condition may not have been satisfied because, among other things, the terms of
the Escrow Agreement (described in Note 2. Bankruptcy Proceedings-Transactions
on the Effective Date) may constitute a material modification of the Plan.
Pending resolution of this matter, WCL and SBC continue to operate under the
alliance agreement, although the amendments to the alliance agreement described
above have not yet been implemented.

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

o SBC has a change of control; or

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

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

Worldcom, Inc.

As of September 30, 2002, the Company currently has an agreement with
WorldCom, Inc. ("WorldCom") for which the Company maintains an asset on its
balance sheet with a net book value of approximately $97 million as of September
30, 2002. The Company cannot determine at this time what financial impact, if
any, the WorldCom bankruptcy filing will have on the recoverability of this
asset. Developments in the WorldCom bankruptcy proceedings could impair the
Company's ability to realize or recover this asset, leading to an adjustment of
the carrying value for some or all of the currently recorded value.

15. RECENT ACCOUNTING STANDARDS

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

In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." The Statement
requires companies to record a liability for asset retirement obligations in the
period in which they are incurred, which typically could be upon completion of
construction or shortly thereafter. The FASB decided to limit the scope to legal
obligations and the liability will be recorded at fair value. The Company will
implement this statement as part of its fresh start accounting as required by
SOP 90-7. The effect of adopting this standard on the Company's results of
operations and financial position is currently being evaluated. However, the
Company currently estimates a net present value liability of approximately $30
million.

35

WILTEL COMMUNICATIONS GROUP, INC.

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

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Statement, effective for
fiscal years beginning after December 15, 2001, provides a single accounting
model for long-lived assets to be disposed of and replaces SFAS No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Company's
approach for impairment under SFAS No. 121 is consistent with the provisions
under SFAS No. 144. Accordingly, the effect of adopting this standard on the
Company's results of operations and financial position was not different than
had the Company continued to operate under SFAS No. 121.

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

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

16. RELATED PARTY TRANSACTIONS

As disclosed in the Company's Annual Report on Form 10-K for the year 2001,
the Compensation Committee of the board of directors of WCG established a
program to award annual retention bonuses over a period of five years in the
aggregate amount of $13 million to certain executives to be applied, after
deduction of applicable withholding taxes, solely against their respective
outstanding principal loan balances. The agreements executed under this program
have subsequently been amended in conjunction with finalizing the Plan. In
addition, certain amendments were executed that were conditioned on the purchase
by Leucadia of shares of WilTel Stock pursuant to the Plan.

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

36

WILTEL COMMUNICATIONS GROUP, INC.

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

Under a separate amendment conditioned on the transaction with Leucadia, as
described above, all retention bonus payments would vest upon consummation of
the transactions contemplated by the Plan or, if earlier, termination without
cause of a given executive, but would still be paid out over the first through
fourth anniversaries of the restructuring date. Payment would only accelerate
upon death or disability or the rejection of the retention bonus agreement under
federal bankruptcy laws. The payment of associated taxes would be limited to an
aggregate total of $20 million for all participants. Under the Leucadia
agreement, any officers who are parties to retention bonus agreements would not
be eligible to participate in the Company's otherwise applicable change in
control severance plan. The Company recorded a total of $31.6 million in 2002
related to the retention bonus agreements discussed above.

In the course of the spin-off from TWC, WCG inherited a long-established
loan program from TWC under which TWC extended loans to its executives to
purchase TWC stock (the "Executive Loans"). At the time of the spin-off, six
executives had outstanding loans with TWC. As part of the spin-off, the
Executive Loans were transferred to WCG. On October 10 2002, the Bankruptcy
Court approved a settlement agreement between WCG and John C. Bumgarner, a
former officer of WCG who participated in the TWC loan program, which had
previously been approved by the Lenders and the Committee. The agreement
provided that WCG would settle a $6.9 million employee loan plus accrued
interest in return for the loan's collateral of 238,083 shares of TWC common
stock and 195,798 shares of WCG common stock and approximately $7 million of
face value of WCG's senior redeemable notes. The surrender of the senior
redeemable notes prevented any WilTel stock distribution under the Plan to Mr.
Bumgarner. In addition, Mr. Bumgarner will provide consulting services at no
cost to the Company for a period of three years from the date of his retirement.
The Company recorded a loss of approximately $7 million in September 2002
related to the agreement.

The Company also recorded $12.7 million related to an employee incentive
program that was adopted to retain employees during the Company's restructuring
process for the three and nine months ended September 30, 2002, of which $3.9
million related to officers of the Company.

The Company is currently in discussions with Leucadia with respect to a
restructuring advisory services agreement pursuant to which Leucadia would
provide, and is currently providing, certain restructuring advisory services to
the Company for a period of one year, subject to earlier termination by either
party on not less than 90 days notice. In connection therewith, the Company has
also provided work space and transportation to certain officers and employees of
Leucadia. As currently contemplated, the Company would not pay Leucadia a fee
for these services, but would reimburse Leucadia for all expenses incurred in
connection with its provision of services under the agreement. The agreement is
subject to approval of the Audit Committee of the Board of Directors, which
consists of directors of the Company not affiliated with Leucadia.

37

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

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

BALANCE SHEET RESTRUCTURING

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

CRITICAL ACCOUNTING POLICIES

Accounting standards require information in financial statements about the
accounting principles and methods used and the risks and uncertainties inherent
in significant estimates. The Company believes that its financial statements and
footnote disclosures present fairly, in all material respects, an accurate
application of generally accepted accounting principles ("GAAP"). In addition,
disclosures are required about the accounting policies that management believes
are the most critical; that is, they are both most important to the portrayal of
the company's financial condition and results, and they require management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain. In
addition, the SEC issued FR-61 to remind public companies of existing disclosure
requirements and to suggest steps for meeting those requirements. In response to
these requirements, and in anticipation of new rules, the Company is making the
following comments, all of which should be read in conjunction with the
financial statements including the accompanying footnotes:

Adoption of fresh start accounting

As a result of emerging from chapter 11 in October 2002, the Company will
implement fresh start accounting under the provisions of SOP 90-7 during fourth
quarter 2002. Under SOP 90-7, the reorganization fair value of the Company will
be allocated to its assets and liabilities, its accumulated deficit will be
eliminated, and will reflect the new equity issued in accordance with the Plan.
In addition, changes in accounting principles that would be required in the
financial statements within twelve months following emergence from chapter 11
will be adopted in the Company's fresh start financial statements.

In conjunction with formulating its plan of reorganization, the Company has
been required to estimate its post-confirmation going concern value. The
Company's financial advisors have assisted in the valuation utilizing
methodologies representing the reorganized enterprise value assuming the
implementation of the business plan as well as other significant assumptions.
Based upon this analysis, upon emergence from chapter 11, the enterprise value
for the Company is estimated to range from $1.2 billion to $1.6 billion. The
indebtedness of the Company will be approximately $571 million, substantially
all of which is expected to be classified as long-term. After deducting this
amount from the enterprise value, the total equity value of the Company is
estimated to range from $0.6 billion to $1.0 billion assuming the release and
use of funds held in escrow. Based on preliminary fair value adjustments, the
Company anticipates it will reduce its carrying value of long-lived assets by
approximately $2.3 billion.

