<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>lnc2ndqtr10q.txt
<DESCRIPTION>LEUCADIA NATIONAL 2ND QTR. 2005 FORM 10-Q
<TEXT>


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   ----------

                                    FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
                  For the quarterly period ended June 30, 2005

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
                     For the transition period from     to

                          Commission File Number 1-5721

                          LEUCADIA NATIONAL CORPORATION
             (Exact name of registrant as specified in its Charter)

         New York                                      13-2615557
 (State or other jurisdiction of                   (I.R.S. Employer
  incorporation or organization)                 Identification Number)

 315 Park Avenue South, New York,  New York           10010-3607
 (Address of principal executive offices)             (Zip Code)

                                 (212) 460-1900
              (Registrant's telephone number, including area code)

                                       N/A
              (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 is an accelerated filer (as
defined in Rule 12b-2 of the Act).

                       YES     X            NO
                            --------            -------

APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at July 29, 2005: 107,685,578.



<PAGE>


                         PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements.

LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2005 and December 31, 2004
(Dollars in thousands, except par value)

<TABLE>
<CAPTION>


                                                                                             June 30,          December 31,
                                                                                               2005                2004
                                                                                         -------------         -----------
                                                                                           (Unaudited)
<S>                                                                                              <C>                <C>

ASSETS
Current assets:
   Cash and cash equivalents                                                              $   517,529          $   486,948
   Investments                                                                                961,855            1,106,322
   Trade, notes and other receivables, net                                                    386,165              414,552
   Prepaids and other current assets                                                          172,891               52,127
                                                                                          -----------          -----------
       Total current assets                                                                 2,038,440            2,059,949
Non-current investments                                                                       786,812              726,782
Notes and other receivables, net                                                               12,303               16,906
Intangible assets, net and goodwill                                                            92,025                1,472
Deferred tax asset, net                                                                     1,080,114                 --
Other assets                                                                                  192,601              201,624
Property, equipment and leasehold improvements, net                                         1,363,587            1,332,876
Investments in associated companies                                                           452,602              460,794
                                                                                          -----------          -----------
           Total                                                                          $ 6,018,484          $ 4,800,403
                                                                                          ===========          ===========

LIABILITIES
Current liabilities:
   Trade payables and expense accruals                                                    $   399,570          $   407,350
   Deferred revenue                                                                            55,850               52,632
   Other current liabilities                                                                  123,497               94,956
   Customer banking deposits due within one year                                               10,812               18,472
   Debt due within one year                                                                    63,253               68,237
   Income taxes payable                                                                        18,396               17,690
                                                                                          -----------          -----------
       Total current liabilities                                                              671,378              659,337
Long-term deferred revenue                                                                    166,916              161,206
Other non-current liabilities                                                                 206,185              213,309
Non-current customer banking deposits                                                           5,089                6,119
Long-term debt                                                                              1,460,445            1,483,504
                                                                                          -----------          -----------
       Total liabilities                                                                    2,510,013            2,523,475
                                                                                          -----------          -----------

Commitments and contingencies

Minority interest                                                                              15,355               18,275
                                                                                          -----------          -----------

SHAREHOLDERS' EQUITY
Common shares, par value $1 per share, authorized 300,000,000 shares;
  107,685,578 and 107,600,403 shares issued and outstanding, after deducting
  42,374,172 and 42,399,597 shares held in treasury                                           107,686              107,600
Additional paid-in capital                                                                    599,805              598,504
Accumulated other comprehensive income                                                         95,490              136,138
Retained earnings                                                                           2,690,135            1,416,411
                                                                                          -----------          -----------
       Total shareholders' equity                                                           3,493,116            2,258,653
                                                                                          -----------          -----------

           Total                                                                          $ 6,018,484          $ 4,800,403
                                                                                          ===========          ===========

</TABLE>

             See notes to interim consolidated financial statements.

                                       2
<PAGE>


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended June 30, 2005 and 2004
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>


                                                                               For the Three Month              For the Six Month
                                                                              Period Ended June 30,           Period Ended June 30,
                                                                              ---------------------           ---------------------
                                                                               2005            2004            2005           2004
                                                                               ----            ----            ----           ----
<S>                                                                                <C>            <C>           <C>             <C>

Revenues and Other Income:
   Telecommunications                                                     $   458,642      $ 395,414     $   880,137    $   776,393
   Healthcare                                                                  60,977         64,044         128,415        127,271
   Manufacturing                                                               88,051         16,683         108,925         30,065
   Investment and other income                                                 45,893         41,060          96,816         83,930
   Net securities gains                                                        46,949         52,346          47,004         61,618
                                                                          -----------      ---------     -----------    -----------
                                                                              700,512        569,547       1,261,297      1,079,277
                                                                          -----------      ---------     -----------    -----------
Expenses:
   Cost of sales:
      Telecommunications                                                      323,708        285,514         626,727        572,291
      Healthcare                                                               51,328         52,281         107,792        104,067
      Manufacturing                                                            76,412         11,831          91,121         21,527
   Interest                                                                    25,033         24,612          49,842         45,482
   Salaries and incentive compensation                                         54,733         45,584          99,500         88,724
   Depreciation and amortization                                               48,667         58,597          95,183        121,197
   Selling, general and other expenses                                         78,903         60,172         157,315        130,227
                                                                          -----------      ---------     -----------    -----------
                                                                              658,784        538,591       1,227,480      1,083,515
                                                                          -----------      ---------     -----------    -----------
       Income (loss) from continuing operations before income taxes
        and equity in income of associated companies                           41,728         30,956          33,817         (4,238)
Income taxes                                                               (1,107,460)        (1,264)     (1,106,836)        (1,006)
                                                                          -----------      ---------     -----------    -----------
       Income (loss) from continuing operations before equity in
        income of associated companies                                      1,149,188         32,220       1,140,653         (3,232)
Equity in income of associated companies, net of taxes                         67,345          4,151          78,493         28,132
                                                                          -----------      ---------     -----------    -----------

       Income from continuing operations                                    1,216,533         36,371       1,219,146         24,900
Loss from discontinued operations, net of taxes                                   -           (4,633)         --             (5,114)
Gain on disposal of discontinued operations, net of taxes                      54,578          2,237          54,578          2,237
                                                                          -----------      ---------      ----------    -----------

       Net income                                                         $ 1,271,111      $  33,975     $ 1,273,724    $    22,023
                                                                          ===========      =========     ===========    ===========

Basic earnings (loss) per common share:
   Income from continuing operations                                           $11.30          $ .34          $11.32           $.23
   Loss from discontinued operations                                             --             (.04)           --             (.04)
   Gain on disposal of discontinued operations                                    .51            .02             .51            .02
                                                                               ------          -----          ------           ----
       Net income                                                              $11.81          $ .32          $11.83           $.21
                                                                               ======          =====          ======           ====


Diluted earnings (loss) per common share:
   Income from continuing operations                                           $10.56          $ .34          $10.62           $.23
   Loss from discontinued operations                                             --             (.04)           --             (.04)
   Gain on disposal of discontinued operations                                    .47            .02             .47            .02
                                                                               ------          -----          ------           ----
       Net income                                                              $11.03          $ .32          $11.09           $.21
                                                                               ======          =====          ======           ====


</TABLE>





             See notes to interim consolidated financial statements.


                                       3
<PAGE>



LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30, 2005 and 2004
(In thousands)
(Unaudited)

<TABLE>
<CAPTION>

                                                                                                    2005             2004
                                                                                                    ----             ----
<S>                                                                                                    <C>           <C>

Net cash flows from operating activities:
Net income                                                                                     $ 1,273,724       $   22,023
Adjustments to reconcile net income to net cash provided by operations:
   Deferred income tax provision (benefit)                                                      (1,110,000)          10,752
   Depreciation and amortization of property, equipment and leasehold improvements                  97,416          124,564
   Other amortization                                                                                1,392            1,127
   Provision for doubtful accounts                                                                   3,605           (6,542)
   Net securities gains                                                                            (47,004)         (61,618)
   Equity in income of associated companies                                                        (79,223)         (43,280)
   Distributions from associated companies                                                          89,245           20,948
   Gain on disposal of real estate, property and equipment, loan receivables and other assets      (21,614)         (16,197)
   Gain on disposal of discontinued operations                                                     (56,578)          (2,237)
   Investments classified as trading, net                                                           18,537           11,608
   Net change in:
      Trade, notes and other receivables                                                            77,420           28,195
      Prepaids and other assets                                                                    (32,347)         (14,091)
      Trade payables and expense accruals                                                          (11,882)          13,236
      Other liabilities                                                                            (10,586)           7,559
      Deferred revenue                                                                              (8,735)          (1,668)
      Income taxes payable                                                                             674            2,954
   Other                                                                                               (97)          (1,508)
                                                                                               -----------       ----------
   Net cash provided by operating activities                                                       183,947           95,825
                                                                                               -----------       ----------

Net cash flows from investing activities:
Acquisition of property, equipment and leasehold improvements                                      (65,596)         (48,074)
Acquisitions of and capital expenditures for real estate investments                                (6,855)          (5,193)
Proceeds from disposals of real estate, property and equipment, and other assets                    29,079           25,467
Proceeds from sale of discontinued operations                                                       95,160             --
Principal collections on loan receivables                                                              762           37,280
Proceeds from sale of loan receivables                                                                 --           149,042
Acquisitions, net of cash acquired                                                                (177,947)            --
Advances on notes receivables                                                                         (100)            (400)
Collections on notes receivables                                                                     1,721           26,868
Investments in associated companies                                                                 (4,180)         (51,422)
Distributions from associated companies                                                                130             --
Purchases of investments (other than short-term)                                                (1,587,206)      (1,202,857)
Proceeds from maturities of investments                                                            607,759          402,225
Proceeds from sales of investments                                                                 994,387          567,756
                                                                                               -----------       ----------
   Net cash used for investing activities                                                         (112,886)         (99,308)
                                                                                               -----------       ----------

Net cash flows from financing activities:
Net change in customer banking deposits                                                             (8,658)         (81,002)
Issuance of debt                                                                                    21,612          437,598
Reduction of debt                                                                                  (51,814)          (6,182)
Issuance of common shares                                                                            1,387            1,812
                                                                                               -----------       ----------
   Net cash provided by (used for) financing activities                                            (37,473)         352,226
                                                                                               -----------       ----------
Effect of foreign exchange rate changes on cash                                                     (3,007)            (112)
                                                                                               -----------       ----------
   Net increase in cash and cash equivalents                                                        30,581          348,631
Cash and cash equivalents at January 1,                                                            486,948          214,390
                                                                                               -----------       ----------
Cash and cash equivalents at June 30,                                                          $   517,529       $  563,021
                                                                                               ===========       ==========

             See notes to interim consolidated financial statements.

</TABLE>
                                       4
<PAGE>




LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the six months ended June 30, 2005 and 2004
(In thousands, except par value)
(Unaudited)

<TABLE>
<CAPTION>

                                                       Common                      Accumulated
                                                       Shares       Additional        Other
                                                       $1 Par        Paid-In      Comprehensive       Retained
                                                       Value         Capital       Income (Loss)       Earnings           Total
                                                       -----         -------       -------------       --------           -----
<S>                                                       <C>              <C>              <C>            <C>            <C>

Balance, January 1, 2004                              $ 106,235         $577,863       $152,251     $ 1,297,812      $2,134,161
                                                                                                                     ----------
Comprehensive loss:
   Net change in unrealized gain (loss) on
     investments, net of taxes of $10,545                                               (22,421)                        (22,421)
   Net change in unrealized foreign exchange
     gain (loss), net of taxes of $504                                                   (1,072)                         (1,072)
   Net change in unrealized gain (loss) on
     derivative instruments, net of taxes of $297                                           633                             633
   Net income                                                                                            22,023          22,023
                                                                                                                     ----------
     Comprehensive loss                                                                                                    (837)
                                                                                                                     ----------
Exercise of options to purchase common shares               108            1,704                                          1,812
                                                      ---------         --------       --------     -----------      ----------

Balance, June 30, 2004                                $ 106,343         $579,567       $129,391     $ 1,319,835      $2,135,136
                                                      =========         ========       ========     ===========      ==========

Balance, January 1, 2005                              $ 107,600         $598,504       $136,138     $ 1,416,411      $2,258,653
                                                                                                                     ----------
Comprehensive income:
   Net change in unrealized gain (loss) on
     investments, net of taxes of $0                                                    (29,639)                        (29,639)
   Net change in unrealized foreign exchange
     gain (loss), net of taxes of $0                                                    (13,136)                        (13,136)
   Net change in unrealized gain (loss) on
     derivative instruments, net of taxes of $0                                           2,127                           2,127
   Net income                                                                                         1,273,724       1,273,724
                                                                                                                     ----------
     Comprehensive income                                                                                             1,233,076
                                                                                                                     ----------
Exercise of options to purchase common shares                86            1,301                                          1,387
                                                      ---------         --------       --------     -----------      ----------

Balance, June 30, 2005                                $ 107,686         $599,805       $ 95,490     $ 2,690,135      $3,493,116
                                                      =========         ========       ========     ===========      ==========


</TABLE>

             See notes to interim consolidated financial statements.

                                       5
<PAGE>


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements

1.   The unaudited interim consolidated financial statements,  which reflect all
     adjustments  (consisting  of  normal  recurring  items or  items  discussed
     herein) that  management  believes  necessary to present  fairly results of
     interim  operations,  should  be read in  conjunction  with  the  Notes  to
     Consolidated  Financial  Statements  (including  the Summary of Significant
     Accounting   Policies)  included  in  the  Company's  audited  consolidated
     financial  statements  for the year  ended  December  31,  2004,  which are
     included in the  Company's  Annual Report filed on Form 10-K, as amended by
     Form 10-K/A,  for such year (the "2004 10-K").  Results of  operations  for
     interim  periods  are not  necessarily  indicative  of  annual  results  of
     operations.  The  consolidated  balance  sheet  at  December  31,  2004 was
     extracted from the audited annual financial statements and does not include
     all disclosures required by accounting principles generally accepted in the
     United States of America ("GAAP") for annual financial statements.

     Statement  of  Financial  Accounting  Standards  No. 123,  "Accounting  for
     Stock-Based Compensation" ("SFAS 123"), establishes a fair value method for
     accounting for stock-based  compensation  plans, either through recognition
     in the  statements of operations or disclosure.  As permitted,  the Company
     applies APB Opinion No. 25 and related  Interpretations  in accounting  for
     its plans.  Accordingly,  no  compensation  cost has been recognized in the
     statements  of  operations  for its  stock-based  compensation  plans.  Had
     compensation cost for the Company's stock option plans been recorded in the
     statements of operations  consistent  with the  provisions of SFAS 123, the
     Company's  results of operations  would not have been materially  different
     from that reported.  In April 2005, the Securities and Exchange  Commission
     amended the effective date of Statement of Financial  Accounting  Standards
     No. 123R,  "Share-Based  Payment" ("SFAS 123R"),  from the first interim or
     annual  period after June 15, 2005 to the beginning of the next fiscal year
     that begins after June 15, 2005.  The Company is currently  evaluating  the
     impact of SFAS 123R on its consolidated financial statements.

