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<SEC-DOCUMENT>0000096223-06-000118.txt : 20061109
<SEC-HEADER>0000096223-06-000118.hdr.sgml : 20061109
<ACCEPTANCE-DATETIME>20061109114454
ACCESSION NUMBER:		0000096223-06-000118
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		9
CONFORMED PERIOD OF REPORT:	20060930
FILED AS OF DATE:		20061109
DATE AS OF CHANGE:		20061109

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			LEUCADIA NATIONAL CORP
		CENTRAL INDEX KEY:			0000096223
		STANDARD INDUSTRIAL CLASSIFICATION:	TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822]
		IRS NUMBER:				132615557
		STATE OF INCORPORATION:			NY
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-05721
		FILM NUMBER:		061200279

	BUSINESS ADDRESS:	
		STREET 1:		315 PARK AVE S
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10010
		BUSINESS PHONE:		2124601900

	MAIL ADDRESS:	
		STREET 1:		315 PARK AVENUE SOUTH
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10010

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	TALCOTT NATIONAL CORP
		DATE OF NAME CHANGE:	19800603
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>lnc3rdqtr10q.txt
<DESCRIPTION>LEUCADIA NATIONAL 3RD QTR. 2006 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 September 30, 2006

                                       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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer  X     Accelerated filer      Non-accelerated filer
                       -----                     ----                      ----


Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

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

APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding
of  each  of the  issuer's  classes  of  common  stock,  at  November  1,  2006:
216,329,442.




<PAGE>


                         PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements.

LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
(Dollars in thousands, except par value)

<TABLE>
<CAPTION>

                                                                                       September 30,            December 31,
                                                                                           2006                     2005
                                                                                      -------------             -----------
                                                                                       (Unaudited)
<S>                                                                                         <C>                    <C>
ASSETS
- ------
Current assets:
   Cash and cash equivalents                                                          $    301,019             $   386,957
   Investments                                                                             980,144               1,323,562
   Trade, notes and other receivables, net                                                 100,005                 377,216
   Prepaids and other current assets                                                       173,165                 140,880
                                                                                      ------------             -----------
       Total current assets                                                              1,554,333               2,228,615
Restricted cash                                                                             18,262                  27,018
Non-current investments                                                                  1,272,382                 977,327
Notes and other receivables, net                                                            29,801                  22,747
Intangible assets, net and goodwill                                                         61,293                  85,083
Deferred tax asset, net                                                                    972,876               1,094,017
Other assets                                                                               369,576                 213,583
Property, equipment and leasehold improvements, net                                        236,095                 237,021
Investments in associated companies                                                        709,815                 375,473
                                                                                      ------------             -----------
           Total                                                                      $  5,224,433             $ 5,260,884
                                                                                      ============             ===========

LIABILITIES
- -----------
Current liabilities:
   Trade payables and expense accruals                                                $    103,327             $   259,778
   Other current liabilities                                                                 5,633                  23,783
   Debt due within one year                                                                184,079                 175,664
   Income taxes payable                                                                     10,978                  15,171
                                                                                      ------------             -----------
       Total current liabilities                                                           304,017                 474,396
Other non-current liabilities                                                              109,655                 121,893
Long-term debt                                                                             972,637                 986,718
                                                                                      ------------             -----------
       Total liabilities                                                                 1,386,309               1,583,007
                                                                                      ------------             -----------
Commitments and contingencies

Minority interest                                                                           13,513                  15,963
                                                                                      ------------             -----------

SHAREHOLDERS' EQUITY
- --------------------
Common shares, par value $1 per share, authorized 300,000,000 shares;
   216,326,442 and 216,058,016 shares issued and outstanding, after deducting
   56,875,963 and 56,874,929 shares held in treasury                                       216,326                 216,058
Additional paid-in capital                                                                 517,783                 501,914
Accumulated other comprehensive loss                                                      (113,132)                (81,502)
Retained earnings                                                                        3,203,634               3,025,444
                                                                                      ------------             -----------
       Total shareholders' equity                                                        3,824,611               3,661,914
                                                                                      ------------             -----------
           Total                                                                      $  5,224,433             $ 5,260,884
                                                                                      ============             ===========
</TABLE>


             See notes to interim consolidated financial statements.

                                       2
<PAGE>


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended September 30, 2006 and 2005
(In thousands, except per share amounts)
(Unaudited)

<TABLE>
<CAPTION>

                                                                              For the Three Month              For the Nine Month
                                                                          Period Ended September 30,      Period Ended September 30,
                                                                           --------------------------     --------------------------
                                                                             2006            2005            2006           2005
                                                                             ----            ----            ----           ----
<S>                                                                               <C>          <C>            <C>             <C>

Revenues and Other Income:
   Manufacturing                                                            $ 105,375      $ 115,066     $   343,180    $   223,991
   Investment and other income                                                 48,609         47,503         243,706        111,899
   Net securities gains                                                        16,259         85,706          99,391        132,732
                                                                            ---------      ---------     -----------    -----------
                                                                              170,243        248,275         686,277        468,622
                                                                            ---------      ---------     -----------    -----------
Expenses:
   Manufacturing cost of sales                                                 91,909         98,019         290,698        189,140
   Interest                                                                    22,843         16,203          61,541         49,240
   Salaries and incentive compensation                                         19,971         13,256          62,042         33,216
   Depreciation and amortization                                                5,855          4,296          16,187         13,675
   Selling, general and other expenses                                         35,707         29,641         108,570         85,223
                                                                            ---------      ---------     -----------    -----------
                                                                              176,285        161,415         539,038        370,494
                                                                            ---------      ---------     -----------    -----------
       Income (loss) from continuing operations before income taxes
        and equity in income (losses) of associated companies                  (6,042)        86,860         147,239         98,128
Income taxes                                                                   (8,709)       (24,885)         48,871     (1,131,809)
                                                                           ----------      ---------     -----------    -----------
       Income from continuing operations before equity in
        income (losses) of associated companies                                 2,667        111,745          98,368      1,229,937
Equity in income (losses) of associated companies, net of taxes                 1,073        (66,531)         24,336         11,962
                                                                            ---------      ---------     -----------    -----------

       Income from continuing operations                                        3,740         45,214         122,704      1,241,899
Income (loss) from discontinued operations, net of taxes                       (2,717)        58,770          (3,870)        81,231
Gain on disposal of discontinued operations, net of taxes                      59,454            130          59,356         54,708
                                                                             --------      ---------     -----------    -----------
       Net income                                                            $ 60,477      $ 104,114     $   178,190    $ 1,377,838
                                                                             ========      =========     ===========    ===========

Basic earnings (loss) per common share:
   Income from continuing operations                                            $ .02         $  .21           $ .57         $ 5.77
   Income (loss) from discontinued operations                                    (.01)           .27            (.02)           .38
   Gain on disposal of discontinued operations                                    .27           --               .27            .25
                                                                                -----         ------           -----         ------
       Net income                                                               $ .28         $  .48           $ .82         $ 6.40
                                                                                =====         ======           =====         ======
Diluted earnings (loss) per common share:
   Income from continuing operations                                            $ .02         $  .21           $ .56         $ 5.42
   Income (loss) from discontinued operations                                    (.01)           .26            (.02)           .35
   Gain on disposal of discontinued operations                                    .26           --               .26            .24
                                                                                -----         ------           -----         ------
       Net income                                                               $ .27         $  .47           $ .80         $ 6.01
                                                                                =====         ======           =====         ======


</TABLE>

             See notes to interim consolidated financial statements.


                                       3
<PAGE>


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2006 and 2005
(In thousands)
(Unaudited)

<TABLE>
<CAPTION>

                                                                                                    2006             2005
                                                                                                    ----             ----
<S>                                                                                                   <C>             <C>
Net cash flows from operating activities:
Net income                                                                                     $   178,190      $ 1,377,838
Adjustments to reconcile net income to net cash provided by operations:
   Deferred income tax provision (benefit)                                                          96,344       (1,135,100)
   Depreciation and amortization of property, equipment and leasehold improvements                  28,171          142,374
   Other amortization                                                                               (9,936)           2,132
   Share-based compensation                                                                         12,390             --
   Excess tax benefit from exercise of stock options                                                  (376)            --
   Provision for doubtful accounts                                                                   1,005            3,951
   Net securities gains                                                                            (99,391)        (135,009)
   Equity in income of associated companies                                                        (38,792)         (12,692)
   Distributions from associated companies                                                          74,209           89,293
   Net gains related to real estate, property and equipment, and other assets                      (99,344)         (36,968)
   Gain on disposal of discontinued operations                                                     (94,616)         (56,708)
   Investments classified as trading, net                                                           (3,885)          19,472
   Net change in:
      Restricted cash                                                                                8,625           (9,152)
      Trade, notes and other receivables                                                           156,384           31,860
      Prepaids and other assets                                                                     (1,394)         (14,743)
      Trade payables and expense accruals                                                         (127,152)         (17,133)
      Other liabilities                                                                            (15,900)         (28,823)
      Income taxes payable                                                                          (4,179)          (1,634)
   Other                                                                                             8,288             (673)
                                                                                               -----------      -----------
      Net cash provided by operating activities                                                     68,641          218,285
                                                                                               -----------      -----------

Net cash flows from investing activities:
Acquisition of property, equipment and leasehold improvements                                      (33,659)        (109,559)
Acquisitions of and capital expenditures for real estate investments                               (57,398)         (20,353)
Proceeds from disposals of real estate, property and equipment, and other assets                   179,985           27,579
Proceeds from sale of discontinued operations, net of expenses and cash of operations sold         115,304          101,360
Collection of Premier's insurance proceeds                                                         109,383             --
Acquisitions, net of cash acquired                                                                (105,282)        (172,622)
Net change in restricted cash                                                                      (91,640)          (2,415)
Advances on notes and other receivables                                                            (23,588)            (100)
Collections on notes, loan and other  receivables                                                   21,790            3,015
Investments in associated companies                                                               (267,273)          (6,241)
Distributions from associated companies                                                              2,040            2,619
Investment in Fortescue Metals Group Ltd                                                          (408,030)            --
Purchases of investments (other than short-term)                                                (3,010,495)      (2,342,929)
Proceeds from maturities of investments                                                            893,339          977,805
Proceeds from sales of investments                                                               2,483,093        1,417,222
                                                                                                 ---------      -----------
    Net cash used for investing activities                                                        (192,431)        (124,619)
                                                                                                 ---------      -----------

Net cash flows from financing activities:
Net change in customer banking deposits                                                               --            (24,565)
Issuance of long-term debt                                                                          61,739           70,765
Reduction of long-term debt                                                                        (34,042)         (58,978)
Issuance of common shares                                                                            3,404            1,584
Purchase of common shares for treasury                                                                 (33)            --
Excess tax benefit from exercise of stock options                                                      376             --
Other                                                                                                6,364             (664)
                                                                                               -----------      -----------
   Net cash provided by (used for) financing activities                                             37,808          (11,858)
                                                                                               -----------      -----------
Effect of foreign exchange rate changes on cash                                                         44             (880)
                                                                                               -----------      -----------
   Net increase (decrease) in cash and cash equivalents                                            (85,938)          80,928
Cash and cash equivalents at January 1,                                                            386,957          486,948
                                                                                               -----------      -----------
Cash and cash equivalents at September 30,                                                     $   301,019      $   567,876
                                                                                               ===========      ===========


</TABLE>

             See notes to interim consolidated financial statements.

                                       4
<PAGE>




LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 2006 and 2005
(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, 2005                            $ 215,201       $ 490,903     $  136,138       $ 1,416,411      $2,258,653
                                                                                                                    ----------
Comprehensive income:
   Net change in unrealized gain (loss) on
      investments, net of taxes of $0                                                (95,818)                          (95,818)
   Net change in unrealized foreign exchange
      gain (loss), net of taxes of $0                                                (14,802)                          (14,802)
   Net change in unrealized gain (loss) on
      derivative instruments, net of taxes of $0                                       2,395                             2,395
   Net income                                                                                        1,377,838       1,377,838
                                                                                                                    ----------
     Comprehensive income                                                                                            1,269,613
                                                                                                                    ----------
Issuance of common shares on acquisition of
  minority interest in MK Resources Company               668          12,191                                           12,859
Exercise of options to purchase common shares             192           1,392                                            1,584
                                                    ---------       ---------     ----------       -----------      ----------

Balance, September 30, 2005                         $ 216,061       $ 504,486     $   27,913       $ 2,794,249      $3,542,709
                                                    =========       =========     ==========       ===========      ==========

Balance, January 1, 2006                            $ 216,058       $ 501,914     $  (81,502)      $ 3,025,444      $3,661,914
                                                                                                                    ----------
Comprehensive income:
   Net change in unrealized gain (loss) on
     investments, net of taxes of $18,163                                            (32,009)                          (32,009)
   Net change in unrealized foreign exchange
     gain (loss), net of taxes of $298                                                   526                               526
   Net change in unrealized gain (loss) on
     derivative instruments, net of taxes of $84                                        (147)                             (147)
   Net income                                                                                          178,190         178,190
                                                                                                                    ----------
     Comprehensive income                                                                                              146,560
                                                                                                                    ----------
Share-based compensation expense                                       12,390                                           12,390
Exercise of options to purchase common shares,
   including excess tax benefit                           269           3,511                                            3,780
Purchase of common shares for treasury                     (1)            (32)                                             (33)
                                                    ---------       ---------     ----------       -----------      ----------

Balance, September 30, 2006                         $ 216,326       $ 517,783     $ (113,132)      $ 3,203,634      $3,824,611
                                                    =========       =========     ==========       ===========      ==========


</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,  2005,  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 "2005 10-K").  Results of  operations  for
     interim  periods  are not  necessarily  indicative  of  annual  results  of
     operations.  The  consolidated  balance  sheet  at  December  31,  2005 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.

     On June 14, 2006, a  two-for-one  stock split was effected in the form of a
     100%  stock  dividend  that was paid to  shareholders  of record on May 30,
     2006. The financial  statements (and notes thereto) give retroactive effect
     to the stock split for all periods presented.

     In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
     Interpretation  No. 48,  "Accounting  for  Uncertainty in Income Taxes - an
     Interpretation  of FASB Statement No. 109" ("FIN 48"), which prescribes the
     accounting for and  disclosure of uncertainty in income tax positions.  FIN
     48 defines the criteria  that must be met before any part of the benefit of
     a tax position can be  recognized  in the  financial  statements,  provides
     guidance for the  measurement  of tax benefits  recognized and guidance for
     classification  and  disclosure.  FIN  48 is  effective  for  fiscal  years
     beginning after December 15, 2006, with the cumulative effect of the change
     in  accounting  principle  recorded as an  adjustment  to opening  retained
     earnings. The Company is currently evaluating the impact of adopting FIN 48
     on its consolidated financial statements.

     In  September  2006,  the FASB issued  Statement  of  Financial  Accounting
     Standards No. 157, "Fair Value  Measurements"  ("SFAS 157"),  which defines
     fair value,  establishes a framework  for measuring  fair value and expands
     disclosures about fair value measurements. SFAS 157 is effective for fiscal
     years   beginning  after  November  15,  2007.  The  Company  is  currently
     evaluating  the impact of adopting SFAS 157 on its  consolidated  financial
     statements.

     In  September  2006,  the FASB issued  Statement  of  Financial  Accounting
     Standards No. 158,  "Employers'  Accounting for Defined Benefit Pension and
     Other  Postretirement  Plans - an amendment of FASB  Statements No. 87, 88,
     106, and 132(R)"  ("SFAS 158"),  which  requires  companies to recognize on
     their balance sheet a net liability or asset for the funded status of their
     defined benefit pension and other postretirement  plans,  recognize changes
     in funded  status  through  comprehensive  income  and  provide  additional
     footnote  disclosures.  SFAS 158 is effective for publicly  traded calendar
     year-end companies as of December 31, 2006. In addition,  SFAS 158 requires
     companies to measure the funded status of their plans as of the date of its
     fiscal year-end, with limited exceptions, effective for fiscal years ending
     after December 15, 2008. The Company is currently  evaluating the impact of
     adopting SFAS 158 on its consolidated  financial  statements,  but does not
     believe it will have a material impact.

     Certain  amounts  for  prior  periods  have also  been  reclassified  to be
     consistent  with the 2006  presentation,  and to  reflect  as  discontinued
     operations  WilTel  Communications  Group,  LLC ("WilTel"),  which was sold
     during  the  fourth  quarter  of  2005,   Symphony  Health  Services,   LLC
     ("Symphony"),  which was sold in July 2006,  and ATX  Communications,  Inc.
     ("ATX"),  which was sold in September 2006. For more information concerning
     the sales, see Note 9.

                                       6
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

2.   Results of  operations  for the Company's  segments are reflected  from the
     date of acquisition.  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.  As a  result  of the  classification  of  Symphony  and  ATX as
     discontinued  operations,  the Company no longer has a healthcare  services
     segment  or  a  telecommunications   segment;  for  information  about  the
     Company's new gaming entertainment segment, see Note 17.

     Certain  information  concerning  the Company's  segments for the three and
     nine month  periods  ended  September 30, 2006 and 2005 is presented in the
     following table (in thousands).

<TABLE>
<CAPTION>

                                                                           For the Three Month            For the Nine Month
                                                                        Period Ended September 30,     Period Ended September 30,
                                                                        --------------------------     --------------------------
                                                                           2006           2005           2006            2005
                                                                           ----           ----           ----            ----
             <S>                                                            <C>           <C>             <C>             <C>

     Revenues and other income (a):
        Manufacturing:
           Idaho Timber                                                 $  77,614      $  90,887      $ 261,895       $ 154,419
           Plastics                                                        27,944         24,500         82,175          69,943
        Gaming Entertainment                                                1,599           --            2,441            --
        Domestic Real Estate                                                4,951          4,824         76,836          22,116
        Other Operations                                                   12,474         31,421         30,151          49,614
        Corporate (b)                                                      45,661         96,643        232,779         172,530
                                                                        ---------      ---------      ---------       ---------
            Total consolidated revenues and other income                $ 170,243      $ 248,275      $ 686,277       $ 468,622
                                                                        =========      =========      =========       =========

     Income (loss) from continuing operations before income taxes
      and equity in income (losses) of associated companies:
        Manufacturing:
           Idaho Timber                                                 $     335      $   4,463      $  11,871       $   4,112
           Plastics                                                         5,150          4,344         15,374          12,289
        Gaming Entertainment                                                 (830)           --            (217)          --
        Domestic Real Estate                                               (2,353)         1,034         48,445           1,576
        Other Operations (c)                                               (8,856)        15,403        (22,657)         10,832
        Corporate (b)                                                         512         61,616         94,423          69,319
                                                                        ---------      ---------      ---------       ---------
            Total consolidated income (loss) from continuing
              operations before income taxes and equity in income
              (losses) of associated companies                          $  (6,042)     $  86,860      $ 147,239       $  98,128
                                                                        =========      =========      =========       =========

</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 net securities  gains of $16,300,000  and $75,800,000 for the
          three month periods ended  September 30, 2006 and 2005,  respectively,
          and  $99,400,000  and  $123,500,000  for the nine month  periods ended
          September  30,  2006 and  2005,  respectively.  Net  securities  gains
          include  provisions of $9,700,000  and  $4,000,000 for the three month
          periods  ended  September  30,  2006  and  2005,   respectively,   and
          $12,300,000  and $7,300,000 for the nine month periods ended September
          30, 2006 and 2005, respectively,  to write down investments in certain
          available  for  sale  securities  due  to  declines  in  market  value
          determined to be other than temporary.

     (c)  Losses in other operations for the 2006 periods  principally relate to
          research  and  development  expenses  and  operating  expenses  of the
          Company's medical product development subsidiary.


                                       7
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

     For the three month periods ended September 30, 2006 and 2005,  income from
     continuing  operations has been reduced by  depreciation  and  amortization
     expenses of  $10,400,000  and  $8,300,000,  respectively;  such amounts are
     primarily comprised of Corporate ($2,900,000 and $2,700,000, respectively),
     manufacturing   ($4,400,000   and  $4,000,000,   respectively)   and  other
     operations  ($1,700,000 and $1,500,000,  respectively).  For the nine month
     periods  ended  September  30,  2006  and  2005,   income  from  continuing
     operations has been reduced by depreciation  and  amortization  expenses of
     $29,300,000  and  $24,000,000,  respectively;  such  amounts are  primarily
     comprised  of  Corporate   ($8,800,000   and   $8,000,000,   respectively),
     manufacturing   ($13,000,000  and  $9,900,000,   respectively)   and  other
     operations  ($4,200,000 and  $4,500,000,  respectively).  Depreciation  and
     amortization expenses for other segments are not material.

     For the three month periods ended September 30, 2006 and 2005,  income from
     continuing  operations has been reduced by interest  expense of $22,800,000
     and  $16,200,000,  respectively;  such amounts are  primarily  comprised of
     Corporate ($18,100,000 and $15,900,000, respectively), gaming entertainment
     ($4,700,000 in 2006) and other operations  ($300,000 in 2005). For the nine
     month periods ended  September  30, 2006 and 2005,  income from  continuing
     operations  has  been  reduced  by  interest  expense  of  $61,500,000  and
     $49,200,000,   respectively;   such  amounts  are  primarily  comprised  of
     Corporate ($53,100,000 and $47,000,000, respectively), gaming entertainment
     ($8,000,000 in 2006) and other  operations  ($1,200,000 in 2005).  Interest
     expense for other segments is not material.

3.   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, 2006 (in thousands).
<TABLE>
<CAPTION>

                                                                                                   September 30,    September 30,
                                                                                                        2006             2005
                                                                                                   ------------       ---------
             <S>                                                                                       <C>               <C>

     EagleRock Capital Partners (QP), LP ("EagleRock"):
         Total revenues                                                                           $    10,200      $   (16,800)
         Income (loss) from continuing operations before extraordinary items                            9,600          (18,000)
         Net income (loss)                                                                              9,600          (18,000)
         The Company's equity in net income (loss)                                                      7,100          (13,500)

     Jefferies Partners Opportunity Fund II, LLC ("JPOF II"):
         Total revenues                                                                           $    37,900      $    31,600
         Income from continuing operations before extraordinary items                                  36,300           29,300
         Net income                                                                                    36,300           29,300
         The Company's equity in net income                                                            23,900           19,500
</TABLE>

4.   A summary of  investments at September 30, 2006 and December 31, 2005 is as
     follows (in thousands):


                                       8
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

<TABLE>
<CAPTION>

                                                                      September 30, 2006                   December 31, 2005
                                                                -------------------------------        ---------------------------
                                                                                 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                           $  859,198        $  862,373         $1,206,973       $1,206,195
        Trading securities                                          103,445           102,975            103,978          105,541
        Other investments, including accrued interest income         14,796            14,796             11,826           11,826
                                                                 ----------        ----------         ----------       ----------
            Total current investments                            $  977,439        $  980,144         $1,322,777       $1,323,562
                                                                 ==========        ==========         ==========       ==========

     Non-current Investments:
        Investments available for sale                           $1,094,480        $1,101,478         $  762,178       $  825,716
        Other investments                                           170,904           170,904            151,611          151,611
                                                                 ----------        ----------         ----------       ----------
            Total non-current investments                        $1,265,384        $1,272,382         $  913,789       $  977,327
                                                                 ==========        ==========         ==========       ==========

</TABLE>

     During the first quarter of 2006, the Company sold all of its 115,000,000
     shares of Level 3 Communications, Inc. common stock that it had received in
     connection with the sale of WilTel for total proceeds of $376,600,000 and
     recorded a pre-tax gain of $37,400,000.

5.   A summary of intangible  assets, net and goodwill at September 30, 2006 and
     December 31, 2005 is as follows (in thousands):

<TABLE>
<CAPTION>

                                                                                                   September 30,     December 31,
                                                                                                       2006             2005
                                                                                                  ------------       ----------
                <S>                                                                                     <C>             <C>

     Intangibles:
        Customer relationships, net of accumulated amortization of $9,980 and $6,686                 $ 48,621         $ 58,911
        Trademarks and tradename, net of accumulated amortization of $192 and $268                      1,662            4,140
        Software, net of accumulated amortization of $0 and $701                                         --              4,399
        Patents, net of accumulated amortization of $259 and $142                                       2,071            2,188
        Other, net of accumulated amortization of $1,583 and $1,488                                       788            1,446
     Goodwill                                                                                           8,151           13,999
                                                                                                     --------         --------
                                                                                                     $ 61,293         $ 85,083
                                                                                                     ========         ========
</TABLE>

     During the nine months  ended  September  30,  2006,  the Company  recorded
     $4,200,000 of new intangible assets,  principally  customer  relationships,
     resulting from acquisitions by the plastics  manufacturing  segment and the
     other  operations  segment.  Intangible  assets,  net at December  31, 2005
     included $16,500,000 related to ATX, which was sold in September 2006.

     Amortization  expense on intangible  assets was $2,000,000 and  $1,500,000,
     respectively,  for the three month  periods  ended  September  30, 2006 and
     2005,  and  $5,700,000  and  $3,900,000,  respectively,  for the nine month
     periods ended September 30, 2006 and 2005. The estimated  aggregate  future
     amortization  expense for the  intangible  assets for each of the next five
     years is as follows:  2006 (for the  remaining  three months) - $2,000,000;
     2007  -  $7,100,000;  2008 -  $6,600,000;  2009 -  $6,100,000;  and  2010 -
     $5,800,000.

     At September 30, 2006 and December 31, 2005,  goodwill included  $8,200,000
     within the plastics  manufacturing  segment; at December 31, 2005, goodwill
     also included $5,800,000 related to ATX.


                                       9
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

6.   A summary of accumulated other comprehensive income (loss), net of taxes at
     September 30, 2006 and December 31, 2005 is as follows (in thousands):

<TABLE>
<CAPTION>

                                                                           September 30,       December 31,
                                                                                2006               2005
                                                                           -------------       -----------
              <S>                                                               <C>                 <C>

          Net unrealized losses on investments                             $   (54,390)        $  (22,381)
          Net unrealized foreign exchange losses                                (2,364)            (2,890)
          Net unrealized losses on derivative instruments                       (1,155)            (1,008)
          Net minimum pension liability                                        (55,223)           (55,223)
                                                                           -----------         ----------
                                                                           $  (113,132)        $  (81,502)
                                                                           ===========         ==========
</TABLE>

7.   Investment  and  other  income  includes  changes  in the  fair  values  of
     derivative financial instruments of $(900,000) and $1,600,000 for the three
     month periods ended September 30, 2006 and 2005, respectively, and $900,000
     and  $1,500,000,  for the nine month periods  ended  September 30, 2006 and
     2005, respectively.

8.   In February  2006,  Square 711 Developer,  LLC ("Square  711"), a 90% owned
     subsidiary of the Company, completed the sale of 8 acres of unimproved land
     in Washington,  D.C. for aggregate cash consideration of $121,900,000.  The
     land was acquired by Square 711 in September 2003 for cash consideration of
     $53,800,000. After satisfaction of mortgage indebtedness on the property of
     $32,000,000  and other  closing  payments,  the Company  received  net cash
     proceeds  of  approximately  $75,700,000,  and  recorded a pre-tax  gain of
     $48,900,000.