The allocation of enterprise value to assets and liabilities requires
significant judgment and assumptions which impacts the amount that will be
recorded for property, plant and equipment. For example, the fair value
adjustment of the deferred revenue balance requires a determination of fair
value for transactions that have limited activity in the current
telecommunications market environment. In addition, the liabilities recorded for
long-term commitments not representative of current market conditions primarily
consist of real estate leases and domestic and international capacity contracts.
These commitments are at amounts above current market rates or for capacity not
required based on the Company's revised business plans. The accrual for these
unfavorable

38

commitments includes significant estimates pertaining to future market prices,
future capacity utilization and the ability to terminate the contractual
commitment or the ability to enter into subleasing arrangements.

The implementation of SFAS 143 at the time of adopting fresh start
accounting also requires significant judgment and assumptions, primarily related
to the cost and timing of cash flows required to satisfy the Company's future
legal obligations.

The Company is still evaluating the impact of adopting fresh start
accounting. However, the Company anticipates that the adoption of fresh start
accounting will have a material effect on its financial statements because of
the revised valuation of the Company, the valuation of assets and liabilities to
fair value and the adoption of new accounting rules upon emergence from chapter
11. In addition, actual results in the future that differ from assumptions used
in developing the fair value adjustments at the time of adopting fresh start
accounting and at the time of recording the asset retirement obligation under
the provisions of SFAS 143 will impact future results of operations and the
financial position of the company.

Impairments of long-lived assets

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

During first, second and third quarters 2002, the Company compared estimated
future net cash flows associated with its long-lived assets with the remaining
basis of such long-lived assets on a going concern basis, and determined its
remaining basis in its long-lived assets was recoverable through future cash
flows. Estimates of future net cash flows used for potential impairment analysis
are consistent with estimates used by the financial advisors to arrive at
enterprise value and include assumptions regarding decreased prices for the
Company's products and services, significant increases in sales quantities in
periods beyond 2002 and that the Company has adequate liquidity. As discussed
above, it is anticipated that the adoption of fresh start accounting will result
in a reduction in its carrying value of long-lived assets by approximately $2.3
billion as a result of the enterprise value that was determined in conjunction
with formulating the plan of reorganization. The enterprise value is based on a
discounted cash flow methodology whereas the impairment test utilizes
undiscounted cash flows. This is the primary reason no impairment is necessary
at September 30, 2002 but yet a reduction in the carrying value of long-lived
assets will be necessary at the adoption of fresh start accounting. In light of
the instability in the telecommunications market, the Company will continually
evaluate and test the recoverability of its long-lived assets.

The Company currently has an agreement with WorldCom for which the Company
maintains an asset on its balance sheet with a net book value of approximately
$97 million as of September 30, 2002. The Company cannot determine at this time
what financial impact, if any, the WorldCom bankruptcy filing will have on the
recoverability of this asset. Developments in the WorldCom bankruptcy
proceedings could impair the Company's ability to realize or recover this asset,
leading to an adjustment of the carrying value for some or all of the currently
recorded value.

Covenant compliance

Upon emerging from chapter 11, the Company's debt consists primarily of its
Exit Credit Agreement and the sale and subsequent leaseback to TWC, which will
be replaced with a mortgage note (see Notes 2 and 12). The Company's ability to
classify the non-current portion of these obligations as long-term is dependent
on its ability to meet the covenant requirements listed in its debt agreements
or obtain waivers or amendments in the event the Company cannot comply with its
covenants or cure any instances of noncompliance. As of October 15, 2002, the
Effective Date for the Company's emergence from bankruptcy, the Company was and
expects to remain in compliance with its covenants.

39

In February 2002, the Company advanced PowerTel 16 million Australian
dollars (or $8.3 million) in the form of a subordinated loan in order to satisfy
certain conditions of the restructuring plan with PowerTel's bank group due to
PowerTel's violation of two covenant requirements for the three months ending
December 31, 2001. In March 2002, as part of an approved restructuring plan with
its bank group, PowerTel received waivers from its bank group related to the
covenant violations. In addition, the bank facility was reduced by 50 million
Australian dollars to 100 million Australian dollars. Under the approved
restructuring plan, beginning September 1, 2002, subject to meeting certain
covenants with its lenders, PowerTel had access to its remaining bank facility.
In September 2002, PowerTel met its covenant requirements and borrowed an
additional 4.5 million Australian dollars, bringing the total outstanding
balance under the bank facility to 75.5 million Australian dollars (or $41
million) as of September 30, 2002. However, there can be no assurance that
PowerTel can remain in compliance with, and it may not be able to meet, its
covenant requirements in the near term. WilTel is currently evaluating various
options for maximizing its total return from its investment in PowerTel.

Collections on notes receivable

As of September 30, 2002, the Company has notes receivable outstanding of
approximately $54 million plus accrued interest of approximately $3 million
primarily related to the sale of the domestic, Mexican and Canadian professional
services operations of the Solutions segment to Platinum Equity LLC. In April
2002, Platinum Equity paid $30 million ($21 million in principal and $9 million
in interest) on its $75 million promissory note from the sale of Solutions in
2001. On August 28, 2001, Platinum Equity sent formal notice that it believes
the Company owes it approximately $47 million arising from a recalculation of
the net working capital related to the sale. Pursuant to the provisions of the
sale agreement, the parties submitted the dispute to binding arbitration before
an independent public accounting firm. Both parties have completed submission of
information to the arbitrator and are in the process of responding to the
arbitrator's final questions. The amount currently in dispute is approximately
$55 million. The Company denies that a material adjustment to the net working
capital calculation is required. A final decision is expected by December 31,
2002.

In September, Platinum Equity filed suit against the Company alleging
various breaches of representations and warranties related to the sale of
Solutions segment and requesting declatory action with respect to its right to
set-off its damages for such breaches against its payment to the Company of
approximately $57 million related to the promissory note. Platinum Equity then
failed to make this payment. The Company denies the allegations and, in October
2002, the Company notified Platinum Equity that it was in default for its
non-payment to the Company. The Company will avail itself of all available legal
rights and remedies to collect the entire unpaid note balance from Platinum
Equity.

Revenue recognition/collectibility of receivables

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

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

The Company recognizes revenues when collectibility is reasonably assured.
In the current distressed telecom environment, significant judgment and
assumptions are required in order to determine whether or not collectibility

40

is reasonably assured. These judgments include assessing the likelihood of
customers meeting covenants or obtaining financing. In addition, the Company
must be able to assess, in some cases, the likelihood of customers filing for
chapter 11 and predict the outcome of bankruptcy filings once they occur. The
Company believes it has the appropriate reserves recorded for any exposures
resulting from these uncertainties. During third quarter 2002, WorldCom
commenced a chapter 11 case. As disclosed in the Company's 2001 Annual Report on
Form 10-K, the Company's revenues from WorldCom, including Intermedia and UUNet,
accounted for 11 percent of Network's revenues for the year ended December 31,
2001 (7 percent of Network's revenues for the nine months ended September 30,
2002). The Company is uncertain at this time to what extent WorldCom's
bankruptcy filing will impact, if at all, the recognition of revenues in the
future and will continue to monitor the progress of the bankruptcy filing.