     In May 2005,  the Financial  Accounting  Standards  Board  ("FASB")  issued
     Statement of Financial  Accounting  Standards No. 154,  "Accounting Changes
     and  Error  Corrections-a  replacement  of APB  Opinion  No.  20  and  FASB
     Statement No. 3" ("SFAS 154"),  which is effective for  accounting  changes
     and corrections of errors made in fiscal years beginning after December 15,
     2005. SFAS 154 applies to all voluntary  changes in accounting  principles,
     and changes  the  accounting  and  reporting  requirements  for a change in
     accounting principle.  SFAS 154 requires retrospective application to prior
     periods' financial statements of a voluntary change in accounting principle
     unless doing so is  impracticable.  APB 20  previously  required  that most
     voluntary changes in accounting principle be recognized by including in net
     income of the period in which the change occurred the cumulative  effect of
     changing to the new  accounting  principle.  SFAS 154 also  requires that a
     change in depreciation,  amortization,  or depletion method for long-lived,
     nonfinancial  assets be accounted  for as a change in  accounting  estimate
     effected by a change in  accounting  principle.  SFAS 154  carries  forward
     without  change the guidance in APB 20 for reporting  the  correction of an
     error in previously  issued  financial  statements,  a change in accounting
     estimate and a change in reporting  entity,  as well as the  provisions  of
     SFAS 3 that  govern  reporting  accounting  changes  in  interim  financial
     statements.  The Company is currently  evaluating the impact of SFAS 154 on
     its consolidated financial statements,  but does not expect that the impact
     will be material.

     In March 2005, the FASB issued FASB  Interpretation No. 47, "Accounting for
     Conditional  Asset Retirement  Obligations"  ("FIN 47"), which is effective
     for fiscal years ending after  December 15, 2005. FIN 47 clarifies that the
     term conditional asset retirement  obligation as used in FASB Statement No.
     143,  "Accounting  for  Asset  Retirement  Obligations",  refers to a legal
     obligation  to perform  an asset  retirement  activity  in which the timing
     and/or method of settlement  are  conditional on a future event that may or
     may not be within  the  control of the  entity.  Under FIN 47, an entity is
     required to recognize a liability for the fair value of a conditional asset
     retirement  obligation if the fair value of the liability can be reasonably
     estimated.  The  fair  value  of a  liability  for  the  conditional  asset
     retirement  obligation should be recognized when incurred  - generally upon
     acquisition,   construction,  or  development  and/or  through  the  normal
     operation of the asset.  The Company is currently  evaluating the impact of
     FIN 47 on its consolidated  financial statements,  but does not expect that
     the impact will be material.

                                       6
<PAGE>

Notes to Interim Consolidated Financial Statements, continued

     Certain  amounts for prior  periods  have been  reclassified  to reflect as
     discontinued operations a commercial real estate property and the Company's
     geothermal  power  business,  which were sold during the fourth  quarter of
     2004, and to be consistent with the 2005 presentation.

2.   In accordance with Financial  Accounting Standards No. 144, "Accounting for
     the Impairment or Disposal of Long-Lived  Assets" ("SFAS 144"), the Company
     evaluates its long-lived  assets for impairment  whenever events or changes
     in  circumstances  indicate,  in management's  judgment,  that the carrying
     value of such assets may not be  recoverable.  When testing for impairment,
     the Company groups its long-lived  assets with other assets and liabilities
     at  the  lowest  level  for  which  identifiable  cash  flows  are  largely
     independent  of the cash flows of other  assets and  liabilities  (or asset
     group). The determination of whether an asset group is recoverable is based
     on  management's  estimate  of  undiscounted  future  cash  flows  directly
     attributable  to the asset group as compared to its carrying  value. If the
     carrying  amount of the asset group is greater than the  undiscounted  cash
     flows,  an impairment  loss would be recognized for the amount by which the
     carrying amount of the asset group exceeds its estimated fair value.

     As more  fully  described  in the 2004  10-K,  on  January  31,  2005,  SBC
     Communications  Inc.  ("SBC")  announced that it would buy AT&T Corp.,  and
     announced its  intention to migrate the services  provided by WilTel to the
     AT&T network. Since SBC is WilTel's largest customer, accounting for 70% of
     the  Network  segment's  2005  telecommunications   revenues,  the  Company
     concluded that the SBC  announcement is an event which requires the Company
     to assess the carrying value of WilTel's  long-lived assets for impairment,
     principally property and equipment.  Since the event which gave rise to the
     impairment  review occurred on January 31, 2005, and is not reflective of a
     condition  that  existed  as  of  December  31,  2004,  the  assessment  of
     impairment  was  performed  as part  of the  preparation  of the  Company's
     financial   statements  for  the  first  quarter  of  2005.  Based  on  the
     assumptions  described  below,  the Company  concluded  that an  impairment
     charge was not required.

     The Company determined that WilTel's fiber optic communications  network is
     the lowest level for which identifiable cash flows are largely  independent
     of the cash  flows of other  assets  and  liabilities.  The asset  group is
     primarily composed of fiber optic cable, conduit,  rights of way, optronics
     and certain  buildings  and  related  improvements.  These  assets are used
     together to generate joint cash flows.  The Company has determined that the
     primary  asset of the group is fiber  optic  cable,  which has a  remaining
     weighted  average  useful  life of 16  years.  The  fiber  optic  cable  is
     considered  to be  the  primary  asset  of  the  group  as it is  the  most
     significant  component  of the group,  the  principal  asset from which the
     asset group derives its cash flow generating capacity,  would cost the most
     to replace and without which most of the assets in the group would not have
     been acquired. The determination of the primary asset of the asset group is
     significant  because  estimated cash flows used to test for  recoverability
     are based on the estimated  remaining useful life of the primary asset. The
     carrying  value of the asset  group  that was  tested  for  impairment  was
     approximately $920,000,000.

     The Company utilized WilTel's internal  estimates of future cash flows from
     all of its customers  over the remaining  useful life of the primary asset.
     These  assumptions   reflected   estimated  future  operating  results  and
     considered all relevant facts and circumstances.  The economics and term of
     WilTel's future relationship with SBC were the most significant assumptions
     in the analysis.  These  assumptions  were based upon the best  information
     available;  however,  when the  analysis  was  performed  during  the first
     quarter of 2005, negotiations between SBC and WilTel were not yet completed
     with  respect to a  transition  services  and pricing  agreement  and other
     matters. As more fully described below, WilTel and SBC subsequently entered
     into new agreements,  and WilTel's new estimate of the cash flows that will
     be received  from SBC  pursuant  to these  agreements  is greater  than the
     amounts  assumed for the first quarter  impairment  analysis.  However,  if
     WilTel's  actual  cash  flows in the future  are  materially  less than the
     amounts used for its impairment analysis,  or other events occur which have
     a material  adverse  affect on  WilTel's  business  or ability to  generate
     future  cash  flows,  the  Company  would have to prepare a new  impairment
     analysis and may conclude that this asset group is impaired.

                                       7
<PAGE>



Notes to Interim Consolidated Financial Statements, continued

3.   On June 15, 2005,  WilTel and SBC reached an  agreement,  pursuant to which
     the existing alliance agreements between WilTel and SBC were terminated and
     a new Master  Services  Agreement  and a  Termination,  Mutual  Release and
     Settlement  Agreement were entered into. In exchange for the termination of
     the  existing  alliance  agreements  and the  exchange of mutual  releases,
     WilTel will receive  aggregate cash payments from SBC of  $236,000,000.  Of
     this amount,  $11,000,000 is payable on January 3, 2006, and the balance is
     payable in twelve equal  monthly  installments  beginning on the earlier of
     April 30, 2006 or the closing or termination of SBC's  agreement to acquire
     AT&T.

     Under the new Master  Services  Agreement,  SBC agreed to  purchase  WilTel
     services at the fixed prices that had been in effect on June 15, 2005, with
     minimum  purchase  commitments for on-net services of $600,000,000  for the
     period from January 1, 2005 through  December 31, 2007, and $75,000,000 for
     the period from January 1, 2008 through  December 31, 2009. If SBC fails to
     spend the  required  $600,000,000  or  $75,000,000  during  the  respective
     designated periods, SBC will pay the amount of any deficiency and receive a
     credit equal to such amount to be used for future  services.  If SBC spends
     more than $600,000,000  during the initial  three-year  period,  any excess
     will be credited  toward the  $75,000,000  commitment in the second period.
     SBC's  minimum  purchase  commitments  exclude  access and  off-net  costs.
     However,  for  financial  reporting  purposes  these costs are  included as
     revenues,  with offsetting amounts reported in  telecommunications  cost of
     sales, on the Company's consolidated  statements of operations.  As of June
     30, 2005,  approximately  $120,000,000 of the minimum purchase  commitments
     have been satisfied.  Minimum purchase commitments are considered satisfied
     only when SBC has paid for the  service  provided,  not when the service is
     recognized as revenue for financial reporting purposes.

     WilTel  will  also  have  the  opportunity  to  earn  up to  an  additional
     $50,000,000 by meeting quality of service performance  criteria in 2006 and
     2007. In addition,  the Master Services Agreement provides that $18,000,000
     of the  $25,000,000  that SBC paid to  WilTel in 2004 to  pre-fund  capital
     expenditures  will be  applied  as a  credit  against  amounts  that  would
     otherwise be payable for services  during the second half of 2005, with the
     balance to be retained by WilTel.  The amount  received during 2004 was not
     recognized as income and has been reflected as a liability on the Company's
     consolidated balance sheet.

     WilTel will recognize the  $236,000,000 of cash payments and the pre-funded
     capital  expenditures  that is not  credited to SBC  ($7,000,000)  as other
     non-operating  income,  which is not a  component  of segment  profit  from
     operations.  These  amounts  will be  recognized  as other income over time
     proportionally with the ratio of the minimum purchase commitments that have
     been satisfied  subsequent to entering into the agreements with SBC, to the
     remaining  minimum  purchase  commitment at June 15, 2005.  For the periods
     ended June 30,  2005,  $1,100,000  of this  amount was  reflected  in other
     income. The quality of service  performance  criteria will be recognized as
     operating revenue during 2006 and 2007 as it is earned.

     SBC's  January 2005  announcement  to migrate its  business  from WilTel is
     considered an event which could  reasonably be expected to have a "material
     adverse effect" as defined in WilTel's amended credit  facility,  and while
     WilTel can no longer access its  $25,000,000  revolving  credit facility it
     has no impact  on the  $358,100,000  of term  loans  under  the  agreement.
     However,  the credit agreement provides for an event of default if there is
     any  amendment,  supplement,  modification  or  termination  of any  WilTel
     contract  or  agreement  that has had or could  reasonably  be  expected to
     result in a material  adverse  effect on WilTel  (as  defined in the credit
     agreement).  The Company does not believe that the new SBC agreements  have
     had or could  reasonably be expected to result in a material adverse effect
     on WilTel,  particularly  inasmuch as the Company  believes  that these new
     agreements,  along with WilTel's  existing  liquidity,  will provide WilTel
     with sufficient  funds to pay its long-term debt obligations as they become
     due; as a result,  the  Company  continues  to  classify  the term loans as
     long-term debt.  However,  the Company has agreed with SBC that if WilTel's
     debt under its credit agreement becomes due and payable, and if WilTel does
     not have  sufficient  funds to pay the debt,  the Company  will  advance to
     WilTel the incremental funds needed to pay the debt.

                                       8
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

4.   The Company records a valuation  allowance to reduce its deferred tax asset
     to the amount that is more likely than not to be  realized.  If the Company
     were to  determine  that it would be able to realize its deferred tax asset
     in the future in excess of its net recorded  amount,  an  adjustment  would
     increase income in such period. Similarly, if the Company were to determine
     that it would not be able to realize all or part of its  deferred tax asset
     in the future, an adjustment would be charged to income in such period. The
     Company also records  reserves for contingent tax liabilities  based on the
     Company's assessment of the probability of successfully  sustaining its tax
     filing positions.

     As more  fully  discussed  in the 2004 10-K,  at  acquisition  the  Company
     established a valuation  allowance that reserved for  substantially  all of
     WilTel's net deferred tax asset,  because the Company could not demonstrate
     it would have the future  taxable  income  necessary to realize that asset.
     The Company's projections of consolidated taxable income and its assessment
     of the need for a full  valuation  allowance for the deferred tax asset had
     been  significantly  influenced  by the fact that it had not yet  generated
     positive  cumulative  pre-tax  income over a period of years on a pro forma
     combined basis with WilTel,  and the  uncertainty of WilTel's  relationship
     with SBC in the future.  During the second quarter of 2005,  WilTel entered
     into  new  agreements  with  SBC  that  significantly  reduced  uncertainty
     surrounding  WilTel's future  profitability.  Additionally,  taxable income
     from the Company's other operations and investments, when added to WilTel's
     on a pro  forma  combined  basis,  have now  achieved  positive  cumulative
     pre-tax  income  for  the  Company.   The  Company  has  prepared   updated
     projections  of future  taxable  income and has  concluded  that it is more
     likely  than not that it will have  future  taxable  income  sufficient  to
     realize a portion of the Company's net deferred tax asset, and in June 2005
     reversed  $1,110,000,000  of the valuation  allowance as a credit to income
     tax expense.  After the adjustment,  the remaining balance in the valuation
     allowance  as of June  30,  2005  is  approximately  $950,000,000.  For the
     remainder  of 2005,  the  Company  does not expect to record  any  material
     federal  income tax  provision;  however,  in future years the Company will
     record income tax provisions equal to its effective income tax rate, unless
     there is a further adjustment to the valuation allowance (see below).

     The Company's  conclusion that a portion of the deferred tax asset was more
     likely than not to be realizable was strongly  influenced by its historical
     ability to generate  significant  amounts of taxable income.  The Company's
     estimate of future taxable income considered all available  evidence,  both
     positive  and  negative,  about its  current  operations  and  investments,
     included  an  aggregation  of  individual  projections  for  each  material
     operation and investment,  incorporated  the assumptions used by WilTel for
     its impairment  analysis  (updated for the new SBC agreements) and included
     all future years  (through  2024) that the Company  estimated it would have
     available net operating loss carryforwards. Over the projection period, the
     Company  assumed that its readily  available  cash,  cash  equivalents  and
     marketable  securities  would  provide  returns  equivalent  to the returns
     expected  to  be  provided  by  the  Company's   existing   operations  and
     investments,  except  for  certain  amounts  assumed  to be  invested  on a
     short-term  basis  to meet  the  Company's  liquidity  needs.  The  Company
     believes  that its  estimate of future  taxable  income is  reasonable  but
     inherently  uncertain,   and  if  its  current  or  future  operations  and
     investments  generate  taxable income  greater than the projected  amounts,
     further  adjustments  to  reduce  the  valuation  allowance  are  possible.
     Conversely,  if the  Company  realizes  unforeseen  material  losses in the
     future,  or its ability to generate  future  taxable  income  necessary  to
     realize  a  portion  of the  deferred  tax  asset  is  materially  reduced,
     additions to the valuation allowance could be recorded.