9.   In July 2006,  the Company  sold  Symphony to  RehabCare  Group,  Inc.  for
     aggregate  cash   consideration   of  approximately   $107,000,000.   After
     satisfaction of Symphony's  outstanding  credit  agreement  ($31,700,000 at
     date of sale) and other sale related obligations,  the Company realized net
     cash  proceeds  of  $62,300,000  and  recorded  a  pre-tax  gain on sale of
     discontinued operations of $53,300,000  ($33,500,000 after tax). Results of
     operations for Symphony for the three month period ended September 30, 2005
     and for the nine month  periods  ended  September  30, 2006 and 2005 are as
     follows (in thousands):

<TABLE>
<CAPTION>

                                                                    For the Three Month              For the Nine Month
                                                                 Period Ended September 30,       Period Ended September 30,
                                                                 -------------------------        -------------------------
                                                                            2005                     2006            2005
                                                                            ----                     ----            ----
                 <S>                                                          <C>                    <C>               <C>
     Revenues and other income:
        Healthcare revenues                                               $  54,376               $ 110,370         $182,791
        Investment and other income                                             208                     225              751
                                                                          ---------               ---------         --------
                                                                             54,584                 110,595          183,542
                                                                          ---------               ---------         --------
     Expenses:
        Healthcare cost of sales                                             46,308                  95,628          154,100
        Interest                                                                674                   1,195            2,143
        Salaries                                                              3,483                   5,835            9,968
        Depreciation and amortization                                           280                     708              895
        Selling, general and other expenses                                   3,667                   7,013           14,059
                                                                          ---------               ---------         --------
                                                                             54,412                 110,379          181,165
                                                                          ---------               ---------         --------
     Income from discontinued operations before income taxes                    172                     216            2,377
     Income taxes                                                                (3)                    107              (11)
                                                                          ---------               ---------         --------
     Income from discontinued operations                                  $     175               $     109         $  2,388
                                                                          =========               =========         ========

</TABLE>

                                       10
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

     The  Company  has not  classified  Symphony's  assets  and  liabilities  as
     discontinued  operations because the balances are not material.  Summarized
     information  for  Symphony's  assets  and  liabilities  is as  follows  (in
     thousands):

                                                                December 31,
                                                                     2005
                                                                     ----

     Current assets                                               $  52,470
     Non-current assets                                               3,165
                                                                  ---------
        Total assets                                              $  55,635
                                                                  =========

     Current liabilities                                          $  45,262
     Non-current liabilities                                            280
                                                                  ---------
        Total liabilities                                         $  45,542
                                                                  =========

     At  December  31,  2005,  current  assets  principally  consisted  of trade
     receivables and current liabilities principally consisted of trade payables
     and amounts due under Symphony's credit agreement.

     In September  2006,  the Company sold ATX to Broadview  Networks  Holdings,
     Inc. for aggregate cash consideration of approximately $85,700,000, subject
     to working  capital  adjustments,  and  recorded a pre-tax  gain on sale of
     discontinued operations of $41,600,000  ($26,100,000 after tax). Results of
     operations for ATX for the three and nine month periods ended September 30,
     2006 and 2005 are as follows (in thousands):

<TABLE>
<CAPTION>

                                                                        For the Three Month             For the Nine Month
                                                                     Period Ended September 30,     Period Ended September 30,
                                                                     --------------------------     --------------------------
                                                                        2006            2005           2006           2005
                                                                        ----            ----           ----           ----
               <S>                                                        <C>           <C>               <C>          <C>
     Revenues and other income:
        Telecommunication revenues                                    $  39,377      $  40,402         $ 118,987     $ 70,995
        Investment and other income                                         172              4             1,275           66
                                                                      ---------      ---------         ---------     --------
                                                                         39,549         40,406           120,262       71,061
                                                                      ---------      ---------         ---------     --------

     Expenses:
        Telecommunication cost of sales                                  25,007         24,149            72,231       43,490
        Interest                                                             38             35               126           64
        Salaries                                                          8,585          6,456            21,054       11,539
        Depreciation and amortization                                     2,223          2,412             7,374        4,179
        Selling, general and other expenses                               6,869          6,403            20,629       11,557
                                                                      ---------      ---------         ---------     --------
                                                                         42,722         39,455           121,414       70,829
                                                                      ---------      ---------         ---------     --------

     Income (loss) from discontinued operations before
        income taxes                                                     (3,173)           951            (1,152)         232
     Income taxes                                                          (707)             5               749          101
                                                                      ---------      ---------        ----------     --------
     Income (loss) from discontinued operations                       $  (2,466)     $     946         $  (1,901)    $    131
                                                                      =========      =========         =========     ========

</TABLE>

     The Company has not classified ATX's assets and liabilities as discontinued
     operations  because the balances are not material.  Summarized  information
     for ATX's assets and liabilities is as follows (in thousands):

                                       11
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

                                                         December 31,
                                                            2005
                                                            ----

     Current assets                                       $  40,308
     Non-current assets                                      48,550
                                                          ---------
        Total assets                                      $  88,858
                                                          =========

     Current liabilities                                  $  32,479
     Non-current liabilities                                  2,001
                                                          ---------
        Total liabilities                                 $  34,480
                                                          =========

     At December  31, 2005,  current  assets  principally  consisted of cash and
     trade receivables, non-current assets principally consisted of property and
     equipment  and  intangible  assets and  goodwill,  and current  liabilities
     principally consisted of trade payables.

     For the three and nine month 2006 periods, gain on disposal of discontinued
     operations also reflects  $700,000 and $600,000,  respectively,  of pre-tax
     gains ($500,000 and $400,000,  respectively, after tax) principally for the
     resolution  of  certain  sale-related  contingencies  and  obligations  and
     working capital adjustments related to WilTel, which was sold in the fourth
     quarter of 2005. In addition,  gain on disposal of discontinued  operations
     for the 2006 periods  includes a pre-tax loss of $900,000  ($600,000  after
     tax)  from  the sale of the  Company's  gas  properties  during  the  third
     quarter. Income (loss) from discontinued operations for the nine month 2006
     period includes $2,900,000 of pre-tax losses ($2,100,000 after tax) related
     to these gas properties;  amounts for the comparable period in 2005 as well
     as for the three month 2006 and 2005 periods were not material.

10.  Pension  expense charged to operations for the three and nine month periods
     ended  September 30, 2006 and 2005 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 Nine Month
                                                                      Period Ended September 30,     Period Ended September 30,
                                                                      --------------------------     ------------------------
                                                                         2006            2005          2006           2005
                                                                         ----            ----          ----           ----
                  <S>                                                      <C>               <C>            <C>            <C>

     Interest cost                                                      $   479           $  511       $1,446         $1,534
     Expected return on plan assets                                        (263)            (222)        (795)          (679)
     Actuarial loss                                                         226              220          697            636
     Amortization of prior service cost                                       1                1            2              3
                                                                        -------           ------       ------         ------
        Net pension expense                                             $   443           $  510       $1,350         $1,494
                                                                        =======           ======       ======         ======
</TABLE>

     Employer  contributions  to the defined  benefit  pension  plan (other than
     WilTel's plan) were $7,000,000 during the first nine months of 2006.

     WilTel's defined benefit pension plan expense charged to operations for the
     three and nine month periods ended September 30, 2006 and 2005 included the
     following components (in thousands):

<TABLE>
<CAPTION>

                                                                For the Three Month                   For the Nine Month
                                                             Period Ended September 30,            Period Ended September 30,
                                                             --------------------------            --------------------------
                                                               2006             2005                  2006          2005
                                                               ----             ----                  ----          ----
            <S>                                                  <C>              <C>                 <C>             <C>

     Interest cost                                           $   2,487        $   2,954           $  7,463         $ 7,057
     Service cost                                                 --              1,528               --             3,459
     Expected return on plan assets                             (1,766)          (2,229)            (5,299)         (4,882)
     Actuarial loss                                                397            2,327              1,190           2,350
                                                             ---------        ---------           --------         -------
        Net pension expense                                  $   1,118        $   4,580           $  3,354         $ 7,984
                                                             =========        =========           ========         =======

</TABLE>

                                       12
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

     As more fully discussed in the 2005 10-K,  WilTel was sold in December 2005
     but its  defined  benefit  pension  plan was  excluded  from the sale.  The
     defined  benefit  pension  plan  expense for  periods  prior to the sale is
     classified as discontinued operations; expenses subsequent to the sale have
     been charged to continuing operations.

     Employer  contributions  to  WilTel's  defined  benefit  pension  plan were
     $42,800,000  during  the first nine  months of 2006;  as  disclosed  in the
     Company's  2005  10-K  such   contributions  were  estimated  to  aggregate
     $29,100,000 for all of 2006. Additional contributions were made during 2006
     to  reduce  the  underfunded  status of the plan  which  has the  effect of
     reducing the cost of government charged variable insurance premiums.

     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 nine
     month periods ended September 30, 2006 and 2005.

11.  Effective  January 1, 2006,  the Company  adopted  Statement  of  Financial
     Accounting Standards No. 123R,  "Share-Based  Payment" ("SFAS 123R"), using
     the modified  prospective  method.  SFAS 123R requires that the cost of all
     share-based  payments to  employees,  including  grants of  employee  stock
     options and warrants,  be recognized in the financial  statements  based on
     their fair values.  The cost is  recognized  as an expense over the vesting
     period of the award.  Prior to adoption of SFAS 123R, no compensation  cost
     was   recognized  in  the   statements  of  operations  for  the  Company's
     share-based  compensation  plans; the Company  disclosed  certain pro forma
     amounts as required.

     The fair value of each award is  estimated  at the date of grant  using the
     Black-Scholes  option  pricing  model.  As a result of the adoption of SFAS
     123R,   compensation   cost  increased  by  $3,000,000   and   $12,400,000,
     respectively,  for the three and nine  month  2006  periods  and net income
     decreased by $2,000,000  and  $8,100,000,  respectively,  for the three and
     nine  month  2006  periods.  Had the  Company  used  the fair  value  based
     accounting  method for the three and nine month 2005 periods,  compensation
     cost would have been higher by $400,000 and $1,400,000,  respectively,  and
     primary  and  diluted  earnings  per share  would not have  changed.  As of
     September  30,  2006,  total  unrecognized  compensation  cost  related  to
     nonvested  share-based  compensation  plans was  $29,500,000;  this cost is
     expected to be recognized over a weighted-average period of 1.7 years.

     As of September 30, 2006,  the Company has two  share-based  plans: a fixed
     stock  option plan and a senior  executive  warrant  plan.  The fixed stock
     option  plan  provides  for  grants of  options  or rights to  non-employee
     directors and certain  employees up to a maximum grant of 450,000 shares to
     any individual in a given taxable year. The maximum number of common shares
     that may be acquired  through the  exercise of options or rights under this
     plan cannot exceed  2,519,150.  The plan provides for the issuance of stock
     options  and stock  appreciation  rights  at not less than the fair  market
     value of the  underlying  stock at the date of grant.  Options  granted  to
     employees  under  this plan are  intended  to qualify  as  incentive  stock
     options to the extent  permitted under the Internal Revenue Code and become
     exercisable in five equal annual instalments starting one year from date of
     grant. Options granted to non-employee directors become exercisable in four
     equal annual  instalments  starting  one year from date of grant.  No stock
     appreciation rights have been granted. As of September 30, 2006,  2,495,150
     shares  were  available  for grant  under the plan.  During  the nine month
     period ended  September 30, 2006,  24,000  options at $30.78 per share were
     granted;  during the nine month period  ended  September  30, 2005,  12,000
     options at $18.03 per share were granted.

                                       13
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

     The senior  executive  warrant plan provides for the  issuance,  subject to
     shareholder approval, of warrants to purchase up to 2,000,000 common shares
     to each of the Company's  Chairman and President at an exercise price equal
     to 105% of the  closing  price per  share of a common  share on the date of
     grant. On March 6, 2006, the Company's Board of Directors approved, subject
     to shareholder approval, the grant of warrants to purchase 2,000,000 common
     shares to each of the Company's Chairman and President at an exercise price
     equal to $28.515 per share (105% of the closing price per share of a common
     share on that date). In May 2006, shareholder approval was received and the
     warrants  were issued.  The warrants  expire in 2011 and vest in five equal
     tranches with 20% vesting on the date shareholder approval was received and
     an additional 20% vesting in each subsequent year.

     The following  summary presents the  weighted-average  assumptions used for
     grants made during the 2006 and 2005 periods:

<TABLE>
<CAPTION>

                                                                      2006                            2005
                                                          --------------------------------          --------
                                                            Options             Warrants            Options
                                                            -------             --------            -------
                <S>                                            <C>                 <C>                   <C>

     Risk free interest rate                                  4.92%               4.95%               3.77%
     Expected volatility                                     22.78%              23.05%              23.58%
     Expected dividend yield                                   .81%                .41%                .69%
     Expected life                                            4.3 years           4.3 years           4.3 years
     Weighted average fair value per grant                   $7.75               $9.39               $4.29

</TABLE>


     The  expected  life  assumptions  were  based on  historical  behavior  and
     incorporated post-vesting forfeitures for each type of award and population
     identified.

     The following table summarizes  information about outstanding stock options
     at September 30, 2006 and changes during the nine months then ended:

<TABLE>
<CAPTION>

                                                                                 Weighted-Average
                                                                                    Remaining
                                                          Weighted-Average       Contractual Term       Aggregate Intrinsic
                                               Shares       Exercise Price          (in years)                Value
                                               ------       --------------       ------------------     -------------------
        <S>                                       <C>             <C>                   <C>                      <C>

Outstanding at January 1, 2006              1,955,260         $17.60
Granted                                        24,000         $30.78
Exercised                                    (269,460)        $12.63                                        $  4,000,000
                                                                                                            ============
Forfeited                                        --           $  --
                                            ---------

Outstanding at September 30, 2006           1,709,800         $18.56                       3.5              $ 13,100,000
                                            =========         ======                ==========              ============
Exercisable at September 30, 2006             556,900         $14.88                       2.8              $  6,300,000
                                           ==========         ======                ==========              ============
</TABLE>

     At September 30, 2006, 4,000,000 warrants were outstanding and 800,000 were
     exercisable  but had no aggregate  intrinsic  value as the  exercise  price
     exceeded the market value.  Both the outstanding  and exercisable  warrants
     had a weighted-average remaining contractual term of 4.4 years. No warrants
     were exercised or forfeited during the nine month 2006 period.

12.  For the 2006 periods, the Company's effective income tax rate is lower than
     the federal  statutory  rate because of the reversal of $6,000,000 of state
     income  tax  reserves   due  to  the   favorable   resolution   of  certain
     contingencies.  The income tax provisions for the three and nine month 2005
     periods reflect credits of $25,100,000 and $1,135,100,000, respectively, as
     a result of the reversal of a portion of the  valuation  allowance  for the
     deferred tax asset.  The Company  adjusted the valuation  allowance in 2005
     since it  believed  it was more  likely  than not that it will have  future
     taxable  income  sufficient to realize that portion of the net deferred tax
     asset.

                                       14
<PAGE>


Notes to Interim Consolidated Financial Statements, continued

13.  Basic  earnings  (loss) per share  amounts are  calculated  by dividing net
     income  by  the  sum  of the  weighted  average  number  of  common  shares
     outstanding.  To determine  diluted earnings (loss) per share, the weighted
     average  number of common shares is adjusted for the  incremental  weighted
     average number of shares issuable upon exercise of outstanding  options and
     warrants, unless the effect is antidilutive.  In addition, the calculations
     of diluted  earnings (loss) per share assume the 3 3/4%  Convertible  Notes
     are converted into common shares and earnings increased for the interest on
     such  notes,   net  of  the  income  tax  effect,   unless  the  effect  is
     antidilutive.  The number of shares used to calculate basic earnings (loss)
     per share  amounts  was  216,291,000  and  215,595,000  for the three month
     periods ended  September 30, 2006 and 2005,  respectively,  and 216,202,000
     and  215,387,000  for the nine month periods  ended  September 30, 2006 and
     2005, respectively. The number of shares used to calculate diluted earnings
     (loss) per share  amounts was  231,906,000  and  231,328,000  for the three
     month  periods  ended  September  30,  2006  and  2005,  respectively,  and
     231,875,000  and 231,132,000 for the nine month periods ended September 30,
     2006 and 2005, respectively.

14.  Cash paid for interest  and income  taxes (net of refunds) was  $70,200,000
     and $6,400,000, respectively, for the nine month period ended September 30,
     2006 and  $83,900,000  and  $3,900,000,  respectively,  for the nine  month
     period ended September 30, 2005.

15.  Debt due  within  one year  includes  $149,600,000  and  $92,100,000  as of
     September  30,  2006 and  December  31,  2005,  respectively,  relating  to
     repurchase  agreements.  These  fixed  rate  repurchase  agreements  have a
     weighted average interest rate of  approximately  5.28%,  mature at various
     dates through March 2007 and are secured by non-current  investments with a
     carrying value of $153,300,000.

16.  In April  2006,  the  Company  acquired  a 30%  limited  liability  company
     interest  in  Goober  Drilling,  LLC,  ("Goober  Drilling")  for  aggregate
     consideration  of $60,000,000,  excluding  expenses,  and agreed to lend to
     Goober  Drilling,  on a secured  basis,  up to  $80,000,000  to finance new
     equipment  purchases and construction costs, and to repay existing debt. In
     June 2006,  the Company  agreed to increase  the secured  loan amount to an
     aggregate of $126,000,000  to finance  additional  equipment  purchases and
     construction  costs. As of September 30, 2006, the outstanding  loan amount
     was  $93,100,000.  Goober  Drilling  is an  on-shore  contract  oil and gas
     drilling  company based in  Stillwater,  Oklahoma  that  provides  drilling
     services to exploration and production companies.  The Company's investment
     in Goober Drilling is classified as an investment in an associated company.

17.  During  the second  quarter  of 2006,  the  Company  indirectly  acquired a
     controlling  voting interest in Premier for an aggregate  purchase price of
     $90,800,000,  excluding expenses. The Company owns approximately 46% of the
     common units of Premier and all of Premier's  preferred units, which accrue
     an annual  preferred  return of 17%.  The Company also  acquired  Premier's
     junior  subordinated  note due August 2012, with an outstanding  balance at
     acquisition of $13,400,000,  and has made an $8,100,000 12% loan to Premier
     that  matures  in May 2007.  Premier  is the owner of the Hard Rock Hotel &
     Casino Biloxi ("Hard Rock Biloxi"), located in Biloxi,  Mississippi,  which
     was  severely  damaged  prior to opening by  Hurricane  Katrina  and which,
     pending receipt of insurance proceeds,  is to be rebuilt.  All of Premier's
     equity interests are pledged to secure  repayment of Premier's  outstanding
     $160,000,000  principal amount of 10 3/4% First Mortgage Notes due February
     1, 2012 (the "Premier Notes").  In addition,  the Company agreed to provide
     up to $40,000,000 of construction financing to Premier's general contractor
     by purchasing the contractor's  receivables from Premier if the receivables
     are more than ten days past due. At acquisition,  the Company  consolidated
     Premier as a result of its controlling voting interest.

     On September 19, 2006, Premier and its subsidiary filed voluntary petitions
     for  reorganization  under chapter 11 of title 11 of the United States Code
     (the "Bankruptcy Code"),  before the United States Bankruptcy Court for the
     Southern District of Mississippi,  Southern Division (the "Court"). Premier
     is  seeking  the  Court's   assistance  in  gaining   access  to  Hurricane
     Katrina-related  insurance proceeds which has been denied to Premier by its
     pre-petition  secured  bondholders.  Premier  will  continue to operate its
     business as "debtors in possession" under the jurisdiction of the Court and
     in accordance  with the applicable  provisions of the  Bankruptcy  Code and
     orders of the Court.  Premier  believes  that its  insurance  proceeds  and
     permitted  equipment  financing are sufficient to pay its creditors in full
     and to  rebuild  the  Hard  Rock  Biloxi.
                                       15
<PAGE>


  Notes  to  Interim  Consolidated Financial Statements, continued

     The Company has  deconsolidated  Premier  effective  with the filing of the
     voluntary petitions, and has classified its net investment in Premier as an
     investment in an associated company ($116,900,000 as of September 30, 2006,
     including all loans and equity interests). The bankruptcy filings were made
     solely to allow Premier access to the insurance  proceeds,  the proceedings
     are not expected to last for an extended  period and creditors are expected
     to  receive  the  amounts  owed to them.  For these  reasons,  the  Company
     believes that the application of the equity method of accounting during the
     pendency of the bankruptcy proceedings is appropriate.

     Summarized financial information for Premier is as follows (in thousands):

                                                             September 30,
                                                                 2006
                                                              -----------
     Assets:
     Current assets                                           $     9,358
     Non-current assets (a)                                       315,588
                                                              -----------
        Total assets                                          $   324,946
                                                              ===========

     Liabilities:
     Current liabilities (b)                                  $   196,051
     Non-current liabilities                                       11,962
                                                              -----------
        Total liabilities                                         208,013
                                                              -----------
     Shareholders' equity                                         116,933
                                                              -----------
        Total liabilities and shareholders' equity            $   324,946
                                                              ===========

     (a)  Includes  $11,900,000  of  intangible  assets,   $148,500,000  of  net
          property and equipment and $152,600,000 of restricted cash for amounts
          held by the indenture trustee of the Premier Notes.
     (b)  Includes bonds and notes payable of $165,300,000.

     Premier has filed a motion with the Court seeking approval for $180,000,000
     debtor in  possession  financing  to be  provided  by a  subsidiary  of the
     Company. If approved,  proceeds from the financing would be used by Premier
     to pay the  Premier  Notes  in  full,  to pay for  post-petition  operating
     expenses including the repair, reconstruction and eventual operation of the
     Hard  Rock  Biloxi,  and to pay  certain  other  costs and  expenses  to be
     determined.  The financing would bear interest at 10 3/4% per annum,  would
     have a scheduled  maturity of February 1, 2012, and would be subject to the
     satisfaction of certain conditions at the Company's discretion.

     Prior to  Hurricane  Katrina,  Premier  purchased a  comprehensive  blanket
     insurance  policy  providing up to  $181,100,000  in coverage for damage to
     real and  personal  property,  including  business  interruption  coverage.
     Premier has received payments from various insurance  carriers  aggregating
     $160,800,000  with respect to  $168,100,000  face amount of  coverage;  the
     remaining  $13,000,000  face amount of coverage has not been settled and is
     currently in  litigation.  All  insurance  settlements  have been placed on
     deposit into restricted accounts under the control of the indenture trustee
     of the Premier Notes.

     Hurricane Katrina completely destroyed the Hard Rock Biloxi's casino, which
     was a facility built on floating barges,  and caused  significant damage to
     the hotel and  related  structures.  The  threat  of  hurricanes  remains a
     significant  risk to the existing  facilities and to the new casino,  which
     will be  constructed  over water on concrete  pilings  that are expected to
     greatly  improve the  structural  integrity of the facility.  In July 2006,
     Premier  purchased a new insurance  policy  providing up to $149,300,000 in
     coverage for damage to real and  personal  property and up to the lesser of
     six months or  $30,000,000  of business  interruption  and delayed  opening
     coverage.  The coverage is syndicated  through several insurance  carriers,
     each with an A.M.  Best  rating of A-  (Excellent)  or  better.  The policy
     provides  coverage for the existing  structures,  as well as for the repair
     and rebuild of the hotel,  low rise  building  and  parking  garage and the
     construction of the new casino.

                                       16
<PAGE>



Notes to Interim Consolidated Financial Statements, continued

     Although the insurance policy is an "all risk" policy,  weather catastrophe
     occurrence  ("WCO"),  which is defined to include  damage caused by a named
     storm, is limited to $50,000,000  with a deductible equal to the greater of
     $7,000,000 or 5% of total insured  values at risk.  WCO coverage is subject
     to mandatory  reinstatement  of coverage for an  additional  pre-determined
     premium.

     Since the WCO coverage  purchased by Premier is substantially less than the
     coverage in place prior to Hurricane Katrina,  Premier has more exposure to
     property  damage  resulting  from  similar  catastrophic  storms.  However,
     Premier's assessment of the probability of a similar type of loss occurring
     during  the  remainder  of this  year's  hurricane  season  is  remote,  an
     assessment  based in large part on the less severe damage  sustained to the
     non-casino  facilities from Hurricane  Katrina last year, and the amount of
     new  construction  that  will be at risk  during  the  balance  of the 2006
     hurricane season.  Premiums for WCO policies have increased dramatically as
     a result of  Hurricane  Katrina,  and the  amount of  coverage  that can be
     purchased has also been reduced as insurance companies seek to reduce their
     exposure to such events.

18.  In June 2006, the Company entered into a new credit  agreement with various
     bank lenders for a $100,000,000  unsecured  credit facility that matures in
     five years and bears interest based on the  Eurocurrency  rate or the prime
     rate. The Company's existing credit agreement was terminated.  At September
     30, 2006, no amounts were outstanding under this bank credit facility.

19.  In August 2006, pursuant to a subscription  agreement with Fortescue Metals
     Group Ltd ("Fortescue") and its subsidiary, FMG Chichester Pty Ltd ("FMG"),
     the Company invested an aggregate of $408,000,000,  including expenses,  in
     Fortescue's  Pilbara iron ore infrastructure  project in Western Australia.
     In exchange for its cash investment, the Company acquired 26,400,000 common
     shares of Fortescue,  representing  approximately  9.99% of the outstanding
     Fortescue common stock, and a 13 year,  $100,000,000  note of FMG. Interest
     on  the  note  is  calculated  as 4% of  the  revenue,  net  of  government
     royalties,  invoiced from the iron ore produced from the project.  The note
     is unsecured and subordinate to the project's secured debt.  Fortescue is a
     publicly traded company on the Australian  Stock  Exchange,  and the shares
     acquired  by the Company may be sold  without  restriction.  At the date of
     acquisition,  the  Company's  investment in  Fortescue's  common shares was
     recorded at an aggregate fair value of  $202,100,000,  based on the closing
     price of Fortescue's common shares on that date. The Company has classified
     the Fortescue common shares as a non-current available for sale investment.

     For accounting purposes,  the Company bifurcated its remaining $205,900,000
     investment into a 13 year  zero-coupon  note and a prepaid mining interest.
     The  zero-coupon  note was recorded at an  estimated  initial fair value of
     $21,600,000,  representing  the  present  value  of  the  principal  amount
     discounted at 12.5%.  The prepaid mining interest of $184,300,000  has been
     classified with other non-current  assets, and will be amortized to expense
     as the 4% of revenue is earned.




                                       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 2005
10-K.  As more  fully  discussed  in the 2005  10-K,  reported  cash  flows from
operating,  investing  and  financing  activities  do not  generally  follow any
particular  pattern or trend,  and  reported  results in the most recent  period
should not be expected to recur in any subsequent period.

                         Liquidity and Capital Resources

Net cash provided by operating  activities  decreased by $149,600,000 in 2006 as
compared to the same period in 2005, due  principally to no 2006 cash flows from
WilTel, which was sold in December 2005, reduced  distributions of earnings from
associated  companies,  reduced  funds  generated  from  activity in the trading
portfolio and payment of incentive  compensation and pension plan contributions.
During 2006,  cash provided by operating  activities  reflect the  collection of
$179,800,000 of certain  receivables  from AT&T Inc. (as more fully discussed in
the 2005  10-K) and  increased  cash flow from the  Company's  operating  units,
principally the manufacturing businesses. WilTel's 2005 cash flow from operating
activities for the nine month period ended September 30, 2005 was  $119,000,000.
The increased  cash flow from the Company's  manufacturing  units reflects Idaho
Timber,  which was acquired  during the second  quarter of 2005,  and  increased
operating income at the plastics  manufacturing segment resulting from increased
revenues.  In 2006,  distributions from associated companies principally include
earnings   distributed  by  EagleRock,   which  is  discussed  below.  In  2005,
distributions from associated  companies  principally  resulted from the sale of
Union Square.