TRANSACTIONS WITH SBC

SBC is the Company's largest customer and was a related party due to the
membership of an officer of SBC on the Company's board of directors. In first
quarter 2002, the officer of SBC resigned his membership on the Company's board
of directors. SBC purchases domestic voice and data long-distance and local
transport services from the Company. Revenues from SBC for the three months
ended September 30, 2002 and 2001 were approximately $145 million and $100
million, respectively, and for the nine months ended September 30, 2002 and 2001
were approximately $400 million and $280 million, respectively. The Company
purchases local transport services, platform services such as toll-free,
operator, calling card and directory assistance services and international
services such as transport and switched-voice services from SBC. These purchases
from SBC were $40.8 million and $42.8 million for the three months ended
September 30, 2002 and 2001, respectively, and $124.7 million and $110.6 million
for the nine months ended September 30, 2002 and 2001, respectively.

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

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

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

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

On September 25, 2002, the United States Bankruptcy Court for the Southern
District of New York approved a stipulation agreement (the "Stipulation
Agreement") between the Company and SBC, conditioned upon the consummation of
the Plan. Specifically, the approved Stipulation Agreement satisfactorily
resolves change of control issues related to the Company's spin-off from TWC. It
also provided for the necessary SBC approval of WCG's Plan of Reorganization. At
the same time, SBC and WCL executed amendments to the alliance agreement that
make a number of changes that would assure SBC that WCL will continue to provide
quality service to SBC. However, although the Plan was consummated, which
seemingly satisfied the condition to the Stipulation Agreement described above,
SBC notified the Company prior to the Effective Date that it believes the
condition may not have been satisfied because, among other things, the terms of
the Escrow Agreement (described in Note 2. Bankruptcy Proceedings-Transactions
on the Effective Date) may constitute a material modification of the Plan.
Pending resolution of this matter, WCL and SBC continue to operate under the
alliance agreement, although the amendments to the alliance agreement described
above have not yet been implemented.

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

o SBC has a change of control; or

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

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

41

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

RESULTS OF OPERATIONS

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

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

CONSOLIDATED RESULTS

The Company's loss before extraordinary gain improved by $267.2 million
primarily due to an improvement in loss from operations of $209.9 million and a
decrease in net interest expense of $108.4 million, partially offset by
reorganization items of $52.3 million.

Network, Other and Emerging Markets' loss from operations improved $15.1
million, $4.5 million and $0.8 million, respectively, before considering asset
impairments and restructuring charges.

42

NETWORK

The table below summarizes Network's results from operations:

Network's revenues increased $10.3 million, or 4%, primarily attributable to
data and voice services provided to SBC of approximately $145 million for the
three months ended September 30, 2002 compared to approximately $100 million for
the three months ended September 30, 2001 and an increase of $55.7 million
attributable to the acquisition of Ameritech Global Gateway Services ("AGGS") on
September 28, 2001, of which $26.7 million relates to SBC and is included in the
SBC revenues amount above. These increases were offset by significant customer
disconnects and lower pricing for new circuit turn-ups, $7.9 million of lower
revenues from Emerging Markets due to contractual price re-rates and
approximately $20 million of lower revenues from vendor assignments.

Network's gross margin decreased to $32.3 million (or 11%) for the three
months ended September 30, 2002 from $49.5 million (or 18%) for the three months
ended September 30, 2001. The decrease in Network's gross margin is primarily a
result of lower data revenues as a result of customer disconnects and $7.9
million of lower margins from Emerging Markets partially offset by $7.9 million
lower lease expense from the absence of lease costs associated with the ADP (see
Note 2 to the condensed consolidated financial statements) which have been
replaced with interest expense in 2002 until the filing of the Company's Chapter
11 Case and a $2.5 million increase attributable to the acquisition of AGGS.

Network's selling, general and administrative expenses decreased $22.2
million, or 37%, due primarily to reduced payroll related expenses from
workforce reductions in 2002, reduced incentive accruals and reduced advertising
costs. Network's selling, general and administrative expenses as a percentage of
revenues decreased to 13% for the three months ended September 30, 2002 from 22%
for the three months ended September 30, 2001.

Network's provision for doubtful accounts decreased $5.7 million, or 46%,
primarily due to the onset of significant increases in provisions in third
quarter of 2001 associated with general market conditions in the
telecommunications industry. These decreases are partially offset by
approximately $6 million in reserves allocated to Network relating to a
settlement agreement between the Company and an employee (see Note 16).

43

Network's depreciation and amortization decreased $4.8 million, or 4%,
primarily due to the impairment of long-lived assets recorded in fourth quarter
2001 partially offset by the addition of $750 million of assets associated with
the ADP and assets placed in service since September 30, 2001.

Network's asset impairment and restructuring charges for the three months
ended September 30, 2001 consists of $150.0 million related to valuation
adjustments associated with equipment held for sale and $30.0 million related to
suspended capital projects and severance.

EMERGING MARKETS

The table below summarizes Emerging Markets results from operations:

Emerging Markets' revenues decreased $10.0 million, or 23%, primarily due to
a decrease in the transmission of news events and reduced satellite business,
partially offset by higher media services as a result of the iBEAM acquisition
in December 2001. The decrease in revenues associated with the transmission of
news events is primarily a result of migrating certain significant customers
beginning in third quarter 2002 to a new lower-priced compressed service in line
with industry trends, higher revenues in September 2001 from coverage of the
terrorist attacks and the loss of business during WCG's bankruptcy proceedings.

Emerging Markets' gross margin increased to $5.5 million (or 17%) for the
three months ended September 30, 2002 from $4.1 million (or 9%) for the three
months ended September 30, 2001. The increase in gross margin is primarily due
to $7.9 million of lower costs from Network because of contractual price
re-rates, reduced payroll related expenses from workforce reductions in 2002 and
lower costs as a result of exiting long-term transponder lease commitments,
partially offset by a decrease in the transmission of news event revenue
discussed above.

Emerging Markets' selling, general and administrative expenses decreased
$2.0 million, or 18%, due primarily to lower payroll related expenses as a
result of workforce reductions and lower consulting expenses, partially offset
by the addition of payroll costs due to the acquisition of iBEAM.

Emerging Markets' depreciation and amortization expense increased $2.3
million, or 25%, due primarily to assets placed in service since September 30,
2001 relating to media services and as a result of the acquisition of iBEAM,
partially offset by $1.3 million lower amortization expense as the Company fully
impaired its goodwill and other intangibles as of December 31, 2001.

Emerging Markets' restructuring charges for the three months ended
September 30, 2002 relates primarily to the early termination of a satellite
lease agreement. The charges for the three months ended September 30, 2001 of
$11.3 million represents an impairment of goodwill associated with its satellite
operations.

44

CONSOLIDATED NON-OPERATING ITEMS

The Company's net interest expense decreased $108.4 million primarily due to
ceasing the accrual of interest expense on liabilities subject to compromise as
of the Petition Date as discussed in Note 2 and principal reductions of $200
million and $50 million on the credit facility in April and July 2002,
respectively, partially offset by the absence of $11.7 million of capitalized
interest due to the completion of assets under construction.

The Company's interest and other investing income decreased $11.7 million
primarily due to significantly lower average short-term investment balances for
the three months ended September 30, 2002 compared to the three months ended
September 30, 2001 and a reduction in short-term interest rates.

The Company's equity losses decreased $19.9 million primarily due to the
Company recording $20.0 million of equity losses related to an investment
entered into with iBEAM in third quarter 2001.

The Company's income from investments for the three months ended September
30, 2001 of $3.1 million included a gain of $45.1 million from the sale of its
remaining economic interest in ATL to America Movil. These gains were largely
offset by a loss of $42.0 million related to write-downs of certain investments
resulting from management's determination that the decline in the value of these
investments was other than temporary.