     For the periods ended June 30, 2004, the Company has recorded a net federal
     income tax provision on income from continuing  operations,  inclusive of a
     federal  tax  provision  netted  against  equity in  income  of  associated
     companies.  The provision for federal income tax on income from  continuing
     operations  is fully offset by federal  income tax benefits  recognized  on
     losses  in  other   comprehensive   income  and  losses  from  discontinued
     operations. As a result, when all components of income are aggregated there
     is no net federal  income tax expense  recorded for the periods  ended June
     30, 2004.  Income  taxes for the 2004 periods also include a provision  for
     state income taxes.

                                       9
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

5.   Results of  operations  for the Company's  segments are reflected  from the
     date of acquisition.  Except for the telecommunications segments of WilTel,
     the primary measure of segment operating results and profitability  used by
     the Company is income (loss) from continuing operations before income taxes
     and  equity  in income  (losses)  of  associated  companies.  For  WilTel's
     segments, segment profit from operations is the primary performance measure
     of segment  operating  results and  profitability.  WilTel defines  segment
     profit from  operations as income before  income taxes,  interest  expense,
     investment  income,   depreciation  and  amortization   expense  and  other
     non-operating income and expense.

     The following information  reconciles segment profit from operations of the
     Network and Vyvx segments to the most  comparable  GAAP  measure,  which is
     used for all other reportable segments, for the three and six month periods
     ended June 30, 2005 and 2004 (in thousands):

<TABLE>
<CAPTION>


                                                                                For the Three Month Period Ended June 30,
                                                                        -----------------------------------------------------
                                                                                    2005                        2004
                                                                        --------------------------    -----------------------
                                                                         Network          Vyvx          Network         Vyvx
                                                                         -------          ----          -------         ----
         <S>                                                                <C>            <C>             <C>            <C>

     Segment profit from operations (1) (3)                             $   49,222    $   8,346        $  31,891      $  8,713
     Depreciation and amortization expense                                 (40,047)      (1,147)         (51,117)       (2,174)
     Interest income (expense), net (2)                                     (6,645)       1,018           (7,047)         (529)
     Other non-operating income (expense), net (2) (5)                       1,018           (8)             (66)           (6)
                                                                        ----------    ---------        ---------      --------
        Income (loss) from continuing operations before income taxes
           and equity in income of associated companies                 $    3,548    $   8,209        $ (26,339)     $  6,004
                                                                        ==========    =========        =========      ========


                                                                                For the Six Month Period Ended June 30,
                                                                        ---------------------------------------------------
                                                                                    2005                        2004
                                                                        --------------------------    -----------------------
                                                                         Network          Vyvx          Network         Vyvx
                                                                         -------          ----          -------         ----

     Segment profit from operations (1) (3)                             $   98,061    $  15,348        $  46,350     $  15,064
     Depreciation and amortization expense                                 (81,143)      (2,279)        (105,662)       (4,462)
     Interest income (expense), net (2) (4)                                (11,902)       2,237          (13,602)       (1,085)
     Other non-operating income (expense), net (2) (5)                         775          (32)           2,938            14
                                                                        ----------    ---------        ---------      --------
        Income (loss) from continuing operations before income taxes
           and equity in income of associated companies                 $    5,791    $  15,274        $ (69,976)     $  9,531
                                                                        ==========    =========        =========      ========
</TABLE>

     (1)  Reflects  intersegment  charges from Network to Vyvx of $4,400,000 and
          $4,600,000  for the three month  periods ended June 30, 2005 and 2004,
          respectively,  and $8,600,000 and $9,100,000 for the six month periods
          ended June 30, 2005 and 2004, respectively. Also reflects intersegment
          charges of $500,000 from Network to ATX for the 2005 periods.
     (2)  If  items in these  categories  cannot  be  directly  attributed  to a
          particular  WilTel  segment,  they are allocated to each segment based
          upon a formula that considers each  segment's  revenues,  property and
          equipment and headcount.
     (3)  For Network,  for the three and six month periods ended June 30, 2005,
          includes  $7,900,000 from the termination of a dark fiber contract and
          related  maintenance  services  for  which  Network  will  not have to
          perform any remaining services and for which it has been paid; for the
          six month period ended June 30, 2005,  includes  gains of  $13,000,000
          from sales of operating assets, principally undersea cable assets.
     (4)  For Vyvx for the six month  period  ended  June 30,  2005,  includes a
          bankruptcy  claim  distribution of $1,600,000  received for a security
          with no book value.
     (5)  For the three and six month  periods  ended  June 30,  2005,  includes
          $1,100,000  related to the new agreements with SBC, which is discussed
          in Note 3. For the six month period  ended June 30,  2004,  includes a
          pre-tax gain of $2,800,000 related to cash and securities  received in
          excess of the book value of secured claims in a customer's bankruptcy.

     Certain information concerning the Company's segments for the three and six
     month  periods  ended June 30, 2005 and 2004 is presented in the  following
     table.

                                       10
<PAGE>


Notes to Interim Consolidated Financial Statements, continued
<TABLE>
<CAPTION>

                                                                             For the Three Month            For the Six Month
                                                                            Period Ended June 30,         Period Ended June 30,
                                                                            ---------------------         ---------------------
                                                                                2005           2004           2005            2004
                                                                               ----           ----           ----            ----
                                                                                               (In thousands)
                  <S>                                                            <C>           <C>           <C>            <C>

     Revenues and other income (a):
        Telecommunications:
           Network (b)                                                       $ 416,205      $ 369,698     $  829,287     $  731,873
           Vyvx                                                                 30,575         31,421         61,163         59,384
           ATX Communications, Inc. ("ATX")                                     30,655           --           30,655           --
        Healthcare Services                                                     61,080         64,068        128,958        127,315
        Banking and Lending                                                      1,669         11,183          3,067         19,890
        Manufacturing:
           Plastics manufacturing                                               24,624         16,675         45,443         30,076
           Idaho Timber Corporation ("ITC")                                     63,532           --           63,532           --
        Domestic Real Estate                                                     7,838          9,458         17,292         25,815
        Other Operations                                                         8,426          7,313         15,126         14,952
        Corporate (c)                                                           60,841         64,312         75,887         79,044
        Intersegment elimination (d)                                            (4,933)        (4,581)        (9,113)        (9,072)
                                                                             ---------      ---------     ----------     ----------

            Total consolidated revenues and other income                     $ 700,512      $ 569,547     $1,261,297     $1,079,277
                                                                             =========      =========     ==========     ==========

     Income (loss) from continuing operations before income taxes and
      equity in income of associated companies:
        Telecommunications:
           Network (d)                                                       $   3,548      $ (26,339)    $    5,791     $  (69,976)
           Vyvx (d)                                                              8,209          6,004         15,274          9,531
           ATX (d)                                                                (719)           --            (719)         --
        Healthcare Services                                                        849          5,405          2,205          7,788
        Banking and Lending                                                        689          9,252            688         14,566
        Manufacturing:
           Plastics manufacturing                                                4,677          2,336          7,945          3,262
           ITC                                                                    (351)          --             (351)         --
        Domestic Real Estate                                                     1,130          1,220            542          9,115
        Other Operations                                                        (1,620)          (965)        (5,259)          (812)
        Corporate (c)                                                           25,316         34,043          7,701         22,288
                                                                             ---------      ---------     ----------     ----------
            Total consolidated income (loss) from continuing operations
              before income taxes and equity in income
              of associated companies                                        $  41,728      $  30,956     $   33,817     $   (4,238)
                                                                             =========      =========     ==========     ==========
</TABLE>

     (a)  Revenues  and  other  income  for each  segment  include  amounts  for
          services  rendered  and  products  sold,  as well as segment  reported
          amounts  classified as investment  and other income and net securities
          gains on the Company's consolidated statements of operations.

     (b)  Includes  services  provided to SBC of $281,600,000 and  $261,600,000,
          respectively,  for the three  month  periods  ended June 30,  2005 and
          2004, and $560,700,000  and  $500,000,000,  respectively,  for the six
          month periods ended June 30, 2005 and 2004. In addition, for the three
          and six month  periods  ended June 30, 2005,  includes  $1,100,000  of
          non-operating  income related to the new agreements with SBC, which is
          discussed in Note 3.

     (c)  Includes  net  securities   gains  of  $46,900,000  and   $52,500,000,
          respectively,  for the three  month  periods  ended June 30,  2005 and
          2004, and $47,700,000 and $61,500,000, respectively, for the six month
          periods ended June 30, 2005 and 2004.

                                       11
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

     (d)  Eliminates  intersegment  revenues  billed  from  Network  to  Vyvx of
          $4,400,000  and  $4,600,000 for the three month periods ended June 30,
          2005 and 2004, respectively, and $8,600,000 and $9,100,000 for the six
          month  periods  ended  June  30,  2005  and  2004,  respectively,  and
          intersegment  revenues  billed from Network to ATX of $500,000 for the
          2005 periods.  However, the intersegment  revenues are included in the
          calculation  to determine  segment  profit from  operations and income
          (loss) from continuing operations for each of Network, Vyvx and ATX.

     For the three  month  periods  ended June 30,  2005 and 2004,  income  from
     continuing  operations has been reduced by  depreciation  and  amortization
     expenses of $52,800,000  and  $61,200,000,  respectively;  such amounts are
     primarily comprised of Corporate ($2,700,000 and $3,500,000, respectively),
     plastics  manufacturing  ($1,800,000  and  $1,400,000,  respectively),  ITC
     manufacturing   ($2,400,000  in  2005)  and  amounts  related  to  WilTel's
     segments,  which are disclosed  above. For the six month periods ended June
     30, 2005 and 2004,  income from  continuing  operations has been reduced by
     depreciation  and amortization  expenses of $102,500,000 and  $126,500,000,
     respectively; such amounts are primarily comprised of Corporate ($5,300,000
     and  $6,900,000,  respectively),  plastics  manufacturing  ($3,400,000  and
     $2,600,000,  respectively),  ITC  manufacturing  ($2,400,000  in 2005)  and
     amounts   related  to  WilTel's   segments   which  are  disclosed   above.
     Depreciation and amortization expenses for other segments are not material.

     For the three  month  periods  ended June 30,  2005 and 2004,  income  from
     continuing  operations has been reduced by interest  expense of $25,000,000
     and  $24,600,000,  respectively;  such amounts are  primarily  comprised of
     Corporate ($15,600,000 and $14,200,000,  respectively), healthcare services
     ($800,000 and $500,000,  respectively),  banking and lending  ($400,000 and
     $700,000,   respectively)   and  amounts   related  to  WilTel's   segments
     ($7,900,000 and $8,600,000,  respectively). For the six month periods ended
     June 30, 2005 and 2004, income from continuing  operations has been reduced
     by interest  expense of $49,800,000  and  $45,500,000,  respectively;  such
     amounts are primarily comprised of Corporate  ($31,200,000 and $24,300,000,
     respectively),    healthcare    services    ($1,500,000   and   $1,000,000,
     respectively), banking and lending ($800,000 and $1,800,000, respectively),
     and amounts  related to WilTel's  segments  ($15,300,000  and  $17,100,000,
     respectively). Interest expense for other segments is not material.

6.   The following  tables provide  summarized  data with respect to significant
     investments in associated  companies  accounted for under the equity method
     of accounting  for the periods the  investments  were owned by the Company.
     The   information  is  provided  for  those   investments   whose  relative
     significance to the Company could result in the Company including  separate
     audited  financial  statements for such investments in its Annual Report on
     Form 10-K for the year ended December 31, 2005 (in thousands).
<TABLE>
<CAPTION>

                                                                                                      June 30,        June 30,
                                                                                                        2005           2004
                                                                                                   ------------     -----------
<S>                                                                                                      <C>              <C>

     Olympus Re Holdings, Ltd.:
         Total revenues                                                                           $   260,200      $   244,400
         Income from continuing operations before extraordinary items                                  60,000           96,700
         Net income                                                                                    60,000           96,700
         The Company's equity in net income                                                            12,000           15,500

     EagleRock Capital Partners (QP), LP:
         Total revenues                                                                           $   (25,300)     $     7,400
         Income (loss) from continuing operations before extraordinary items                          (26,100)           6,900
         Net income (loss)                                                                            (26,100)           6,900
         The Company's equity in net income (loss)                                                    (19,500)           5,900

     Jefferies Partners Opportunity Fund II, LLC:
         Total revenues                                                                           $    17,600      $    13,900
         Income from continuing operations before extraordinary items                                  16,400           12,600
         Net income                                                                                    16,400           12,600
         The Company's equity in net income                                                            11,100            8,700

</TABLE>
                                       12
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

     7.   A summary of  investments at June 30, 2005 and December 31, 2004 is as
          follows (in thousands):

<TABLE>
<CAPTION>

                                                                          June 30, 2005                     December 31, 2004
                                                                ------------------------------      -----------------------------
                                                                                Carrying Value                      Carrying Value
                                                                 Amortized       and Estimated       Amortized      and Estimated
                                                                    Cost          Fair Value            Cost          Fair Value
                                                                ------------     ------------        ---------        ----------

                <S>                                                 <C>                <C>               <C>              <C>

     Current Investments:
        Investments available for sale                           $ 857,183        $  856,527        $  939,175        $  939,313
        Trading securities                                          93,588            97,434           148,602           159,616
        Other investments, including accrued interest income         7,894             7,894             7,393             7,393
                                                                 ---------        ----------        ----------        ----------
            Total current investments                            $ 958,665        $  961,855        $1,095,170        $1,106,322
                                                                 =========        ==========        ==========        ==========

     Non-current Investments:
        Investments available for sale                           $ 493,178        $  704,859        $  432,207        $  676,051
        Other investments                                           81,953            81,953            50,731            50,731
                                                                 ---------        ----------        ----------        ----------
            Total non-current investments                        $ 575,131        $  786,812        $  482,938        $  726,782
                                                                 =========        ==========        ==========        ==========
</TABLE>

     8.   A summary of intangible  assets, net and goodwill at June 30, 2005 and
          December 31, 2004 is as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                                   June 30,        December 31,
                                                                                                     2005             2004
                                                                                                -------------      ----------
         <S>                                                                                          <C>             <C>

     Customer relationships, net of accumulated amortization of $2,113 and $491                 $    61,488         $  1,472
     Trademarks and tradename, net of accumulated amortization of $101                                5,059             --
     Patents, net of accumulated amortization of $65                                                  2,265             --
     Software, net of accumulated amortization of $191                                                4,909             --
     Other intangible assets, net of accumulated amortization of $188                                 1,939             --
     Goodwill                                                                                        16,365             --
                                                                                                -----------         --------
                                                                                                $    92,025         $  1,472
                                                                                                ===========         ========
</TABLE>

     The net carrying amount of intangible  assets increased due to acquisitions
     made during 2005,  and are being  amortized on a  straight-line  basis over
     their average useful lives. See Note 14 for further information.