Net cash flows used for investing activities increased by $67,800,000 in 2006 as
compared  to 2005.  During  the 2006  period,  proceeds  from  the  disposal  of
discontinued  operations  net of  expenses  and  cash  sold  were  $115,300,000,
principally  reflecting  the  sale of  Symphony  and ATX and the  resolution  of
WilTel's  working  capital  adjustment,  as compared to $101,400,000 in the 2005
period, principally reflecting the sale of the Waikiki Beach hotel. During 2006,
funds provided by the disposal of real estate and other assets include the sales
of Square 711 and certain  associated  companies,  and funds used for  investing
activities include the investment in Fortescue; these transactions are discussed
in greater detail below.  Premier's  obligation to place  insurance  proceeds in
restricted  accounts (see below) is the  principal  reason for the net change in
restricted cash during 2006. The use of funds during 2006 for acquisitions  (net
of cash acquired)  principally  reflects the acquisition of Premier.  The use of
funds during 2005 for acquisitions (net of cash acquired)  totaled  $172,600,000
for the  acquisitions  of NSW,  ATX and Idaho  Timber.  Funds used for  WilTel's
acquisition   of  property,   equipment  and  leasehold   improvements   totaled
$79,100,000  in 2005;  as a result of the sale of WilTel  the  Company's  use of
funds for property, equipment and leasehold improvements declined significantly.
The  use  of  funds  for  investments  in  associated   companies  increased  by
$261,000,000 in 2006 as compared to 2005,  principally reflecting the investment
in Safe Harbor Domestic Partners L.P. ("Safe Harbor") and Goober Drilling, which
are discussed below.

During 2006,  net cash  provided by financing  activities  was  $37,800,000,  as
compared  to net cash used for  financing  activities  of  $11,900,000  in 2005.
During 2005,  funds were used to retire customer banking deposits of the banking
and lending  operations as they became due and the remaining deposits were sold.
Issuance of long-term debt during the 2006 and 2005 periods  principally relates
to repurchase  agreements.  The reduction of long-term debt during 2006 includes
the  repayment  of  $32,000,000  of debt of Square  711,  which  was  sold.  The
reduction of long-term debt during 2005 includes the repayment of $22,100,000 of
debt of operations  sold (Waikiki Beach hotel) and the maturity of the Company's
8 1/4% Senior Subordinated Notes.

As reflected on the Company's September 30, 2006 consolidated balance sheet, the
sum of the  Company's  cash  and cash  equivalents,  investments  classified  as
current assets and non-current investments aggregated  $2,553,500,000.  However,
since  $400,000,000 of this amount is pledged as collateral  pursuant to various
agreements,  represents  investments  in  non-public  securities  or is  held by
subsidiaries  that are party to agreements which restrict the Company's  ability
to use the funds for other purposes, the Company does not consider those amounts
to be readily available to meet the Parent's liquidity needs. The $2,153,500,000
that is readily available is comprised of cash and short-term bonds and notes of
the United States Government and its agencies of

                                       18
<PAGE>



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

$808,000,000  (37.5%),  U.S.  Government-Sponsored  Enterprises of  $300,700,000
(14.0%)  and  other  publicly  traded  debt and  equity  securities  aggregating
$1,044,800,000 (48.5%), including the Company's investment in Fortescue's common
stock. The investment  income realized from the Parent's readily available cash,
cash equivalents and marketable  securities is used to meet the Parent company's
short-term  recurring cash  requirements,  which are  principally the payment of
interest on its debt and corporate overhead expenses.

As of September 30, 2006, the Company had outstanding $149,600,000 of fixed rate
repurchase agreements (an increase of $57,500,000 from December 31, 2005). These
repurchase  agreements,  which are reflected in debt due within one year, have a
weighted average interest rate of approximately  5.28%,  mature at various dates
through March 2007 and are secured by  non-current  investments  with a carrying
value of $153,300,000.

In January,  April and July 2006, the Company received $16,600,000,  $20,100,000
and  $11,500,000,   respectively,   as  distributions  from  its  investment  in
EagleRock.  The amount received in January was included in current trade,  notes
and other  receivables,  net in the  Company's  December  31, 2005  consolidated
balance sheet. In October 2006, the Company informed  EagleRock that it does not
intend to redeem its remaining interest at this time. At September 30, 2006, the
book value of the Company's investment in EagleRock was $51,000,000.

In January 2006,  the Company  invested  $50,000,000  in Safe Harbor,  a limited
partnership  which will principally  invest in the securities of Japanese public
companies.  Although  the general  partner is  permitted  to invest  directly in
securities,  the general  partner expects that  substantially  all funds will be
invested in a master fund managed by the general partner.

In February 2006, Square 711 completed the sale of 8 acres of unimproved land in
Washington, D.C. for aggregate cash consideration of $121,900,000. The land was
acquired by Square 711 in September 2003 for cash consideration of $53,800,000.
After satisfaction of mortgage indebtedness on the property of $32,000,000 and
other closing payments, the Company received net cash proceeds of approximately
$75,700,000.

During the first quarter of 2006, the Company  received  aggregate cash proceeds
of $56,400,000 from the sale of its equity interest in and loan repayment by two
associated companies and recorded a pre-tax gain totaling $27,500,000,  which is
reflected  in  investment  and other  income  for the nine  month  period  ended
September 30, 2006.

In the second  quarter of 2006,  the Company  acquired a 30%  limited  liability
company interest in Goober Drilling for aggregate  consideration of $60,000,000,
excluding expenses,  and agreed to lend to Goober Drilling,  on a secured basis,
up to $126,000,000 to finance new equipment  purchases and  construction  costs,
and to repay  existing  debt. As of September  30, 2006,  the  outstanding  loan
amount was  $93,100,000.  Goober  Drilling is an on-shore  contract  oil and gas
drilling company based in Stillwater,  Oklahoma that provides  drilling services
to exploration and production companies.

As discussed  above,  during the second quarter of 2006, the Company  indirectly
acquired a  controlling  voting  interest in Premier for an  aggregate  purchase
price of $90,800,000,  excluding expenses. The Company owns approximately 46% of
the common units of Premier and all of Premier's  preferred units,  which accrue
an annual  preferred  return of 17%. The Company also acquired  Premier's junior
subordinated note due August 2012, with an outstanding balance at acquisition of
$13,400,000,  and has made an $8,100,000 12% loan to Premier that matures in May
2007.  All of  Premier's  equity  interests  are pledged to secure  repayment of
Premier's  outstanding  $160,000,000  principal amount of 10 3/4% First Mortgage
Notes due  February 1, 2012 (the  "Premier  Notes").  In  addition,  the Company
agreed to provide up to  $40,000,000  of  construction  financing  to  Premier's
general  contractor by purchasing the  contractor's  receivables from Premier if
the receivables are more than ten days past due.

                                       19
<PAGE>


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

On September 19, 2006, Premier and its subsidiary filed voluntary  petitions for
reorganization  under  chapter  11 of title 11 of the  United  States  Code (the
"Bankruptcy  Code"),  before the United States Bankruptcy Court for the Southern
District of Mississippi, Southern Division (the "Court"). Premier is seeking the
Court's  assistance  in gaining  access to Hurricane  Katrina-related  insurance
proceeds  which  has  been  denied  to  Premier  by  its  pre-petition   secured
bondholders.  Premier  will  continue  to operate  its  business  as "debtors in
possession"  under the  jurisdiction  of the Court  and in  accordance  with the
applicable  provisions of the Bankruptcy  Code and orders of the Court.  Premier
believes  that its  insurance  proceeds and  permitted  equipment  financing are
sufficient to pay its creditors in full and to rebuild the Hard Rock Biloxi.

The  Company  has  deconsolidated  Premier  effective  with  the  filing  of the
voluntary  petitions,  and has  classified  its net  investment in Premier as an
investment  in an  associated  company  ($116,900,000  as of September 30, 2006,
including  all loans and equity  interests).  The  bankruptcy  filings were made
solely to allow Premier access to the insurance  proceeds,  the  proceedings are
not  expected  to last for an  extended  period and  creditors  are  expected to
receive the amounts owed to them. For these reasons,  the Company  believes that
the  application  of the equity method of accounting  during the pendency of the
bankruptcy proceedings is appropriate.

Premier  has filed a motion with the Court  seeking  approval  for  $180,000,000
debtor-in-possession financing to be provided by a subsidiary of the Company. If
approved,  proceeds  from  the  financing  would be used by  Premier  to pay the
Premier Notes in full, to pay for post-petition operating expenses including the
repair,  reconstruction  and eventual  operation of the Hard Rock Biloxi, and to
pay certain other costs and expenses to be determined.  The financing would bear
interest at 10 3/4% per annum,  would have a  scheduled  maturity of February 1,
2012,  and would be subject to the  satisfaction  of certain  conditions  at the
Company's discretion.

Prior to Hurricane Katrina,  Premier purchased a comprehensive blanket insurance
policy  providing up to $181,100,000 in coverage for damage to real and personal
property,   including  business  interruption  coverage.  Premier  has  received
payments from various insurance carriers  aggregating  $160,800,000 with respect
to $168,100,000 face amount of coverage;  the remaining  $13,000,000 face amount
of coverage has not been settled and is currently in  litigation.  All insurance
settlements  have been  placed on deposit  into  restricted  accounts  under the
control of the indenture trustee of the Premier Notes.

Hurricane Katrina completely  destroyed the Hard Rock Biloxi's casino, which was
a facility built on floating barges,  and caused significant damage to the hotel
and related  structures.  The threat of hurricanes remains a significant risk to
the existing  facilities and to the new casino,  which will be constructed  over
water on concrete  pilings that are expected to greatly  improve the  structural
integrity  of the  facility.  In July 2006,  Premier  purchased a new  insurance
policy  providing up to $149,300,000 in coverage for damage to real and personal
property  and  up to the  lesser  of  six  months  or  $30,000,000  of  business
interruption and delayed opening  coverage.  The coverage is syndicated  through
several insurance  carriers,  each with an A.M. Best rating of A- (Excellent) or
better. The policy provides coverage for the existing structures, as well as for
the repair and rebuild of the hotel,  low rise  building and parking  garage and
the  construction  of the new casino.  Although the insurance  policy is an "all
risk"  policy,  weather  catastrophe  occurrence  ("WCO"),  which is  defined to
include  damage  caused by a named  storm,  is  limited  to  $50,000,000  with a
deductible  equal to the greater of $7,000,000 or 5% of total insured  values at
risk.  WCO  coverage is subject to  mandatory  reinstatement  of coverage for an
additional pre-determined premium.

Since the WCO  coverage  purchased  by  Premier is  substantially  less than the
coverage  in place prior to  Hurricane  Katrina,  Premier  has more  exposure to
property damage resulting from similar catastrophic storms.  However,  Premier's
assessment of the  probability  of a similar type of loss  occurring  during the
remainder of this year's  hurricane  season is remote,  an  assessment  based in
large part on the less severe damage sustained to the non-casino facilities from
Hurricane  Katrina last year, and the amount of new construction that will be at
risk during the balance of the 2006 hurricane season.  Premiums for WCO policies
have increased  dramatically as a result of Hurricane Katrina, and the amount of
coverage that can be purchased has also been reduced as insurance companies seek
to reduce their exposure to such events.

                                       20
<PAGE>



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

In June 2006, the Company entered into a new credit  agreement with various bank
lenders for a $100,000,000  unsecured credit facility that matures in five years
and  bears  interest  based on the  Eurocurrency  rate or the  prime  rate.  The
Company's  existing credit  agreement was terminated.  At September 30, 2006, no
amounts were outstanding under this bank credit facility.

In July 2006, the Company sold Symphony to RehabCare Group,  Inc., for aggregate
cash  consideration  of  approximately   $107,000,000.   After  satisfaction  of
Symphony's  outstanding credit agreement ($31,700,000 at date of sale) and other
sale related obligations,  the Company realized net cash proceeds of $62,300,000
and recorded a pre-tax gain on sale of discontinued operations of $53,300,000.

In August 2006, pursuant to a subscription agreement with Fortescue and FMG, the
Company  invested  an  aggregate  of  $408,000,000,   including   expenses,   in
Fortescue's  Pilbara iron ore infrastructure  project in Western  Australia.  In
exchange for its cash investment,  the Company acquired 26,400,000 common shares
of Fortescue,  representing  approximately  9.99% of the  outstanding  Fortescue
common stock, and a 13 year,  $100,000,000  note of FMG. Interest on the note is
calculated as 4% of the revenue, net of government royalties,  invoiced from the
iron ore produced from the project. The note is unsecured and subordinate to the
project's secured debt. Fortescue is a publicly traded company on the Australian
Stock  Exchange,  and the shares  acquired by the  Company  may be sold  without
restriction. At the date of acquisition, the Company's investment in Fortescue's
common shares was recorded at an aggregate fair value of $202,100,000,  based on
the closing price of  Fortescue's  common  shares on that date.  The Company has
classified  the  Fortescue  common  shares as a  non-current  available for sale
investment.

For  accounting  purposes,  the Company  bifurcated  its remaining  $205,900,000
investment into a 13 year zero-coupon  note and a prepaid mining  interest.  The
zero-coupon note was recorded at an estimated initial fair value of $21,600,000,
representing the present value of the principal amount  discounted at 12.5%. The
prepaid  mining  interest  of  $184,300,000   has  been  classified  with  other
non-current  assets,  and will be  amortized  to expense as the 4% of revenue is
earned.

In September 2006, the Company sold ATX to Broadview Networks Holdings, Inc. for
aggregate cash  consideration of approximately  $85,700,000,  subject to working
capital  adjustments  and  recorded  a  pre-tax  gain on  sale  of  discontinued
operations of $41,600,000.

                          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.  On an on-going basis, the Company evaluates all of these estimates
and assumptions. The following areas have been identified 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.  Actual results
could differ from these estimates.

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 in the
future  the  Company  were to  determine  that it would be able to  realize  its
deferred tax asset in excess of its net recorded  amount,  an  adjustment  would
increase income in such period.  Similarly, if in the future the Company were to
determine  that it would not be able to realize all or part of its  deferred tax
asset,  an  adjustment   would  be  charged  to  income  in  such  period.   The
determination  of the amount of the valuation  allowance  required is based,  in
significant part, upon the Company's  projection of future taxable income at any
point in time. 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.

During 2005,  the Company's  projections  of future taxable income enabled it to
conclude 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;
accordingly, $1,135,100,000 of the deferred tax valuation allowance was reversed
as a credit to income tax  expense  (principally  during  the second  quarter of
2005).  The  Company's  conclusion  that a portion of the deferred tax asset was
more likely than not to be realizable is strongly  influenced by its  historical
ability  to  generate  significant  amounts  of taxable  income.  The  Company's
estimate  of future  taxable  income  considers  all  available  evidence,  both
positive and negative, about its current operations and investments, includes an
aggregation  of  individual   projections   for  each  material   operation  and
investment,  and includes  all future years that the Company  estimated it would
have available net operating  losses.  Over the projection  period,  the Company
assumed  that its  readily  available  cash,  cash  equivalents  and  marketable
securities would provide returns generally 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. At September 30, 2006, the balance of the
deferred valuation allowance was approximately $911,600,000.

Impairment of Securities - Investments with an impairment in value considered to
be  other  than  temporary  are  written  down  to  estimated  fair  value.  The
write-downs are included in net securities gains in the consolidated  statements
of  operations.  The Company  evaluates  its  investments  for  impairment  on a
quarterly basis.

The  Company's  determination  of whether a security  is other than  temporarily
impaired  incorporates  both  quantitative  and  qualitative  information;  GAAP
requires  the  exercise of judgment in making this  assessment,  rather than the
application of fixed  mathematical  criteria.  The Company considers a number of
factors  including,  but not  limited  to,  the length of time and the extent to
which the fair value has been less than cost,  the financial  condition and near
term prospects of the issuer, the reason for the decline in fair value,  changes
in fair value  subsequent to the balance sheet date, and other factors  specific
to the individual investment. The Company's assessment involves a high degree of
judgment  and  accordingly,  actual  results  may  differ  materially  from  the
Company's  estimates and judgments.  The Company recorded impairment charges for
securities  of  $9,700,000  and  $4,000,000  for the three month  periods  ended
September 30, 2006 and 2005,  respectively,  and  $12,300,000 and $7,300,000 for
the nine month periods ended September 30, 2006 and 2005, respectively.

Business  Combinations  - At  acquisition,  the Company  allocates the cost of a
business acquisition to the specific tangible and intangible assets acquired and
liabilities assumed based upon their relative fair values. Significant judgments
and  estimates  are often made to  determine  these  allocated  values,  and may
include the use of independent  appraisals,  consider  market quotes for similar
transactions,   employ   discounted  cash  flow  techniques  or  consider  other
information  the Company  believes  relevant.  The  finalization of the purchase
price  allocation  will  typically  take a number of months to complete,  and if
final  values  are  materially   different  from  initially   recorded   amounts
adjustments are recorded.  Any excess of the cost of a business acquisition over
the fair  values of the net assets  and  liabilities  acquired  is  recorded  as
goodwill  which is not  amortized to expense.  Recorded  goodwill of a reporting
unit is required to be tested for  impairment  on an annual  basis,  and between
annual  testing dates if events or  circumstances  change that would more likely
than not reduce the fair value of a reporting unit below its net book value.

Subsequent to the finalization of the purchase price allocation, any adjustments
to the recorded values of acquired assets and liabilities  would be reflected in
the Company's consolidated  statement of operations.  Once final, the Company is
not permitted to revise the allocation of the original  purchase price,  even if
subsequent events or circumstances  prove the Company's  original  judgments and
estimates to be  incorrect.  In addition,  long-lived  assets like  property and
equipment,  amortizable intangibles and goodwill may be deemed to be impaired in
the future  resulting in the recognition of an impairment loss;  however,  under
GAAP the methods, assumptions and
                                       22

<PAGE>



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

results of an impairment review are not the same for all long-lived  assets. The
assumptions   and  judgments  made  by  the  Company  when  recording   business
combinations  will have an impact on  reported  results of  operations  for many
years into the future.

                              Results of Operations

                  The 2006 Periods Compared to the 2005 Periods

Manufacturing - Idaho Timber

For the three and nine months  ended  September  30,  2006,  revenues  and other
income for Idaho Timber were $77,600,000 and $261,900,000,  respectively;  gross
profit was  $4,200,000  and  $25,500,000,  respectively;  and pre-tax income was
$300,000 and $11,900,000,  respectively. Results of operations for the three and
nine months ended September 30, 2006 include salaries and incentive compensation
expenses of  $1,900,000  and  $7,100,000,  respectively,  and  depreciation  and
amortization expenses of $1,200,000 and $3,700,000,  respectively. For the three
months ended September 30, 2005 and for the period from  acquisition  (May 2005)
through  September  30, 2005,  revenues and other  income were  $90,900,000  and
$154,400,000,   respectively;  gross  profit  was  $9,100,000  and  $12,600,000,
respectively;  and pre-tax income was $4,500,000 and  $4,100,000,  respectively.
Results of operations for the three months ended  September 30, 2005 and for the
period  from  acquisition  through  September  30,  2005  include  salaries  and
incentive compensation expenses of $3,000,000 and $4,200,000,  respectively, and
depreciation   and   amortization   expenses  of  $1,100,000   and   $2,900,000,
respectively.

Idaho  Timber's  revenues for the third  quarter of 2006 declined as compared to
the prior  quarters  of 2006 due to lower  average  selling  prices and  reduced
shipment volume.  This decline was principally due to weakening demand resulting
from  reductions  in  housing  starts and the  abundant  supply of lumber in the
marketplace. In October 2006, the trade dispute between the U.S. and Canada over
Canadian lumber imports was resolved and a new Softwood Lumber  Agreement became
effective that restricts and imposes a tax on Canadian  lumber  imports.  During
the  third  quarter,  imports  from  Canada  increased  in  anticipation  of the
implementation of the new agreement adding to the oversupply in the market.

While raw material costs (the largest  component of its cost of sales)  declined
slightly  in the third  quarter of 2006 due to the  continued  decline in market
conditions and the diminished  uncertainty concerning the impact of the Softwood
Lumber Agreement,  this reduction lagged behind the reduction in selling prices.
Gross  profit and pre-tax  results for the third  quarter of 2006  reflect  this
compression.  Pre-tax  results  for the third  quarter  of 2006  also  reflect a
reduction  in  salaries  and  incentive  compensation  as  compared to the prior
quarters of 2006 principally due to lower incentive  compensation as a result of
Idaho Timber's decreased profitability.

Manufacturing - Plastics

Pre-tax  income for the plastics  division was $5,200,000 and $4,300,000 for the
three  month  periods  ended  September  30,  2006 and 2005,  respectively,  and
$15,400,000  and $12,300,000 for the nine month periods ended September 30, 2006
and 2005,  respectively.  The plastics division's revenues and other income were
$27,900,000 and $24,500,000 for the three month periods ended September 30, 2006
and 2005,  respectively,  and  $82,200,000  and  $69,900,000  for the nine month
periods  ended  September  30, 2006 and 2005,  respectively.  Gross profits were
$9,200,000 and  $7,900,000 for the three month periods ended  September 30, 2006
and 2005,  respectively,  and  $27,000,000  and  $22,300,000  for the nine month
periods ended September 30, 2006 and 2005,  respectively.  Revenues for the nine
months ended September 30, 2006 reflects  $3,900,000 of increased  revenues from
NSW (which was acquired in February  2005).  In addition,  revenues in the three
and nine month 2006 periods reflect  increases in the carpet cushion and erosion
control markets,  partially reduced by a decline in the consumer products market
due to lower demand for certain  products.  These revenue  changes result from a
variety of factors including increased road construction and the impact of price
increases implemented in 2005. While the carpet

                                       23
<PAGE>


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

cushion market  continued to benefit from the  previously  strong housing market
through the first half of 2006,  it has begun to experience a reduction in sales
volume resulting from a slowdown in housing starts.  Gross margins for the three
and  nine  month  2006   periods  also  reflect  an  increase  in  the  cost  of
polypropylene,  the  principal  raw  material  used and a  byproduct  of the oil
refining  process  whose  price  tends to  fluctuate  with the price of oil.  In
addition,  gross margin for the nine month 2006 period  reflects  $1,000,000  of
greater  amortization  expense on intangible  assets resulting from acquisitions
and depreciation expense as compared to the same period in 2005. Pre-tax results
for the three and nine month 2006 periods also reflect  $400,000 and  $1,400,000
of higher  salaries and incentive  compensation  expense than for the comparable
periods in 2005.

Gaming Entertainment

For the three month period and the period from date of  acquisition to September
30, 2006,  Premier had pre-tax  losses of $800,000 and  $200,000,  respectively.
Such amounts reflect  Premier's  interest  expense of $4,700,000 and $8,000,000,
respectively,  all other  expenses of $3,600,000 and  $6,800,000,  respectively,
insurance recoveries and charges for minority interests. As more fully discussed
above,  the  Company  has  deconsolidated  Premier  as a  result  of its  filing
voluntary  petitions  with the  Bankruptcy  Court;  during the  pendency  of the
bankruptcy,  Premier's results will be reflected as equity in income (losses) of
associated companies. Until such time as the Hard Rock Biloxi reopens, Premier's
operating  results will consist  primarily of overhead costs,  interest expense,
charges or credits for minority interests and remaining insurance recoveries.

Domestic Real Estate

Pre-tax income (loss) for the domestic real estate segment was  $(2,400,000) and
$1,000,000  for the three  month  periods  ended  September  30,  2006 and 2005,
respectively,  and  $48,400,000  and $1,600,000 for the nine month periods ended
September 30, 2006 and 2005,  respectively.  Pre-tax income for this segment for
the nine month period ended September 30, 2006 principally  reflects the sale by
Square 711, which resulted in a pre-tax gain of  $48,900,000.  In addition,  the
Company recognized  pre-tax profit related to its 95-lot development  project in
South  Walton  County,  Florida of $100,000 and  $1,800,000  for the three month
periods ended  September 30, 2006 and 2005,  respectively,  and  $3,600,000  and
$4,200,000  for the nine  month  periods  ended  September  30,  2006 and  2005,
respectively.  Such amounts  principally  result from the  completion of certain
required improvements.

Corporate and Other Operations

Investment and other income  increased in the three and nine month periods ended
September  30,  2006 as compared to the same  periods in 2005  primarily  due to
greater interest income of $12,100,000 and $50,100,000, respectively, reflecting
a larger amount of invested assets and higher  interest rates,  and for the nine
month  2006  period,  $27,500,000  of gain  from  the  sales  of two  associated
companies and $7,100,000 from the recovery of a bankruptcy claim. Investment and
other  income  for the three and nine  month  2005  periods  includes  a gain of
$10,500,000  on the sale of 70% of the  Company's  interest in Cobre Las Cruces,
S.A. to Inmet Mining  Corporation.  Investment  and other  income also  reflects
income  (charges) of $(900,000) and $1,600,000 for the three month periods ended
September 30, 2006 and 2005,  respectively,  and $900,000 and $1,500,000 for the
nine month periods ended September 30, 2006 and 2005,  respectively,  related to
the accounting for mark-to-market values of Corporate derivatives.

Net securities gains for Corporate and Other Operations  aggregated  $16,300,000
and  $85,700,000  for the three month periods ended September 30, 2006 and 2005,
respectively,  and $99,400,000 and $132,700,000 for the nine month periods ended
September 30, 2006 and 2005, respectively.  Included in net securities gains for
the nine month 2006 period is a gain of $37,400,000 from the sale of 115,000,000
shares of Level 3 common  stock for  $376,600,000.  Included  in net  securities
gains for the 2005  periods  is a gain of  $70,000,000  from the sale of 175,000
shares of White Mountain  Insurance  Group,  Ltd.  common stock.  Net securities
gains  include  provisions  of  $9,700,000  and  $4,000,000  for the three month
periods ended September 30, 2006 and 2005, respectively, and

                                       24

<PAGE>



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

$12,300,000  and $7,300,000 for the nine month periods ended  September 30, 2006
and 2005,  respectively,  to write  down the  Company's  investments  in certain
available for sale securities.  The write-down of the securities resulted from a
decline in market value determined to be other than temporary.

The increase in interest expense during the 2006 periods as compared to the same
periods in 2005  primarily  reflects  interest  expense  relating  to fixed rate
repurchase agreements.

Salaries  and  incentive   compensation  expense  increased  by  $6,600,000  and
$23,200,000,  respectively,  in the three and nine month periods ended September
30, 2006 as compared to the same periods in 2005  principally due to share-based
compensation  expense recorded as a result of the adoption of SFAS 123R. For the
three and nine month 2006 periods,  salaries and incentive  compensation expense
included $3,000,000 and $12,400,000, respectively, relating to grants made under
the  Company's  senior  executive  warrant plan and the fixed stock option plan.
Salaries and incentive  compensation  also increased in the three and nine month
2006  periods as compared to the same  periods in 2005 due to greater  Corporate
bonus  expense,  compensation  expense of a subsidiary  that was acquired in the
fourth  quarter  of 2005 that is  engaged in the  development  of a new  medical
product,  and for the nine month 2006 period,  greater  compensation expense for
the winery operations.

The  increase  in  selling,   general  and  other  expenses  of  $6,200,000  and
$20,300,000  in the three and nine month  periods  ended  September  30, 2006 as
compared to the same periods in 2005 primarily reflects research and development
costs and  operating  expenses of the medical  product  development  subsidiary,
greater  employee  benefit costs  including  pension costs  relating to WilTel's
retained plan (which were  classified with  discontinued  operations in 2005 for
periods  prior to the sale of  WilTel),  and  higher  professional  fees,  which
largely  relate to  potential  and existing  investments.  The 2006 periods also
reflect increased corporate aircraft expenses. In addition, selling, general and
administrative  expenses  for the  three and nine  month  2005  periods  include
$2,400,000 and $4,500,000,  respectively,  related to Indular, an Argentine shoe
manufacturing company that was sold in the fourth quarter of 2005.