The Company's reorganization items for the three months ended September 30,
2002 of $52.3 million represents retention bonus agreements of $21.2 million,
retention incentive expense of $12.7 million and professional fees and other
items of $22.5 million partially offset by the forgiveness of interest related
to the Trust Notes of $4.1 million (see Note 8).

The Company's tax provision increased $0.6 million primarily due to changes
in the valuation allowance established for deferred tax assets and liabilities
created by changes in the value of marketable equity securities. The tax
provision reflects fully reserving, through a valuation allowance, its net
deferred tax assets. Reductions to the fair value of marketable equity
securities reduced the associated deferred tax liabilities creating net deferred
tax assets for which the utilization has not yet been demonstrated. The
valuation allowance represents a reserve against the Company's net deferred tax
assets, primarily resulting from net operating loss carryforwards which may not
be utilized.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001

CONSOLIDATED RESULTS

The Company's loss before extraordinary gain improved by $238.7 million
primarily due to an improvement in loss from operations of $131.4 million, a
decrease in net interest expense of $137.7 million, a decrease related to the
tax provision of $50.9 million and an increase in investing income of $42.4
million, partially offset by reorganization items of $115.9 million.

Other loss from operations improved $6.9 million while Network and Emerging
Markets' loss from operations increased $28.7 million and $23.0 million,
respectively, before considering asset impairments and restructuring charges.

45

NETWORK

Network's revenues increased $43.8 million, or 6%, primarily attributable to
data and voice services provided to SBC of approximately $400 million for the
nine months ended September 30, 2002 compared to approximately $280 million for
the nine months ended September 30, 2001 and an increase of $143.5 million
attributable to the acquisition of AGGS, of which $56.5 million relates to SBC
and is included in the SBC revenues amount above. The increase in revenues is
substantially offset by significant customer disconnects and lower pricing for
new circuit turn-ups, approximately $40 million of lower revenues from vendor
assignments, $13.2 million of lower revenues from Emerging Markets due to
contractual price re-rates and $9.1 million lower revenues from dark fiber
transactions entered into prior to June 30, 1999 and accordingly accounted for
as sales type leases.

Network's gross margin increased to $105.2 million for the nine months ended
September 30, 2002 from $100.0 million for the nine months ended September 30,
2001. Gross margin remained at 13% for both the nine months ended September 30,
2002 and 2001. Network's gross margin was impacted by $29.4 million lower lease
expense from the absence of lease costs associated with the ADP (see Note 2 to
the condensed consolidated financial statements) which have been replaced with
interest expense in 2002 until the date of the Company's Chapter 11 Case filing,
$9.8 million lower ad valorem taxes as a result of changes in fair values of the
associated assets and a $7.0 million increase attributable to the acquisition of
AGGS. These improvements are partially offset by lower data revenues as a result
of customer disconnects, $13.0 million of lower margins from Emerging Markets
and $5.9 million of lower margins from the absence of sales type lease dark
fiber transactions.

Network's selling, general and administrative expenses decreased $56.4
million, or 30%, due primarily to reduced payroll related expenses as a result
of workforce reductions in 2002, the absence of costs associated with the
spin-off from TWC in April 2001 in addition to certain corporate costs from TWC,
reduced incentive accruals and reduced advertising costs, partially offset by
charges incurred for retention bonus agreements (see Note 16). Network's
selling, general and administrative expenses as a percentage of revenues
decreased to 16% for the nine months ended September 30, 2002 from 24% for the
nine months ended September 30, 2001.

Network's provision for doubtful accounts decreased $2.5 million, or 13%,
primarily due to the onset of significant increases in provisions in third
quarter of 2001 associated with general market conditions in the
telecommunications industry. These decreases are partially offset by
approximately $6 million in reserves allocated to Network relating to a
settlement agreement between the Company and an employee (see Note 16).

Network's depreciation and amortization increased $74.3 million, or 24%,
primarily as a result of assets placed in service throughout 2001 and the
addition of $750 million of assets associated with the ADP, partially offset by
the impairment of long-lived assets recorded in fourth quarter 2001.

Network's restructuring charges for the nine months ended September 30, 2002
primarily represents restructuring charges incurred in 2002 due to workforce
reductions. Network's asset impairment and restructuring charges for the nine
months ended September 30, 2001 consists of $150.0 million related to valuation
adjustments associated with equipment held for sale and $30.0 million related to
suspended capital projects and severance.

Network's other expense increased $18.5 million primarily due to a $35
million accrual for contingent liabilities recorded in second quarter 2002,
partially offset by settlement gains related to various agreements.

EMERGING MARKETS

Emerging Markets' revenues decreased $14.5 million, or 12%, primarily due to
a decrease in the transmission of news and sporting events and a decrease in
satellite business, partially offset by higher media services as a result of the
iBEAM acquisition and development of media services in December 2001. The
decrease in revenues associated with news events is primarily a result of
migrating certain significant customers beginning in third quarter 2002 to a new
lower-priced compressed service in line with industry trends, higher revenues in
September

46

2001 from coverage of the terrorist attacks and the loss of business during
WCG's bankruptcy proceedings.

Emerging Markets' gross margin decreased to $6.7 million (or 6%) for the
nine months ended September 30, 2002 from $9.4 million (or 8%) for the nine
months ended September 30, 2001. The decrease in gross margin is primarily due
to a decrease in the transmission of news event revenue discussed above, costs
associated with early termination of long-term satellite lease agreements and
costs associated with the development and support of media services, partially
offset by $13.2 million of lower costs from Network because of contractual price
re-rates, reduced payroll related expenses from workforce reductions in 2002 and
lower costs as a result of exiting long-term transponder lease commitments.

Emerging Markets' selling, general and administrative expenses increased
$4.2 million, or 13%, due primarily to integration costs associated with the
acquisition of iBEAM, partially offset by lower payroll related expenses as a
result of workforce reductions.

Emerging Markets' depreciation and amortization expense increased $16.0
million, or 65%, due primarily to assets placed in service since September 30,
2001 relating to media services and as a result of the acquisition of iBEAM,
partially offset by $3.9 million lower amortization expense as the Company fully
impaired its goodwill and other intangibles as of December 31, 2001.

Emerging Markets' restructuring charges for the nine months ended September
30, 2002 represent restructuring charges incurred in 2002 due to workforce
reductions. Emerging Markets' asset impairment and restructuring charges for the
nine months ended September 30, 2001 of $11.3 million represents an impairment
of goodwill associated with its satellite operations.

CONSOLIDATED NON-OPERATING ITEMS

The Company's net interest expense decreased $137.7 million primarily due to
ceasing the accrual of interest expense on liabilities subject to compromise as
of the Petition Date as discussed in Note 2, partially offset by a decrease in
capitalized interest of $63.8 million due to the completion of assets under
construction during 2002.

The Company's interest and other investing income decreased $14.8 million
primarily due to a reduction in short-term interest rates and lower short-term
investment balances for the nine months ended September 30, 2002 compared to the
nine months ended September 30, 2001.

The Company's equity losses decreased $27.4 million primarily due to the
Company recording $20.0 million of equity losses related to an investment
entered into with iBEAM in third quarter 2001.