     Amortization  expense on  intangible  assets was  $2,700,000  and $600,000,
     respectively, for the three month periods ended June 30, 2005 and 2004, and
     $3,000,000 and  $1,100,000,  respectively,  for the six month periods ended
     June 30, 2005 and 2004. The estimated aggregate future amortization expense
     for the intangible assets for each of the next five years is as follows (in
     thousands):  2005  (for the  remaining  six  months) -  $4,900,000;  2006 -
     $9,800,000; 2007 - $8,600,000; 2008 - $8,100,000; and 2009 - $8,100,000.

     At June 30, 2005,  goodwill was  comprised of  $4,800,000,  $8,200,000  and
     $3,400,000 within the ATX  telecommunications,  plastics  manufacturing and
     ITC manufacturing segments, respectively.

     9.   A summary of accumulated  other  comprehensive  income (loss),  net of
          taxes at June  30,  2005  and  December  31,  2004 is as  follows  (in
          thousands):
<TABLE>
<CAPTION>
                                                                              June 30,         December 31,
                                                                                2005               2004
                                                                             ----------        -----------
                  <S>                                                             <C>                <C>

          Net unrealized gains on investments                               $  123,557         $  153,196
          Net unrealized foreign exchange gains                                  1,173             14,309
          Net unrealized losses on derivative instruments                       (1,628)            (3,755)
          Net minimum pension liability                                        (27,612)           (27,612)
                                                                            ----------         ----------
                                                                            $   95,490         $  136,138
                                                                            ==========         ==========
</TABLE>
                                       13
<PAGE>



Notes to Interim Consolidated Financial Statements, continued

10.  Investment  and  other  income  includes  changes  in the  fair  values  of
     derivative   financial   instruments  of   $(1,300,000)   and   $2,500,000,
     respectively, for the three month periods ended June 30, 2005 and 2004, and
     $(200,000)  and  $1,300,000  respectively,  for the six month periods ended
     June 30, 2005 and 2004.

11.  Pension  expense  charged to operations for the three and six month periods
     ended June 30, 2005 and 2004  related to the defined  benefit  pension plan
     (other  than  WilTel's   plan)   included  the  following   components  (in
     thousands):
<TABLE>
<CAPTION>

                                                                             For the Three Month            For the Six Month
                                                                            Period Ended June 30,         Period Ended June 30,
                                                                            ---------------------         ---------------------
                                                                             2005           2004           2005            2004
                                                                             ----           ----           ----            ----
          <S>                                                                   <C>           <C>            <C>             <C>

     Interest cost                                                           $  512         $  531         $1,023          $1,063
     Expected return on plan assets                                            (229)          (447)          (457)           (895)
     Actuarial loss                                                             208            144            416             288
     Amortization of prior service cost                                           1           --                2               1
                                                                             ------         ------         ------          ------

        Net pension expense                                                  $  492         $  228         $  984          $  457
                                                                             ======         ======         ======          ======
</TABLE>

     WilTel's  pension expense charged to operations for the three and six month
     periods ended June 30, 2005 and 2004 related to the defined benefit pension
     plan included the following components (in thousands):

<TABLE>
<CAPTION>


                                                                             For the Three Month            For the Six Month
                                                                            Period Ended June 30,         Period Ended June 30,
                                                                            ---------------------         ---------------------
                                                                             2005           2004           2005            2004
                                                                             ----           ----           ----            ----
             <S>                                                               <C>             <C>            <C>            <C>

     Interest cost                                                           $2,052         $1,612         $4,103          $3,224
     Service cost                                                               966            864          1,931           1,727
     Expected return on plan assets                                          (1,327)          (961)        (2,653)         (1,921)
     Actuarial loss                                                              11            --              23              --
                                                                             ------         ------         ------          ------
        Net pension expense                                                  $1,702         $1,515         $3,404          $3,030
                                                                             =======        ======         ======          ======
</TABLE>

     Employer  contributions  to  WilTel's  defined  benefit  pension  plan were
     $4,500,000 during the first six months of 2005.

     Several  subsidiaries  provide  certain  healthcare  and other  benefits to
     certain  retired  employees under plans which are currently  unfunded.  The
     Company  pays the cost of  postretirement  benefits  as they are  incurred.
     Amounts  charged to expense  were not material in each of the three and six
     month periods ended June 30, 2005 and 2004.

12.  Per share amounts were  calculated by dividing  income (loss) by the sum of
     the weighted  average number of common shares  outstanding and, for diluted
     earnings  (loss) per share,  the  incremental  weighted  average  number of
     shares  issuable upon exercise of outstanding  options and warrants for the
     periods they were  outstanding.  In addition,  the  calculations of diluted
     earnings  (loss)  per share  assume the 3 3/4%  Convertible  Notes had been
     converted  into common  shares for the periods  they were  outstanding  and
     earnings  increased  for the interest on such notes,  net of the income tax
     effect.  The number of shares used to calculate  basic earnings  (loss) per
     share amounts was  107,652,000  and 106,320,000 for the three month periods
     ended June 30, 2005 and 2004, respectively, and 107,633,000 and 106,295,000
     for the six month periods ended June 30, 2005 and 2004,  respectively.  The
     number  of shares  used to  calculate  diluted  earnings  (loss)  per share
     amounts was  115,513,000  and 112,948,000 for the three month periods ended
     June 30, 2005 and 2004,  respectively,  and 115,509,000 and 107,217,000 for
     the six month periods ended June 30, 2005 and 2004, respectively.


                                       14
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

13.  Cash paid for interest and net income taxes paid (refunded) was $52,000,000
     and $1,400,000,  respectively, for the six month period ended June 30, 2005
     and $38,000,000 and $(27,800,000),  respectively,  for the six month period
     ended June 30, 2004.

14.  In February 2005, the plastics manufacturing segment acquired the assets of
     NSW, LLC U.S.  ("NSW") for a purchase price of  approximately  $26,800,000,
     subject to working  capital  adjustments,  and  recorded  an  aggregate  of
     $10,200,000  of intangible  assets and  $8,200,000  of goodwill.  NSW has a
     manufacturing  and  distribution  facility  in  Roanoke,   Virginia,  which
     manufactures a variety of products  including  produce and packaging  nets,
     header  label bags,  case liners and heavy  weight  nets for  drainage  and
     erosion control purposes.  The NSW intangible assets will be amortized on a
     straight-line  basis over the  following  average  useful  lives:  customer
     relationships - 16 years, trademarks and tradename - 19 years, patents - 15
     years and other intangible assets - 5 years.

     The bankruptcy plan (the "Plan") of ATX Communications, Inc. and certain of
     its affiliates  (collectively  "ATX") was confirmed by the Bankruptcy Court
     for the  Southern  District of New York and became  effective  on April 22,
     2005.  The Company has  consolidated  ATX since the  effective  date of the
     Plan.  ATX is an  integrated  communications  provider  that  offers  local
     exchange carrier and inter-exchange carrier telephone, Internet, high-speed
     data  and  other  communications   services  to  business  and  residential
     customers  in targeted  markets  throughout  the  Mid-Atlantic  and Midwest
     regions of the United States.  ATX has entered into  agreements to sell its
     Midwest region business and its internet service provider  business;  as of
     the date of  acquisition  these  businesses  were  held for sale in the net
     amount of $14,500,000.

     In December 2003, the Company purchased all of ATX's debt obligations under
     its senior secured credit facility for $25,000,000.  As contemplated by the
     Plan,  in exchange for its  investment  in the credit  facility the Company
     received  94.4% of the new common  stock of the  reorganized  ATX and a new
     $25,000,000  senior  secured note which bears interest at 10%. In addition,
     the Company provided ATX $5,000,000 of  debtor-in-possession  financing and
     $25,000,000  of exit  financing  to fund  bankruptcy  related  payments and
     working capital  requirements.  On behalf of ATX, the Company also obtained
     cash collateralized  letters of credit totaling  $14,700,000 issued for the
     benefit of one of ATX's vendors.  The requirement to provide the letters of
     credit  will  decline  over a period  of  years,  commencing  in 2006.  The
     aggregate  purchase price for ATX was  $56,300,000,  which includes all the
     financing provided to ATX by the Company and acquisition expenses.

     Based upon its preliminary  allocation of the purchase  price,  the Company
     has  recorded  ATX  intangible   assets  of  $20,400,000  and  goodwill  of
     $4,800,000.  The  intangible  assets will be amortized  on a  straight-line
     basis over the  following  average  useful  lives:  trademarks  - 10 years,
     customer relationships - 7 years, software - 5 years, and other intangibles
     - 2 years.  The Company will not finalize  its  allocation  of the purchase
     price until an independent  third-party  appraisal of the fair value of the
     assets  acquired  is  completed.   When  finalized,   any  changes  to  the
     preliminary  purchase price  allocation could result in changes to property
     and equipment, identifiable intangible assets and/or goodwill. However, the
     Company does not expect that its final  allocation  of the  purchase  price
     will be materially different from the preliminary allocation.

     In May 2005,  the Company  acquired  Idaho Timber  Corporation  and certain
     affiliated  entities ("ITC") for total cash  consideration of $138,900,000,
     including  working  capital  adjustments  and  expenses.  The  Company  has
     consolidated  ITC from the date of  acquisition.  ITC was a privately  held
     corporation that is headquartered in Boise,  Idaho, which  "remanufactures"
     dimensional  lumber,  home center boards,  5/4"  radius-edge  decking and a
     number  of  specialized  products.  ITC  operates  ten  facilities  located
     throughout the United States,  and its revenue is principally  derived from
     the  purchase of bundles of low-grade  lumber on the spot  market,  and the
     conversion  of that lumber into  higher-grade  lumber  through  sorting and
     minor rework.

                                       15
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

     Based upon its preliminary  allocation of the purchase  price,  the Company
     has  recorded  ITC  intangible   assets  of  $46,200,000  and  goodwill  of
     $3,400,000.  The  intangible  assets will be amortized  on a  straight-line
     basis over the following average useful lives: customer  relationships - 10
     years,  and other  intangibles - 1 year.  The Company will not finalize its
     allocation of the purchase price until an independent third-party appraisal
     of the fair value of the assets acquired is completed.  When finalized, any
     changes  to the  preliminary  purchase  price  allocation  could  result in
     changes to property and equipment,  identifiable  intangible  assets and/or
     goodwill. However, the Company does not expect that its final allocation of
     the  purchase  price  will be  materially  different  from the  preliminary
     allocation.

     Unaudited  pro  forma  operating  results  for the  Company,  assuming  the
     acquisitions of ATX and ITC had occurred as of the beginning of each period
     presented below are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>

                                                                             For the Three Month            For the Six Month
                                                                            Period Ended June 30,         Period Ended June 30,
                                                                            ---------------------         ---------------------
                                                                             2005           2004           2005            2004
                                                                             ----           ----           ----            ----
<S>                                                                               <C>            <C>         <C>             <C>

     Revenues                                                              $  745,200      $ 719,600     $1,432,700     $1,362,100
     Income before extraordinary items and cumulative
      effect of a change in accounting principles                          $1,268,300      $  47,300     $1,274,600     $   43,700
     Net income                                                            $1,268,300      $  47,300     $1,274,600     $   43,700
     Per Share:
          Basic                                                                $11.78           $.45         $11.84           $.41
          Diluted                                                              $11.01           $.43         $11.10           $.41
</TABLE>

     Prior to its acquisition by the Company, during 2005 ITC recorded aggregate
     expenses  of  $6,500,000  for  consulting  and  advisory  fees,  legal  and
     accounting  fees,  incentive  compensation  and other  items all related to
     ITC's  efforts to sell the  company.  Substantially  all of these costs are
     included in their historical results for the second quarter of 2005.

     Pro forma adjustments principally reflect the preliminary allocation of the
     purchase price to the  difference  between the fair value and book value of
     property and  equipment,  resulting in increases or decreases to historical
     depreciation expense, and the allocation to identifiable  intangible assets
     discussed above,  resulting in increased amortization expense. For ATX, the
     pro forma  adjustments  also include the elimination of net  reorganization
     items, which principally resulted from a gain recognized upon the discharge
     of ATX indebtedness in bankruptcy,  fresh start accounting  adjustments and
     bankruptcy  related  professional  fees,  and the  reversal  of  historical
     interest expense related to indebtedness that was discharged in bankruptcy.
     The  increase  or  (decrease)  to  historical  income  from  the pro  forma
     adjustments is as follows (in thousands):
<TABLE>
<CAPTION>


                                                                             For the Three Month            For the Six Month
                                                                            Period Ended June 30,         Period Ended June 30,
                                                                            ---------------------         ---------------------
                                                                             2005           2004           2005            2004
                                                                             ----           ----           ----            ----
                       <S>                                                      <C>          <C>             <C>            <C>

     Depreciation and amortization expenses                                 $   (200)    $  (3,400)     $  (5,400)      $  (7,600)
     Reorganization items                                                   $ (3,500)    $   3,500      $  (1,000)      $  20,400
</TABLE>

     The  unaudited  pro  forma  data is not  indicative  of future  results  of
     operations or what would have resulted if the  acquisitions  of ATX and ITC
     had  actually  occurred  as of  the  beginning  of the  periods  presented.
     Unaudited  pro forma data for NSW is not  included as the amounts  were not
     material.

15.  In May 2005, the Company sold its 716-room  Waikiki Beach hotel and related
     assets for an aggregate  purchase  price of  $107,000,000,  before  closing
     costs  and  other  required   payments.   After  satisfaction  of  mortgage
     indebtedness on the hotel of $22,100,000 at closing,  the Company  received
     net cash proceeds of approximately $73,000,000, and recorded a pre-tax gain
     of $56,600,000 (reflected in discontinued operations). Historical operating
     results for the hotel have not been material.

                                       16
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

16.  In May 2005,  an entity in which the Company has a  non-controlling  equity
     interest ("Union Square") sold its interest in an office complex located on
     Capitol Hill in Washington,  D.C. and the Company recognized a pre-tax gain
     of  $71,900,000.  The gain is reported  in the caption  equity in income of
     associated   companies.   The  Company's  share  of  the  net  proceeds  is
     $72,800,000,  all of which was received  except for $1,000,000 that remains
     in escrow and is expected to be received during the fourth quarter of 2005.