For the three and nine month  periods ended  September  30, 2006,  the Company's
effective  income tax rate is lower than the federal  statutory  rate  primarily
because of the  reversal of  $6,000,000  of state income tax reserves due to the
favorable resolution of certain contingencies. The income tax provisions for the
three and nine  month  periods  ended  September  30,  2005  reflect  credits of
$25,100,000 and $1,135,100,000,  respectively,  as a result of the reversal of a
portion of the  valuation  allowance  for the  deferred  tax asset.  The Company
adjusted  the  valuation  allowance  in 2005 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.

Associated Companies

Equity in income (losses) of associated companies for the three and nine month
periods ended September 30, 2006 and 2005 includes the following (in thousands):


                                       25
<PAGE>


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

<TABLE>
<CAPTION>

                                                            For the Three Month            For the Nine Month
                                                         Period Ended September 30,     Period Ended September 30,
                                                         --------------------------     --------------------------
                                                            2006           2005           2006              2005
                                                           ------         -------       -------            ------
       <S>                                                   <C>            <C>              <C>             <C>

Olympus Re Holdings, Ltd.                                $   --         $(81,700)      $    --           $(69,700)
EagleRock                                                  (4,900)         6,100           7,100          (13,500)
JPOF II                                                     4,200          8,400          23,900           19,500
HomeFed Corporation                                           300            800           1,200            1,300
Union Square                                                 --              --             --             72,300
Safe Harbor                                                (3,800)           --           (7,300)             --
Other                                                       5,400           (100)         13,900            2,800
                                                         --------       --------       ---------         --------
  Equity in income (losses) before income taxes             1,200        (66,500)         38,800           12,700
Income tax expense                                            100            --           14,500              700
                                                         --------       --------       ---------         --------
  Equity in income (losses), net of taxes                $  1,100       $(66,500)      $  24,300         $ 12,000
                                                         ========       ========       =========         ========
</TABLE>

In early 2006,  Olympus Re Holdings,  Ltd.  raised a  significant  amount of new
equity to replace some,  but not all of the capital that was lost as a result of
the 2005  hurricanes.  Since the  Company did not invest  additional  capital in
Olympus,  its  equity  interest  was  diluted  (to less than 4%) such that it no
longer applies the equity method of accounting for this investment subsequent to
December  31,  2005.  The  Company  wrote down the book  value of its  remaining
investment in Olympus to zero in 2005.

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

Discontinued Operations

Healthcare Services

As discussed  above,  in July 2006 the Company sold Symphony and  classified its
historical  operating  results  as a  discontinued  operation  during the second
quarter.  Pre-tax income of the healthcare services segment was $200,000 for the
three month period ended  September 30, 2005 and $200,000 and $2,400,000 for the
nine month periods  ended  September  30, 2006 and 2005,  respectively.  Gain on
disposal of discontinued operations for the 2006 periods includes a pre-tax gain
on the sale of Symphony of $53,300,000 ($33,500,000 after tax).

Telecommunications - ATX

As discussed  above,  in September  2006 the Company sold ATX and classified its
historical  operating  results  as a  discontinued  operation  during  the third
quarter.  Pre-tax income (loss) of ATX was  $(3,200,000)  and $1,000,000 for the
three  month  periods  ended  September  30,  2006 and 2005,  respectively,  and
$(1,200,000)  and $200,000 for the nine month periods  ended  September 30, 2006
and 2005, respectively. Gain on disposal of discontinued operations for the 2006
periods  includes a pre-tax gain on the sale of ATX of $41,600,000  ($26,100,000
after tax).

Real Estate

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
($54,600,000  after tax), which is reflected in gain on disposal of discontinued
operations for the nine month period ended September 30, 2005.

                                       26
<PAGE>



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

WilTel

Gain on disposal of  discontinued  operations  for the three and nine month 2006
periods includes $700,000 and $600,000,  respectively of pre-tax gains ($500,000
and $400,000, respectively, after tax) principally for the resolution of certain
sale-related  contingencies  and  obligations  and working  capital  adjustments
related  to  WilTel,  which was sold in the  fourth  quarter  of 2005.  WilTel's
pre-tax  income  classified  as a  discontinued  operation was  $57,300,000  and
$78,300,000  for the three and nine month  periods  ended  September  30,  2005,
respectively.

Other

In the third quarter of 2006, the Company sold its gas properties and recorded a
pre-tax loss on disposal of $900,000  ($600,000  after tax).  Income (loss) from
discontinued  operations for the nine month 2006 period  includes  $2,900,000 of
pre-tax  losses  related to these gas  properties;  amounts  for the  comparable
period in 2005 as well as for the three  month  2006 and 2005  periods  were not
material.

              Cautionary Statement for Forward-Looking Information

Statements included in this Report may contain forward-looking  statements. Such
statements may relate, but are not limited,  to projections of revenues,  income
or loss,  development  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 Report,  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.

Factors that could cause actual  results to differ  materially  from any results
projected,  forecasted,  estimated or budgeted or may  materially  and adversely
affect  the  Company's  actual  results  include  but  are  not  limited  to the
following:  potential  acquisitions  and  dispositions  of  our  operations  and
investments could change our risk profile;  dependence on certain key personnel;
economic   downturns;   changes  in  the  U.S.   housing   market;   changes  in
telecommunications  laws and  regulations;  risks  associated with the increased
volatility in raw material  prices and the  availability  of key raw  materials;
compliance with government laws and  regulations;  changes in mortgage  interest
rate levels or changes in  consumer  lending  practices;  a decrease in consumer
spending or general increases in the cost of living;  proper  functioning of our
information systems; intense competition in the operation of our businesses; our
ability to generate  sufficient taxable income to fully realize our deferred tax
asset;  weather related conditions and significant natural disasters,  including
hurricanes,  tornadoes,  windstorms,  earthquakes and hailstorms; our ability to
insure certain risks  economically;  reduction or cessation of dividend payments
on our common  shares.  For  additional  information  see Part I, Item 1A.  Risk
Factors in the 2005 10-K and Part II, Item 1A. Risk Factors contained herein.

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  Report  or to  reflect  the
occurrence of unanticipated events.

                                       27
<PAGE>



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,  2005,  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 September 30, 2006.  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 September 30, 2006.

Changes in internal control over financial reporting

(b)  There has been no change 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 September 30,
     2006, that has materially  affected,  or is reasonably likely to materially
     affect, the Company's internal control over financial reporting.













                                       28
<PAGE>




                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

Reference is made to the Company's  Quarterly Report on Form 10-Q for the fiscal
quarter  ended June 30, 2006 and the  disclosure  contained  in such Report with
respect to litigation  concerning  The Thaxton  Group,  Inc.  (together with its
subsidiaries,  "Thaxton").  On  September  12, 2006,  Thaxton and the  Company's
affiliate, The FINOVA Group Inc. and its subsidiaries  (collectively,  "Finova")
reached a  preliminary  settlement  to  resolve  all  outstanding  claims in the
ongoing litigation  involving Thaxton and Finova (the "Settlement").  As part of
the Settlement,  the previously  disclosed  lawsuit pending in the United States
District Court for the District of South  Carolina,  Anderson  Division in which
the Company and one of its  executive  officers were named as defendants is also
being settled  without any payment by or adverse finding against the Company and
its  executive.  An agreement  reflecting  the Settlement has been signed by the
parties and is subject to the satisfaction of certain conditions,  including (i)
approval of the District Court and the Thaxton and Finova  bankruptcy courts and
(ii) final District Court approval of the fairness of the Settlement.

For additional  information  concerning Finova and  Thaxton-related  litigation,
reference is made to the Form 10-K for the year ended December 31, 2005 filed by
The FINOVA  Group Inc.  and its Form 10-Q for the quarter  ended  September  30,
2006.

Item 1A.  Risk Factors.

As a result of the chapter 11 filing of Premier in September  2006,  the Company
is adding to its risk  factors  the item  listed  below that is  specific to the
Premier investment.

As a debtor in possession, Premier must obtain bankruptcy court approval for the
conduct of its business.  Premier is currently  operating under bankruptcy court
supervision  as a debtor in possession,  and the  bankruptcy  court will need to
approve its access to financing and any other transactions  outside the ordinary
course of business.  If the court does not  authorize  Premier to enter into the
$180,000,000  debtor in  possession  financing  offered by an  affiliate  of the
Company (to repay the Premier Notes), or if the court does not otherwise provide
Premier access to insurance  proceeds already paid to Premier but held under the
control of Premier's pre-petition bondholders, Premier would not have sufficient
funds to repair  and  rebuild  the Hard  Rock  Biloxi  and fund its  pre-opening
expenses.  Risks and  uncertainties  related to Premier's chapter 11 filing also
include  those  related to the actions of  Premier's  creditors  and other third
parties with an interest in Premier's chapter 11 proceedings.










                                       29
<PAGE>





Item 6.   Exhibits.

          10.1 Form of Subscription Agreement, dated as of July 15, 2006, by and
               among FMG Chichester Pty Ltd, the Company,  and Fortescue Metals
               Group Ltd.

          10.2 Form of Amending  Agreement,  dated as of August 18, 2006, by and
               among FMG Chichester Pty Ltd, the Company,  and Fortescue  Metals
               Group Ltd.

          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.






                                       30
<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:  November 9, 2006               By: /s/ Barbara L. Lowenthal
                                           --------------------------
                                           Barbara L. Lowenthal
                                           Vice President and Comptroller
                                           (Chief Accounting Officer)


                                       31
<PAGE>





                                  Exhibit Index

     10.1 Form of  Subscription  Agreement,  dated as of July 15,  2006,  by and
          among FMG Chichester Pty Ltd, the Company,  and Fortescue Metals Group
          Ltd.

     10.2 Form of Amending Agreement,  dated as of August 18, 2006, by and among
          FMG Chichester Pty Ltd, the Company, and Fortescue Metals Group Ltd.

     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.






                                       32



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<FILENAME>subscription_agmt-110706.txt
<DESCRIPTION>EXHIBIT 10.1
<TEXT>
                                                                    EXHIBIT 10.1
                                                                    ------------
CLAYTON UTZ


                                                                  EXECUTION COPY




SUBSCRIPTION AGREEMENT

FMG CHICHESTER PTY LTD
ABN 83 109 264 262

FMG


LEUCADIA NATIONAL CORPORATION


Subscriber


FORTESCUE METALS GROUP LTD
ABN 50 002 594 872

Fortescue











The Clayton Utz contact for this document is
KAREN EVAN-CULLEN ON +61 2 9353 4000


Clayton Utz
Lawyers
Levels 19-35  No. 1 O'Connell Street  Sydney  NSW  2000  Australia
PO Box H3  Australia Square  Sydney  NSW  1215
T +61 2 9353 4000  F +61 2 8220 6700


WWW.CLAYTONUTZ.COM


Our reference  838/12963/80035314








<PAGE>



TABLE OF CONTENTS


1.     DEFINITIONS AND INTERPRETATION..........................................1

       1.1         Definitions.................................................1
       1.2         Interpretation..............................................4
       1.3         Matters required to be done other than on a Business Day....5

2.     CONDITION PRECEDENT.....................................................5

       2.1         Condition...................................................5
       2.2         Benefit and waiver of Condition.............................5
       2.3         Notice in relation to satisfaction of Condition.............5
       2.4         Failure of Condition........................................6

3.     SUBSCRIPTION AND ISSUE OF SUBSCRIPTION SHARES AND NOTES.................6

       3.1         Agreement to subscribe for the Subscription Shares
                   and Notes...................................................6
       3.2         Agreement to issue the Subscription Shares and Notes........6
       3.3         Completion..................................................6
       3.4         Matters to occur on or before Completion....................6
       3.5         Interdependence of obligations at Completion................7
       3.6         Matters to occur after the Completion Date..................7
       3.7         Specific performance........................................7

4.     APPOINTMENT OF NOMINEE DIRECTORS........................................7

5.     REPRESENTATIONS AND WARRANTIES..........................................8

       5.1         General.....................................................8
       5.2         Fortescue entity Warranties.................................9
       5.3         Fortescue Warranties........................................9
       5.4         Subscriber Warranties......................................10
       5.5         Further warranties imported................................11
       5.6         Warranties separate........................................11
       5.7         Survival...................................................12
       5.8         Future Events..............................................12
       5.9         Warranty Certificates......................................12
       5.10        Reliance...................................................12
       5.11        Indemnity..................................................12
       5.12        Entire Agreement...........................................12
       5.13        No reliance................................................13

6.     PRE-EMPTIVE RIGHT......................................................14

7.     DELIVERY OF SHARES.....................................................14

       7.1         On Completion..............................................14
       7.2         Undertaking by Fortescue...................................14

8.     CONFIDENTIALITY AND ANNOUNCEMENTS......................................14

       8.1         Provisions to remain confidential..........................14
       8.2         Permitted disclosure.......................................15
       8.3         Announcements..............................................15

9.     GST....................................................................15

       9.1         Interpretation.............................................15
       9.2         Reimbursements and similar payments........................15
       9.3         GST payable................................................16

10.    ASSIGNMENT.............................................................16

                                       i

<PAGE>

11.    NOTICES................................................................16

       11.1        How notice to be given.....................................16
       11.2        When notice taken to be received...........................17

12.    GENERAL................................................................17

       12.1        Amendments.................................................17
       12.2        Waiver.....................................................17
       12.3        Further acts and documents.................................18
       12.4        Consents...................................................18
       12.5        Indemnities................................................18
       12.6        Counterparts...............................................18

13.    GOVERNING LAW, JURISDICTION AND SERVICE OF PROCESS.....................18

       13.1        Governing law..............................................18
       13.2        Jurisdiction...............................................18
       13.3        Service of process.........................................19

SCHEDULE 1 -- NOTE DEED POLL..................................................21


SCHEDULE 2 - APPLICATION.......................................................1


SCHEDULE 3 - TENEMENTS.........................................................2




                                       ii


<PAGE>


SUBSCRIPTION AGREEMENT MADE ON

PARTIES        FMG CHICHESTER PTY LTD ABN 83 109 264 262 of Level 2, 87 Adelaide
               Terrace, East Perth, Western Australia  ("FMG")

               LEUCADIA NATIONAL CORPORATION of 315 Park Avenue South, New York,
               NY 10010 ("SUBSCRIBER")

               FORTESCUE METALS GROUP LTD ABN 50 002 594 872 of Level 2, 87
               Adelaide Terrace, East Perth, Western Australia ("FORTESCUE")

BACKGROUND

A.          Fortescue is a public company incorporated under the Corporations
            Act and listed on the ASX.

B.          FMG is a wholly-owned subsidiary of Fortescue.

C.          Subscriber has agreed to subscribe for, and FMG and Fortescue have
            agreed to issue and allot the Notes and the Subscription Shares,
            respectively upon the terms and conditions of this Agreement.

D.          This Agreement sets out the terms upon which such subscription,
            issue and allotment of the Subscription Shares are to be made, and
            certain agreements as to the conduct of the affairs of FMG,
            Fortescue and Subscriber.

OPERATIVE PROVISIONS

- --------------------------------------------------------------------------------
1.          DEFINITIONS AND INTERPRETATION

1.1         DEFINITIONS

            In this Agreement:

            "APPLICATION" means an application in the form of Schedule 2.

            "ASX" means the Australian Stock Exchange Limited ABN 98 008 624
            691.

            "BUSINESS" means the business or businesses conducted by Fortescue
            and its Subsidiary Entities, including the exploration and mining of
            iron ore.

            "CLAIM" means, in relation to any person, any allegation, debt,
            cause of action, liability, claim, action, proceeding, suit or
            demand of any nature made against the person, however arising, and
            whether present or future, fixed or unascertained, actual or
            contingent whether at law, in equity, under statute or otherwise.

            "COMPLETION" means completion of each subscription, allotment and
            issue of any of the Subscription Shares and the Notes.

            "COMPLETION DATE" means the date on which the Condition is satisfied
            or waived in accordance with clause 2 or such other date agreed
            between the parties in writing.

            "CONDITION" means the condition specified in clause 2.1.

            "CORPORATIONS ACT" means the Corporations Act 2001 (Commonwealth).

                                       1
<PAGE>

            "ENCUMBRANCE" means a mortgage, charge, pledge, lien, encumbrance,
            security interest, title retention, preferential right, trust
            arrangement, contractual right of set-off, or any other security
            agreement or arrangement in favour of any person.

            "END DATE" means 31 December 2006 or such other date agreed between
            the parties in writing.

            "EQUITY PROPORTION" in relation to the Subscriber and its Nominees,
            means a fraction, (expressed as a percentage) the numerator of which
            is the total number of Fortescue Shares held by the Subscriber and
            its Nominees and the denominator of which is the total number of
            Fortescue Shares (including Fortescue Shares held by the Subscriber
            and its Nominees) on issue.

            "EVENT OF INSOLVENCY" means in relation to a company means each of
            the following events:

            (a)   a "controller" (as defined in section 9 of the Corporations
                  Act), trustee, liquidator, provisional liquidator,
                  administrator or similar officer is appointed in respect of
                  the company; or

            (b)   the company enters into, or resolves to enter into, a scheme
                  of arrangement, deed of company arrangement or composition
                  with, or assignment for the benefit of, all or any class of
                  its creditors, or it proposes a reorganisation, moratorium or
                  other administration involving any of them; or

            (c)   the company resolves to wind itself up, or otherwise dissolve
                  itself, or gives notice of its intention to do so, except to
                  reconstruct or amalgamate while solvent or is otherwise wound
                  up or dissolved; or

            (d)   the company is or states that it is unable to pay its debts
                  when they fall due; or

            (e)   the company is, or makes a statement from which it may be
                  reasonably deduced that that company is, the subject of an
                  event described in section 459C(2)(b) or section 585 of the
                  Corporations Act; or

            (f)   the company takes any step to obtain protection or is granted
                  protection from its creditors, under any applicable
                  legislation or an administrator is appointed to that company
                  or the board of directors of that company propose to appoint
                  an administrator to that company or that company becomes aware
                  that a person who is entitled to enforce a charge on the whole
                  or substantially the whole of that company's property proposes
                  to appoint an administrator to that company; or

            (g)   anything analogous or having a substantially similar effect to
                  any of the events specified above happens under the law of any
                  applicable jurisdiction.

            "FINANCIAL CLOSE" means the first date on which:

            (a)   funds are available for use by Fortescue or its Subsidiary
                  Entities through the issue of the Senior Secured Notes; and

            (b)   Fortescue or its Subsidiary Entities have been offered one or
                  more credit approved lease facilities pursuant to which they
                  may enter into lease agreements for the lease of equipment,

            either one of which or the combination of which has a total value of
            not less than $2,000,000,000, on terms which are reasonably
            acceptable to the Subscriber, and provided that the all in blended
            cost on these funds and leases is not more than 9.5% per annum. For
            the purposes of determining the all in blended cost on these funds
            and leases for this definition, the yield on an operating lease will


                                       2
<PAGE>



            be determined as that portion of the operating expenses arising from
            the relevant operating lease attributable to interest that would be
            incurred if the relevant assets the subject of that lease had been
            purchased with borrowed money.

            "FMG FINANCE" means FMG Finance Pty Ltd ACN 118 887 835.

            "FORTESCUE SHARE" means an ordinary share in the capital of
            Fortescue of the same class in all respects as those shares in
            Fortescue listed on the ASX.

            "GOVERNMENT AUTHORITY" means any government or any governmental or
            semi governmental entity, authority, agency, commission, corporation
            or body (including those constituted or formed under any Statute),
            local government authority, stock exchange, administrative or
            judicial body or tribunal.

            "GST" means any tax imposed on the supply of any goods, services,
            real or personal property or other things or similar tax under any
            GST law as defined in section 195(1) of A New Tax System (Goods and
            Services Tax) Act 1999 (Commonwealth), as affected or interpreted by
            any other applicable legislation and any public or private ruling of
            the Commissioner of Taxation.

            "NOMINEES" means one or more Related Entities of the Subscriber (if
            any) nominated by the Subscriber to subscribe for the Subscription
            Shares or the Notes pursuant to clause 3.1

            "NOTE DEED POLL" means the note deed poll in the form set out in
            Schedule 1 to this Agreement.

            "NOTEHOLDER" in relation to a Note means the person or persons
            registered as the holder of that Note in any register maintained by
            FMG or, if there is no such register, in whose name a Note
            certificate is issued.

            "NOTES" means notes with an aggregate total face value of
            $100,000,000 on the terms and conditions set out in the Note Deed
            Poll.

            "NOTE SUBSCRIPTION PRICE" means $100,000,000.

            "PROJECT" means development of one or more iron ore mines on the
            Tenements and the related rail, port and infrastructure project.

            "RELATED ENTITY" of a corporation means:

            (a)   a related body corporate of that corporation within the
                  meaning of Division 6 of Part 1.2 of the Corporations Act; and

            (b)   a trust that would be a related body corporate of that
                  corporation within that meaning assuming that the trust were a
                  body corporate and that a subsidiary meant a Subsidiary Entity
                  for the purposes of that meaning.

            "REPRESENTATIVES" means, in relation to a party, its officers,
            employees, professional advisers and agents of the party and those
            of its Related Entities.

            "SECURITIES ACT" means the US Securities Act of 1933, as amended.

            "SENIOR SECURED NOTES" means the senior secured notes to be issued
            by FMG Finance under Rule 144A(d)(4) under the Securities Act
            pursuant to an indenture to be dated on or about the Completion
            Date, without regard to any amendment thereto.

            "SHAREHOLDER" means a registered holder of Shares in Fortescue.



                                       3
<PAGE>



            "SHARE SUBSCRIPTION PRICE" means $300,000,000.

            "SUBSIDIARY ENTITY" of a corporation means:

            (a)   a subsidiary of that corporation within the meaning of
                  Division 6 of Part 1.2 of the Corporations Act;

            (b)   a trust that would be a subsidiary of that corporation within
                  that meaning if the trust were a company limited by shares,
                  equating for this purpose:

                  (i)   shares with the beneficial interests or units held in
                        the trust; and

                  (ii)  the board of directors with the trustee; or

            (c)   a body corporate or subtrust owned or held as an asset of a
                  trust, where the body corporate or subtrust would be a
                  subsidiary of that corporation under paragraph (a) or (b) if
                  the trust were a body corporate.

            "STATE" means the State of Western Australia.

            "SUBSCRIPTION SHARES" means 26,400,000 Fortescue Shares.

            "TENEMENTS" means the mining tenements set out in Schedule 3.

1.2         INTERPRETATION

            In this Agreement headings and words in bold are for convenience
            only and do not affect the interpretation of this Agreement and,
            unless the contrary intention appears:

            (a)   a word importing the singular includes the plural and vice
                  versa, and a word indicating a gender includes every other
                  gender;

            (b)   the word "INCLUDING" or any other form of that word is not a
                  word of limitation;

            (c)   if a word or phrase is given a defined meaning, any other part
                  of speech or grammatical form of that word or phrase has a
                  corresponding meaning; and

            (d)   a reference to a "PERSON" includes an individual, the estate
                  of an individual, a corporation, an authority, an association
                  or a joint venture (whether incorporated or unincorporated), a
                  partnership and a trust;

            (e)   a reference to a party includes that party's executors,
                  administrators, successors and permitted assigns, including
                  persons taking by way of novation and, in the case of a
                  trustee, includes any substituted or additional trustee;

            (f)   except with respect to the Senior Secured Notes, a reference
                  to a document (including this Agreement) is to that document
                  as varied, novated, ratified or replaced from time to time;

            (g)   a reference to a party, clause, schedule, exhibit, attachment
                  or annexure is a reference to a party, clause, schedule,
                  exhibit, attachment or annexure to or of this Agreement, and a
                  reference to this Agreement includes all schedules, exhibits,
                  attachments and annexures to it;

            (h)   a reference to a statute includes any regulations or other
                  instruments made under it ("DELEGATED LEGISLATION") and a
                  reference to a statute or delegated legislation or a provision
                  of either includes consolidations, amendments, re-enactments
                  and replacements;

                                       4
<PAGE>



            (i)   a reference to a "LIABILITY" incurred by any person includes
                  any liability of that person arising from or in connection
                  with any obligation (including indemnities and all other
                  obligations owed as principal or guarantor) whether liquidated
                  or not, whether present, prospective or contingent and whether
                  owed, incurred or imposed by or to or on account of or for the
                  account of that person alone, severally or jointly or jointly
                  and severally with any other person;

            (j)   a reference to a "LOSS" incurred by any person includes any
                  loss, liability, damage, cost, charge, expense which the
                  person pays, incurs or is liable for and any other diminution
                  of value of any description which the person suffers,
                  including all liabilities on account of Taxes or Duties, all
                  interest, penalties, fines and other amounts payable to third
                  parties and all legal expenses (on a full indemnity basis
                  without necessity of taxation) and other expenses in
                  connection with investigating or defending any claim, action,
                  demand or proceeding, whether or not resulting in any
                  liability, and all amounts paid in settlement of any such
                  claims;

            (k)   a reference to "$" or "DOLLAR" is to the currency of the
                  United States of America;

            (l)   a "BUSINESS DAY" is a day on which banks are generally open
                  for business in the State and which is not:

                  (i)   a Saturday;

                  (ii)  a Sunday; or

                  (iii) a gazetted public holiday,

                  in the State; and

            (m)   this Agreement must not be construed adversely to a party just
                  because that party prepared it or caused it to be prepared.

1.3         MATTERS REQUIRED TO BE DONE OTHER THAN ON A BUSINESS DAY

            Where the day on or by which any sum is payable or any act, matter
            or thing is to be done under this Agreement is a day other than a
            Business Day, that sum will be paid or that act, matter or thing
            will be done on the first Business Day after that day.

- --------------------------------------------------------------------------------
2.          CONDITION PRECEDENT

2.1         CONDITION

            Clause 3 does not become binding on the parties and has no force and
            effect, and Completion must not take place, until Financial Close
            has occurred.

2.2         BENEFIT AND WAIVER OF CONDITION

            The Condition in clause 2.1 is for the benefit of the Subscriber and
            may only be waived by the Subscriber by notice in writing to the
            other parties.

2.3         NOTICE IN RELATION TO SATISFACTION OF CONDITION

            Each party must in relation to the Condition notify the other party
            in writing upon becoming aware of:

            (a)   the satisfaction of the Condition, in which case the notifying
                  party must also provide reasonable evidence the Condition has
                  been satisfied; and

                                       5
<PAGE>



            (b)   any fact or circumstance which results in the Condition
                  becoming incapable of satisfaction or may result in the
                  Condition not being satisfied in accordance with its terms.

2.4         FAILURE OF CONDITION

            Subject to clause 3.7, if the Condition:

            (a)   becomes incapable of satisfaction; or

            (b)   has not been satisfied or waived in accordance with clause 2.2
                  before the End Date,

            then this Agreement will terminate and no party has any claim on any
            other party arising out of any such termination.

- --------------------------------------------------------------------------------
3.         SUBSCRIPTION AND ISSUE OF SUBSCRIPTION SHARES AND NOTES

3.1         AGREEMENT TO SUBSCRIBE FOR THE SUBSCRIPTION SHARES AND NOTES

            (a)   The Subscriber will, or will procure that one or more Related
                  Entities of the Subscriber nominated in writing to Fortescue
                  will, subscribe for the Subscription Shares at the Share
                  Subscription Price and the Notes at the Note Subscription
                  Price on the terms of this Agreement.

            (b)   The Subscriber or Nominee who is issued the Subscriber Shares
                  becomes bound by the Fortescue constitution on the issue and
                  allotment to it of the Subscription Shares.

3.2         AGREEMENT TO ISSUE THE SUBSCRIPTION SHARES AND NOTES

            Fortescue agrees to issue to the Subscriber or Nominee(s) the
            Subscription Shares, and FMG agrees to issue to the Subscriber or
            Nominee(s) the Notes, on the terms of this Agreement.