The Company's income from investments for the nine months ended September
30, 2002 of $1.5 million included $0.9 million in dividends received from a
cost-based investment and gains from sales of certain marketable equity
securities. Loss from investments for the nine months ended September 30, 2001
of $28.3 million included a loss of $135.7 million related to write-downs of
certain investments resulting from management's determination that the decline
in the value of these investments was other than temporary. This loss was
partially offset by gains of $45.1 million from the sale of its remaining
economic interest in ATL to America Movil and $40.9 million from the change in
market value of cashless collars on certain marketable equity securities in
accordance with SFAS No. 133 as amended since the cashless collars did not
qualify as a hedge and net gains of $21.4 million from sales of certain
marketable equity securities.

The Company's reorganization items for the nine months ended September 30,
2002 of $115.9 million represents the write-off of unamortized debt and
preferred stock issuance costs and debt discount of $102.4 million and
professional fees and other items of $53.5 million, retention bonus agreements
of $21.2 million and retention incentive expense of $12.7 million, partially
offset by a gain of $73.9 million recognized from the forgiveness of interest
related to the Trust Notes (see Note 8).

47

The Company's tax provision decreased $50.9 million primarily due to smaller
changes in the valuation allowance established for deferred tax assets and
liabilities created by smaller net decreases in the value of marketable equity
securities in 2002. The Company's tax provision reflects fully reserving,
through a valuation allowance, its net deferred tax assets. Reductions to the
fair value of marketable equity securities reduced the associated deferred tax
liabilities creating net deferred tax assets for which the utilization has not
yet been demonstrated. The valuation allowance represents a reserve against the
Company's net deferred tax assets, primarily resulting from net operating loss
carryforwards which may not be utilized.

LIQUIDITY AND CAPITAL RESOURCES

ACTIVITY THROUGH SEPTEMBER 30, 2002

As of September 30, 2002, the Company had $574.2 million of cash, cash
equivalents and short-term investments compared to $1 billion at December 31,
2001.

Cash used in operating activities was $79.9 million for the nine months
ended September 30, 2002. Included in this amount are interest payments of
approximately $107 million relating to the Company's long-term debt prior to its
Chapter 11 filing.

In February 2002, America Movil prepaid its non-interest bearing note of
$90 million from the sale of ATL by paying a discounted amount of $88.8 million.
In addition, in April 2002, Platinum Equity LLC paid $30 million ($21 million in
principal and $9 million in interest) on its $75 million promissory note from
the sale of Solutions in 2001. The cash received from both of these note
receivables are included in the cash used in operating activities amount
discussed above. The remaining balance of approximately $54 million in principal
and approximately $3 million in interest from Platinum Equity LLC was due
September 2002 and has not yet been received.

Capital expenditures of $63.4 million were incurred through September 30,
2002 along with payments on accrued liabilities associated with capital
expenditures, partially offset by proceeds received from tax refunds,
settlements and asset sales of $48.7 million.

Under the terms of the Interim Amendment to the Credit Agreement, the
Company prepaid $200 million in April 2002 and $50 million in July 2002. In
addition, principal payments on the sale and subsequent leaseback along with
other debt and capital lease obligations of approximately $29 million were made
during the nine months ended September 30, 2002.

In February 2002, the Company advanced PowerTel 16 million Australian
dollars (or $8.3 million) in the form of a subordinated loan in order to satisfy
certain conditions of the restructuring plan with PowerTel's bank group due to
PowerTel's violation of two covenant requirements for the three months ending
December 31, 2001. In March 2002, as part of an approved restructuring plan with
its bank group, PowerTel received waivers from its bank group related to the
covenant violations. In addition, the bank facility was reduced by 50 million
Australian dollars to 100 million Australian dollars. Under the approved
restructuring plan, beginning September 1, 2002, subject to meeting certain
covenants with its lenders, PowerTel had access to its remaining bank facility.
In September 2002, PowerTel met its covenant requirements and borrowed an
additional 4.5 million Australian dollars bringing the total outstanding balance
under the bank facility to 75.5 million Australian dollars (or $41.0 million) as
of September 30, 2002. However, there can be no assurance that PowerTel can
remain in compliance with, and it may not be able to meet, its covenant
requirements in the near term. WilTel is currently evaluating various options
for maximizing its total return from its investment in PowerTel.

EMERGENCE FROM CHAPTER 11

As discussed in Notes 2 and 12 to the condensed consolidated financial
statements, on October 15, 2002, the Company emerged from proceedings under the
Bankruptcy Code. As part of the Plan, approximately $4.6 billion

48

in debt was discharged, comprised of approximately $2.4 billion principal on its
Senior Redeemable Notes, approximately $1.4 billion principal amount under the
Trust Notes, and approximately $754 million related to the ADP claims. Interest
relief with these obligations approximates $420 million on an annual basis. In
addition, approximately $243 million of accrued interest related to the
discharged debt and other general unsecured claims were discharged as part of
the Plan.

In accordance with the conditions provided for under the Interim Amendment,
WCL prepaid $250 million leaving a balance of $725 million as of September 30,
2002. On October 15, 2002, WCL and the credit facility lenders entered into the
Exit Credit Agreement as the Debtors had satisfied all of the conditions
provided for in the Restructuring Agreement Plan. WCL paid $350 million upon the
effectiveness of the Exit Credit Agreement leaving a balance of $375 million.
The Exit Credit Agreement combined the term loans under the previous Credit
Agreement into one loan. The loan will be repaid in installments beginning in
June 2005 through September 2006 and will bear interest at either the Prime rate
plus a margin of 3.50% or the LIBOR plus a margin of 4.50%. In October 2002, WCL
locked in a rate of 6.34% for three months based on the LIBOR. The Exit Credit
Agreement does not provide for revolving loans for WCL, although WCL can
request up to $45 million in cash-collateralized letters of credit, less the
amount of cash deposits and pledges made to third parties in an amount not to
exceed $30 million. The total of cash collateralized letters of credit, plus
cash deposits and pledges made to third parties, outstanding as of September
30, 2002 was $40.4 million.

FUTURE CASH REQUIREMENTS

After adjusting the September 30, 2002 cash balance for the payments made in
October on the Exit Credit Agreement, the Company has approximately $224 million
in cash, cash equivalents and short-term investments. The Company is currently
developing new projections for the balance of 2002 and all of 2003, which are
subject to review and approval by the Company's new management and board of
directors. The Company is in the process of undergoing a significant
restructuring of its operations and staffing levels, which are not as yet
complete. Until this process is completed, the Company is not in a position to
estimate its total cash needs for the immediate future with a degree of
certainty, particularly with respect to operating activities. However, the
Company is able to estimate the following significant uses and sources of cash:

o Capital expenditures of approximately $65 million;

o Debt service obligations, including interest, of approximately $70
million;

o Restructuring-related payments ranging from approximately $55
million to $75 million;

o The anticipated release of the $150 million investment from Leucadia
currently in escrow.

The Company currently estimates it will spend approximately $65 million for
capital expenditures for the remainder of 2002 and through 2003 primarily to
enhance and expand products and service offerings for both carrier and media
services and continued extension of the network in major metro markets.
Projected capital expenditures may be impacted if the actual level of asset
sales and business requirements vary from those currently considered in the
projections or if there are unfavorable outcomes associated with contingent
liabilities or disputes not currently factored in its projections. In addition,
the acquisition of new customers or the expansion of the business activities of
existing customers could significantly impact the capital expenditure
requirement.