17.  In May 2005, the Company's  72.1% owned  subsidiary,  MK Resources  Company
     ("MK"),  entered into a share purchase agreement with the Company and Inmet
     Mining Corporation  ("Inmet"), a Canadian-based global mining company, that
     provides  for  Inmet's  acquisition  of 70% of MK's  interest  in Cobre Las
     Cruces,  S.A. ("CLC"),  a wholly-owned  Spanish subsidiary of MK that holds
     the  exploration and mineral rights to the Las Cruces copper deposit in the
     Pyrite Belt of Spain.  Inmet will  acquire the  interest in CLC in exchange
     for 5,600,000 newly issued Inmet common shares.  The Inmet shares will have
     the benefit of a registration rights agreement; however, the shares may not
     be  transferred  or sold to a third  party  until the earlier of four years
     from the  closing  date or the  date on  which  the  Company  is no  longer
     obligated under the guarantee  discussed  below.  Although the Company does
     not currently  believe it will record any loss on the sale at closing,  any
     gain or loss  recorded by the Company would be based upon the fair value of
     the Inmet stock on the date it is received.

     Closing of the transaction is subject to a number of conditions,  including
     the  Company's  acquisition  of the  outstanding  MK common  shares that it
     doesn't already own, the execution of project  financing  commitments  with
     third parties to provide for no less than $255,000,000  (including interest
     during construction), a 66 million euro bridge facility and other customary
     closing conditions. The Company has entered into a merger agreement with MK
     to  acquire  the   remaining  MK  common   shares  for   aggregate   merger
     consideration of approximately  333,500 of the Company's common shares.  MK
     has  scheduled  a  shareholder  meeting  to vote on the merger on August 9,
     2005,  and since the agreement  with Inmet requires the Company to vote its
     shares in favor of the merger,  approval is assured.  The Company and Inmet
     have also  committed  to provide  financing to CLC which is estimated to be
     $159,000,000,  of which the  Company's  share will be 30%  ($32,300,000  of
     which has  already  been  loaned),  and the Company has agreed to provide a
     payment  guarantee for 30% of the third party project  financing until such
     time as the completion  tests to be specified  under the project  financing
     have been achieved.

18.  During  the third  quarter  of 2005,  the  Company's  banking  and  lending
     subsidiary  sold  its  remaining  customer  deposits  and  surrendered  its
     national bank charter.



                                       17

<PAGE>



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations.

The following should be read in conjunction with the Management's Discussion and
Analysis of Financial  Condition and Results of Operations  included in the 2004
10-K.

                         Liquidity and Capital Resources

For the six  month  period  ended  June  30,  2005,  net cash  was  provided  by
operations  principally as a result of the collection of a receivable related to
a former partnership interest, as discussed below, distributions from associated
companies and a decrease in the Company's  investment in the trading  portfolio.
For the six  month  period  ended  June  30,  2004,  net cash  was  provided  by
operations  principally as a result of distributions from associated  companies,
the pre-funding by SBC of certain of WilTel's capital  expenditures,  the refund
of excess federal income tax payments,  accrued but unpaid  interest on debt and
an increase in accounts payable due to the timing of payments.

As of June 30, 2005, the Company's  readily available cash, cash equivalents and
marketable  securities,  excluding amounts held by its regulated  subsidiary and
non-regulated  subsidiaries  that are parties to agreements  which  restrict the
payment of dividends,  totaled $1,668,900,000.  This amount is comprised of cash
and short-term bonds and notes of the United States  Government and its agencies
of $939,500,000  (56.3%),  the equity  investment in White  Mountains  Insurance
Group, Ltd. of $236,600,000 (14.2%) (which can be sold privately or otherwise in
compliance  with the  securities  laws and have the  benefit  of a  registration
rights   agreement)  and  other  publicly  traded  debt  and  equity  securities
aggregating $492,800,000 (29.5%).

In June 2005,  the  Company's 8 1/4%  senior  subordinated  notes,  which had an
outstanding  principal amount of $19,100,000,  matured. The Company repaid these
notes and the related accrued interest with readily available cash resources.

As of June 30, 2005,  WilTel had aggregate cash and investments of $289,600,000,
an increase of  $49,900,000  from  December 31, 2004.  The increase  during this
period reflects WilTel's positive operating results, reduced by WilTel's capital
expenditures  of  $44,000,000.  Substantially  all of WilTel's  assets have been
pledged to secure its  outstanding  long-term  debt,  principally  to secure its
obligations under its credit agreement ($358,100,000  outstanding as of June 30,
2005) and its mortgage debt ($59,900,000 outstanding at June 30, 2005).

On June 15,  2005,  WilTel and SBC reached an  agreement,  pursuant to which the
existing  alliance  agreements  between WilTel and SBC were terminated and a new
Master  Services  Agreement and a  Termination,  Mutual  Release and  Settlement
Agreement  were entered  into. In exchange for the  termination  of the existing
alliance  agreements  and the exchange of mutual  releases,  WilTel will receive
aggregate cash payments from SBC of $236,000,000. Of this amount, $11,000,000 is
payable on January 3, 2006,  and the balance is payable in twelve equal  monthly
installments  beginning  on the  earlier  of April 30,  2006 or the  closing  or
termination  of SBC's  agreement  to acquire  AT&T.  SBC also  agreed to minimum
purchase  commitments for WilTel services and other  performance  based payments
which are discussed in results of operations below.

SBC's  January  2005  announcement  to  migrate  its  business  from  WilTel  is
considered  an event  which  could  reasonably  be  expected to have a "material
adverse effect" as defined in WilTel's amended credit facility, and while WilTel
can no longer access its $25,000,000  revolving credit facility it has no impact
on the  $358,100,000  of term loans  under the  agreement.  However,  the credit
agreement  provides  for  an  event  of  default  if  there  is  any  amendment,
supplement, modification or termination of any WilTel contract or agreement that
has had or could  reasonably be expected to result in a material  adverse effect
on WilTel (as defined in the credit  agreement).  The  Company  does not believe
that the new SBC agreements  have had or could  reasonably be expected to result
in a material  adverse  effect on WilTel,  particularly  inasmuch as the Company
believes that these new agreements, along with WilTel's existing liquidity, will
provide WilTel with  sufficient  funds to pay its long-term debt  obligations as
they become due; as a result,  the Company  continues to classify the term loans
as  long-term  debt.  However,  the Company has agreed with SBC that if WilTel's
debt under its credit agreement becomes due and payable,  and if WilTel does not
have  sufficient  funds to pay the debt,  the Company will advance to WilTel the
incremental funds needed to pay the debt.


                                       18
<PAGE>


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.

As more fully discussed in the 2004 10-K,  WilTel plans to modify its operations
in light of the anticipated loss of its major customer,  including expanding its
customer base and evaluating opportunities for consolidation. However, given the
current economic condition of the telecommunications industry as a whole, WilTel
does not  believe it will be able to fully  replace  the  revenues  and  profits
generated  by the SBC  agreements  in the  near  future,  if ever.  The  Company
believes  there  may  be  opportunities  to  increase  Network's  value  through
consolidation   opportunities,   and   it  is   actively   investigating   those
possibilities.

WilTel  is a party  to  various  legal  actions  and  claims,  and has  reserved
$20,900,000 for the  satisfaction  of all  litigation.  Certain of these actions
relate  to the  rights  of  way  licensed  to  WilTel  in  connection  with  the
installation of its  fiber-optic  cable and seek damages from WilTel for failure
to obtain all necessary landowner  consents.  Additional right of way claims may
be asserted  against  WilTel.  The Company  does not believe  that the  ultimate
resolution  of all claims,  legal  actions and  complaints  will have a material
adverse  effect  upon  WilTel's  results  of  operations,  although  unfavorable
outcomes could significantly impact WilTel's liquidity.

As more fully described in the 2004 10-K,  current  operating  activities at the
banking and lending segment have been concentrated on maximizing  returns on its
investment portfolio, collecting and servicing its remaining loan portfolios and
discharging  deposit  liabilities  as they come due.  During 2005, the Company's
banking  and  lending  subsidiary  filed a formal  plan  with the  Office of the
Comptroller  of the Currency to  liquidate  its  operations  and  surrender  its
national bank charter.  In the third quarter of 2005, the Company's  banking and
lending  subsidiary  sold its remaining  customer  deposits and  surrendered its
national bank charter.  As of June 30, 2005, the banking and lending segment had
outstanding loans of $3,500,000 and deposit liabilities of $15,900,000.

As of December 31, 2004, the Company  redeemed its interest in Pershing  Square,
L.P.  ("Pershing"),  a limited  partnership  that is  authorized  to engage in a
variety  of  investing  activities.  The  total  amount  due  from  Pershing  of
$71,300,000  was  included  in trade,  notes and other  receivables,  net in the
Company's  consolidated  balance  sheet at December  31,  2004.  Such amount was
received in cash during the first quarter of 2005.

In February 2005, the plastics  manufacturing segment acquired the assets of NSW
for approximately $26,800,000, subject to working capital adjustments. NSW has a
manufacturing and distribution facility in Roanoke,  Virginia,  and for its year
ended December 31, 2004  generated  annual sales of  approximately  $20,000,000.
Products  manufactured by NSW include  produce and packaging nets,  header label
bags,  case  liners and heavy  weight  nets for  drainage  and  erosion  control
purposes. The funds for the acquisition were provided from the Company's readily
available cash resources.

In April 2005, the Company acquired ATX upon the effectiveness of its bankruptcy
plan for approximately $56,300,000, including expenses, of which $25,300,000 was
spent in 2005  and the  balance  was  spent  during  2003  and  2004.  ATX is an
integrated  communications  provider  that  offers  local  exchange  carrier and
inter-exchange   carrier   telephone,   Internet,   high-speed  data  and  other
communications  services  to  business  and  residential  customers  in targeted
markets  throughout the  Mid-Atlantic  and Midwest regions of the United States.
ATX has entered  into  agreements  to sell its Midwest  region  business and its
internet  service  provider  business;  as of  the  date  of  acquisition  these
businesses were held for sale in the net amount of $14,500,000.

In  May  2005,  the  Company  acquired  ITC  for  total  cash  consideration  of
$138,900,000,   including   working  capital   adjustments  and  expenses.   ITC
"remanufactures"  dimensional  lumber,  home  center  boards,  5/4"  radius-edge
decking and a number of specialized products and operates ten facilities located
throughout  the United  States.  Its  revenue is  principally  derived  from the
purchase of bundles of low-grade  lumber on the spot market,  and the conversion
of that lumber into  higher-grade  lumber through sorting and minor rework.  The
funds for the  acquisition  were provided from the Company's  readily  available
cash resources.


                                       19
<PAGE>



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.

In May 2005,  the  Company  sold its  716-room  Waikiki  Beach hotel and related
assets for an aggregate purchase price of $107,000,000 (before closing costs and
other required  payments).  After  satisfaction of mortgage  indebtedness on the
hotel of  $22,100,000  at closing,  the Company  received  net cash  proceeds of
approximately $73,000,000.

In May  2005,  an  entity  in which the  Company  has a  non-controlling  equity
interest  ("Union  Square")  sold its interest in an office  complex  located on
Capitol  Hill in  Washington,  D.C. The  Company's  share of the net proceeds is
$72,800,000,  all of which was received  except for  $1,000,000  that remains in
escrow and is expected to be received during the fourth quarter of 2005.

In May 2005,  MK entered into a share  purchase  agreement  with the Company and
Inmet,  a  Canadian-based  global  mining  company,  which  provides for Inmet's
acquisition of 70% of MK's interest in CLC, a wholly-owned Spanish subsidiary of
MK that  holds the  exploration  and  mineral  rights to the Las  Cruces  copper
deposit in the Pyrite Belt of Spain.  Inmet will  acquire the interest in CLC in
exchange for 5,600,000  newly issued Inmet common shares.  The Inmet shares will
have the benefit of a registration rights agreement; however, the shares may not
be transferred or sold to a third party until the earlier of four years from the
closing date or the date on which the Company is no longer  obligated  under the
guarantee discussed below.

Closing of the  transaction is subject to a number of conditions,  including the
Company's  acquisition  of the  outstanding  MK common  shares  that it  doesn't
already own, the execution of project  financing  commitments with third parties
to  provide  for  no  less  than   $255,000,000   (including   interest   during
construction),  a 66 million euro bridge  facility and other  customary  closing
conditions.  The Company has entered into a merger  agreement with MK to acquire
the  remaining  MK  common  shares  for  aggregate   merger   consideration   of
approximately  333,500  of the  Company's  common  shares.  MK has  scheduled  a
shareholder  meeting  to vote on the  merger on August  9,  2005,  and since the
agreement  with Inmet  requires  the  Company to vote its shares in favor of the
merger,  approval is  assured.  The  Company  and Inmet have also  committed  to
provide  financing to CLC which is estimated  to be  $159,000,000,  of which the
Company's share will be 30% ($32,300,000 of which has already been loaned),  and
the Company has agreed to provide a payment guarantee for 30% of the third party
project  financing until such time as the completion tests to be specified under
the project financing have been achieved.

                          Critical Accounting Estimates

The Company's  discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these financial  statements
requires the Company to make estimates and assumptions  that affect the reported
amounts in the financial  statements and  disclosures  of contingent  assets and
liabilities.  In its 2004 10-K, the Company identified certain areas as critical
accounting  estimates  because they have the potential to have a material impact
on the Company's financial statements, and because they are based on assumptions
which are used in the  accounting  records to  reflect,  at a specific  point in
time,  events whose  ultimate  outcome  won't be known until a later date. On an
on-going basis, the Company evaluates all of these estimates and assumptions.

Impairment  of  Long-Lived  Assets - In  accordance  with SFAS 144,  the Company
evaluates its  long-lived  assets for impairment  whenever  events or changes in
circumstances  indicate,  in management's  judgment,  that the carrying value of
such assets may not be  recoverable.  When testing for  impairment,  the Company
groups its  long-lived  assets with other assets and  liabilities  at the lowest
level for which  identifiable  cash flows are  largely  independent  of the cash
flows of other assets and liabilities  (or asset group).  The  determination  of
whether an asset  group is  recoverable  is based on  management's  estimate  of
undiscounted  future  cash flows  directly  attributable  to the asset  group as
compared to its carrying  value.  If the  carrying  amount of the asset group is
greater than the undiscounted cash flows, an impairment loss would be recognized
for the  amount by which the  carrying  amount of the asset  group  exceeds  its
estimated fair value.

                                       20
<PAGE>



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.

As discussed  above,  on January 31, 2005,  SBC announced that it would buy AT&T
and announced  its  intention to migrate the services  provided by WilTel to the
AT&T network. Since SBC is WilTel's largest customer,  accounting for 70% of the
Network segment's 2005  telecommunications  revenues, the Company concluded that
the SBC  announcement  is an event  which  requires  the  Company  to assess the
carrying  value  of  WilTel's  long-lived  assets  for  impairment,  principally
property and equipment. Since the event which gave rise to the impairment review
occurred on January 31, 2005,  and is not reflective of a condition that existed
as of December 31, 2004,  the  assessment of impairment was performed as part of
the preparation of the Company's  financial  statements for the first quarter of
2005. Based on the assumptions  described  below, the Company  concluded that an
impairment charge was not required.