3.3         COMPLETION

            Completion will take place on the Completion Date at the same place
            at which Financial Close in respect of the Senior Secured Notes
            takes place or, if the Condition is waived and Financial Close does
            not occur, at the offices of Fortescue at Level 2, 87 Adelaide
            Terrace, Perth, Western Australia (or such other place as the
            parties agree).

3.4         MATTERS TO OCCUR ON OR BEFORE COMPLETION

            Subject to clause 3.5:

            (a)   the Subscriber must:

                  (i)   on or before the Completion Date, lodge with, or procure
                        a Nominee to lodge with, Fortescue a duly executed
                        Application for the Subscription Shares;

                  (ii)  on the Completion Date, pay to:

                        A.    Fortescue the Share Subscription Price in
                              consideration for the issue of the Subscription
                              Shares; and

                        B.    FMG the Note Subscription Price in consideration
                              for the issue of the Notes,


                                       6
<PAGE>



                  in cash or by bank cheque or other cleared funds.

            (b)   Fortescue must, on the Completion Date:

                  (i)   allot and issue Shares to the Subscriber or Nominee(s)
                        in respect of each application lodged for the
                        Subscription Shares;

                  (ii)  take such other legal action as may be required, if any,
                        to constitute the Subscriber or Nominee(s) as the holder
                        of the Subscription Shares; and

                  (iii) execute the Note Deed Poll; and

            (c)   FMG must, on the Completion Date, execute the Note Deed Poll
                  and issue the Notes to the Subscriber or Nominee(s).

3.5         INTERDEPENDENCE OF OBLIGATIONS AT COMPLETION

            In respect of Completion:

            (a)   the obligations of the parties under clauses 3.4 are
                  interdependent; and

            the obligations of the parties under clause 3.4 will be taken to
            have occurred simultaneously on the Completion Date.

3.6         MATTERS TO OCCUR AFTER THE COMPLETION DATE

            Subject to the parties fulfilling their obligations under clause
            3.4, immediately after the Completion Date, Fortescue must:

            (a)   apply to ASX for the official quotation of the Subscription
                  Shares;

            (b)   give the Subscriber a statement showing it as the holder of
                  the Subscription Shares; and

            (c)   give ASX a notice which complies with subsection 708A(6) of
                  the Corporations Act.

3.7         SPECIFIC PERFORMANCE

            If Completion does not occur in accordance with this clause 3
            because of the failure of any party (the "DEFAULTING PARTY") to
            satisfy any of its obligations under this clause 3 then, Fortescue
            or FMG (where the Defaulting Party is the Subscriber) or the
            Subscriber (where the Defaulting Party is Fortescue or FMG) is
            entitled to, in addition to any other remedies available at law or
            in equity, seek specific performance of this Agreement.

- --------------------------------------------------------------------------------
4.       APPOINTMENT OF NOMINEE DIRECTORS

            (a)   Immediately after the Completion Date and for as long as the
                  Subscriber and any Nominee are the holders in aggregate of:

                  (i)   Notes with a face value of $50,000,000 or more; or

                  (ii)  13,200,000 Fortescue Shares, adjusted to take into
                        account any corporate action undertaken by Fortescue
                        after the date of this Agreement which affects the
                        Fortescue Shares including, but not limited to, any
                        stock split or consolidation, stock dividends, reverse
                        stock split, and the like.


                                       7
<PAGE>


                  the Subscriber will be entitled to nominate:

                  (iii) one person to act as a director of Fortescue; and

                  (iv)  another person or persons to act as an alternate
                        director for the person nominated in clause 4(a)(iii),

                  subject to each person's consent to act in that capacity.

            (b)   Subject to the exercise by the directors of Fortescue of their
                  fiduciary duties, the board of directors of Fortescue will
                  appoint:

                  (i)   the person nominated by the Subscriber in clause
                        4(a)(iii) as a director of Fortescue; and

                  (ii)  the person or persons nominated by the Subscriber in
                        clause 4(a)(iv) as an alternate director of the person
                        appointed as a director in clause 4(b)(i),

                  as a casual vacancy.

            (c)   If Shareholders do not approve any person nominated by the
                  Subscriber to act as a director under clause 4(a) at a general
                  meeting, the Subscriber will be entitled to nominate another
                  person to act as a director of Fortescue pursuant to clause
                  4(a).

- --------------------------------------------------------------------------------
5.          REPRESENTATIONS AND WARRANTIES

5.1         GENERAL

            Each party represents and warrants to each of the other parties that
            each of the following statements will be true and correct and not
            misleading as at the date of this Agreement and as at Completion:

            (a)   (INCORPORATION) it is a body corporate validly existing under
                  the laws of its place of incorporation;

            (b)   (POWER) it has the power to enter into and perform its
                  obligations under this Agreement and to carry out the
                  transactions contemplated by it;

            (c)   (CORPORATE ACTION) it has taken all necessary corporate action
                  to enter into and perform this Agreement;

            (d)   (AUTHORISATIONS) all approvals and authorities that may be
                  required to permit it to enter into this Agreement and to
                  carry out the transactions contemplated by this Agreement have
                  been obtained and such authorisations remain valid and
                  subsisting; and

            (e)   (BINDING OBLIGATION) this Agreement constitutes its legal,
                  valid and binding obligations and subject to any necessary
                  stamping is enforceable against it in accordance with its
                  terms, except as the enforcement thereof may be limited by
                  bankruptcy, insolvency, fraudulent transfer, reorganisation,
                  moratorium and other similar laws relating to or affecting
                  enforcement of creditor's rights generally.


                                       8
<PAGE>


5.2         FORTESCUE ENTITY WARRANTIES

            Fortescue and FMG each represent and warrant to the Subscriber that,
            as at the date of this Agreement and as at Completion, it is not and
            has never been subject to an Event of Insolvency.

5.3         FORTESCUE WARRANTIES

            Fortescue represents and warrants to the Subscriber that each of the
            following statements is true and correct and not misleading:

            (a)   as at the date of this Agreement and as at Completion:

                  (i)   it is in compliance with ASX Listing Rule 3.1;

                  (ii)  it is not relying on an exception in ASX Listing Rule
                        3.1A in respect of any information not disclosed to ASX,
                        other than as disclosed by or on behalf of Fortescue to
                        the Subscriber or its advisers;

                  (iii) it is able to issue a notice that would comply with
                        subsection 708A(6) of the Act, and that upon issue of
                        that notice, subsection 708A(1) would apply with respect
                        to an offer for the sale of any Subscription Shares;

                  (iv)  all returns, notices and other documents required to be
                        lodged or given by Fortescue under the Corporations Act
                        or the Listing Rules of the ASX have been duly and
                        properly prepared and lodged or given and are in all
                        material respects accurate and not misleading and
                        deceptive;

                  (v)   other than information referred to in paragraph (vi)
                        below, all written information given with respect to
                        Fortescue or any of its Subsidiary Entities by or on
                        behalf of Fortescue to the Subscriber or to any
                        director, agent or adviser of the Subscriber before the
                        date of this Agreement was, when given, accurate in all
                        material respects and not misleading in any particular,
                        whether by inclusion of misleading information or
                        omission of material information or both;

                  (vi)  each forecast or projection given in writing with
                        respect to Fortescue or any of its Subsidiary Entities
                        by or on behalf of Fortescue to the Subscriber or to any
                        director, agent or adviser of the Subscriber before the
                        date of this Agreement was at the time of writing:

                        A.    made after due and careful consideration by its
                              author;

                        B.    based on information which the author reasonably
                              believed was reliable; and

                        C.    based on assumptions that were reasonable in the
                              context of the forecast or projection;

                  (vii) that the Tenements listed in Schedule 3:

                        A.    are the same as the tenements to be included in
                              the offering memorandum in relation to the Senior
                              Secured Notes;

                        B.    relate to Cloud Break and Christmas Creek
                              deposits;

                        C.    are owned by FMG; and


                                       9
<PAGE>



                        D.    are all of the tenements that relate to the
                              Project.

                 (viii) except as otherwise disclosed by or on behalf of
                        Fortescue to the Subscriber or to any director, agent or
                        adviser of the Subscriber, or disclosed publicly by
                        Fortescue to the ASX, before the date of this Agreement:

                        A.    neither Fortescue nor any of its Subsidiary
                              Entities are in breach of any provision of the
                              Corporations Act, the Trade Practices Act 1975
                              (Cth), the Income Tax Assessment Act or any other
                              applicable law to an extent that is material to
                              Fortescue or the price or value of the
                              Subscription Shares; and

                        B.    no litigation, arbitration, dispute or
                              administrative proceeding has been commenced, is
                              pending or threatened against Fortescue or any of
                              its Subsidiary Entities which may have a material
                              adverse effect on the financial position or
                              financial prospects of Fortescue and its
                              subsidiaries as a whole; and

                  (ix)  it reasonably considers that the issue of the
                        Subscription Shares in accordance with this Agreement
                        does not require the approval of the members of
                        Fortescue or the provision of notice of the proposed
                        issue to the Foreign Investment Review Board under the
                        Foreign Acquisitions and Takeovers Act 1975 (Cth);

            (b)   as at the date of this Agreement, except as disclosed to the
                  Subscriber in writing before the date of this Agreement,
                  Fortescue is not aware of any fact which may have a material
                  adverse effect on any assumption or may require a material
                  adverse revision of any forecast or projection;

            (c)   as at the date of Completion, the Subscription Shares will be
                  validly issued fully paid and will from the date of issue rank
                  equally with all existing Fortescue Shares and will, once
                  issued, be less than 10% of the total number of Fortescue
                  Shares then on issue;

            (d)   as at the date of issue of the offering memorandum in relation
                  to the Senior Secured Notes, it has not disclosed to the
                  Subscriber or its advisers any information which, following
                  the issue of the offering memorandum is inside information for
                  the purpose of Division 3 of Part 7.10 of the Corporations
                  Act; and

            (e)   as at the date of this Agreement, it has on issue 237,711,961
                  Fortescue Shares.

5.4         SUBSCRIBER WARRANTIES

            The Subscriber represents and warrants to Fortescue and FMG that:

            (a)   it understands that the offer and sale to it of the
                  Subscription Shares and the Notes have not been and will not
                  be registered under the Securities Act or the laws of any
                  state or other jurisdiction in the United States. Therefore,
                  the Subscriber agrees that it will not offer, sell, pledge,
                  transfer or otherwise dispose of any Subscription Shares or
                  the Notes in the United States or to, or for the account or
                  benefit of, any U.S. person (as defined in Regulation S under
                  the Securities Act) unless and until the Subscription Shares
                  or the Notes, as the case may be (i) are registered under the
                  Securities Act (which you acknowledge Fortescue and FMG have
                  no obligation to do) or (ii) are offered, sold, pledged,
                  transferred or otherwise disposed of in a transaction exempt
                  from, or not subject to, the registration requirements of the
                  Securities Act and the laws of any state or other jurisdiction
                  in the United States.


                                       10
<PAGE>



            (b)   it is an "accredited investor", as such term is defined in
                  Rule 501(a) under the Securities Act, and it is purchasing the
                  Subscription Shares and the Notes for its own account and not
                  with a view to any resale or distribution thereof.

            (c)   it agrees that, in the future, if it decides to sell or
                  otherwise transfer any Subscription Shares or the Notes, it
                  will only do so if the offer and sale of such Subscription
                  Shares or the Notes, as the case may be, are (i) registered
                  under the Securities Act (which the Subscriber acknowledges
                  Fortescue and FMG have no obligation to do), (ii) made in a
                  transaction exempt from the registration requirements of the
                  Securities Act or (iii) made in regular way brokered
                  transactions on the ASX or otherwise outside the United States
                  in offshore transactions in accordance with Regulation S under
                  the Securities Act and, in the case of (i) or (ii) above, in
                  accordance with any applicable securities laws of any state of
                  the United States or any other jurisdiction.

            (d)   except for the sale of Subscription Shares in regular way
                  brokered transactions on the ASX, it agrees that it will
                  obtain agreement for the benefit of Fortescue and FMG of any
                  person to whom any Subscription Shares or Notes are sold or
                  otherwise transferred, prior to any such transfer, that such
                  person will be bound by the provisions of the immediately
                  preceding paragraph.

            (e)   it understands that the Subscription Shares and the Notes will
                  constitute "restricted securities" within the meaning of Rule
                  144 under the Securities Act, and for so long as they remain
                  "restricted securities", such Subscription Shares may not be
                  deposited in any unrestricted American Depositary Receipt
                  facility with respect to the ordinary shares of Fortescue.

            (f)   it acknowledges that an investment in the Subscription Shares
                  and the Notes involves a degree of risk and it has considered
                  the risks associated with the Subscription Shares and the
                  Notes and the particular income tax consequences of
                  purchasing, owning or disposing of the Subscription Shares or
                  the Notes in light of its particular situation in deciding
                  whether to purchase any Subscription Shares or the Notes. It
                  further acknowledges that it has had access to and have
                  received all information that it believes necessary or
                  appropriate in connection with, and for an adequate time prior
                  to, its purchase of Subscription Shares and the Notes, and
                  have been given the opportunity to ask such questions of, and
                  receive answers from, representatives of Fortescue and FMG, so
                  as to be able to make an informed investment decision with
                  respect to an investment in the Subscription Shares and the
                  Notes.

5.5         FURTHER WARRANTIES IMPORTED

            Each representation and warranty given by Fortescue and FMG in the
            note purchase deed relating to the Senior Secured Notes are deemed
            to be repeated in full in this Agreement and given in favour of the
            Subscriber as at the date that those representations and warranties
            are first given to a party to a transaction document relating to the
            Senior Secured Notes and as at Completion.

5.6         WARRANTIES SEPARATE

            Each representation and warranty in this Agreement is to be treated
            as a separate representation and warranty and is not limited by
            reference to any other representation or warranty or any other
            provision of this Agreement.


                                       11
<PAGE>



5.7         SURVIVAL

            Each representation and warranty in this Agreement will remain in
            full force and effect after the date of this Agreement and a Claim
            under any such representation or warranty is not limited to breaches
            identified prior to the date of this Agreement.

5.8         FUTURE EVENTS

            If anything occurs or arises which results or may result in any of
            the representations and warranties given by a party under this
            Agreement being unfilled, untrue, incorrect or misleading, that
            party must immediately give notice of it to the other parties.

5.9         WARRANTY CERTIFICATES

            On Completion:

            (a)   FMG and Fortescue must give separate certificates to the
                  Subscriber that each representation and warranty given by that
                  party is true, correct and not misleading as at Completion;
                  and

            (b)   the Subscriber must give a separate certificate to FMG and
                  Fortescue that each representation and warranty given by it is
                  true, correct and not misleading as at Completion.

5.10        RELIANCE

            Each party acknowledges that the other parties have entered into
            this Agreement in reliance on the representations and warranties
            given by it.

5.11        INDEMNITY

            (a)   The Subscriber indemnifies FMG and Fortescue against all loss
                  arising from, or which FMG or Fortescue otherwise suffers or
                  incurs or may suffer or incur in connection with:

                  (i)   a breach of any obligations of the Subscriber under this
                        Agreement;

                  (ii)  any breach of a representation and warranty given by the
                        Subscriber under this Agreement.

            (b)   Fortescue and FMG indemnify the Subscriber against all loss
                  arising from, or which the Subscriber otherwise suffers or
                  incurs or may suffer or incur in connection with:

                  (i)   a breach of any obligations of Fortescue or FMG under
                        this Agreement;

                  (ii)  any breach of a representation and warranty given by
                        Fortescue or FMG under this Agreement.

5.12        ENTIRE AGREEMENT

            The parties acknowledge and agree that:

            (a)   this Agreement constitutes the entire agreement between the
                  parties in relation to its subject matter including the
                  subscription for the Subscription Shares and the Notes;

            (b)   to the maximum extent permitted by law, all terms, conditions,
                  warranties and statements (whether express or implied,
                  written, oral, collateral, statutory or otherwise) not


                                       12
<PAGE>



                  contained in this Agreement are excluded and the parties
                  disclaim any liability in respect of them;

            (c)   to the maximum extent permitted by law, the Subscriber will
                  not make, waive any right to make, and releases Fortescue, FMG
                  and their Representatives in respect of any claim under the
                  Corporations Act, the Australian Securities and Investments
                  Commission Act 2001, the Trade Practices Act 1974, the Fair
                  Trading Acts of the various Australian States and Territories,
                  or comparable clauses in any legislation in any other
                  jurisdiction outside Australia.

5.13        NO RELIANCE

            The Subscriber acknowledges and otherwise agrees in favour of
            Fortescue, FMG and their Representatives that:

            (a)   at no time has Fortescue, FMG or its Representatives made,
                  given or undertaken, any conduct, representation, warranty,
                  promise, statement, forecast or undertaking in connection with
                  the subject matter of this Agreement or the operations and
                  affairs of the Business other than the representations and
                  warranties given by Fortescue and FMG or referred to under
                  this clause 5 and any other terms of this Agreement;

            (b)   no conduct, representation, warranty, promise, statement,
                  forecast or undertaking:

                  (i)   has induced or influenced the Subscriber to enter into
                        this Agreement;

                  (ii)  has been relied on by the Subscriber or any of their
                        Representatives;

                  (iii) has been represented or warranted to the Subscriber as
                        being true or accurate;

                  (iv)  has been taken into account by the Subscriber or any of
                        their Representatives as being important to its decision
                        to enter into this Agreement or to agree to any of its
                        terms,

                  other than the representations and warranties given by
                  Fortescue and FMG or referred to under this clause 5 and any
                  other terms of this Agreement;

            (c)   it has made, and relies on its own searches, investigations,
                  enquiries and assessment of the operations and affairs of the
                  Business other than as set out in this Agreement in addition
                  to the representations and warranties given by Fortescue and
                  FMG or referred to under this clause 5; and

            (d)   in relation to any opinions, estimates, projections, business
                  plans, budget information or other forecasts or forward
                  looking statements which the Subscriber or its Representatives
                  has received in respect of the operations and affairs of the
                  Business:

                  (i)   there are uncertainties inherent in attempting to make
                        these estimates, projections, business plans, budgets,
                        forecasts or forward looking statements and it is
                        familiar with these uncertainties; and

                  (ii)  other than the representations and warranties given by
                        Fortescue and FMG under clause 5 and any other terms of
                        this Agreement, it has made its own independent
                        evaluation of all estimates, projections, business
                        plans, budgets, forecasts and forward looking statements
                        furnished to it.


                                       13
<PAGE>


- --------------------------------------------------------------------------------
6.          PRE-EMPTIVE RIGHT

            (a)   If Fortescue wishes to issue any Fortescue Shares or
                  securities which are convertible into Fortescue Shares
                  ("SECURITIES") other than to employees or on conversion or
                  exercise of any convertible securities or options which are on
                  issue at the date of this Agreement, Fortescue must also offer
                  the Subscriber or a Nominee its Equity Proportion of the total
                  number of Securities to be issued.

            (b)   Any offer of Securities by Fortescue under clause 6(a) must:

                  (i)   be on the same terms of issue as provided to all other
                        potential offerees and allow the Subscriber to accept
                        for the whole or part of the number of Securities
                        offered; and

                  (ii)  allow the Subscriber 5 Business Days to accept (in whole
                        or part) or reject the offer.

            (c)   If the Subscriber or a Nominee accepts the offer in respect of
                  some or all of the Securities offered to it, the Subscriber
                  must pay the agreed subscription amount by the due date for
                  receipt of all other subscription amounts under the offer,
                  such date to be no earlier than 5 Business Days after the date
                  that Fortescue notifies the Subscriber of the offer of
                  Securities..

            (d)   If the Subscriber rejects or does not accept in full an offer
                  made to it under clause 6(a), then the Securities in respect
                  of which that offer was not accepted can be offered by
                  Fortescue to such persons as it thinks fit on terms no more
                  favourable than those offered to the Subscriber.

- --------------------------------------------------------------------------------
7.          DELIVERY OF SHARES

7.1         ON COMPLETION

            If on the Completion Date, the Subscription Shares represent 10% or
            more of the ordinary share capital of Fortescue to be issued and
            outstanding after such issuance, then the Subscription Shares shall
            be proportionately reduced so that the Subscription Shares to be
            delivered at Completion will represent 9.99% of the issued and
            outstanding ordinary share capital of Fortescue, giving effect to
            such issuance, and the Share Subscription Price shall be accordingly
            reduced.

7.2         UNDERTAKING BY FORTESCUE

            Fortescue undertakes to the Subscriber that, following Completion,
            it will not take any action with respect to any Fortescue Shares if
            that would result in the Subscriber and its Nominees holding, at any
            time, more than 9.99% of the issued and outstanding ordinary share
            capital of Fortescue without the consent of the Subscriber.

- --------------------------------------------------------------------------------
8.          CONFIDENTIALITY AND ANNOUNCEMENTS

8.1         PROVISIONS TO REMAIN CONFIDENTIAL

            Subject to clauses 8.2 and 8.3, no party may disclose the content or
            effect of this Agreement without the prior written consent of the
            other parties.


                                       14
<PAGE>



8.2         PERMITTED DISCLOSURE

            Any party may disclose matters referred to in clause 8.1:

            (a)   if reasonably required to perform its obligations under this
                  Agreement;

            (b)   to those of its employees, officers, professional or financial
                  advisers and bankers as the party reasonably thinks necessary
                  but only on a strictly confidential basis and in accordance
                  with the terms of any confidentiality agreement entered into
                  between any of the parties;

            (c)   if required by law or the rules of any recognised stock
                  exchange, after the form and terms of that disclosure have
                  been notified to the other parties and, where the relevant law
                  or rules permit, those other parties have had a reasonable
                  opportunity to comment on that form and terms.

8.3         ANNOUNCEMENTS

            (a)   Immediately after the execution of this Agreement, Fortescue
                  will issue an announcement to ASX in a form agreed by the
                  Subscriber in writing.

            (b)   Other than as provided in paragraph (a), no party may make or
                  authorise a press release or public announcement relating to
                  the negotiations of the parties or the subject matter or
                  provisions of this Agreement unless:

                  (i)   it is required to be made by law or the rules of a
                        recognised stock exchange and before it is made that
                        party has:

                        A.    notified each other party; and

                        B.    where the relevant law or rules permit given that
                              other party a reasonable opportunity to comment on
                              the contents of, and the requirement for it; or

                  (ii)  it has the prior written approval of each other party.

- --------------------------------------------------------------------------------
9.          GST

9.1         INTERPRETATION

            (a)   Except where the context suggests otherwise, terms used in
                  this clause 9 have the meanings given to those terms by the A
                  New Tax System (Goods and Services Tax) Act 1999 (as amended
                  from time to time).

            (b)   Any part of a supply that is treated as a separate supply for
                  GST purposes (including attributing GST payable to tax
                  periods) will be treated as a separate supply for the purposes
                  of this clause.

            (c)   Any consideration that is specified to be inclusive of GST
                  must not be taken into account in calculating the GST payable
                  in relation to a supply for the purpose of this clause.

9.2         REIMBURSEMENTS AND SIMILAR PAYMENTS

            Any payment or reimbursement required to be made under this
            Agreement that is calculated by reference to a cost, expense, or
            other amount paid or incurred will be limited to the total cost,


                                       15
<PAGE>



            expense or amount less the amount of any input tax credit to which
            an entity is entitled for the acquisition to which the cost, expense
            or amount relates.

9.3         GST PAYABLE

            (a)   If GST is payable in relation to a supply made under or in
                  connection with this Agreement then any party ("RECIPIENT")
                  that is required to provide consideration to another party
                  ("SUPPLIER") for that supply must pay an additional amount to
                  the Supplier equal to the amount of that GST at the same times
                  as other consideration is to be provided for that supply or,
                  if later, within 5 Business Days of the Supplier providing a
                  valid tax invoice to the Recipient.

            (b)   If the GST payable in relation to a supply made under or in
                  connection with this Agreement varies from the additional
                  amount paid by the Recipient under clause 9.3(a) then the
                  Supplier will provide a corresponding refund or credit to, or
                  will be entitled to receive the amount of that variation from,
                  the Recipient. Any ruling, advice, document or other
                  information received by the Recipient from the Australian
                  Taxation Office in relation to any supply made under this
                  Agreement shall be conclusive as to the GST payable in
                  relation to that supply. Any payment, credit or refund under
                  this paragraph is deemed to be a payment, credit or refund of
                  the additional amount payable under clause 9.3(a).

            (c)   Where the consideration is specified to be inclusive of GST,
                  the Recipient need not make a payment for the GST component of
                  the supply made under or in connection with this Agreement
                  until it receives a tax invoice for the supply to which the
                  payment relates.

- --------------------------------------------------------------------------------
10.         ASSIGNMENT

            (a)   Subject to clause 10(b), a party cannot assign, novate or
                  otherwise transfer any of its rights or obligations under this
                  Agreement without the prior consent of each other party.

            (b)   The Subscriber may assign, novate or otherwise transfer any of
                  its rights or obligations under this Agreement at any time to
                  any Related Entity provided that the Related Entity agrees to
                  be bound by the terms of this Agreement.

- --------------------------------------------------------------------------------
11.         NOTICES

11.1        HOW NOTICE TO BE GIVEN

            Each communication (including each notice, consent, approval,
            request and demand) under or in connection with this Agreement:

            (a)   must be in writing;

            (b)   must be addressed as follows (or as otherwise notified by that
                  party to each other party from time to time):

                  (i)   if to FMG or Fortescue:

                        Address: Level 2, 87 Adelaide Terrace,
                        East Perth  WA  6000, Australia

                        Fax number: +61 6218 8880

                        Attention:  Company Secretary


                                       16
<PAGE>



                  (ii)  if to the Subscriber:

                        Address: 315 Park Avenue South, New York, NY 10010, USA

                        Fax number:  +212 598 4869

                        Attention: Joseph S. Steinberg, President

                        with a copy to:

                        Weil, Gotshal and Manges LLP
                        767 Fifth Avenue
                        New York  NY  10153  USA

                        Fax number:  +212 310 8007

                        Attention:  Andrea A. Bernstein

            (c)   must be signed by the party making it or (on that party's
                  behalf) by the solicitor for, or any attorney, director,
                  secretary or authorised agent of, that party; and

            (d)   must be delivered by hand or posted by prepaid post to the
                  address, or sent by fax to the number, of the addressee, in
                  accordance with clause 11.(b).

11.2        WHEN NOTICE TAKEN TO BE RECEIVED

            Each communication (including each notice, consent, approval,
            request and demand) under or in connection with this Agreement is
            taken to be received by the addressee:

            (a)   (in the case of prepaid post sent to an address in the same
                  country) on the third day after the date of posting;

            (b)   (in the case of prepaid post sent to an address in another
                  country) on the fifth day after the date of posting by
                  airmail;

            (c)   (in the case of fax) at the time in the place to which it is
                  sent equivalent to the time shown on the transmission
                  confirmation report produced by the fax machine from which it
                  was sent; and

            (d)   (in the case of delivery by hand) on delivery,

            but if the communication is taken to be received on a day that is
            not a working day or after 5.00 pm, it is taken to be received at
            9.00 am on the next working day ("working day" meaning a day that is
            not a Saturday, Sunday or public holiday and on which banks are open
            for business generally, in the place to which the communication is
            posted, sent or delivered).

- --------------------------------------------------------------------------------
12.         GENERAL

12.1        AMENDMENTS

            This Agreement may only be varied by a document signed by or on
            behalf of each party.

12.2        WAIVER

            (a)   Failure to exercise or enforce, or a delay in exercising or
                  enforcing, or the partial exercise or enforcement of, a right,
                  power or remedy provided by law or under this Agreement by a
                  party does not preclude, or operate as a waiver of, the


                                       17
<PAGE>



                  exercise or enforcement, or further exercise or enforcement,
                  of that or any other right, power or remedy provided by law or
                  under this Agreement.