Debt service obligations for the remainder of fourth quarter 2002 through
2003 consists of interest payments and principal payments of approximately $55
million and $15 million, respectively, for the remaining Credit Agreement
balance, sale and subsequent leaseback, which will be replaced with new secured
debt, and miscellaneous debt and capital lease obligations.

Projected restructuring related payments include payments for professional
services provided to the Company as a result of its Chapter 11 filing, retention
bonus agreements and retention incentive awards discussed in Note 16 to the
condensed consolidated financial statements and fourth quarter severance
payments.

As explained above, the $150 million investment by Leucadia is currently
held in escrow pending receipt of certain approvals from the FCC. The projection
above assumes the proceeds will be received by the Company

49

prior to the February 2003 deadline. If the Escrow Agreement is unwound, the
Company will not receive the $150 million investment by Leucadia. In order to
maintain sufficient liquidity to execute on its business plan, the Company will
need to pursue certain asset sales allowed by the Exit Credit Agreement for
working capital requirements.

The Company believes that the projections discussed above are based on
estimates and assumptions that are reasonable. However, the estimates and
assumptions may not be realized and are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which are beyond the Company's control. No representations can be or are made as
to whether the actual results will be within the range set forth in its
projections and should not be relied upon as a guarantee or other assurance of
the actual results that will occur. Any variation in the projections could
impact the Company's future cash requirements. In addition, the Company expects
that upon completion of its restructuring of its operations, it may still
require significant amounts of cash to fund its operating activities. No amounts
for operating activities are reflected above.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

Upon consummation of the Restructuring Agreement on October 15, 2002,
approximately $4.6 billion of the Company's debt was discharged resulting in
interest relief of approximately $420 million on an annual basis. Pursuant to
the terms of the Interim Amendment to the Credit Agreement, the Company prepaid
$600 million of upcoming maturities under the Credit Agreement prior to and upon
emergence from chapter 11. The Company's remaining outstanding debt balance
subsequent to emergence from chapter 11 is estimated to be approximately $571
million consisting primarily of variable rate debt.

The Company's interest rate exposure associated with short-term investments
decreased since December 31, 2001 as short-term investments excluding marketable
equity securities total $169.5 million as of September 30, 2002 compared to
$893.9 million as of December 31, 2001.

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days prior to the filing of this report, the Company carried out
an evaluation under the supervision and with the participation of the Company's
management, including the CEO and CFO, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Company's CEO and CFO
concluded that the Company's disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and procedures that are designed
to ensure that information required to be disclosed in Company reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. The Company's management, including the principal executive
officer and the principal financial officer, recognizes that any set of controls
and procedures, no matter how well designed and operated, can provide only
resonable assurance of achieving the desired control objectives.

There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect and internal controls
subsequent to the date the Company carried out this evaluation.

50

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

Williams' Securities Litigation

On January 29, 2002, the first of numerous putative federal securities class
actions was filed in the U.S. District Court for the Northern District of
Oklahoma, against WCG, TWC, Keith Bailey, the former Chairman of TWC, Howard
Janzen, the former Chairman, President and CEO of WCG, and Scott Schubert, the
CFO of WCG. In June 2002, the Court bifurcated the case into two subclasses -
one for purchasers of WCG securities and one for purchasers of TWC securities.
In September 2002, the putative WCG subclass complaint was amended raising
additional allegations and adding as defendants certain present and former
officers of WCG and the accounting firm of Ernst & Young LLP. The putative WCG
subclass amended complaint indicates that the action is purportedly brought on
behalf of all persons who purchased or otherwise acquired securities of WCG
between July 24, 2000 and April 22, 2002.

As described in Note 2 above, the Confirmation Order provides an injunction
with respect to (a) channeling all personal claims of WCG's unsecured creditors
against TWC and deeming them satisfied from the consideration provided by TWC
under the Settlement Agreement; and (b) channeling all remaining securities
actions against WCG's officers and directors to a "fund" consisting of up to 2%
of WilTel's common stock and the right to collect under the Company's director
and officer liability insurance policies.

Right of Way Class Action Litigation

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

The Company and other major carriers are seeking to settle the class action
claims referenced above relating to the railroad rights of way through an agreed
class action. These companies initially sought approval of a settlement in a
case styled Zografos et. al. vs. Qwest Communications Corp., et. al., filed in
the U.S. District Court for the District of Oregon on January 31, 2002. On July
12, 2002, the Oregon Court dismissed the action. Thereafter, on September 4,
2002, an existing case styled Smith, et al. v. Sprint, et al., pending in the
United States District Court for the Northern District of Illinois, was amended
to join the Company and two other telecommunications companies as defendants. On
that same day, the plaintiffs and defendants jointly asked the Court to
preliminarily approve a nationwide class action settlement agreement. A
scheduling order has been entered by the Court and a hearing on the motion for
preliminary approval has been scheduled for April 1, 2003. If approved, the
settlement would settle the majority of the putative nationwide and statewide
class actions referenced above.

Platinum Equity Dispute

On August 28, 2001, Platinum Equity LLC sent formal notice that it believes
the Company owes it approximately $47 million arising from a recalculation of
the net working capital of the domestic, Mexican, and

51

Canadian professional services operations of the Solutions segment sold to
Platinum Equity. Pursuant to the provisions of the sale agreement, the parties
submitted the dispute to binding arbitration before an independent public
accounting firm. Both parties have completed submission of information to the
arbitrator and are in the process of responding to the arbitrator's final
questions. The amount currently in dispute is approximately $55 million. The
Company denies that a material adjustment to the net working capital calculation
is required. A final decision is expected by December 31, 2002.

In September 2002, Platinum Equity filed suit against the Company alleging
various breaches of representations and warranties related to the sale of the
Solutions segment and requesting declatory action with respect to its right to
set-off its damages for such breaches against its payment to the Company of
approximately $57 million related to a promissory note from its purchase of the
business. Platinum Equity then failed to make this payment. The Company denies
the allegations and, in October 2002, the Company notified Platinum Equity that
it was in default for its non-payment to the Company. The Company will avail
itself of all available legal rights and remedies to collect the entire unpaid
note balance from Platinum Equity.

Thoroughbred Technology and Telecommunications, Inc. vs. WCL

On July 24, 2001, Thoroughbred Technology and Telecommunications, Inc.
("TTTI") filed suit against WCL in the U.S. District Court for the Northern
District of Georgia for claims that include breach of contract with respect to a
fiber-optic fiber installation project that TTTI was constructing for itself and
others, including WCL. TTTI seeks specific performance that includes payment of
in excess of $36 million in damages plus pre-judgment interest and to require
WCL to take title to a three (3) conduit system constructed between Cleveland,
Ohio and Boyce, Virginia. WCL alleges various defenses, including significant
warranty and breach of contract claims on the part of TTTI. On May 9, 2002, the
Court granted TTTI's motion for partial summary judgment on the issue of WCL's
liability, finding that WCL did not have the right to terminate the contract.
WCL's warranty and breach of contract claims remain pending. The Court's order
stated the amount of damages would not be established until a ruling is made
regarding the remaining claims of both parties. However, TTTI filed a motion
with the Court seeking to require WCL to close on the Cleveland to Boyce
transaction and to enter judgment in TTTI's favor for in excess of $38 million.
WCL counterclaims, if proven, will reduce the amount of any potential judgment
that TTTI may obtain. WCL recently filed a Motion for Partial Summary Judgment
contending that (1) WCL properly rejected the Cleveland to Boyce 3 conduit
system and (2) TTTI is liable to WCL for its breaches of the construction
related requirements of the Agreement. TTTI has indicated its intention to raise
additional claims in the litigation against WCL in the stated amount of as much
as $43 million. The discovery period of the lawsuit has closed and both TTTI and
WCL have filed separate motions for partial summary judgment which remain
pending with the Court.