The Company determined that WilTel's fiber optic  communications  network is the
lowest level for which  identifiable  cash flows are largely  independent of the
cash  flows of other  assets  and  liabilities.  The  asset  group is  primarily
composed of fiber optic cable,  conduit,  rights of way,  optronics  and certain
buildings and related  improvements.  These assets are used together to generate
joint cash flows. The Company has determined that the primary asset of the group
is fiber optic cable,  which has a remaining  weighted average useful life of 16
years.  The fiber optic cable is considered to be the primary asset of the group
as it is the most  significant  component of the group, the principal asset from
which the asset group derives its cash flow generating capacity,  would cost the
most to replace and without which most of the assets in the group would not have
been  acquired.  The  determination  of the primary  asset of the asset group is
significant  because  estimated cash flows used to test for  recoverability  are
based on the estimated  remaining useful life of the primary asset. The carrying
value of the asset  group  that was  tested  for  impairment  was  approximately
$920,000,000.

The Company utilized WilTel's  internal  estimates of future cash flows from all
of its customers  over the  remaining  useful life of the primary  asset.  These
assumptions  reflected  estimated  future  operating  results and considered all
relevant  facts and  circumstances.  The economics  and term of WilTel's  future
relationship  with SBC were the most  significant  assumptions  in the analysis.
These assumptions were based upon the best information available;  however, when
the  analysis  was  performed  during the first  quarter  of 2005,  negotiations
between  SBC and WilTel  were not yet  completed  with  respect to a  transition
services and pricing agreement and other matters. As more fully described above,
WilTel and SBC  subsequently  entered  into new  agreements,  and  WilTel's  new
estimate  of the cash flows that will be  received  from SBC  pursuant  to these
agreements is greater than the amounts assumed for the first quarter  impairment
analysis.  However,  if WilTel's  actual cash flows in the future are materially
less than the amounts used for its  impairment  analysis,  or other events occur
which have a material adverse affect on WilTel's business or ability to generate
future cash flows,  the Company would have to prepare a new impairment  analysis
and may conclude that this asset group is impaired.

The Company's  conclusion  that an  impairment  charge was not required does not
mean that the Company  believes the fair value of the network asset group equals
its  current  carrying  value.  Under  FAS  144,  an asset  group is  considered
recoverable (and no impairment  charge is recorded) if management's  estimate of
the direct cash flows that the asset group can generate  is, on an  undiscounted
basis, greater than the carrying value. However, since the Company's estimate of
the  future  cash  flows  is  undiscounted   and  extends  over  16  years,  the
determination of the fair value of the asset group would have to include,  among
other factors, discounting the gross cash flows to their net present value at an
appropriate rate.

Income Taxes - The Company records a valuation  allowance to reduce its deferred
tax asset to the amount  that is more  likely  than not to be  realized.  If the
Company  were to  determine  that it would be able to realize its  deferred  tax
asset in the future in excess of its net recorded  amount,  an adjustment  would
increase income in such period. Similarly, if the Company were to determine that
it would not be able to  realize  all or part of its  deferred  tax asset in the
future,  an  adjustment  would be charged to income in such period.  The Company
also records  reserves for  contingent  tax  liabilities  based on the Company's
assessment  of  the  probability  of  successfully  sustaining  its  tax  filing
positions.

                                       21
<PAGE>


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.

As more fully discussed in the 2004 10-K, at acquisition the Company established
a valuation  allowance  that  reserved  for  substantially  all of WilTel's  net
deferred tax asset,  because the Company could not demonstrate it would have the
future taxable income necessary to realize that asset. The Company's projections
of  consolidated  taxable  income  and its  assessment  of the  need  for a full
valuation allowance for the deferred tax asset had been significantly influenced
by the fact that it had not yet generated  positive  cumulative  pre-tax  income
over a period  of years on a pro  forma  combined  basis  with  WilTel,  and the
uncertainty of WilTel's  relationship with SBC in the future.  During the second
quarter of 2005, WilTel entered into new agreements with SBC that  significantly
reduced uncertainty  surrounding  WilTel's future  profitability.  Additionally,
taxable income from the Company's other operations and  investments,  when added
to WilTel's on a pro forma combined basis, have now achieved positive cumulative
pre-tax income for the Company.  The Company has prepared updated projections of
future  taxable income and has concluded that it is more likely than not that it
will have future taxable income sufficient to realize a portion of the Company's
net  deferred  tax  asset,  and in  June  2005  reversed  $1,110,000,000  of the
valuation allowance as a credit to income tax expense. After the adjustment, the
remaining   balance  in  the  valuation   allowance  as  of  June  30,  2005  is
approximately  $950,000,000.  For the  remainder  of 2005,  the Company does not
expect to record any material federal income tax provision;  however,  in future
years the  Company  will record  income tax  provisions  equal to its  effective
income tax rate, unless there is a further adjustment to the valuation allowance
(see below).

The  Company's  conclusion  that a portion  of the  deferred  tax asset was more
likely than not to be  realizable  was  strongly  influenced  by its  historical
ability  to  generate  significant  amounts  of taxable  income.  The  Company's
estimate of future  taxable  income  considered  all  available  evidence,  both
positive and negative, about its current operations and investments, included an
aggregation  of  individual   projections   for  each  material   operation  and
investment,  incorporated  the  assumptions  used by WilTel  for its  impairment
analysis  (updated  for the new SBC  agreements)  and  included all future years
(through 2024) that the Company  estimated it would have available net operating
loss  carryforwards.  Over the projection  period,  the Company assumed that its
readily available cash, cash equivalents and marketable securities would provide
returns  equivalent  to the returns  expected  to be  provided by the  Company's
existing  operations and  investments,  except for certain amounts assumed to be
invested  on a  short-term  basis to meet the  Company's  liquidity  needs.  The
Company  believes that its estimate of future  taxable  income is reasonable but
inherently  uncertain,  and if its current or future  operations and investments
generate taxable income greater than the projected amounts,  further adjustments
to reduce the  valuation  allowance  are  possible.  Conversely,  if the Company
realizes  unforeseen  material losses in the future,  or its ability to generate
future taxable  income  necessary to realize a portion of the deferred tax asset
is materially reduced, additions to the valuation allowance could be recorded.

The Company is  required  to record the  adjustment  to the  deferred  tax asset
valuation  allowance under generally accepted accounting  principles.  While the
adjustment  significantly  increases  the  Company's  June  2005 net  worth  (an
increase  of  47%),  there  is no  current  cash  benefit  to the  Company.  The
adjustment  will also result in the recording of material  income tax expense in
the future,  even though there will be no material cash  expenditure  for income
taxes.  Further,  while the  adjustment  results from the  projection of taxable
income  over  a  long  period  of  time,  under  generally  accepted  accounting
principles the expected future tax savings are not discounted. As a result, this
adjustment  increases the Company's net worth attributable to tax savings before
the Company has  generated  the taxable  income  necessary to realize  those tax
savings; when the tax savings are actually realized over time, net worth will be
reduced by the  recording of a deferred tax  provision.  Reflecting  tax savings
before the tax is actually  saved results in the  Company's  balance sheet being
less conservative than the Company would want it to be. However, this accounting
policy is mandated by generally accepted accounting principles.


                                       22
<PAGE>



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.

                              Results of Operations

                  The 2005 Periods Compared to the 2004 Periods

Telecommunications - Network and Vyvx

The following tables reconcile WilTel's segment profit from operations to income
(loss) from  continuing  operations  before  income  taxes for the three and six
month  periods  ended June 30, 2005 and 2004.  For  WilTel's  segments,  segment
profit from operations is the primary  performance  measure of segment operating
results and  profitability.  WilTel defines  segment  profit from  operations as
income before income taxes,  interest expense,  investment income,  depreciation
and amortization expense and other non-operating income and expense.

<TABLE>
<CAPTION>


                                                                           For the Three Month Period Ended June 30,
                                                                      2005                                    2004
                                                       ------------------------------------     ------------------------------------
                                                       Network          Vyvx          Total        Network       Vyvx        Total
                                                       -------      -----------   ----------    -----------  -----------  ---------
                                                                                        (In thousands)
<S>                                                        <C>          <C>            <C>            <C>           <C>        <C>

Operating revenues (1) (3)                             $  407,100   $   30,400     $ 437,500    $   364,100   $  31,400   $ 395,500
                                                       ==========   ==========     =========    ===========    =========  =========
Segment profit from operations (3)                     $   49,200   $    8,400     $  57,600    $    31,900   $   8,700   $  40,600
Depreciation and amortization expense                     (40,000)      (1,200)      (41,200)       (51,100)     (2,200)    (53,300)
Interest income (expense), net (2)                         (6,600)       1,000        (5,600)        (7,000)       (500)     (7,500)
Other non-operating income (expenses), net (2) (5)          1,000         --           1,000           (100)       --          (100)
                                                       ----------   ----------     ---------    -----------    ---------  ---------

   Pre-tax income (loss)                               $    3,600   $    8,200     $  11,800    $   (26,300)  $   6,000   $ (20,300)
                                                       ==========   ==========     =========    ===========   =========   =========

                                                                           For the Six Month Period Ended June 30,
                                                                       2005                                   2004
                                                       -------------------------------------    ---------------------------------
                                                       Network          Vyvx          Total        Network         Vyvx      Total
                                                       -------      -----------   ----------    -------------  ----------  -------
                                                                                        (In thousands)

Operating revenues (1) (3)                             $  814,000   $   59,200     $ 873,200    $   717,200   $  59,200   $ 776,400
                                                       ==========   ==========     =========    ===========   =========   =========
Segment profit from operations (3)                     $   98,100   $   15,300     $ 113,400    $    46,400   $  15,100   $  61,500
Depreciation and amortization expense                     (81,200)      (2,200)      (83,400)      (105,700)     (4,500)   (110,200)
Interest income (expense), net (2) (4)                    (11,900)       2,200        (9,700)       (13,600)     (1,100)    (14,700)
Other non-operating income (expenses), net (2) (5)            800         --             800          2,900         --        2,900
                                                       ----------   ----------     ---------    -----------   ---------   ---------

    Pre-tax income (loss)                              $    5,800   $   15,300     $  21,100    $   (70,000)  $   9,500   $ (60,500)
                                                       ==========   ==========     =========    ===========   =========   =========
</TABLE>

(1)  Excludes  intersegment  revenues from amounts  billed by Network to Vyvx of
     $4,400,000 and $4,600,000,  respectively, for the three month periods ended
     June 30, 2005 and 2004, and $8,600,000 and  $9,100,000,  respectively,  for
     the six  month  periods  ended  June 30,  2005 and 2004,  and  intersegment
     revenue billed from Network to ATX of $500,000 for the 2005 periods.
(2)  If  items  in  these  categories  cannot  be  directly  attributable  to  a
     particular WilTel segment,  they are allocated to each segment based upon a
     formula that considers each segment's revenues,  property and equipment and
     headcount.
(3)  For  Network,  for the three and six month  periods  ended  June 30,  2005,
     includes  $7,900,000  from the  termination  of a dark fiber  contract  and
     related maintenance services for which Network will not have to perform any
     remaining services and for which it has been paid; for the six month period
     ended June 30, 2005,  includes gains of $13,000,000 from sales of operating
     assets, principally undersea cable assets.
(4)  For  Vyvx  for the six  month  period  ended  June  30,  2005,  includes  a
     bankruptcy claim distribution of $1,600,000 received for a security with no
     book value.
(5)  For the  three  and  six  month  periods  ended  June  30,  2005,  includes
     $1,100,000  related  to the new  agreements  with SBC,  which is  discussed
     below.  For the six  month  period  ended  June 30,  2004,  WilTel's  other
     non-operating  income includes a pre-tax gain of $2,800,000 related to cash
     and securities  received in excess of the book value of secured claims in a
     customer's bankruptcy.

                                       23
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.

Network's  revenues  include  services  provided  to  SBC  of  $281,600,000  and
$261,600,000  for the  three  month  periods  ended  June  30,  2005  and  2004,
respectively, representing approximately 70% and 71%, respectively, of Network's
telecommunications revenues, and $560,700,000 and $500,000,000 for the six month
periods ended June 30, 2005 and 2004, respectively,  representing  approximately
70% and 69%, respectively,  of Network's  telecommunications revenues. Network's
revenues from SBC have continued to grow, principally related to voice products.
Revenues  attributable to other RBOCs were  approximately 5% and 4% of Network's
telecommunications  revenues for the three month periods ended June 30, 2005 and
2004, respectively,  and 6% and 5% for the six month periods ended June 30, 2005
and 2004, respectively.  Revenues for non-SBC related business for the three and
six  month  periods  ended  June  30,  2005  grew   approximately  13%  and  5%,
respectively, over the same periods in 2004, principally from data products.

Under the new SBC  Master  Services  Agreement,  SBC agreed to  purchase  WilTel
services  at the fixed  prices  that had been in effect on June 15,  2005,  with
minimum purchase  commitments for on-net services of $600,000,000 for the period
from January 1, 2005 through  December 31, 2007, and  $75,000,000 for the period
from  January  1, 2008  through  December  31,  2009.  If SBC fails to spend the
required  $600,000,000 or $75,000,000 during the respective  designated periods,
SBC will pay the amount of any  deficiency  and  receive a credit  equal to such
amount to be used for  future  services.  If SBC spends  more than  $600,000,000
during the initial  three-year  period,  any excess will be credited  toward the
$75,000,000  commitment in the second period. SBC's minimum purchase commitments
exclude  access and off-net costs.  However,  for financial  reporting  purposes
these costs are  included  as  revenues,  with  offsetting  amounts  reported in
telecommunications  cost of sales, on the Company's  consolidated  statements of
operations.  As of June 30,  2005,  approximately  $120,000,000  of the  minimum
purchase  commitments  have been  satisfied.  Minimum  purchase  commitments are
considered  satisfied only when SBC has paid for the service provided,  not when
the service is recognized as revenue for financial  reporting  purposes.  WilTel
also has the  opportunity  to earn up to an  additional  $50,000,000  by meeting
quality of service performance criteria in 2006 and 2007.

The  $236,000,000  of termination  payments due from SBC (along with  $7,000,000
previously funded by SBC for capital  expenditures) is being classified as other
non-operating  Network  income,  which is not a component of segment profit from
operations. It is being recognized as other income over time proportionally with
the ratio of the minimum purchase  commitments that have been earned  subsequent
to entering  into the  agreements  with SBC, to the remaining  minimum  purchase
commitment at June 15, 2005. For the periods ended June 30, 2005,  $1,100,000 of
this amount was reflected in other income.