            (b)   A waiver or consent given by a party under this Agreement is
                  only effective and binding on that party if it is given or
                  confirmed in writing by that party.

            (c)   No waiver of a breach of a term of this Agreement operates as
                  a waiver of another breach of that term or of a breach of any
                  other term of this Agreement.

12.3        FURTHER ACTS AND DOCUMENTS

            Each party must promptly do all further acts and execute and deliver
            all further documents (in form and content reasonably satisfactory
            to that party) required by law or reasonably requested by another
            party to give effect to this Agreement.

12.4        CONSENTS

            A consent required under this Agreement from a party may not be
            unreasonably withheld, unless this Agreement expressly provides
            otherwise.

12.5        INDEMNITIES

            (a)   Each indemnity in this Agreement is a continuing obligation,
                  separate and independent from the other obligations of the
                  parties, and survives termination, completion or expiration of
                  this Agreement.

            (b)   It is not necessary for a party to incur expense or to make
                  any payment before enforcing a right of indemnity conferred by
                  this Agreement.

12.6        COUNTERPARTS

            This Agreement may be executed in any number of counterparts and by
            the parties on separate counterparts. Each counterpart constitutes
            an original of this Agreement, and all together constitute one
            agreement.

- --------------------------------------------------------------------------------
13.         GOVERNING LAW, JURISDICTION AND SERVICE OF PROCESS

13.1        GOVERNING LAW

            This Agreement is governed by and must be construed according to the
            law applying in Western Australia.

13.2        JURISDICTION

            Each party irrevocably:

            (a)   submits to the non-exclusive jurisdiction of the courts of
                  Western Australia, and the courts competent to determine
                  appeals from those courts, with respect to any proceedings
                  that may be brought at any time relating to this Agreement;
                  and

            (b)   waives any objection it may now or in the future have to the
                  venue of any proceedings, and any claim it may now or in the
                  future have that any proceedings have been brought in an
                  inconvenient forum, if that venue falls within clause 13.2(a).



                                       18
<PAGE>



13.3        SERVICE OF PROCESS

            The Subscriber irrevocably appoints Allens Arthur Robinson Corporate
            Advisory Pty Ltd (or such other person as the Subscriber may
            nominate with the consent of Fortescue, such consent not to be
            unreasonably withheld) as its agent in Australia for service of
            process.

EXECUTED as an agreement.

EXECUTED by FMG CHICHESTER PTY LTD ABN
83 109 264 262 by or in the presence of:





- -------------------------------------   ----------------------------------------
Signature of Director                   Signature of Secretary/other Director



- -------------------------------------   ----------------------------------------
Name of Director in full                Name of Secretary/other Director in full


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


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

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



Signed for and on behalf of LEUCADIA NATIONAL CORPORATION
by its duly authorised officer


- ---------------------------------------------------
Signature



- ---------------------------------------------------
Name and title




                                       19
<PAGE>



EXECUTED by FORTESCUE METALS GROUP LTD
ABN 50 002 594 872 or in the presence of:






- -------------------------------------   ----------------------------------------
Signature of Director                   Signature of Secretary/other Director



- -------------------------------------   ----------------------------------------
Name of Director in full                Name of Secretary/other Director in full














                                       20
<PAGE>



SCHEDULE 1  --  NOTE DEED POLL

CLAYTON UTZ

                                                                      SCHEDULE 1

FORM OF NOTE DEED POLL

FMG CHICHESTER PTY LTD
ABN 83 109 264 262


Issuer




FORTESCUE METALS GROUP LTD
ABN 50 002 594 872


Guarantor








Clayton Utz
Lawyers
Levels 19-35 No. 1 O'Connell Street Sydney NSW 2000 Australia
PO Box H3 Australia Square Sydney NSW 1215
T +61 2 9353 4000 F +61 2 8220 6700

WWW.CLAYTONUTZ.COM






<PAGE>



                                TABLE OF CONTENTS

                                                                            PAGE


1.       DEFINITIONS AND INTERPRETATION.......................................1

         1.1      Definitions.................................................1

         1.2      Interpretation..............................................1

2.       NATURE AND STATUS OF NOTES...........................................1

         2.1      Constitution of Notes.......................................1

         2.2      Terms of Notes..............................................1

         2.3      Entry in the Note Register..................................2

3.       GUARANTEE OF PAYMENT AND PERFORMANCE.................................2

         3.1      Guarantee...................................................2

         3.2      Indemnities.................................................2

         3.3      No requirement to take steps against Issuer.................2

         3.4      Continuing effect...........................................2

         3.5      No reduction of liability...................................3

         3.6      Obligations.................................................3

4.       ENFORCEABILITY.......................................................4

         4.1      Noteholder may enforce......................................4

         4.2      Noteholders bound...........................................5

         4.3      Independent enforcement.....................................5

5.       GOVERNING LAW AND JURISDICTION.......................................5

         5.1      Governing law...............................................5

         5.2      Jurisdiction................................................5


SCHEDULE 1 NOTE CONDITIONS....................................................6
ANNEXURE A...................................................................18
ANNEXURE B...................................................................19


                                       i

<PAGE>


NOTE DEED POLL MADE AT _______ ON _______________

BY FMG CHICHESTER PTY LTD ABN 83 109 264 252 a company registered in Western
Australia with an office at Level 2, 87 Adelaide Terrace, East Perth, Western
Australia ("ISSUER")

and

FORTESCUE METALS GROUP LTD ABN 50 002 594 872 a company registered in Western
Australia with an office at Level 2, 87 Adelaide Terrace, East Perth, Western
Australia ("GUARANTOR")

BACKGROUND

A.       The Issuer may from time to time issue Notes on the terms and
         conditions contained in the Note Conditions.

B.       The Guarantor has agreed to guarantee to the Noteholders the
         obligations of the Issuer under the Notes and this Note Deed Poll.

C.       If the Issuer issues Notes it is intended that the Noteholders will
         have the benefit of this Note Deed Poll.

OPERATIVE PROVISIONS

1.       DEFINITIONS AND INTERPRETATION

1.1      DEFINITIONS

         In this Note Deed Poll:

         (a)      "NOTE CONDITIONS" means, generally, the terms and conditions
                  contained in Schedule 1; and

         (b)      words and expressions defined in the Note Conditions have the
                  same meanings when used in this Note Deed Poll.

1.2      INTERPRETATION

         Condition 1.2 of the Note Conditions applies to the interpretation of
         this Note Deed Poll as if every reference to "these Note Conditions" is
         replaced with "this Note Deed Poll" and to a "Condition" is replaced
         with a "clause".

2.       NATURE AND STATUS OF NOTES

2.1      CONSTITUTION OF NOTES

         Each Note is a debt obligation of the Issuer constituted by, and owing
         under, this Note Deed Poll.

2.2      TERMS OF NOTES

         Each Note is issued on, and subject to, the provisions of this Note
         Deed Poll and the Note Conditions relating to that Note.




                                       1
<PAGE>



2.3      ENTRY IN THE NOTE REGISTER

         Each entry in the Register in respect of a Note constitutes an
         unconditional and irrevocable covenant by the Issuer in favour of the
         person whose name is so registered that the Issuer will:

         (a)      (MAKE ALL PAYMENTS): make all payments of principal, interest
                  and other amounts in respect of the Note in accordance with
                  this Note Deed Poll and the Note Conditions relating to that
                  Note; and

         (b)      (PERFORM OTHER OBLIGATIONS): perform all of its other
                  obligations in full, and by the due dates, referred to in this
                  Note Deed Poll and the Note Conditions relating to that Note.

3.       GUARANTEE OF PAYMENT AND PERFORMANCE

3.1      GUARANTEE

         The Guarantor unconditionally and irrevocably guarantees to the
         Noteholders:

         (a)      the payment by the Issuer of all present and future monetary
                  liabilities of the Issuer due or payable to the Noteholder
                  under this Note Deed Poll and the Note Conditions; and

         (b)      the performance by the Issuer of each other obligation of the
                  Issuer under this Note Deed Poll and the Note Conditions;

         and if the Issuer fails to pay such monies or fails to perform such
         obligation on the due date for payment or performance the Guarantor
         must immediately on demand by the Noteholder pay such monies to the
         Noteholder in the manner specified in this Note Deed Poll and the Note
         Conditions or procure the performance by the Issuer of such obligation,
         as the case may be.

3.2      INDEMNITIES

         As separate, independent and additional liabilities, the Guarantor
         indemnifies the Noteholder against all loss arising from, or which the
         Noteholder otherwise suffers or incurs or may suffer or incur in
         connection with, any failure of the Issuer to pay any monetary
         liability or to perform any other obligation of the Issuer under this
         Note Deed Poll and the Note Conditions on the due date.

3.3      NO REQUIREMENT TO TAKE STEPS AGAINST ISSUER

         Each Noteholder may make a demand under the guarantee in clause 3.1 or
         the indemnity in clause 3.2 without first taking any steps against the
         Issuer.

3.4      CONTINUING EFFECT

         The guarantee contained in this clause 3 is a continuing guarantee of
         the Guarantor, is not wholly or partially discharged at any time by the
         payment of any monies or the performance of any obligations guaranteed
         under it and remains in full force and effect until all monetary
         liabilities and other obligations guaranteed under it have been fully
         paid and performed.



                                       2
<PAGE>



3.5      NO REDUCTION OF LIABILITY

         The guarantee contained in this clause 3 and the liability of the
         Guarantor under such guarantee is not affected at any time by:

         (a)      the Noteholder under the guarantee granting to the Guarantor,
                  the Issuer or any other person any waiver, extension of time
                  or other indulgence;

         (b)      any other or further security or guarantee now or after the
                  date of this document held or taken by the Noteholder under
                  the guarantee;

         (c)      the loss or release by the Noteholder under the guarantee of
                  any other collateral or other security or guarantee;

         (d)      the Noteholder under the guarantee failing or neglecting to
                  recover by the realisation of any collateral or other security
                  or otherwise any of the money guaranteed under this clause 3;

         (e)      the insolvency, bankruptcy or winding up of any Issuer in
                  relation to that guarantee.

3.6      OBLIGATIONS

         For so long as the Notes are outstanding:

         (a)      Subject to clause 3.6(b), the Guarantor and the Issuer must
                  ensure that -

                  (i)      the Issuer (which owns the Tenements); and

                  (ii)     any person or person, who directly or indirectly own
                           the shares in the Issuer,

                  do not Dispose of all or substantially all of either the
                  assets of the Issuer (including the Tenements) or the direct
                  or indirect shareholding in the Issuer (whether by way of one
                  or more connected transactions) without first procuring that
                  the party or parties acquiring such interests (the
                  "Transferee") gives a guarantee and indemnity in favour of the
                  Noteholders on the same terms, as the guarantee and indemnity
                  given by the Guarantor under clause 3 of the Note Deed Poll
                  and on the basis that after the giving of that guarantee and
                  indemnity the Transferee will be jointly and severally liable
                  with the Guarantor. The giving of such guarantee and indemnity
                  shall not serve to release the Guarantor or the Issuer from
                  its obligations in respect of the Notes.

         (b)      Clause 3.6(a) does not apply to -

                  (i)      any Disposal arising from or pursuant to the
                           enforcement of any Encumbrance granted by the
                           Guarantor or the Issuer in accordance with the terms
                           of the Senior Secured Notes or any Refinancing
                           whether

                           A.       to recover amounts owing under the Senior
                                    Secured Notes or any Refinancing; or

                                       3
<PAGE>



                           B.       to recover amounts owing in connection with
                                    any other financial indebtedness secured by
                                    the same Encumbrances as provided for under
                                    the terms of the Senior Secured Notes or any
                                    Refinancing; and

         (c)      Subject to clause 3.6(d), if the Guarantor or the Issuer wish
                  to sell any of the Tenements or any of the direct or indirect
                  shareholding in the Issuer (other than the sale of all or
                  substantially all of the assets of or shareholding in the
                  Issuer which is regulated by clause 3.6(a)), they must first
                  obtain the consent to such Disposal from the Noteholders
                  holding no less than 50% of the aggregate face value of all
                  Notes on issue.

         (d)      Consent is not required to be obtained under clause 3.6(c) to
                  a Disposal arising from or pursuant to the enforcement of any
                  Encumbrance granted with respect to any bona fide financing
                  facility or accommodation entered with respect to the Project
                  or for the corporate benefit of the Guarantor or the Issuer if
                  at the time of entering into that financing facility or
                  accommodation Leucadia National Corporation and/or its Related
                  Entities had ceased to hold at least 50% of the aggregate face
                  value of all Notes on issue at that time.

         (e)      Any Person or Group of Persons that acquires Control of the
                  Guarantor or the Issuer (whether directly or indirectly) shall
                  be automatically and without further action be deemed to have
                  given a guarantee and indemnity in favour of the Noteholders
                  on the same terms as the guarantee and indemnity by the
                  Guarantor under clause 3 of the Note Deed Poll and on the
                  basis that after the giving of that guarantee and indemnity,
                  such Person or Group of Persons will be jointly and severally
                  liable with the Guarantor. Notwithstanding the foregoing, the
                  Guarantor and the Issuer must ensure the procurement of such
                  guarantee and indemnity. The giving of such guarantee and
                  indemnity shall not serve to release the Guarantor or the
                  Issuer from its obligations in respect of the Notes.

                  For purposes of this clause (e), the terms "Person" and
                  "Group" shall have the meaning used in Section 13(d) of the
                  Securities Exchange Act of 1934 and the rules and regulations
                  thereunder, whether or not such Section 13(d) applies to any
                  securities of the Guarantor or the Issuer, and "Control" means
                  the power, directly or indirectly, to vote or direct the
                  voting of securities having 50% or more of the ordinary voting
                  power for the election of directors of the Guarantor or the
                  Issuer.

                  Clause 3.6(e) shall not require FMG Pilbara Pty Ltd, which as
                  at the date of this Agreement holds all of the issued shares
                  in the capital of the Issuer, to grant a guarantee and
                  indemnity in accordance with clause 3.6(e).

4.       ENFORCEABILITY

4.1      NOTEHOLDER MAY ENFORCE

         This document operates as a deed poll and is enforceable against the
         Issuer and the Guarantor in accordance with its terms by each
         Noteholder in respect of the Notes held by it, even though the
         Noteholder is not a party to, or is not in existence at the time of
         execution and delivery of, this Note Deed Poll.

                                       4
<PAGE>



4.2      NOTEHOLDERS BOUND

         Each Noteholder, and each person claiming through each Noteholder, is
         bound by, and is deemed to have notice of, the provisions of this Note
         Deed Poll and the Note Conditions.

4.3      INDEPENDENT ENFORCEMENT

         Each Noteholder may enforce its rights under this Note Deed Poll and
         the Note Conditions in relation to their Notes independently from each
         other Noteholder, subject to any limitations imposed by this Note Deed
         Poll and the Note Conditions.

5.       GOVERNING LAW AND JURISDICTION

5.1      GOVERNING LAW

         This Note Deed Poll is governed by and must be construed according to
         the law applying in Western Australia.

5.2      JURISDICTION

         The Issuer, the Guarantor and each Noteholder irrevocably:

         (a)      submits to the non-exclusive jurisdiction of the courts of
                  Western Australia, and the courts competent to determine
                  appeals from those courts, with respect to any proceedings
                  which may be brought at any time relating to this Note Deed
                  Poll and the Notes; and

         (b)      waives any objection it may now or in the future have to the
                  venue of any proceedings, and any claim they may now or in the
                  future have that any proceedings have been brought in an
                  inconvenient forum, if that venue falls within clause 5.2(a).


EXECUTED AS A DEED

EXECUTED by FMG CHICHESTER PTY LTD ABN
83 109 264 252 in accordance with section 127
of the Corporations Act by or in the presence
of:


- ----------------------------------------   -------------------------------------
Signature of Secretary/other Director      Signature of Director or Sole
                                           Director and Secretary


- ----------------------------------------   -------------------------------------
Name of Secretary/other Director in full   Name of Director or Sole Director and
                                           Secretary in full





                                       5
<PAGE>


EXECUTED by FORTESCUE METALS GROUP LTD
ABN 50 002 594 872 in accordance with
section 127 of the Corporations Act by or in the
presence of:



- ----------------------------------------   -------------------------------------
Signature of Secretary/other Director      Signature of Director or Sole
                                           Director and Secretary


- ----------------------------------------   -------------------------------------
Name of Secretary/other Director in full   Name of Director or Sole Director and
                                           Secretary in full














                                       6
<PAGE>



SCHEDULE 1
NOTE CONDITIONS


1.       DEFINITIONS AND INTERPRETATION

1.1      DEFINITIONS

         In these Note Conditions:

         "ACCUMULATED INTEREST" means the Interest that the Issuer has been
         unable to pay to the Noteholders in accordance with Condition 5(c)
         together with any interest accruing on that amount pursuant to
         Condition 5(c);

         "CORPORATIONS ACT" means the Australian Corporations Act 2001 (Cth).

         "CONTROL" means the term as defined in Clause 3.6(e).

         "DEFAULT INTEREST" means the amount of the Interest paid or accrued for
         the 2 Interest Periods prior to the time at which notice is given under
         Condition 8.2(a) multiplied by the number of years (and any portion
         thereof) between the end of the later of the two Interest Periods
         referred to above and the Maturity Date.

         "DISPOSE" means to transfer, sell, assign, convey or otherwise dispose
         of by any means whatsoever (including by way of declaration of trust in
         favour of any other person).

         "ENCUMBRANCE" means a mortgage, charge, pledge, lien, encumbrance,
         security interest, title retention, preferential right, trust
         arrangement, contractual right of set-off, or any other security
         agreement or arrangement in favour of any person.

         "EVENT OF INSOLVENCY" means in relation to a company means each of the
         following events:

         (a)      a "controller" (as defined in section 9 of the Corporations
                  Act), trustee, liquidator, provisional liquidator,
                  administrator or similar officer is appointed in respect of
                  the company;

         (b)      the company enters into, or resolves to enter into, a scheme
                  of arrangement, deed of company arrangement or composition
                  with, or assignment for the benefit of, all or any class of
                  its creditors, or it proposes a reorganisation, moratorium or
                  other administration involving any of them;

         (c)      the company resolves to wind itself up, or otherwise dissolve
                  itself, or gives notice of its intention to do so, except to
                  reconstruct or amalgamate while solvent or is otherwise wound
                  up or dissolved;

         (d)      the company is or states that it is unable to pay its debts
                  when they fall due;

         (e)      the company is, or makes a statement from which it may be
                  reasonably deduced that the company is, the subject of an
                  event described in section 459C(2)(b) or section 585 of the
                  Corporations Act;



                                       7
<PAGE>



         (f)      the company takes any step to obtain protection or is granted
                  protection from its creditors, under any applicable
                  legislation or an administrator is appointed to the company or
                  the board of directors of the company propose to appoint an
                  administrator to the company or the company becomes aware that
                  a person who is entitled to enforce a charge on the whole or
                  substantially the whole of the company's property proposes to
                  appoint an administrator to the company; or

         (g)      anything analogous or having a substantially similar effect to
                  any of the events specified above happens under the law of any
                  applicable jurisdiction.

         "FINANCIAL CLOSE" means the date on which funds first become available
         for use by FMG Finance Pty Ltd under the Senior Secured Notes.

         "GOVERNMENT AUTHORITY" means any government or any governmental or semi
         governmental entity, authority, agency, commission, corporation,
         department or body (including those constituted or formed under any
         Statute), local government authority, stock exchange, administrative or
         judicial body or tribunal.

         "GOVERNMENT ROYALTIES" means for the relevant Interest Period all
         royalties payable in respect of the Project during that Interest Period
         under the Mining Act 1978 (WA) .

         "GROSS SALE PROCEEDS" means as at the end of the relevant Interest
         Period the amount in US Dollars determined by multiplying the Price by
         the Tonnes Sold.

         "GROUP" means that term as defined in Clause 3.6(e).

         "GUARANTEE" means the guarantee provided by the Guarantor under the
         Note Deed Poll.

         "INTEREST" means the interest provided for in Condition 5(a) together
         with any Accumulated Interest accruing on that amount pursuant to
         Condition 5(c).

         "INTEREST PAYMENT DATE" has the meaning given in Condition 5(b).

         "INTEREST PERIOD" means in relation to a Note:

         (a)      the period commencing on the date of issue of the Notes and
                  ending on the first to occur of 30 June or 31 December; and

         (b)      each subsequent six month period (or portion thereof)
                  commencing on the day after the final day of the previous
                  Interest Period, until the Notes are redeemed or repaid.

         "IRON ORE" means beneficiated ore, fine ore or lump ore.

         "MATURITY DATE" means 13 years from the date of Financial Close.

         "MATURITY REDEMPTION AMOUNT" in relation to a Note means the face value
         of the Note together with Interest (if any) accrued and unpaid to the
         Maturity Date.

         "NET REVENUE" means Gross Sale Proceeds minus Government Royalties.

         "NOTE" means an obligation of the Issuer to a Noteholder in respect of
         indebtedness of the Issuer to that Noteholder which is recorded in or
         evidenced by an entry in the Register.



                                       8
<PAGE>



         "NOTE CERTIFICATE" means a certificate in the form set out in Annexure
         A.

         "NOTE CONDITIONS" means these terms and conditions.

         "NOTE DEED POLL" means the Note Deed Poll under which the Notes are
         constituted.

         "NOTEHOLDER" in relation to a Note means the person or persons
         registered as the holder of that Note in any register maintained by the
         Issuer or, if there is no such register, in whose name a Note
         Certificate is issued.

         "PERSON" means that term as defined in Clause 3.6(e).

         "PRICE" means the FOB Port Hedland price payable by the purchaser of
         the Tonnes Sold as set out in the invoice relating to the sale of those
         Tonnes Sold which, if not stated in US Dollars, must be converted into
         US Dollars using the prevailing exchange rate on the date on which the
         ship containing the Tonnes Sold sails.

         "PROJECT" means development of one or more iron ore mines on the
         Tenements and the related rail, port and infrastructure project.

         "REFINANCING" means a refinancing of the Senior Secured Notes for no
         greater principal amount than that issued under the Senior Secured
         Notes, at an interest rate no greater than that payable under the
         Senior Secured Notes and with a maturity of no longer than 10 years
         after the date of Financial Close.

         "REGISTER" means the register of Noteholders maintained by the Issuer.

         "SENIOR SECURED NOTES" means the senior secured notes to be issued by
         FMG Finance Pty Ltd means the senior secured notes to be issued by FMG
         Finance under Rule 144A(d)(4) under the US Securities Act 1933 (as
         amended) pursuant to an indenture to be dated on or about the date on
         which the first of the Notes is issued, without regard to any
         amendments thereto.

         "STATUTE" means any legislation of the Parliament of the Commonwealth
         of Australia or of any State or Territory of the Commonwealth of
         Australia in force at any time, and any rule, regulation, ordinance,
         by-law, statutory instrument, order or notice at any time made under
         that legislation.

         "TAXES" means all taxes, levies, imposts, deductions, charges and
         withholdings assessed, imposed, collected or withheld under any
         legislation and, in each case, all interest, fines, penalties, charges,
         fees or other amounts in respect of them.

         "TENEMENTS" means the tenements set out in Annexure B.

         "TONNES SOLD" means for the relevant Interest Period the tonnes of Iron
         Ore produced from all of the Tenements and invoiced for sale during the
         relevant Interest Period.

         "TRANSFEREE" means the term as defined in Clause 3.6(a).



                                       9
<PAGE>



1.2      INTERPRETATION

         In these Note Conditions:

         (a)      headings are for convenience only and do not affect
                  interpretation;

         and unless the context indicates a contrary intention:

         (b)      "PERSON" includes an individual, the estate of an individual,
                  a corporation, a Government Authority, an association or a
                  joint venture (whether incorporated or unincorporated), a
                  partnership and a trust;

         (c)      a reference to a person includes that person's executors,
                  administrators, successors, and permitted assigns, including
                  persons taking by way of novation;

         (d)      except with respect to the Senior Secured Notes, a reference
                  to a document (including these Note Conditions) is to that
                  document as varied, novated, ratified or replaced from time to
                  time;

         (e)      a reference to amending a term, condition or a document
                  includes supplementing, deleting or replacing the term,
                  condition or document (as the case may be);

         (f)      a reference to "$" "US$", "DOLLARS" "DOLLAR" and "US DOLLARS"
                  is to the currency of the United States of America;

         (g)      a reference to a Statute includes its delegated legislation
                  and a reference to a Statute or delegated legislation or a
                  provision of either includes consolidations, amendments,
                  re-enactments and replacements;

         (h)      a word importing the singular includes the plural (and vice
                  versa), and a word indicating a gender includes every other
                  gender;

         (i)      a reference to a clause, Condition, schedule, exhibit,
                  attachment or annexure is a reference to a clause, Condition,
                  schedule, exhibit, attachment or annexure to or of these Note
                  Conditions, and a reference to these Note Conditions includes
                  all schedules, exhibits, attachments and annexures to it;

         (j)      if a word or phrase is given a defined meaning, any other part
                  of speech or grammatical form of that word or phrase has a
                  corresponding meaning;

         (k)      where the day on or by which any sum is payable or any act,
                  matter or thing is to be done is a day other than a Business
                  Day, that sum must be paid and that act, matter or thing must
                  be done on the immediately succeeding Business Day;

         (l)      a reference to time is to local time in Perth, Western
                  Australia ;

         (m)      where time is to be determined by reference to a day or event,
                  that day or the day of that event is to be excluded; and

         (n)      "INCLUDES" in any form is not a word of limitation.



                                       10
<PAGE>



2.       THE NOTES

2.1      ACKNOWLEDGMENT OF INDEBTEDNESS

         The Issuer acknowledges its indebtedness in respect of, and promises to
         pay all amounts due in relation to, each Note on the terms contained in
         the Note Deed Poll and these Note Conditions.

2.2      COVENANT TO PERFORM OBLIGATIONS

         The Issuer covenants in favour of each Noteholder from time to time
         that it will perform its obligations in full, and by the due dates,
         referred to in the Note Deed Poll and these Note Conditions.

2.3      STATUS OF NOTES

         (a)      (DIRECT UNSECURED OBLIGATIONS): each Note constitutes direct,
                  unconditional and unsecured obligations of the Issuer in
                  accordance with these Note Conditions; and

         (b)      (RANKING): the Notes at all times rank pari passu and without
                  any preference amongst themselves and at all times rank after,
                  and are subordinated to, the Senior Secured Notes or any
                  Refinancing thereof.

2.4      DENOMINATION AND CURRENCY OF NOTES

         Each Note will be have a principal amount of, and be issued in minimum
         denominations of US$2,000 and integral multiples of US$1,000 in excess
         thereof.

2.5      NOTES NOT INVALID IF IMPROPERLY ISSUED

         No Note is invalid or unenforceable on the ground that it was issued in
         breach of these Note Conditions.

2.6      LOCATION OF THE NOTES

         The property in a Note for all purposes is situated where the Register
         is located.

2.7      NO RIGHTS BEFORE PAYMENT

         Unless and until the Issuer receives or has the benefit of the
         consideration agreed to be provided in respect of the issue of a Note,
         no Noteholder nor any other person has any right, title or interest to
         the Note.

3.       NOTE CERTIFICATES

3.1      ISSUE

         The Issuer must issue a Note Certificate to each person who is issued a
         Note.

3.2      CONDITIONS OF ISSUE

         The terms of the Note Deed Poll and the Note Conditions are deemed to
         be included or endorsed on each Note Certificate.



                                       11
<PAGE>



3.3      EXECUTION OF NOTE CERTIFICATES

         Subject to any requirement of the Corporations Act, each Note
         Certificate must be executed by any officer of the Issuer duly
         authorised to do so by a resolution of the directors of the Issuer, and
         any signature required for such execution or authentication may be a
         facsimile which is printed as part of the Note Certificate or which is
         applied by mechanical or other means.