Oklahoma Department of Securities Investigation

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

Summary

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

52

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

ITEM 2. CHANGES IN SECURITIES

On October 15, 2002, pursuant to the Plan of Reorganization, as amended,
and the Confirmation Order, WilTel issued an aggregate of 22,000,000 shares of
its Common Stock ("Shares") to Leucadia, an aggregate of 27,000,000 Shares to
the Residual Trust, and 1,000,000 shares to WCG to be held and distributed with
respect to the channeling injunction stated in the Confirmation Order. Shares
were issued to Leucadia in two distributions. First, 11,775,000 shares were
issued under the Plan and pursuant to the Purchase Agreement (as defined in Note
2 to the Financial Statements) whereby Leucadia acquired the TWC Assigned Claims
for a purchase price of $180 million by delivering the TWC Letter of Credit into
escrow pursuant to the Escrow Agreement. Second, pursuant to the Investment
Agreement, Leucadia invested $150 million in the Company by paying the Company
$1,000 and delivering the Company Letter of Credit into escrow pursuant to the
Escrow Agreement, in exchange for which 10,225,000 Shares were issued to
Leucadia in accordance with the Plan. Shares issued to Leucadia in connection
with the Investment Agreement were issued in a private placement and were not
registered under the Securities Act of 1933 (the "33 Act"), and may not be
transferred or otherwise disposed of unless they have been registered under the
'33 Act or an exemption from registration is available. Shares issued pursuant
to the Purchase Agreement are not exempt from the registration requirements of
the '33 Act due to Section 1145(b) of the Bankruptcy Code and may not be
transferred or otherwise disposed of unless they have been registered under the
'33 Act or an exemption from registration is available. Each certificate
representing Shares issued to Leucadia pursuant to the Investment Agreement and
the Purchase Agreement, respectively, bears an appropriate restrictive legend.
Shares were issued to the Residual Trust for distribution to holders of
approximately $2.4 billion in allowed Class 5 and Class 6 claims under the Plan.
Shares issued to the Residual Trust for distribution with respect to allowed
claims under the Plan, excluding Shares issued pursuant to the Purchase
Agreement, are exempt from the registration requirements of the '33 Act pursuant
to section 1145 of the Bankruptcy Code and the Confirmation Order.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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

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

All actions with respect to enforcement of rights under the Senior
Redeemable Notes were stayed by virtue of the commencement of the Chapter 11
Case. See Note 2 for a discussion of the discharge of the Senior Redeemable
Notes in accordance with the Plan.

The Company paid its preferred stock dividends through January 2002. As of the
commencement of the Chapter 11 Case, the Company ceased accruing dividends on
its preferred stock. Because of the priority requirements of the Bankruptcy
Code, the holders of the preferred stock received no distribution under the Plan
and the preferred stock was cancelled.

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

53

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

2.1 Copy of the Order Confirming Second Amended Joint Plan of
Reorganization of Williams Communications Group, Inc. and
CG Austria, Inc. (filed as Exhibit 99.1 to the Current
Report on Form 8-K dated October 11, 2002 (the "October
11, 2002, 8-K"))

2.2 Second Amended Joint Plan of Reorganization of Williams
Communications Group, Inc. and CG Austria, Inc. (filed as
Exhibit A to Exhibit 99.2 to the Current Report on Form
8-K dated August 23, 2002)

2.3 Modifications to Second Amended Joint Chapter 11 Plan of
Reorganization of Williams Communications Group, Inc. and
CG Austria, Inc. (Attachment I to Order Confirming Second
Amended Joint Plan of Reorganization of Williams
Communications Group, Inc. and CG Austria, Inc.) (filed as
Exhibit 99.3 to the October 11, 2002, 8-K)

2.4 Consent Order in Aid of Consummation of Debtors' Second
Amended Joint Chapter 11 Plan of Reorganization (filed as
Exhibit 99.4 to the October 11, 2002, 8-K)

3.1 Charter of the Company, filed with the Secretary of State
of the State of Nevada on October 14, 2002 (filed as
Exhibit 99.7 to the Current Report on Form 8-K dated
October 24, 2002 (the "October 24, 2002, 8-K"))

3.2 By-Laws of the Company, dated as of October 15, 2002
(filed as Exhibit 99.8 to the October 24, 2002, 8-K)

3.3 By-Laws of the Company, as amended, dated as of October
15, 2002 (filed as Exhibit 99.9 to the October 24, 2002,
8-K)

4.1 Stockholders Agreement, dated as of October 15, 2002,
between Leucadia and the Company (filed as Exhibit 99.6
to the October 24, 2002, 8-K)

4.2 Registration Rights Agreement, dated as of October 15,
2002, between Leucadia and the Company (filed as Exhibit
99.10 to the October 24, 2002, 8-K)

4.3 Co-Sale Agreement, dated as of October 15, 2002, between
Leucadia and the Company (filed as Exhibit 99.11 to the
October 24, 2002, 8-K)

4.4 Stockholders Agreement, dated as of October 15, 2002,
between TWC and the Company (filed as Exhibit 99.16 to the
October 24, 2002, 8-K)

4.5 Registration Rights Agreement, dated as of October 15,
2002, between TWC and the Company (filed as Exhibit 99.17
to the October 24, 2002, 8-K)

54

10.119 Declaration of Trust, dated as of October 15, 2002, by and
among WCG, the Company and the Residual Trustee (filed as
Exhibit 99.1 to the October 24, 2002, 8-K)

10.120 Amendment No. 1, dated as of October 15, 2002, to the
Purchase Agreement, dated as of July 26, 2002, between TWC
and Leucadia (filed as Exhibit 99.2 to the October 24,
2002, 8-K)

10.121 Escrow Agreement, dated as of October 15, 2002, by and
among the Company, TWC, Leucadia and The Bank of New York,
as Escrow Agent (filed as Exhibit 99.3 to the October 24,
2002, 8-K)

10.122 First Amendment, dated as of September 30, 2002, to the
Investment Agreement, dated as of July 26, 2002, by and
among the Company, Leucadia and WCL (filed as Exhibit 99.4
to the October 24, 2002, 8-K)

10.123 Amendment No. 2, dated as of October 15, 2002, to the
Investment Agreement, dated as of July 26, 2002 and
amended as of September 30, 2002, by and among the
Company, Leucadia and WCL (filed as Exhibit 99.5 to the
October 24, 2002, 8-K)

10.124 Second Amended and Restated Credit and Guaranty Agreement,
dated as of September 8, 1999, as amended and restated as
of April 25, 2001 and as further amended and restated as
of October 15, 2002 (filed as Exhibit 99.12 to the October
24, 2002, 8-K)

10.125 Amendment No. 9, dated as of October 15, 2002, to Amended
and Restated Credit Agreement, dated as of September 8,
1999, and Amendment No. 1, dated as of October 15, 2002,
to the Subsidiary Guarantee, dated as of September 8, 1999
(filed as Exhibit 99.13 to the October 24, 2002, 8-K)