Network's  cost of sales  reflects  the level of  revenues,  and is comprised of
variable charges paid to access vendors to originate  and/or terminate  switched
voice traffic,  and fixed charges for leased facilities and local off-net costs.
Network's  cost of sales for the three and six month periods ended June 30, 2005
includes charges of  approximately  $1,300,000 and $3,900,000 for changes in the
estimated  accrual for access costs incurred but not yet billed.  Adjustments to
the  estimated  accrual for access  costs for the same  periods of 2004 were not
material.  In addition,  access cost dispute resolutions were less favorable for
the three and six month  periods  ended June 30,  2005 as  compared to the prior
year's  periods  by  approximately  $3,300,000  and  $1,600,000,   respectively.
Network's  cost of sales for the six months ended June 30, 2004 also  included a
charge of $3,500,000 for international  voice access costs, for which no revenue
was recognized. WilTel entered into a commitment for these access costs in order
to provide services for a specific  customer;  however,  the customer  defaulted
under its contract,  and WilTel accrued the remaining  amount of the commitment,
but does not expect to be able to recover from its customer.

Network's  salaries and incentive  compensation were $30,000,000 and $29,000,000
for the three  month  periods  ended June 30, 2005 and 2004,  respectively,  and
$58,800,000  and  $56,600,000  for the six month periods ended June 30, 2005 and
2004, respectively, and selling, general and other expenses were $37,900,000 and
$32,200,000  for  the  three  month  periods  ended  June  30,  2005  and  2004,
respectively, and $78,300,000 and $70,500,000 for the

                                       24
<PAGE>


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.

six month periods ended June 30, 2005 and 2004,  respectively.  Selling, general
and other  expenses  for the three and six month  periods  ended  June 30,  2005
included greater contract  maintenance  costs primarily for equipment that is no
longer under warranty  ($3,000,000 and $3,200,000,  respectively),  higher sales
commissions  ($700,000 and  $1,400,000,  respectively)  and the  amortization of
costs  relating to WilTel's  2004 debt  refinancing  ($500,000  and  $1,000,000,
respectively).  Selling,  general and other expenses for the three and six month
2005 periods also reflect lower  property and ad valorem taxes of $1,200,000 and
$2,300,000,  respectively. Selling, general and other expenses for the six month
period  ended June 30,  2005 also  included a charge of  $1,700,000  for repairs
resulting from weather related fiber damage and increased  advertising and legal
expenses.  For the three and six month  periods  ended June 30,  2004,  selling,
general and other expenses  includes a reduction of $4,100,000  and  $4,700,000,
respectively,  to the provision for doubtful  accounts,  principally  due to the
collection of previously  reserved accounts receivable that had been in dispute.
Selling,  general and other  expenses for the first  quarter of 2004  included a
charge of $2,700,000 to the provision for doubtful accounts to fully reserve for
a customer's accounts receivable.

Vyvx operating  revenues were  $30,400,000  and  $31,400,000 for the three month
periods ended June 30, 2005 and 2004, respectively,  and $59,200,000 for each of
the six month  periods  ended  June 30,  2005 and 2004.  The  slight  decline in
revenues in the second  quarter of 2005 as compared to 2004  reflects the impact
of  price  reductions  and  the  loss of the  National  Hockey  League  revenues
resulting from its labor dispute,  partially  offset by higher  occasional fiber
business.  Revenues  for the six month  period  ended June 30, 2005 were largely
unchanged  compared  to the same  period  in 2004 due to  increased  advertising
distribution services relating to movies,  partially offset by the impact of the
factors mentioned above for the three month periods.

Vyvx cost of sales  reflects the level of revenue and is comprised  primarily of
amounts  billed by  Network  to Vyvx for  transporting  content  over the WilTel
network,  costs  paid to other  providers  for local  access  and other  off-net
services,  transponder  expenses and freight and overnight  delivery costs.  The
Company's  consolidated  statement  of  operations  includes  Vyvx  salaries and
incentive compensation expense of $4,600,000 for each of the three month periods
ended June 30, 2005 and 2004 and  $9,100,000  and  $8,800,000  for the six month
periods  ended June 30, 2005 and 2004,  respectively,  and selling,  general and
other  expenses of $4,100,000  and  $3,600,000 for the three month periods ended
June 30, 2005 and 2004, respectively,  and $7,900,000 and $7,200,000 for the six
month periods ended June 30, 2005 and 2004,  respectively.  Vyvx's gross margins
remained  relatively  unchanged in the second quarter of 2005 as compared to the
same period in 2004 as costs decreased  consistent with the decline in revenues.
The increase in Vyvx's gross  margins for the six month 2005 period  compared to
the same period in 2004 resulted primarily from higher advertising  distribution
services  revenue and a greater  percentage of those  services being provided by
electronic versus physical distribution, for which the costs are lower.

Depreciation and amortization expense for the Network and Vyvx segments declined
in the 2005 periods as compared to the 2004 periods,  principally as a result of
certain assets becoming fully depreciated  partially offset by the impact of new
depreciable assets being placed into service.

Telecommunications - ATX

ATX has been  consolidated  by the Company  since April 22, 2005,  the effective
date of its  bankruptcy  plan.  For the  2005  periods,  ATX  telecommunications
revenues and other  income were  $30,700,000,  telecommunications  cost of sales
were $19,400,000,  salaries and incentive  compensation  expense was $5,100,000,
depreciation and amortizations  expenses were $1,800,000,  selling,  general and
other  expenses  were  $5,000,000  and ATX had a pre-tax loss of  $700,000.  ATX
results reflect intersegment charges from WilTel's Network segment of $500,000.

                                       25
<PAGE>


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.

Healthcare Services

Pre-tax  income of the healthcare  services  segment was $800,000 and $5,400,000
for the three  month  periods  ended June 30, 2005 and 2004,  respectively,  and
$2,200,000  and  $7,800,000  for the six month  periods  ended June 30, 2005 and
2004,  respectively.  For the three month  periods ended June 30, 2005 and 2004,
healthcare services revenues were $61,100,000 and $64,100,000, respectively, and
cost of sales,  which primarily consist of salaries and employee  benefits,  was
$51,300,000 and $52,300,000,  respectively. For the six month periods ended June
30,  2005  and  2004,   healthcare   services  revenues  were  $129,000,000  and
$127,300,000,   respectively,   and  cost  of  sales   were   $107,800,000   and
$104,100,000, respectively.

The decrease in healthcare  revenues for the second  quarter of 2005 as compared
to the same period in 2004 principally  resulted from its termination of certain
underperforming  customers,  customer  attrition  and  the  sale  of  Symphony's
respiratory  line of business.  The increase in healthcare  revenues for the six
month 2005 period as compared to the same period in 2004 primarily resulted from
an  increase in the amount of services  provided  and an increase in  outpatient
therapy  rates.  During the six month periods ended June 30, 2005 and 2004,  one
customer  accounted for approximately 13% and 16%,  respectively,  of Symphony's
revenues.

The decline in gross margins in the 2005 periods as compared to the 2004 periods
reflects revenue changes discussed above,  higher hourly wages and benefits paid
to attract and retain  therapists and greater  amounts  incurred for independent
contractors,  both due to a shortage of licensed  therapists in the marketplace.
The  decline  in pre-tax  results  for the 2005  periods  also  reflects  higher
borrowing costs, depreciation expense,  professional fees for certain outsourced
services and  expenditures for hiring,  training and automation,  which Symphony
hopes will help offset the increase in the costs of therapists.  Pre-tax results
for the six month period ended June 30, 2005 period also reflect aggregate gains
of  $500,000  from the sale of  certain  property  and the  respiratory  line of
business.  Pre-tax income for the 2004 periods also included $2,700,000 from the
collection of receivables in excess of their carrying amounts.

Manufacturing

Pre-tax  income  for the  plastics  manufacturing  segment  was  $4,700,000  and
$2,300,000   for  the  three  month  periods  ended  June  30,  2005  and  2004,
respectively, and $7,900,000 and $3,300,000 for the six month periods ended June
30, 2005 and 2004,  respectively.  Its revenues were $24,600,000 and $16,700,000
for the three  month  periods  ended June 30, 2005 and 2004,  respectively,  and
$45,400,000  and  $30,100,000  for the six month periods ended June 30, 2005 and
2004, respectively.

Revenues for the plastics  manufacturing  segment  increased by  $7,900,000  and
$15,300,000  in the three and six month  periods ended June 30, 2005 as compared
to the same periods in 2004,  reflecting  NSW's  revenues  since  acquisition of
$5,100,000 and $7,500,000,  respectively,  and increases in substantially all of
the  segment's  markets.  These  increases  result  from a  variety  of  factors
including strong housing and construction  markets,  new products developed late
in 2004, and the impact of price increases implemented during the second half of
2004 and in the first  quarter of 2005.  Although raw material  costs  increased
significantly  in 2005, the  aforementioned  increases in selling prices in most
markets,  along with increased sales and production volumes enabled this segment
to maintain its gross profit margins.  Gross margins for the three and six month
periods ended June 30, 2005 also reflect $200,000 and $500,000, respectively, of
greater amortization expense on intangible assets resulting from acquisitions.

Revenues  for ITC from the  date of  acquisition  through  June  30,  2005  were
$63,500,000; gross profit was $3,400,000, depreciation and amortization expenses
were  $1,800,000 and pre-tax loss was $400,000.  ITC revenues,  gross profit and
pre-tax results reflect an oversupply in its dimensional  lumber and home center
boards markets, which has resulted in lower sales prices without a corresponding
reduction in raw material costs.

                                       26
<PAGE>


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.

Banking and Lending

As stated in the 2004 10-K,  the current  activities  of the banking and lending
segment  are  concentrated  on  collecting  and  servicing  its  remaining  loan
portfolio,  maximizing  returns  on its  investment  portfolio  and  discharging
deposit  liabilities  as they come due. As a result,  revenues  and expenses for
this segment are reflective of the  continuing  decrease in the size of the loan
portfolio,  particularly as a result of the loan  portfolios  sales during 2004.
Finance  revenues,  which reflect both the level and mix of consumer  instalment
loans,  and pre-tax  results  decreased in the three and six month periods ended
June 30,  2005 as  compared to the  similar  periods in 2004,  as average  loans
outstanding were $3,600,000 and $30,900,000 during the three month periods ended
June 30, 2005 and 2004,  respectively,  and $3,800,000 and  $109,500,000 for the
six month periods ended June 30, 2005 and 2004, respectively. Pre-tax income for
the banking and lending segment was $700,000 for the 2005 periods and $9,300,000
and  $14,600,000  for the three  and six  month  periods  ended  June 30,  2004,
respectively.  Pre-tax  income for the 2004  periods  includes a pre-tax gain of
$9,000,000 on the sale of its subprime  automobile and  collateralized  consumer
loan portfolios.

Domestic Real Estate

Pre-tax  income  for  the  domestic  real  estate  segment  was  $1,100,000  and
$1,200,000   for  the  three  month  periods  ended  June  30,  2005  and  2004,
respectively,  and $500,000 and  $9,100,000 for the six month periods ended June
30, 2005 and 2004,  respectively.  During the three and six month  periods ended
June 30, 2005, the Company recognized  $1,600,000 and $2,500,000,  respectively,
of previously  deferred pre-tax profit related to its 95-lot development project
in  South  Walton  County,   Florida,   upon  completion  of  certain   required
improvements  to the property.  The Company  expects to recognize the balance of
the deferred  pre-tax  profits during 2005  (aggregating  $7,600,000)  from this
project as it completes the remaining improvements.  Revenues and pre-tax profit
for this segment in the six month period ended June 30, 2004  reflected the sale
of certain unimproved land for cash proceeds of $8,800,000,  which resulted in a
pre-tax gain of $7,600,000.

In May 2005,  the  Company  sold its  716-room  Waikiki  Beach hotel and related
assets for an aggregate purchase price of $107,000,000, before closing costs and
other required  payments.  The Company recorded a pre-tax gain of $56,600,000 in
the second  quarter of 2005,  which is  reflected  in  discontinued  operations.
Historical operating results for the hotel have not been material.

Corporate and Other Operations

Investment  and other income  increased in the three and six month periods ended
June 30, 2005 as compared to the same periods in 2004  primarily  due to greater
interest income of $5,400,000 and $12,300,000, respectively, reflecting a larger
amount of invested assets and higher interest rates. Investment and other income
for the three and six month 2005 periods also reflect  charges of $1,300,000 and
$200,000,  respectively,  related to the accounting for mark-to-market values of
Corporate  derivatives  as  compared  to income of  $2,500,000  and  $1,300,000,
respectively, for the comparable 2004 periods.

Net securities gains for Corporate and Other Operations  aggregated  $46,900,000
and  $52,300,000  for the three  month  periods  ended  June 30,  2005 and 2004,
respectively,  and  $47,000,000  and $61,600,000 for the six month periods ended
June 30, 2005 and 2004, respectively. Net securities gains for the three and six
month  periods  ended  June 30,  2005  include a  provision  of  $1,000,000  and
$3,300,000,  respectively,  to write down the Company's  investments  in certain
available for sale  securities.  Write downs of securities were $600,000 for the
2004 periods.

The increase in interest expense during the three and six month periods ended
June 30, 2005 as compared to the 2004 periods primarily reflects interest
expense relating to $100,000,000 aggregate principal amount of 7% Senior Notes
and $350,000,000 principal amount of its 3 3/4% Convertible Senior Subordinated
Notes issued in April 2004.

                                       27
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.

The increase in salaries and incentive  compensation  expense of $2,300,000  and
$3,200,000, respectively, in the three and six month periods ended June 30, 2005
compared to the same periods in 2004,  principally  relates to  increased  bonus
expense.

The  increase  in  selling,   general  and  other  expenses  of  $4,500,000  and
$8,500,000, respectively, in the three and six month periods ended June 30, 2005
as compared to the same periods in 2004 primarily reflects greater cost of goods
sold of the winery operations,  higher professional fees that principally relate
to due diligence expenses for potential  investments,  greater professional fees
and greater foreign exchange  losses.  In addition,  selling,  general and other
expenses for the three and six month 2005 periods  also include  $1,300,000  and
$2,100,000,  respectively,  related to Indular,  an Argentine shoe manufacturing
company  acquired  in January  2005 in which the Company  has an  effective  59%
interest.

As discussed  above,  the income tax  provision  for the 2005 periods  reflect a
credit  of  $1,110,000,000  as a result  of the  reversal  of a  portion  of the
valuation  allowance  for the  deferred  tax asset.  The  Company  adjusted  the
valuation  allowance  since it  believes it is more likely than not that it will
have  future  taxable  income  sufficient  to  realize  that  portion of the net
deferred tax asset.

For the periods  ended June 30,  2004,  the  Company has  recorded a net federal
income tax  provision  on income  from  continuing  operations,  inclusive  of a
federal tax provision  netted against equity in income of associated  companies.
The provision  for federal  income tax on income from  continuing  operations is
fully  offset by  federal  income  tax  benefits  recognized  on losses in other
comprehensive income and losses from discontinued operations.  As a result, when
all  components  of income are  aggregated  there is no net  federal  income tax
expense recorded for the periods ended June 30, 2004.  Income taxes for the 2004
periods also include a provision for state income taxes.