4.       REGISTER

         The Issuer must establish and maintain a Register. There must be
         recorded in the Register the names and addresses of the Noteholders and
         the date of issue or transfer of such Notes and the amount of Notes
         held by each Noteholder.

5.       INTEREST

         (a)      The interest payable on each Note in respect of an Interest
                  Period is:

                  4% of Net Revenue                         the face value
        --------------------------------------------    X   of the relevant
         aggregate face value of all Notes on issue              Note
            on the relevant Interest Payment Date

         and accrues on a daily basis.

         (b)      Subject to paragraph (c), Interest is payable semi-annually in
                  arrears 30 days after the end of the relevant Interest Period
                  ("INTEREST PAYMENT DATE") .

         (c)      Interest is only required to be paid to the Noteholders after
                  the payment restrictions in the Senior Secured Notes have been
                  satisfied. If the Issuer is unable to pay Interest at any time
                  due to the restrictions in the Senior Secured Notes, the
                  Noteholders' right to Interest will accumulate until such time
                  as the Issuer is permitted under the terms of the Senior
                  Secured Notes to pay such Interest. Each Interest payment
                  which is unpaid will accrue simple interest from the due date
                  for payment until the date it is paid at the rate of 9.5% per
                  annum.

         (d)      As soon as permitted under the terms of the Senior Secured
                  Notes, the Issuer will pay to the Noteholders the Accumulated
                  Interest.

6.       CALCULATION OF INTEREST

         (a)      The Issuer must on the relevant Interest Payment Date provide
                  any Noteholder holding no less than 25% of the aggregate face
                  value of all Notes on issue with a certificate signed by a
                  director of the Issuer and the chief executive officer of the
                  Guarantor setting out in reasonable detail how the Interest
                  was calculated for the relevant Interest Calculation Period
                  and attaching to it copies of all relevant sales invoices.

         (b)      The Issuer must implement and maintain such procedures and
                  maintain such records as are reasonably necessary to ensure
                  that at all times the amount of the Interest payable in
                  respect of the Notes can be accurately calculated.

         (c)      Any Noteholder holding no less than 25% of the aggregate face
                  value of all Notes on issue, or any person authorized by it in
                  writing, may at any time within 30 days of receiving a
                  certificate under paragraph (a), upon reasonable notice to the


                                       12
<PAGE>



                  Issuer, inspect the property comprising the Tenements and the
                  books and records maintained by the Issuer in relation to the
                  Tenements for the sole purpose of determining and verifying
                  the amount of the Interest the subject of that certificate and
                  any variable or factor necessary to determine the amount of
                  the Interest the subject of the certificate.

         (d)      If following any inspection or audit made pursuant to
                  paragraph (c), the Noteholder believes that the amount paid by
                  FMG to a Noteholder is less than the amount required by these
                  Conditions to be paid, the Noteholder must notify FMG and the
                  Noteholder and FMG must endeavour to agree the amount which
                  should have been paid within 21 days of the notice being
                  given. If the parties are unable to agree within that period,
                  an independent expert must be appointed to determine the
                  amount required by these Conditions to be paid.

         (e)      If the parties are unable to agree to the independent expert
                  to be appointed within 7 days after expiration of the 21 day
                  period in paragraph (d), then the expert shall be appointed at
                  the request of either party by the President for the time
                  being of the Australasian Institute of Mining and Metallurgy
                  ("EXPERT").

         (f)      The Expert shall be acting as an expert and not an arbitrator
                  and the Expert's decision will be final and binding on the
                  parties.

         (g)      If the Expert determines that there was a shortfall in the
                  amount that the Issuer was required to pay under these
                  Conditions, the Issuer must immediately pay to all Noteholders
                  the shortfall owing plus interest as calculated pursuant to
                  Condition 5(c).

         (h)      If the Expert determines that the Issuer paid more than it was
                  required to pay under these Conditions, the Issuer will be
                  entitled to deduct from the next payment of Interest to all
                  Noteholders the amount of such excess plus interest at the
                  rate of 9.5% per annum from the date of the last payment of
                  Interest to the date of the next payment of Interest.

         (i)      If the Expert determines that the shortfall in payment to the
                  Noteholder is in excess of 5% of the amount which had
                  initially been paid:

                  (i)      the Issuer must immediately reimburse the Noteholder
                           for all expenses incurred in connection with the
                           audit or inspection which disclosed that shortfall
                           (including, but not limited to, reasonable accounting
                           and legal fees); and

                  (ii)     the Issuer must reimburse the Noteholder for all
                           expenses connected with the next three (if any)
                           subsequent audits or inspections made pursuant to
                           paragraph (c) (including, but not limited to,
                           reasonable accounting and legal fees), irrespective
                           of whether such subsequent audit or inspection
                           reveals any shortfall in any payment.

         (j)      All payments made under this clause are without prejudice to
                  any other remedies that a Noteholder or the Issuer may have
                  under this Note Deed Poll or otherwise.



                                       13
<PAGE>



7.       REDEMPTION

7.1      REDEMPTION ON MATURITY

         Each Note will be redeemed or repaid (as the case may be) on its
         Maturity Date at its Maturity Redemption Amount and, unless clause 8.2
         applies, cannot be redeemed or repaid before that time.

7.2      CANCELLATION OF NOTES

         All Notes that are redeemed will automatically be cancelled on
         redemption and may not be re-issued.

8.       EVENTS OF DEFAULT

8.1      EVENTS OF DEFAULT

         Each of the following events is an Event of Default, whether or not the
         cause is beyond the control of the Issuer or any other person:

         (a)      the Issuer fails to pay within 10 days after the due time on
                  the due date any amount payable under any Note in the manner
                  specified in the Note Conditions;

         (b)      the Issuer defaults in fully performing and observing any of
                  its other obligations in respect of any Note other than a
                  provision requiring the payment of money as contemplated by
                  Condition 8.1(a), and if that default is capable of remedy, it
                  has not been remedied within 45 days of its occurrence;

         (c)      if there is an acceleration by holders in payment of the
                  principal of the Senior Secured Notes or any Refinancing
                  thereof;

         (d)      unless the Senior Secured Notes have been Refinanced, there
                  occurs, at any time after all of the Senior Secured Notes have
                  matured or been redeemed, an event which, if the Senior
                  Secured Notes had not matured or been redeemed, would have
                  been an event of default under the Senior Secured Notes;

         (e)      if the Senior Secured Notes have been Refinanced, there occurs
                  at any time after all of the notes issued to Refinance have
                  matured or been redeemed, an event which, if those notes had
                  not matured or redeemed, would have been an event of default
                  under those notes; or

         (f)      an Event of Insolvency occurs in relation to the Issuer or the
                  Guarantor.

8.2      RIGHTS ON AN EVENT OF DEFAULT

         (a)      Subject to paragraph (b), if any Event of Default occurs and
                  is continuing in relation to a Note, then Noteholders who
                  alone or in aggregate hold at least 50% of the aggregate face
                  value of all Notes on issue may by written notice to the
                  Issuer declare the face value of the Notes together with all
                  accrued Interest, Default Interest and other moneys in
                  relation to a Note to be immediately due and payable.



                                       14
<PAGE>



         (b)      Noteholders shall not be entitled to accelerate repayment
                  after an Event of Default until the earlier of the date (i)
                  the Senior Secured Notes have been paid in full, (ii) 360 days
                  following missed interest payments on the Notes, (iii) of
                  acceleration of the Senior Secured Notes, or (iv) one business
                  day following maturity of the Notes if all amounts of
                  principal and interest have not been paid in full; provided,
                  however, Noteholders may accelerate payment of the Guarantee
                  under the Note Deed Poll if Fortescue no longer guarantees the
                  Senior Secured Notes.

9.       TRANSFER OF NOTES

9.1      FORM OF TRANSFER

         The Notes may be transferred:

         (a)      by written transfer instrument in any usual or common form or
                  in any other form approved by the directors of the Issuer; and

         (b)      to a person or entity that has executed and delivered to the
                  Issuer an undertaking to observe, perform and be bound by the
                  terms of this deed.

9.2      EXECUTION OF TRANSFER

         A written transfer instrument must be executed by the transferor.

9.3      REGISTRATION OF TRANSFER

         A written transfer instrument must be forwarded for registration to the
         Issuer together with the Note Certificate for the Notes to be
         transferred. Subject to compliance with Condition 10.5 and the
         provisions of any relevant Statute relating to stamp duties, the Issuer
         must register the transfer and issue a Note Certificate to the
         transferee for the number of Notes comprised in the transfer.

9.4      TRANSFERS WHERE NOTES ARE QUOTED

         If the Notes are, at the time of transfer, quoted on a financial
         market, then the Notes may alternatively be transferred in accordance
         with the rules of that financial market and the Corporations Act.

9.5      TRANSFER RESTRICTIONS

         It is understood that the Note Certificates may bear one or all of the
         following legends:

         (a)      "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
                  REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
                  AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAW,
                  AND THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES
                  THAT THIS SECURITY MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE
                  TRANSFERRED ONLY (1) TO FORTESCUE METALS GROUP LTD OR FMG
                  CHICHESTER PTY LTD, (2) SO LONG AS THIS SECURITY IS ELIGIBLE
                  FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT
                  ("RULE 144A"), TO A PERSON WHO THE SELLER REASONABLY BELIEVES
                  IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A),
                  (3) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 903 OR RULE


                                       15
<PAGE>



                  904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT,
                  (4) PURSUANT TO AN EXEMPTION FROM REGISTRATION IN ACCORDANCE
                  WITH RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (5)
                  PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
                  SECURITIES ACT, OR (6) PURSUANT TO AN AVAILABLE EXEMPTION FROM
                  THE REGISTRATION REQUIREMENTS IF THE SELLER SHALL HAVE
                  FURNISHED SUCH CERTIFICATIONS AND/OR OPINION OF COUNSEL AS THE
                  ISSUER MAY REASONABLY REQUEST, IN EACH SUCH CASE IN ACCORDANCE
                  WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
                  STATES OR OTHER JURISDICTIONS."

         (b)      Any legend required by applicable state "blue sky" securities
                  laws, rules and regulations.

         To the extent a Note bears the legend set forth in (a) above, the
         Issuer shall be entitled to require such certifications and/or opinions
         as it may reasonably request in connection with the registration of
         transfer of any Note.

         In order to permit resales pursuant to Rule 144A of the Securities Act,
         the Guarantor agrees that, for as long as any Notes are "restricted
         securities" within the meaning of Rule 144(a)(3) under the Securities
         Act, during any period in which the Guarantor is neither subject to
         Section 13 or 15(d) of the US Securities Exchange Act of 1934, nor
         exempt from reporting pursuant to Rule 12g3-2(b) thereunder, the
         Guarantor shall supply to (i) any holder of Notes or beneficial owner
         of a Note or (ii) a prospective purchaser of a Note or a beneficial
         interest therein designated by such holder or owner, the information
         specified in, and meeting the requirements of Rule 144A(d)(4) under the
         Securities Act.

9.6      COMPLIANCE WITH LAW

         Notes may not be transferred within any jurisdiction in a manner which
         would result in a breach of any applicable securities legislation in
         that jurisdiction.

10.      PAYMENT TO NOTEHOLDERS

         Redemption moneys and any other moneys payable on or in respect of any
         Notes must be paid in US dollars by:

         (a)      cheque sent to the address of the Noteholder on the Register;

         (b)      deposit to an account with any bank in Australia or the United
                  States that the Noteholder, by written notice to the Issuer,
                  may direct; or

         (c)      any other method of transferring money agreed by the Issuer
                  and the relevant Noteholder from time to time.

11.      DEDUCTION OF TAXES

11.1     WITHHOLDING TAX

         The Issuer, or any person making payments on behalf of the Issuer, may
         deduct any Tax imposed by the Commonwealth of Australia or any foreign
         Government Authority under the Tax Act or any applicable laws from


                                       16
<PAGE>



         payments of interest in respect of the Notes where the Issuer, or such
         person, considers this is required in accordance with the Tax Act or
         such laws.

11.2     NO GROSS-UP

         No additional payment will be made to a Noteholder with respect to any
         amounts deducted from payment to that Noteholder under this Condition
         11.

12.      JOINT NOTEHOLDERS

         (a)      Joint Noteholders will be entitled to one Note Certificate
                  only in respect of Notes held by them jointly and the Note
                  Certificate will be delivered to the joint Noteholder whose
                  name stands first in the Register.

         (b)      If several Persons are entered in the Register as joint
                  Noteholders in respect of a Note the receipt by any one of
                  such Persons for the payment or satisfaction of any principal
                  or interest from time to time payable or repayable to the
                  Joint Noteholders will be as effective a discharge to the
                  Issuer as if the Person accepting the payment were a sole
                  Noteholder in respect of that Note.

         (c)      The Issuer will not be bound to register more than three
                  Persons as the joint holders of any Notes.

         (d)      Subject to these Note Conditions, all of the joint Noteholders
                  in respect of any Note must execute any transfer form of the
                  relevant Note.

13.      TITLE TO NOTES, NON-RECOGNITION OF EQUITIES

         (a)      Subject to these Note Conditions, the Issuer will recognise
                  only the Noteholder whose name appears in the Register as the
                  absolute owner of the Note in respect of which the Noteholder
                  is entered in the Register.

         (b)      The Issuer will not, except as otherwise ordered by a Court of
                  competent jurisdiction or as required by statute, be bound to
                  take notice of any trust or equity to which a Note may be
                  subject or otherwise affecting the ownership of a Note or
                  rights incidental thereto.

         (c)      The receipt of a Noteholder or one of Joint Noteholders for
                  interest in respect of and for any money payable on the
                  redemption of a Note will be a good discharge to the Issuer
                  despite any notice the Issuer may have, whether express or
                  otherwise, of the right, title or interest of any person to or
                  in that Note or money.

14.      MISCELLANEOUS

14.1     TERMS AND CONDITIONS BINDING

         Each Noteholder, and the Notes are issued on the condition that each
         Noteholder, is bound by the terms and conditions of the Note Deed Poll
         and the Note Conditions relating to the Notes held by that Noteholder.



                                       17
<PAGE>



14.2     SEVERANCE

         If at any time any provision of the Note Deed Poll or these Note
         Conditions is or becomes illegal, invalid or unenforceable in any
         respect under the law of any jurisdiction, that will not affect or
         impair:

         (a)      the legality, validity or enforceability in that jurisdiction
                  of any other provision of the Note Deed Poll or the Note
                  Conditions; or

         (b)      the legality, validity or enforceability under the law of any
                  other jurisdiction of that or any other provision of the Note
                  Deed Poll or the Note Conditions.

14.3     REMEDIES CUMULATIVE

         The rights and remedies conferred by the Note Deed Poll and the Note
         Conditions on the Issuer are cumulative and in addition to all other
         rights or remedies available to the Issuer by Statute, by general law
         or by virtue of any other document.

14.4     WAIVER

         (a)      A failure to exercise or enforce, or a delay in exercising or
                  enforcing, or the partial exercise or enforcement of, a right,
                  power or remedy provided by law or under the Note Deed Poll or
                  these Note Conditions by the Issuer does not preclude, or
                  operate as a waiver of, the exercise or enforcement, or
                  further exercise or enforcement, of that or any other right,
                  power or remedy provided by law or under the Note Deed Poll or
                  these Note Conditions.

         (b)      A waiver or consent given by the Issuer under the Note Deed
                  Poll or these Note Conditions is only effective and binding on
                  the Issuer if it is given or confirmed in writing.

         (c)      No waiver of a breach of a term of the Note Deed Poll or these
                  Note Conditions operates as a waiver of another breach of that
                  term or of a breach of any other term of the Note Deed Poll or
                  these Note Conditions.

14.5     SURVIVAL OF WARRANTIES

         The warranties, representations and covenants of the Noteholders
         contained in or made pursuant to the Note Conditions shall survive the
         execution and delivery of the Note Deed Poll and shall in no way be
         affected by any investigation of the subject matter thereof made by or
         on behalf of the Noteholders, the Issuer or the Guarantor.

14.6     SUCCESSORS AND ASSIGNS

         Except as otherwise provided herein, these Note Conditions shall inure
         to the benefit of and be binding upon the respective successors and
         assigns of the parties (including transferees of any Notes). Nothing in
         the Note Deed Poll, express or implied, is intended to confer upon any
         party other than the parties hereto or their respective successors and
         assigns any rights, remedies, obligations, or liabilities under or by
         reason of the Note Deed Poll, except as expressly provided in the Note
         Deed Poll.



                                       18
<PAGE>



14.7     COUNTERPARTS

         The Note Deed Poll may be executed in two or more counterparts,
         including counterpart facsimile pages, each of which shall be deemed an
         original, but all of which together shall constitute one and the same
         instrument.

14.8     AMENDMENT

         The Note Deed Poll or the Note Conditions may be amended by the Issuer
         at any time with the approval of Noteholders holding in aggregate 50%
         of the aggregate face value of all Notes on issue. However, without the
         consent of each Noteholder affected thereby, no amendment may:

         (a)      reduce the principal amount of Notes,

         (b)      reduce the rate of or extend the time for payment of Interest
                  on any Note;

         (c)      reduce the principal of, or extend the maturity of, any Note;

         (d)      make any Note payable in money other than US dollars;

         (e)      impair the right of any Noteholder to institute suit for the
                  enforcement of any payment on or with respect to such
                  Noteholder's Notes or any Guarantee;

         (f)      subordinate the Notes or the Guarantee to any other obligation
                  of the Issuer or Guarantor; or

         (g)      make any change to the Guarantee that would adversely affect
                  the Noteholders.

15.      OBLIGATIONS IN RELATION TO THE NOTES

15.1     LISTING ON AN EXCHANGE

         (a)      Subject to paragraph (b), the Issuer agrees that, if the
                  Senior Secured Notes are listed on any stock exchange, the
                  Issuer will, to the extent permitted by law and the rules of
                  the relevant stock exchange, use its best endeavours to obtain
                  a listing of the Notes on such stock exchange, provided that
                  the Notes satisfy the requirements of the relevant stock
                  exchange for listing and, if reasonably required by
                  Noteholders holding in aggregate 50% of the face value of all
                  Notes on issue, use its best efforts in connection with a
                  listing or otherwise, to cooperate in connection with a
                  secondary sale by such Noteholders of the Notes, including the
                  preparation of an offering memorandum, making management
                  reasonably available for investor presentations and the entry
                  into a customary purchase or underwriting agreement.

         (b)      The Issuer will not have an obligation to obtain a listing of
                  the Notes under paragraph (a) if the Issuer determines, acting
                  reasonably, that satisfying the requirements for such a
                  listing would be unduly onerous for the Issuer. In these
                  circumstances, the Issuer will identify another exchange
                  reasonably acceptable to Noteholders holding in aggregate 50%
                  of the face value of all Notes on issue on which the Notes may
                  be listed and in respect of which the Issuer is reasonably
                  satisfied that the listing requirements would not be unduly
                  onerous.




                                       19
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>amending_agmt-110706.txt
<DESCRIPTION>EXHIBIT 10.2
<TEXT>
                                                                    EXHIBIT 10.2
                                                                    ------------
CLAYTON UTZ

Amending Agreement

FMG Chichester Pty Ltd
ABN 83 109 264 262

FMG


Leucadia National Corporation

Subscriber


Fortescue Metals Group Ltd
ABN 57 002 594 872

Fortescue



The Clayton Utz contact for this document is
KAREN EVANS-CULLEN ON +612 9353 4000


Clayton Utz
Lawyers
Levels 19-35 No. 1 O'Connell Street Sydney NSW 2000 Australia
PO Box H3 Australia Square Sydney NSW 1215
T +61 2 9353 4000  F +61 2 8220 6700


WWW.CLAYTONUTZ.COM


Our reference 838/80035314













<PAGE>



TABLE OF CONTENTS


1.          DEFINITIONS AND INTERPRETATIONS................................... 2

            1.1         Definitions........................................... 2
            1.2         Interpretation........................................ 2

2.          AMENDMENT......................................................... 2


3.          GENERAL........................................................... 2

            3.1         Amendments............................................ 2
            3.2         Counterparts.......................................... 2
            3.3         Governing law......................................... 3

SCHEDULE 1 -- FORM OF NOTE DEED POLL.......................................... I









                                       1

<PAGE>



AMENDING AGREEMENT MADE ON

PARTIES              FMG CHICHESTER PTY LTD ABN 83 109 264 262 of Level 2,
                     87 Adelaide terrace, East Perth, Western Australia

                     ("FMG")

                     LEUCADIA NATIONAL CORPORATION of 315 Park Avenue South,
                     New York, NY 10010

                     ("SUBSCRIBER")

                     FORTESCUE METALS GROUP LTD ABN 57 002 594 872 of Level 2,
                     87 Adelaide terrace, East Perth, Western Australia

                     ("FORTESCUE")

BACKGROUND

A.          The parties entered into the Subscription Agreement and now wish to
            amend the Subscription Agreement in the manner set out in this
            Agreement.

OPERATIVE PROVISIONS

1.          DEFINITIONS AND INTERPRETATIONS

- --------------------------------------------------------------------------------
1.1         DEFINITIONS

            In this Agreement:

            "SUBSCRIPTION AGREEMENT" means the agreement between the parties
            titled "Subscription Agreement" and dated 15 July 2006.

            All words defined in the Subscription Agreement have the same
            meaning in this Agreement unless a contrary intention appears.

1.2         INTERPRETATION

            Clause 1.2 of the Subscription Agreement applies to this Agreement.
- --------------------------------------------------------------------------------
2.       AMENDMENT

- --------------------------------------------------------------------------------
            The parties agree that Schedule 1 of the Subscription Agreement is
            deleted and replaced with Schedule 1 to this Agreement.

- --------------------------------------------------------------------------------
3.          GENERAL

3.1         AMENDMENTS

            This Agreement may only be varied by a document signed by or on
            behalf of each party.

3.2         COUNTERPARTS

            This Agreement may be executed in any number of counterparts and by
            the parties on separate counterparts. Each counterpart constitutes
            an original of this Agreement, and all together constitute one
            agreement.


                                       2
<PAGE>



3.3         GOVERNING LAW

            This Agreement is governed by and must be construed according to the
            law applying in Western Australia.

EXECUTED as an agreement.



EXECUTED by FMG CHICHESTER PTY LTD
ABN 83 109 264 262 by or in the presence of:





- ---------------------------------       -------------------------------------
Signature of Director                   Signature of Secretary/other Director



- ---------------------------------       -------------------------------------
Name of Director in full                Name of Secretary/other Director in full






EXECUTED by FORTESCUE METALS GROUP LTD
ABN 57 002 594 872 by or in the presence of:





- ---------------------------------       -------------------------------------
Signature of Director                   Signature of Secretary/other Director



- ---------------------------------       -------------------------------------
Name of Director in full                Name of Secretary/other Director in full






                                       3
<PAGE>



Signed for and on behalf of LEUCADIA NATIONAL CORPORATION
by its duly authorised officer




- --------------------------------------
Signature



- --------------------------------------
Name and title
















                                       4
<PAGE>


SCHEDULE 1 -- FORM OF NOTE DEED POLL

FORM OF NOTE DEED POLL



FMG Chichester Pty Ltd
ABN 83 109 264 262


Issuer




Fortescue Metals Group Ltd
ABN 57 002 594 872


Guarantor















Clayton Utz
Lawyers
Levels 19-35  No. 1 O'Connell Street  Sydney  NSW  2000  Australia
PO Box H3  Australia Square  Sydney  NSW  1215
T +61 2 9353 4000  F +61 2 8220 6700


WWW.CLAYTONUTZ.COM






<PAGE>



TABLE OF CONTENTS


1.          DEFINITIONS AND INTERPRETATION.................................... 1

            1.1         Definitions........................................... 1
            1.2         Interpretation........................................ 1

2.          NATURE AND STATUS OF NOTES........................................ 1

            2.1         Constitution of Notes................................. 1
            2.2         Terms of Notes........................................ 2
            2.3         Entry in the Note Register............................ 2

3.          GUARANTEE OF PAYMENT AND PERFORMANCE.............................. 2

            3.1         Guarantee............................................. 2
            3.2         Indemnities........................................... 2
            3.3         No requirement to take steps against Issuer........... 2
            3.4         Continuing effect..................................... 2
            3.5         No reduction of liability............................. 3
            3.6         Obligations........................................... 3

4.          ENFORCEABILITY.................................................... 4

            4.1         Noteholder may enforce................................ 4
            4.2         Noteholders bound..................................... 5
            4.3         Independent enforcement............................... 5

5.          GOVERNING LAW AND JURISDICTION.................................... 5

            5.1         Governing law......................................... 5
            5.2         Jurisdiction.......................................... 5

SCHEDULE 1 NOTE CONDITIONS.................................................... 7


ANNEXURE A................................................................... 20


ANNEXURE B.................................................................... 1





<PAGE>







NOTE DEED POLL MADE AT ____ ON _____________

BY FMG CHICHESTER PTY LTD ABN 83 109 264 252 a company registered in Western
Australia with an office at Level 2, 87 Adelaide Terrace, East Perth, Western
Australia ("ISSUER")

and

FORTESCUE METALS GROUP LTD ABN 57 002 594 872 a company registered in Western
Australia with an office at Level 2, 87 Adelaide Terrace, East Perth, Western
Australia ("GUARANTOR")

BACKGROUND

A.          The Issuer may from time to time issue Notes on the terms and
            conditions contained in the Note Conditions.

B.          The Guarantor has agreed to guarantee to the Noteholders the
            obligations of the Issuer under the Notes and this Note Deed Poll.

C.          If the Issuer issues Notes it is intended that the Noteholders will
            have the benefit of this Note Deed Poll.

OPERATIVE PROVISIONS
- --------------------------------------------------------------------------------
1.          DEFINITIONS AND INTERPRETATION

1.1         DEFINITIONS

            In this Note Deed Poll:

            (a)   "NOTE CONDITIONS" means, generally, the terms and conditions
                  contained in Schedule 1; and

            (b)   words and expressions defined in the Note Conditions have the
                  same meanings when used in this Note Deed Poll.

1.2         INTERPRETATION

            Condition 1.2 of the Note Conditions applies to the interpretation
            of this Note Deed Poll as if every reference to "these Note
            Conditions" is replaced with "this Note Deed Poll" and to a
            "Condition" is replaced with a "clause".

- --------------------------------------------------------------------------------
2.          NATURE AND STATUS OF NOTES

2.1         CONSTITUTION OF NOTES

            Each Note is a debt obligation of the Issuer constituted by, and
            owing under, this Note Deed Poll.


<PAGE>

2.2         TERMS OF NOTES

            Each Note is issued on, and subject to, the provisions of this Note
            Deed Poll and the Note Conditions relating to that Note. Each Note
            is subject to the provisions of the Subordination Deed.

2.3         ENTRY IN THE NOTE REGISTER

            Each entry in the Register in respect of a Note constitutes an
            unconditional and irrevocable covenant by the Issuer in favour of
            the person whose name is so registered that the Issuer will:

            (a)   (MAKE ALL PAYMENTS): make all payments of principal, interest
                  and other amounts in respect of the Note in accordance with
                  this Note Deed Poll and the Note Conditions relating to that
                  Note; and

            (b)   (PERFORM OTHER OBLIGATIONS): perform all of its other
                  obligations in full, and by the due dates, referred to in this
                  Note Deed Poll and the Note Conditions relating to that Note.