10.126 Amended and Restated Security Agreement, dated as of April
23, 2001, as amended and restated as of October 15, 2002
(filed as Exhibit 99.14 to the October 24, 2002, 8-K)

10.127 Amendment No. 1, dated as of October 15, 2002, to the Real
Property Purchase and Sale Agreement, dated as of July 26,
2002, among Williams Headquarters Building Company, WTC,
WCL, WCG and Williams Communications Aircraft, LLC (filed
as Exhibit 99.15 to the October 24, 2002, 8-K)

99.1 Order Pursuant to Section 1125 of the Bankruptcy Code and
Bankruptcy Rules 3017 and 2002 (A) Approving Proposed
Second Amended Disclosure Statement and Certain Related
Relief, (B) Approving Procedures for Solicitation and
Tabulation of Votes to Accept or Reject Proposed Second
Amended Joint Plan of Reorganization, and (C) Scheduling a
Hearing on Confirmation of Such Plan, dated August 13,
2002 (filed as Exhibit 99.1 to the Current Report on Form
8-K dated August 23, 2002 (the "August 23, 2002, 8-K"))

99.2 Second Amended Disclosure Statement With Respect to Second
Amended Joint Chapter 11 Plan of Reorganization of
Williams Communications Group, Inc., and CG Austria, Inc.,
dated August 12, 2002 (filed as Exhibit 99.2 to the August
23, 2002, 8-K)

99.3 Registrant's monthly operating statement for the month
ended August 31, 2002 (filed as Exhibit 99.5 to the
October 11, 2002, 8-K)

55

99.4 Monthly operating statement of WCG for the period after
April 22, 2002 (date of filing) through May 31, 2002 (filed
as Exhibit 99.18 to the October 24, 2002, 8-K)

99.5 Monthly operating statement of WCG for the month ending June
30, 2002 (filed as Exhibit 99.19 to the October 24, 2002,
8-K)

99.6 Monthly operating statement of WCG for the month ending July
31, 2002 (filed as Exhibit 99.20 to the October 24, 2002,
8-K)

99.7 Monthly operating statement of WCG for the month ending
August 31, 2002 (filed as Exhibit 99.21 to the October 24,
2002, 8-K)

99.8 Monthly operating statement of WCG for the month ending
September 30, 2002 (filed as Exhibit 99.22 to the October
24, 2002, 8-K)

(b) During the third quarter 2002, WCG filed a Form 8-K on July 31, 2002
and August 23, 2002, which reported a significant event under Item 5 of the Form
and included the exhibits required by Item 7 of the Form, and on August 16,
2002, which reported under Item 9 of the Form certifications by the chief
executive officer and chief financial officer of the Company delivered pursuant
to 18 U.S.C. Section 1350.

SIGNATURE

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

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

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

November 14, 2002

CERTIFICATION

I, Jeff K. Storey, certify that:

1. I have reviewed this quarterly report on Form 10-Q of WilTel Communications
Group, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/ JEFF K. STOREY
- -----------------------
Jeff K. Storey
Chief Executive Officer

CERTIFICATION

I, Scott E. Schubert, certify that:

1. I have reviewed this quarterly report on Form 10-Q of WilTel Communications
Group, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/ SCOTT E. SCHUBERT
- -----------------------
Scott E. Schubert
Chief Financial Officer

INDEX TO EXHIBITS

10.119 Declaration of Trust, dated as of October 15, 2002, by and
among WCG, the Company and the Residual Trustee (filed as
Exhibit 99.1 to the October 24, 2002, 8-K)

10.120 Amendment No. 1, dated as of October 15, 2002, to the
Purchase Agreement, dated as of July 26, 2002, between TWC
and Leucadia (filed as Exhibit 99.2 to the October 24,
2002, 8-K)

10.121 Escrow Agreement, dated as of October 15, 2002, by and
among the Company, TWC, Leucadia and The Bank of New York,
as Escrow Agent (filed as Exhibit 99.3 to the October 24,
2002, 8-K)

10.122 First Amendment, dated as of September 30, 2002, to the
Investment Agreement, dated as of July 26, 2002, by and
among the Company, Leucadia and WCL (filed as Exhibit 99.4
to the October 24, 2002, 8-K)

10.123 Amendment No. 2, dated as of October 15, 2002, to the
Investment Agreement, dated as of July 26, 2002 and
amended as of September 30, 2002, by and among the
Company, Leucadia and WCL (filed as Exhibit 99.5 to the
October 24, 2002, 8-K)

10.124 Second Amended and Restated Credit and Guaranty Agreement,
dated as of September 8, 1999, as amended and restated as
of April 25, 2001 and as further amended and restated as
of October 15, 2002 (filed as Exhibit 99.12 to the October
24, 2002, 8-K)

10.125 Amendment No. 9, dated as of October 15, 2002, to Amended
and Restated Credit Agreement, dated as of September 8,
1999, and Amendment No. 1, dated as of October 15, 2002,
to the Subsidiary Guarantee, dated as of September 8, 1999
(filed as Exhibit 99.13 to the October 24, 2002, 8-K)

10.126 Amended and Restated Security Agreement, dated as of April
23, 2001, as amended and restated as of October 15, 2002
(filed as Exhibit 99.14 to the October 24, 2002, 8-K)

10.127 Amendment No. 1, dated as of October 15, 2002, to the Real
Property Purchase and Sale Agreement, dated as of July 26,
2002, among Williams Headquarters Building Company, WTC,
WCL, WCG and Williams Communications Aircraft, LLC (filed
as Exhibit 99.15 to the October 24, 2002, 8-K)

99.1 Order Pursuant to Section 1125 of the Bankruptcy Code and
Bankruptcy Rules 3017 and 2002 (A) Approving Proposed
Second Amended Disclosure Statement and Certain Related
Relief, (B) Approving Procedures for Solicitation and
Tabulation of Votes to Accept or Reject Proposed Second
Amended Joint Plan of Reorganization, and (C) Scheduling a
Hearing on Confirmation of Such Plan, dated August 13,
2002 (filed as Exhibit 99.1 to the Current Report on Form
8-K dated August 23, 2002 (the "August 23, 2002, 8-K"))

99.2 Second Amended Disclosure Statement With Respect to Second
Amended Joint Chapter 11 Plan of Reorganization of
Williams Communications Group, Inc., and CG Austria, Inc.,
dated August 12, 2002 (filed as Exhibit 99.2 to the August
23, 2002, 8-K)

99.3 Registrant's monthly operating statement for the month
ended August 31, 2002 (filed as Exhibit 99.5 to the
October 11, 2002, 8-K)

99.4 Monthly operating statement of WCG for the period after
April 22, 2002 (date of filing) through May 31, 2002 (filed
as Exhibit 99.18 to the October 24, 2002, 8-K)

99.5 Monthly operating statement of WCG for the month ending June
30, 2002 (filed as Exhibit 99.19 to the October 24, 2002,
8-K)

99.6 Monthly operating statement of WCG for the month ending July
31, 2002 (filed as Exhibit 99.20 to the October 24, 2002,
8-K)

99.7 Monthly operating statement of WCG for the month ending
August 31, 2002 (filed as Exhibit 99.21 to the October 24,
2002, 8-K)

99.8 Monthly operating statement of WCG for the month ending
September 30, 2002 (filed as Exhibit 99.22 to the October
24, 2002, 8-K)