Associated Companies

Equity in income (losses) of associated companies for the three and six month
periods ended June 30, 2005 and 2004 includes the following (in thousands):

<TABLE>
<CAPTION>


                                                         For the Three Month               For the Six Month
                                                        Period Ended June 30,            Period Ended June 30,
                                                      -------------------------       --------------------------
                                                       2005            2004             2005             2004
                                                      -------        --------         --------          ------
<S>                                                       <C>             <C>            <C>               <C>

Olympus Re Holdings, Ltd.                            $  4,900       $  7,200         $ 12,000          $ 15,500
EagleRock Capital Partners (QP), LP                   (14,700)         1,600          (19,500)            5,900
Jefferies Partners Opportunity Fund II, LLC             4,700          4,300           11,100             8,700
HomeFed Corporation                                       500          1,700              500             3,700
Union Square                                           72,000            500           72,300               700
Pershing                                                 --            3,100             --               6,000
Berkadia                                                 --             --               --                 800
Other                                                     600            900            2,800             2,000
                                                     --------       --------         --------          --------
  Pre-tax                                              68,000         19,300           79,200            43,300
Income tax expense                                        700         15,200              700            15,200
                                                     --------       --------         --------          --------
  Equity in income, net of taxes                     $ 67,300       $  4,100         $ 78,500          $ 28,100
                                                     ========       ========         ========          ========
</TABLE>

As discussed  above,  the Company  redeemed  its interest in Pershing  effective
December 31, 2004.

In May 2005,  Union  Square sold its  interest in an office  complex  located on
Capitol Hill in Washington, D.C. During the second quarter, the Company received
its share of the net proceeds totaling $71,800,000 and expects to receive in the
fourth quarter an additional $1,000,000 for its share of escrowed proceeds.  The
Company recognized a pre-tax gain on the sale,  including the escrowed proceeds,
of $71,900,000.

                                       28
<PAGE>


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.

              Cautionary Statement for Forward-Looking Information

Statements  included in this  Management's  Discussion and Analysis of Financial
Condition  and  Results  of  Interim  Operations  may  contain   forward-looking
statements.  Such statements may relate, but are not limited,  to projections of
revenues,  income or loss,  capital  expenditures,  plans for  growth and future
operations,  competition and regulation,  as well as assumptions relating to the
foregoing. Such forward-looking  statements are made pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking  statements are inherently  subject to risks and  uncertainties,
many of which cannot be predicted or quantified.  When used in this Management's
Discussion   and  Analysis  of  Financial   Condition  and  Results  of  Interim
Operations,  the  words  "estimates",  "expects",   "anticipates",   "believes",
"plans",  "intends"  and  variations of such words and similar  expressions  are
intended  to  identify   forward-looking   statements  that  involve  risks  and
uncertainties.  Future events and actual  results could differ  materially  from
those  set  forth  in,   contemplated  by  or  underlying  the   forward-looking
statements.

The factors  that could cause  actual  results to differ  materially  from those
suggested  by any of these  statements  or which may  materially  and  adversely
affect the  Company's  actual  results  include,  but are not limited to,  those
discussed  or  identified  from time to time in the  Company's  public  filings,
including:

          A worsening of general economic and market  conditions or increases in
          prevailing interest rate levels,  which may result in reduced sales of
          our  products  and  services,  lower  valuations  for  our  associated
          companies and  investments or a negative  impact on the credit quality
          of our assets;

          Changes in foreign and domestic laws, regulations and taxes, which may
          result in higher costs and lower revenue for our businesses, including
          as a result of  unfavorable  political  and  diplomatic  developments,
          currency    fluctuations,    changes   in    governmental    policies,
          expropriation,  nationalization, confiscation of assets and changes in
          legislation relating to non-U.S. ownership;

          Increased competition and changes in pricing  environments,  which may
          result in decreasing revenues and/or margins,  increased raw materials
          costs for our plastics  manufacturing business and ITC, loss of market
          share or significant price erosion;

          Continued  instability  and  uncertainty  in  the   telecommunications
          industry,  associated with increased  competition,  aggressive pricing
          and overcapacity;

          Dependence  on  key  personnel,   in  particular,   our  Chairman  and
          President,  the loss of whom  would  severely  affect  our  ability to
          develop and implement our business strategy;

          Inability to attract and retain highly skilled personnel,  which would
          make  it  difficult  to  conduct  the  businesses  of  certain  of our
          subsidiaries, including WilTel and Symphony;

          Adverse legal and regulatory  developments  that may affect particular
          businesses,  such as regulatory developments in the telecommunications
          and healthcare  industries,  or in the environmental area, which could
          affect  the  Company's   real  estate   development   activities   and
          telecommunications   business,   as  well  as  the   Company's   other
          operations;

          The extent to which WilTel is  successful  in  replacing  revenues and
          profits generated by SBC upon the migration of services from WilTel to
          AT&T,  which,  if not successful  will have a significant  unfavorable
          impact on WilTel's results of operations;

          WilTel's  ability to acquire or maintain  rights of way  necessary for
          the  operation  of its  network,  which could  require  WilTel to find
          alternate routes or increase WilTel's costs to provide services to its
          customers;

                                       29

<PAGE>


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.


          WilTel's  dependence  on a small number of suppliers  and  high-volume
          customers,  the loss of any of which could  adversely  affect WilTel's
          ability to generate operating profits and positive cash flows;

          Changes  in  telecommunications  laws  and  regulations,  which  could
          adversely affect WilTel and its customers through, for example, higher
          costs, increased competition and a loss of revenue;

          Adverse  regulatory  developments  impacting  Medicare,   which  could
          materially reduce Symphony's revenues;

          The ability of the Company to generate  sufficient  taxable  income in
          the  future  to  realize  its net  deferred  tax  asset,  which if not
          achieved could result in the need to record an income tax provision to
          increase the valuation allowance for the deferred tax asset;

          Weather  related   conditions  and  significant   natural   disasters,
          including   hurricanes,   tornadoes,   windstorms,   earthquakes   and
          hailstorms,  which may impact our wineries,  real estate  holdings and
          reinsurance operations;

          The inability to insure or reinsure certain risks economically, or the
          ability to collect on insurance or reinsurance  policies,  which could
          result in the Company having to self-insure business risks;

          Changes in U.S. real estate markets and real estate collateral values,
          including  the  residential  market  in  Southern  California  and the
          commercial market in Washington, D.C., which are sensitive to mortgage
          interest rate levels;

          Adverse  economic,  political or environmental  developments in Spain,
          which could delay or preclude  the  issuance of permits  necessary  to
          develop the Las Cruces copper mining  project or which could result in
          increased  costs of bringing the project to  completion  and increased
          costs in financing the development of the project;

          The inability to obtain necessary  financing for the Las Cruces copper
          mining  project,  or the  failure of the Inmet  transaction  to close,
          which could delay or prevent completion of the project;

          Decreases in world wide copper prices or weakening of the U.S.  dollar
          against  the  euro,   which  could  adversely  affect  the  commercial
          viability of the Las Cruces copper mining project;

          WilTel's ability to adapt to  technological  developments or continued
          or increased pricing competition in the  telecommunications  industry,
          which could adversely  affect WilTel's  ability to generate  operating
          profits and positive cash flows;

          WilTel's  inability to generate  operating  profits and positive  cash
          flows,   which  could  result  in  a  default  under  WilTel's  credit
          agreement,  pursuant  to which  substantially  all of its  assets  are
          pledged;

          Current and future  legal and  administrative  claims and  proceedings
          against  WilTel,  which may result in increased costs and diversion of
          management's attention;

          Regional or general  increases in the cost of living,  particularly in
          the regions in which the Company has  operations or sells its products
          or  services,  which may result in lower  sales of such  products  and
          services; and

                                       30
<PAGE>


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Interim Operations, continued.


          Risks associated with future  acquisitions and investments,  including
          changes in the  composition  of the Company's  assets and  liabilities
          through  such  acquisitions,  competition  from  others for  potential
          acquisition targets,  diversion of management's  attention from normal
          daily operations of the business and  insufficient  revenues to offset
          increased expenses associated with acquisitions.


This list of factors  that may affect  future  performance  and the  accuracy of
forward-looking   statements  is  illustrative,   but  is  not  intended  to  be
exhaustive.  Therefore, all forward-looking  statements should be evaluated with
the  understanding of their inherent  uncertainty.  Undue reliance should not be
placed on these forward-looking statements,  which are applicable only as of the
date hereof.  The Company  undertakes  no  obligation  to revise or update these
forward-looking  statements to reflect events or circumstances  that arise after
the date of this Management's Discussion and Analysis of Financial Condition and
Results of Interim  Operations  or to reflect the  occurrence  of  unanticipated
events.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Information  required  under this Item is contained in Item 7A of the  Company's
Annual  Report  on Form  10-K for the  year  ended  December  31,  2004,  and is
incorporated by reference herein.

Item 4.  Controls and Procedures.

Evaluation of disclosure controls and procedures

(a)  The Company's management evaluated, with the participation of the Company's
     principal executive and principal financial officers,  the effectiveness of
     the  Company's  disclosure  controls  and  procedures  (as defined in Rules
     13a-15(e)  and  15d-15(e)  under the  Securities  Exchange Act of 1934,  as
     amended  (the  "Exchange  Act")),  as of June  30,  2005.  Based  on  their
     evaluation,  the Company's  principal  executive  and  principal  financial
     officers  concluded that the Company's  disclosure  controls and procedures
     were effective as of June 30, 2005.

Changes in internal control over financial reporting

(b)  As  discussed  elsewhere  herein,  during  the  second  quarter of 2005 the
     Company  acquired ATX and ITC.  Each of ATX and ITC have their own distinct
     internal  controls  over  financial  reporting;  therefore,  such  internal
     controls  represent  a new  component  part of the  Company's  consolidated
     internal  control  over  financial  reporting.  The  Company  has  not  yet
     completed its evaluation of the internal controls over financial  reporting
     at ATX or  ITC,  although  these  entities  have  or are  expected  to have
     financial   statement   amounts   which  are  material  to  the   Company's
     consolidated financial statements.  Except for changes that result from the
     acquisition  of ATX and ITC, there have been no  changes  in the  Company's
     internal  control over financial  reporting (as defined in Rules  13a-15(f)
     and 15d-15(f)  under the Exchange  Act) that occurred  during the Company's
     fiscal  quarter ended June 30, 2005,  that has materially  affected,  or is
     reasonably likely to materially affect, the Company's internal control over
     financial reporting.



                                       31
<PAGE>




                           PART II - OTHER INFORMATION

Item 4.    Submission of Matters to a Vote of Security Holders.

           The following matters were submitted to a vote of shareholders at the
           Company's 2005 Annual Meeting of Shareholders held on May 17, 2005.

           a) Election of directors.

<TABLE>
<CAPTION>

                                                                                Number of Shares
                                                                                ----------------
                                                                          For                  Withheld
                                                                          ---                  --------
                          <S>                                              <C>                   <C>

                Ian M. Cumming                                       95,944,036                 1,263,019
                Paul M. Dougan                                       95,564,476                 1,642,579
                Lawrence D. Glaubinger                               95,558,353                 1,648,702
                Alan J. Hirschfield                                  88,708,800                 8,498,255
                James E. Jordan                                      88,400,987                 8,806,068
                Jeffrey C. Keil                                      96,233,858                   973,197
                Jesse Clyde Nichols, III                             95,569,675                 1,637,380
                Joseph S. Steinberg                                  95,899,548                 1,307,507
</TABLE>

          b)   Approval  of  an  amendment  to  the  Company's   certificate  of
               incorporation to increase the number of common shares,  par value
               $1.00 per share,  authorized for issuance to  300,000,000  common
               shares.

                For                                                   94,176,729
                Against                                                2,971,875
                Abstentions                                               56,849
                Broker non-votes                                           1,602

          c)   Approval of an amendment to the Company's  2003 Senior  Executive
               Annual  Incentive  Bonus Plan  extending the plan through  fiscal
               year 2014,  so that the plan,  as revised,  will be in effect for
               the duration of the new employment  agreements  entered into with
               Ian M.  Cumming and Joseph S.  Steinberg,  which  expire June 15,
               2015.

                For                                                   85,895,060
                Against                                               10,592,782
                Abstentions                                              717,608
                Broker non-votes                                           1,605

          d)   Ratification  of   PricewaterhouseCoopers   LLP,  as  independent
               auditors for the year ended December 31, 2005.

                For                                                   96,825,336
                Against                                                  310,686
                Abstentions                                               69,431
                Broker non-votes                                           1,602


                                       32
<PAGE>




Item 6.    Exhibits.


              10.1   Letter   Agreement,   dated  May  25,  2005,   between  SBC
                     Communications, Inc. and WilTel Communications Group, Inc.

              31.1   Certification  of Chairman of the Board and Chief Executive
                     Officer pursuant to Section 302 of the  Sarbanes-Oxley  Act
                     of 2002.

              31.2   Certification  of President  pursuant to Section 302 of the
                     Sarbanes-Oxley Act of 2002.

              31.3   Certification  of  Chief  Financial   Officer  pursuant  to
                     Section 302 of the Sarbanes-Oxley Act of 2002.

              32.1   Certification  of Chairman of the Board and Chief Executive
                     Officer pursuant to Section 906 of the  Sarbanes-Oxley  Act
                     of 2002.

              32.2   Certification  of President  pursuant to Section 906 of the
                     Sarbanes-Oxley Act of 2002.

              32.3   Certification  of  Chief  Financial   Officer  pursuant  to
                     Section 906 of the Sarbanes-Oxley Act of 2002.






                                       33


<PAGE>




                                   SIGNATURES



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.



                                          LEUCADIA NATIONAL CORPORATION
                                             (Registrant)




Date:  August 8, 2005                      By: /s/ Barbara L. Lowenthal
                                               -------------------------------
                                               Barbara L. Lowenthal
                                               Vice President and Comptroller
                                               (Chief Accounting Officer)


                                       34
<PAGE>





                                  Exhibit Index


              10.1   Letter   Agreement,   dated  May  25,  2005,   between  SBC
                     Communications, Inc. and WilTel Communications Group, Inc.

              31.1   Certification  of Chairman of the Board and Chief Executive
                     Officer pursuant to Section 302 of the  Sarbanes-Oxley  Act
                     of 2002.

              31.2   Certification  of President  pursuant to Section 302 of the
                     Sarbanes-Oxley Act of 2002.

              31.3   Certification  of  Chief  Financial   Officer  pursuant  to
                     Section 302 of the Sarbanes-Oxley Act of 2002.

              32.1   Certification  of Chairman of the Board and Chief Executive
                     Officer pursuant to Section 906 of the  Sarbanes-Oxley  Act
                     of 2002.

              32.2   Certification  of President  pursuant to Section 906 of the
                     Sarbanes-Oxley Act of 2002.

              32.3   Certification  of  Chief  Financial   Officer  pursuant  to
                     Section 906 of the Sarbanes-Oxley Act of 2002.







                                       35

</TEXT>
</DOCUMENT>