- --------------------------------------------------------------------------------
3.          GUARANTEE OF PAYMENT AND PERFORMANCE

3.1         GUARANTEE

            The Guarantor unconditionally and irrevocably guarantees to the
            Noteholders:

            (a)   the payment by the Issuer of all present and future monetary
                  liabilities of the Issuer due or payable to the Noteholder
                  under this Note Deed Poll and the Note Conditions; and

            (b)   the performance by the Issuer of each other obligation of the
                  Issuer under this Note Deed Poll and the Note Conditions;

            and if the Issuer fails to pay such monies or fails to perform such
            obligation on the due date for payment or performance the Guarantor
            must immediately on demand by the Noteholder pay such monies to the
            Noteholder in the manner specified in this Note Deed Poll and the
            Note Conditions or procure the performance by the Issuer of such
            obligation, as the case may be.

3.2         INDEMNITIES

            As separate, independent and additional liabilities, the Guarantor
            indemnifies the Noteholder against all loss arising from, or which
            the Noteholder otherwise suffers or incurs or may suffer or incur in
            connection with, any failure of the Issuer to pay any monetary
            liability or to perform any other obligation of the Issuer under
            this Note Deed Poll and the Note Conditions on the due date.

3.3         NO REQUIREMENT TO TAKE STEPS AGAINST ISSUER

            Each Noteholder may make a demand under the guarantee in clause 3.1
            or the indemnity in clause 3.2 without first taking any steps
            against the Issuer.

3.4         CONTINUING EFFECT

            The guarantee contained in this clause 3 is a continuing guarantee
            of the Guarantor, is not wholly or partially discharged at any time
            by the payment of any monies or the performance of any obligations
            guaranteed under it and remains in full force and effect until all
            monetary liabilities and other obligations guaranteed under it have
            been fully paid and performed.



                                       2
<PAGE>

3.5         NO REDUCTION OF LIABILITY

            The guarantee contained in this clause 3 and the liability of the
            Guarantor under such guarantee is not affected at any time by:

            (a)   the Noteholder under the guarantee granting to the Guarantor,
                  the Issuer or any other person any waiver, extension of time
                  or other indulgence;

            (b)   any other or further security or guarantee now or after the
                  date of this document held or taken by the Noteholder under
                  the guarantee;

            (c)   the loss or release by the Noteholder under the guarantee of
                  any other collateral or other security or guarantee;

            (d)   the Noteholder under the guarantee failing or neglecting to
                  recover by the realisation of any collateral or other security
                  or otherwise any of the money guaranteed under this clause 3;

            (e)   the insolvency, bankruptcy or winding up of any Issuer in
                  relation to that guarantee.

3.6         OBLIGATIONS

            For so long as the Notes are outstanding:

            (a)   Subject to clause 3.6(b), the Guarantor and the Issuer must
                  ensure that -

                  (i)   the Issuer (which owns the Tenements); and

                  (ii)  any person or person, who directly or indirectly own the
                        shares in the Issuer,

                  do not Dispose of all or substantially all of either the
                  assets of the Issuer (including the Tenements) or the direct
                  or indirect shareholding in the Issuer (whether by way of one
                  or more connected transactions) without first procuring that
                  the party or parties acquiring such interests (the
                  "Transferee") gives a guarantee and indemnity in favour of the
                  Noteholders on the same terms as the guarantee and indemnity
                  given by the Guarantor under clause 3 of the Note Deed Poll
                  and on the basis that after the giving of that guarantee and
                  indemnity the Transferee will be jointly and severally liable
                  with the Guarantor. The giving of such guarantee and indemnity
                  shall not serve to release the Guarantor or the Issuer from
                  its obligations in respect of the Notes.

            (b)   Subject to clauses 3.6(c) and 3.6(d), if the Guarantor or the
                  Issuer wish to Dispose of any of the Tenements or any of the
                  direct or indirect shareholding in the Issuer (other than the
                  sale of all or substantially all of the assets of or
                  shareholding in the Issuer which is regulated by clause
                  3.6(a)), they must first obtain the consent to such Disposal
                  from the Noteholders holding no less than 50% of the aggregate
                  face value of all Notes on issue.

            (c)   Clauses 3.6(a) and 3.6(b) do not apply to -

                  (i)   any Disposal arising from or pursuant to the enforcement
                        of any Encumbrance granted by the Guarantor or the
                        Issuer in accordance with the terms of the Senior
                        Secured Notes or any Refinancing whether

                                       3

<PAGE>


                        A.    to recover amounts owing under the Senior Secured
                              Notes or any Refinancing; or

                        B.    to recover amounts owing in connection with any
                              other financial indebtedness secured by the same
                              Encumbrances as provided for under the terms of
                              the Senior Secured Notes or any Refinancing; and

            (d)   Consent is not required to be obtained under clause 3.6(c) to
                  a Disposal arising from or pursuant to the enforcement of any
                  Encumbrance granted with respect to any bona fide financing
                  facility or accommodation entered with respect to the Project
                  or for the corporate benefit of the Guarantor or the Issuer if
                  at the time of entering into that financing facility or
                  accommodation Leucadia National Corporation and/or its Related
                  Entities had ceased to hold at least 50% of the aggregate face
                  value of all Notes on issue at that time.

            (e)   Any Person or Group of Persons that acquires Control of the
                  Guarantor or the Issuer (whether directly or indirectly) shall
                  be automatically and without further action be deemed to have
                  given a guarantee and indemnity in favour of the Noteholders
                  on the same terms as the guarantee and indemnity by the
                  Guarantor under clause 3 of the Note Deed Poll and on the
                  basis that after the giving of that guarantee and indemnity,
                  such Person or Group of Persons will be jointly and severally
                  liable with the Guarantor. Notwithstanding the foregoing, the
                  Guarantor and the Issuer must ensure the procurement of such
                  guarantee and indemnity. The giving of such guarantee and
                  indemnity shall not serve to release the Guarantor or the
                  Issuer from its obligations in respect of the Notes.

                  For purposes of this clause (e), the terms "Person" and
                  "Group" shall have the meaning used in Section 13(d) of the
                  Securities Exchange Act of 1934 and the rules and regulations
                  thereunder, whether or not such Section 13(d) applies to any
                  securities of the Guarantor or the Issuer, and "Control" means
                  the power, directly or indirectly, to vote or direct the
                  voting of securities having 50% or more of the ordinary voting
                  power for the election of directors of the Guarantor or the
                  Issuer.

                  Clause 3.6 (e) shall not require FMG Pilbara Pty Ltd, which as
                  at the date of this Agreement holds all of the issued shares
                  in the capital of the Issuer, to grant a guarantee and
                  indemnity in accordance with clause 3.6(e).

            (f)   Clause 3.6(e) does not apply to any acquisition of Control
                  arising from or pursuant to the granting or the enforcement of
                  any Encumbrance granted by the Guarantor or the Issuer in
                  accordance with the terms of the Senior Secured Notes or any
                  Refinancing.

- --------------------------------------------------------------------------------
4.          ENFORCEABILITY

4.1         NOTEHOLDER MAY ENFORCE

            This document operates as a deed poll and is enforceable against the
            Issuer and the Guarantor in accordance with its terms by each
            Noteholder in respect of the Notes held by it, even though the
            Noteholder is not a party to, or is not in existence at the time of
            execution and delivery of, this Note Deed Poll.


                                       4
<PAGE>



4.2         NOTEHOLDERS BOUND

            Each Noteholder, and each person claiming through each Noteholder,
            is bound by, and is deemed to have notice of, the provisions of this
            Note Deed Poll and the Note Conditions.

4.3         INDEPENDENT ENFORCEMENT

            Each Noteholder may enforce its rights under this Note Deed Poll and
            the Note Conditions in relation to their Notes independently from
            each other Noteholder, subject to any limitations imposed by this
            Note Deed Poll and the Note Conditions.

- --------------------------------------------------------------------------------
5.          GOVERNING LAW AND JURISDICTION

5.1         GOVERNING LAW

            This Note Deed Poll is governed by and must be construed according
            to the law applying in Western Australia.

5.2         JURISDICTION

            The Issuer, the Guarantor and each Noteholder irrevocably:

            (a)   submits to the non-exclusive jurisdiction of the courts of
                  Western Australia, and the courts competent to determine
                  appeals from those courts, with respect to any proceedings
                  which may be brought at any time relating to this Note Deed
                  Poll and the Notes; and

            (b)   waives any objection it may now or in the future have to the
                  venue of any proceedings, and any claim they may now or in the
                  future have that any proceedings have been brought in an
                  inconvenient forum, if that venue falls within clause 5.2(a).

EXECUTED AS A DEED



EXECUTED by FMG CHICHESTER PTY LTD ABN
83 109 264 252 in accordance with section 127
of the Corporations Act by or in the presence of:



- ----------------------------------------      ----------------------------------
Signature of Secretary/other Director         Signature of Director



- ----------------------------------------      ----------------------------------
Name of Secretary/other Director in full      Name of Director in full



                                       5
<PAGE>

EXECUTED by FORTESCUE METALS GROUP LTD ABN
57 002 594 872 in accordance with section 127
of the Corporations Act by or in the presence of:



- ----------------------------------------      ----------------------------------
Signature of Secretary/other Director         Signature of Director



- ----------------------------------------      ----------------------------------
Name of Secretary/other Director in full      Name of Director in full




























                                       6
<PAGE>


SCHEDULE 1
NOTE CONDITIONS

- --------------------------------------------------------------------------------
1.          DEFINITIONS AND INTERPRETATION

1.1         DEFINITIONS

            In these Note Conditions:

            "ACCUMULATED INTEREST" means the Interest that the Issuer has been
            unable to pay to the Noteholders in accordance with Condition 5(c)
            together with any interest accruing on that amount pursuant to
            Condition 5(c);

            "CORPORATIONS ACT" means the Australian Corporations Act 2001 (Cth).

            "CONTROL" means the term as defined in Clause 3.6(e).

            "DEFAULT INTEREST" means the amount of the Interest paid or accrued
            for the 2 Interest Periods prior to the time at which notice is
            given under Condition 8.2(a) multiplied by the number of years (and
            any portion thereof) between the end of the later of the two
            Interest Periods referred to above and the Maturity Date.

            "DISPOSE" means to transfer, sell, assign, convey or otherwise
            dispose of by any means whatsoever ( including by way of declaration
            of trust in favour of any other person).

            "ENCUMBRANCE" means a mortgage, charge, pledge, lien, encumbrance,
            security interest, title retention, preferential right, trust
            arrangement, contractual right of set-off, or any other security
            agreement or arrangement in favour of any person.

            "EVENT OF INSOLVENCY" means in relation to a company means each of
            the following events:

            (a)   a "controller" (as defined in section 9 of the Corporations
                  Act), trustee, liquidator, provisional liquidator,
                  administrator or similar officer is appointed in respect of
                  the company;

            (b)   the company enters into, or resolves to enter into, a scheme
                  of arrangement, deed of company arrangement or composition
                  with, or assignment for the benefit of, all or any class of
                  its creditors, or it proposes a reorganisation, moratorium or
                  other administration involving any of them;

            (c)   the company resolves to wind itself up, or otherwise dissolve
                  itself, or gives notice of its intention to do so, except to
                  reconstruct or amalgamate while solvent or is otherwise wound
                  up or dissolved;

            (d)   the company is or states that it is unable to pay its debts
                  when they fall due;

            (e)   the company is, or makes a statement from which it may be
                  reasonably deduced that the company is, the subject of an
                  event described in section 459C(2)(b) or section 585 of the
                  Corporations Act;

            (f)   the company takes any step to obtain protection or is granted
                  protection from its creditors, under any applicable
                  legislation or an administrator is appointed to the company or
                  the board of directors of the company propose to appoint an
                  administrator to the company or the company becomes aware that


                                       7
<PAGE>



                  a person who is entitled to enforce a charge on the whole or
                  substantially the whole of the company's property proposes to
                  appoint an administrator to the company; or

            (g)   anything analogous or having a substantially similar effect to
                  any of the events specified above happens under the law of any
                  applicable jurisdiction.

            "FINANCIAL CLOSE" means the date on which funds first become
            available for use by FMG Finance Pty Ltd under the Senior Secured
            Notes.

            "GOVERNMENT AUTHORITY" means any government or any governmental or
            semi governmental entity, authority, agency, commission,
            corporation, department or body (including those constituted or
            formed under any Statute), local government authority, stock
            exchange, administrative or judicial body or tribunal.

            "GOVERNMENT ROYALTIES" means for the relevant Interest Period all
            royalties payable in respect of the Project during that Interest
            Period under the Mining Act 1978 (WA).

            "GROSS SALE PROCEEDS" means as at the end of the relevant Interest
            Period the amount in US Dollars determined by multiplying the Price
            by the Tonnes Sold.

            "GROUP" means that term as defined in Clause 3.6(e).

            "GUARANTEE" means the guarantee provided by the Guarantor under the
            Note Deed Poll.

            "GUARANTOR" means Fortescue Metals Group Ltd ABN 50 002 594 872.

            "INTEREST" means the interest provided for in Condition 5(a)
            together with any Accumulated Interest accruing on that amount
            pursuant to Condition 5(c).

            "INTEREST PAYMENT DATE" has the meaning given in Condition 5(b).

            "INTEREST PERIOD" means in relation to a Note:

            (a)   the period commencing on the date of issue of the Notes and
                  ending on the first to occur of 30 June or 31 December ; and

            (b)   each subsequent six month period (or portion thereof)
                  commencing on the day after the final day of the previous
                  Interest Period, until the Notes are redeemed or repaid.

            "IRON ORE" means beneficiated ore, fine ore or lump ore.

            "ISSUER" means FMG Chichester Pty Ltd ABN 83 109 264 252.

            "MATURITY DATE" means 13 years from the date of Financial Close.

            "MATURITY REDEMPTION AMOUNT" in relation to a Note means the face
            value of the Note together with Interest (if any) accrued and unpaid
            to the Maturity Date.

            "NET REVENUE" means Gross Sale Proceeds minus Government Royalties.

            "NOTE" means an obligation of the Issuer to a Noteholder in respect
            of indebtedness of the Issuer to that Noteholder which is recorded
            in or evidenced by an entry in the Register.



                                       8
<PAGE>



            "NOTE CERTIFICATE" means a certificate in the form set out in
            Annexure A.

            "NOTE CONDITIONS" means these terms and conditions.

            "NOTE DEED POLL" means the Note Deed Poll under which the Notes are
            constituted.

            "NOTEHOLDER" in relation to a Note means the person or persons
            registered as the holder of that Note in any register maintained by
            the Issuer or, if there is no such register, in whose name a Note
            Certificate is issued.

            "PERSON" means that term as defined in Clause 3.6(e).

            "PRICE" means the FOB Port Hedland price payable by the purchaser of
            the Tonnes Sold as set out in the invoice relating to the sale of
            those Tonnes Sold which, if not stated in US Dollars, must be
            converted into US Dollars using the prevailing exchange rate on the
            date on which the ship containing the Tonnes Sold sails.

            "PROJECT" means development of one or more iron ore mines on the
            Tenements and the related rail, port and infrastructure project.

            "REFINANCING" means a refinancing of the Senior Secured Notes for no
            greater principal amount than that issued under the Senior Secured
            Notes, at an interest rate no greater than that payable under the
            Senior Secured Notes and with a maturity of no longer than 10 years
            after the date of Financial Close.

            "REGISTER" means the register of Noteholders maintained by the
            Issuer.

            "RELATED ENTITY" of a corporation means:

            (a)   a related body corporate of that corporation within the
                  meaning of Division 6 of Part 1.2 of the Corporations Act; and

            (b)   a trust that would be a related body corporate of that
                  corporation within that meaning assuming that the trust were a
                  body corporate and that a subsidiary meant a Subsidiary Entity
                  for the purposes of that meaning.

            "SENIOR SECURED NOTES" means the senior secured notes to be issued
            by FMG Finance Pty Ltd means the senior secured notes to be issued
            by FMG Finance under Rule 144A(d)(4) under the US Securities Act
            1933 (as amended) pursuant to an indenture to be dated on or about
            the date on which the first of the Notes is issued, without regard
            to any amendments thereto.

            "STATUTE" means any legislation of the Parliament of the
            Commonwealth of Australia or of any State or Territory of the
            Commonwealth of Australia in force at any time, and any rule,
            regulation, ordinance, by-law, statutory instrument, order or notice
            at any time made under that legislation.

            "SUBORDINATION DEED" means the subordination deed between the
            Issuer, the Guarantor and the holder of the first Note issued in
            accordance with these conditions, among others.

            "SUBSIDIARY ENTITY" of a corporation means:

            (a)   a subsidiary of that corporation within the meaning of
                  Division 6 of Part 1.2 of the Corporation Act;



                                       9
<PAGE>



            (b)   a trust that would be a subsidiary of that corporation within
                  that meaning if the trust were a company limited by shares,
                  equating for this purpose:

                  (i)   shares with the beneficial interests or units held in
                        the trust; and

                  (ii)  the board of directors with the trustee; or

            (c)   a body corporate or subtrust owned or held as an asset of a
                  trust, where the body corporate or subtrust would be a
                  subsidiary of that corporation under paragraph (a) or (b) if
                  the trust were a body corporate.

            "TAXES" means all taxes, levies, imposts, deductions, charges and
            withholdings assessed, imposed, collected or withheld under any
            legislation and, in each case, all interest, fines, penalties,
            charges, fees or other amounts in respect of them.

            "TENEMENTS" means the tenements set out in Annexure B.

            "TONNES SOLD" means for the relevant Interest Period the tonnes of
            Iron Ore produced from all of the Tenements and invoiced for sale
            during the relevant Interest Period.

            "TRANSFEREE" means the term as defined in Clause 3.6(a).

1.2         INTERPRETATION

            In these Note Conditions:

            (a)   headings are for convenience only and do not affect
                  interpretation;

            and unless the context indicates a contrary intention:

            (b)   "PERSON" includes an individual, the estate of an individual,
                  a corporation, a Government Authority, an association or a
                  joint venture (whether incorporated or unincorporated), a
                  partnership and a trust;

            (c)   a reference to a person includes that person's executors,
                  administrators, successors, and permitted assigns, including
                  persons taking by way of novation;

            (d)   except with respect to the Senior Secured Notes, a reference
                  to a document (including these Note Conditions) is to that
                  document as varied, novated, ratified or replaced from time to
                  time;

            (e)   a reference to amending a term, condition or a document
                  includes supplementing, deleting or replacing the term,
                  condition or document (as the case may be);

            (f)   a reference to "$" "US$", "DOLLARS" "DOLLAR" and "US DOLLARS"
                  is to the currency of the United States of America;

            (g)   a reference to a Statute includes its delegated legislation
                  and a reference to a Statute or delegated legislation or a
                  provision of either includes consolidations, amendments,
                  re-enactments and replacements;

            (h)   a word importing the singular includes the plural (and vice
                  versa), and a word indicating a gender includes every other
                  gender;



                                       10
<PAGE>



            (i)   a reference to a clause, Condition, schedule, exhibit,
                  attachment or annexure is a reference to a clause, Condition,
                  schedule, exhibit, attachment or annexure to or of these Note
                  Conditions, and a reference to these Note Conditions includes
                  all schedules, exhibits, attachments and annexures to it;

            (j)   if a word or phrase is given a defined meaning, any other part
                  of speech or grammatical form of that word or phrase has a
                  corresponding meaning;

            (k)   where the day on or by which any sum is payable or any act,
                  matter or thing is to be done is a day other than a Business
                  Day, that sum must be paid and that act, matter or thing must
                  be done on the immediately succeeding Business Day;

            (l)   a reference to time is to local time in Perth, Western
                  Australia ;

            (m)   where time is to be determined by reference to a day or event,
                  that day or the day of that event is to be excluded; and

            (n)   "INCLUDES" in any form is not a word of limitation.


- --------------------------------------------------------------------------------
2.          THE NOTES

2.1         ACKNOWLEDGMENT OF INDEBTEDNESS

            The Issuer acknowledges its indebtedness in respect of, and promises
            to pay all amounts due in relation to, each Note on the terms
            contained in the Note Deed Poll and these Note Conditions.

2.2         COVENANT TO PERFORM OBLIGATIONS

            The Issuer covenants in favour of each Noteholder from time to time
            that it will perform its obligations in full, and by the due dates,
            referred to in the Note Deed Poll and these Note Conditions.

2.3         STATUS OF NOTES

            (a)   (DIRECT UNSECURED OBLIGATIONS): each Note constitutes direct,
                  unconditional and unsecured obligations of the Issuer in
                  accordance with these Note Conditions; and

            (b)   (RANKING): the Notes at all times rank pari passu and without
                  any preference amongst themselves and at all times rank after,
                  and are subordinated to, the Senior Secured Notes or any
                  Refinancing thereof.

2.4         DENOMINATION AND CURRENCY OF NOTES

            Each Note will be have a principal amount of, and be issued in
            minimum denominations of US$2,000 and integral multiples of US$1,000
            in excess thereof.;

2.5         NOTES NOT INVALID IF IMPROPERLY ISSUED

            No Note is invalid or unenforceable on the ground that it was issued
            in breach of these Note Conditions.

2.6         LOCATION OF THE NOTES

            The property in a Note for all purposes is situated where the
            Register is located.


                                       11
<PAGE>


2.7         NO RIGHTS BEFORE PAYMENT

            Unless and until the Issuer receives or has the benefit of the
            consideration agreed to be provided in respect of the issue of a
            Note, no Noteholder nor any other person has any right, title or
            interest to the Note.

- --------------------------------------------------------------------------------
3.          NOTE CERTIFICATES

3.1         ISSUE

            The Issuer must issue a Note Certificate to each person who is
            issued a Note.

3.2         CONDITIONS OF ISSUE

            The terms of the Note Deed Poll and the Note Conditions are deemed
            to be included or endorsed on each Note Certificate.

3.3         EXECUTION OF NOTE CERTIFICATES

            Subject to any requirement of the Corporations Act, each Note
            Certificate must be executed by any officer of the Issuer duly
            authorised to do so by a resolution of the directors of the Issuer,
            and any signature required for such execution or authentication may
            be a facsimile which is printed as part of the Note Certificate or
            which is applied by mechanical or other means.

- --------------------------------------------------------------------------------
4.          REGISTER

            The Issuer must establish and maintain a Register. There must be
            recorded in the Register the names and addresses of the Noteholders
            and the date of issue or transfer of such Notes and the amount of
            Notes held by each Noteholder.

- --------------------------------------------------------------------------------
5.          INTEREST

            (a)   The interest payable on each Note in respect of an Interest
                  Period is:


               4% of Net Revenue
- ----------------------------------------  X  the face value of the relevant Note
  aggregate face value of all Notes on
     issue on the relevant Interest
              Payment Date

            and accrues on a daily basis.

            (b)   Subject to paragraph (c), Interest is payable semi-annually in
                  arrears 30 days after the end of the relevant Interest Period
                  ("INTEREST PAYMENT DATE") .

            (c)   Interest is only required to be paid to the Noteholders after
                  the payment restrictions in the Senior Secured Notes have been
                  satisfied. If the Issuer is unable to pay Interest at any time
                  due to the restrictions in the Senior Secured Notes, the
                  Noteholders' right to Interest will accumulate until such time
                  as the Issuer is permitted under the terms of the Senior
                  Secured Notes to pay such Interest. Each Interest payment
                  which is unpaid will accrue simple interest from the due date
                  for payment until the date it is paid at the rate of 9.5% per
                  annum.

            (d)   As soon as permitted under the terms of the Senior Secured
                  Notes, the Issuer will pay to the Noteholders the Accumulated
                  Interest.


                                       12
<PAGE>

- --------------------------------------------------------------------------------
6.          CALCULATION OF INTEREST

            (a)   The Issuer must on the relevant Interest Payment Date provide
                  any Noteholder holding no less than 25% of the aggregate face
                  value of all Notes on issue with a certificate signed by a
                  director of the Issuer and the chief executive officer of the
                  Guarantor setting out in reasonable detail how the Interest
                  was calculated for the relevant Interest Calculation Period
                  and attaching to it copies of all relevant sales invoices.

            (b)   The Issuer must implement and maintain such procedures and
                  maintain such records as are reasonably necessary to ensure
                  that at all times the amount of the Interest payable in
                  respect of the Notes can be accurately calculated.

            (c)   Any Noteholder holding no less than 25% of the aggregate face
                  value of all Notes on issue, or any person authorized by it in
                  writing, may at any time within 30 days of receiving a
                  certificate under paragraph (a), upon reasonable notice to the
                  Issuer, inspect the property comprising the Tenements and the
                  books and records maintained by the Issuer in relation to the
                  Tenements for the sole purpose of determining and verifying
                  the amount of the Interest the subject of that certificate and
                  any variable or factor necessary to determine the amount of
                  the Interest the subject of the certificate.

            (d)   If following any inspection or audit made pursuant to
                  paragraph (c), the Noteholder believes that the amount paid by
                  FMG to a Noteholder is less than the amount required by these
                  Conditions to be paid, the Noteholder must notify FMG and the
                  Noteholder and FMG must endeavour to agree the amount which
                  should have been paid within 21 days of the notice being
                  given. If the parties are unable to agree within that period,
                  an independent expert must be appointed to determine the
                  amount required by these Conditions to be paid.

            (e)   If the parties are unable to agree to the independent expert
                  to be appointed within 7 days after expiration of the 21 day
                  period in paragraph (d), then the expert shall be appointed at
                  the request of either party by the President for the time
                  being of the Australasian Institute of Mining and Metallurgy
                  ("EXPERT").

            (f)   The Expert shall be acting as an expert and not an arbitrator
                  and the Expert's decision will be final and binding on the
                  parties.

            (g)   If the Expert determines that there was a shortfall in the
                  amount that the Issuer was required to pay under these
                  Conditions, the Issuer must immediately pay to all Noteholders
                  the shortfall owing plus interest as calculated pursuant to
                  Condition 5(c).

            (h)   If the Expert determines that the Issuer paid more than it was
                  required to pay under these Conditions, the Issuer will be
                  entitled to deduct from the next payment of Interest to all
                  Noteholders the amount of such excess plus interest at the
                  rate of 9.5% per annum from the date of the last payment of
                  Interest to the date of the next payment of Interest.

            (i)   If the Expert determines that the shortfall in payment to the
                  Noteholder is in excess of 5% of the amount which had
                  initially been paid:

                  (i)   the Issuer must immediately reimburse the Noteholder for
                        all expenses incurred in connection with the audit or
                        inspection which disclosed that shortfall (including,
                        but not limited to, reasonable accounting and legal
                        fees); and

                                       13
<PAGE>



                  (ii)  the Issuer must reimburse the Noteholder for all
                        expenses connected with the next three (if any)
                        subsequent audits or inspections made pursuant to
                        paragraph (c) (including, but not limited to, reasonable
                        accounting and legal fees), irrespective of whether such
                        subsequent audit or inspection reveals any shortfall in
                        any payment.

            (j)   All payments made under this clause are without prejudice to
                  any other remedies that a Noteholder or the Issuer may have
                  under this Note Deed Poll or otherwise.

- --------------------------------------------------------------------------------
7.          REDEMPTION

7.1         REDEMPTION ON MATURITY

            Each Note will be redeemed or repaid (as the case may be) on its
            Maturity Date at its Maturity Redemption Amount and, unless clause
            8.2 applies, cannot be redeemed or repaid before that time.

7.2         CANCELLATION OF NOTES

            All Notes that are redeemed will automatically be cancelled on
            redemption and may not be re-issued.

- --------------------------------------------------------------------------------
8.          EVENTS OF DEFAULT

8.1         EVENTS OF DEFAULT

            Each of the following events is an Event of Default, whether or not
            the cause is beyond the control of the Issuer or any other person:

            (a)   the Issuer fails to pay within 10 days after the due time on
                  the due date any amount payable under any Note in the manner
                  specified in the Note Conditions;

            (b)   the Issuer defaults in fully performing and observing any of
                  its other obligations in respect of any Note other than a
                  provision requiring the payment of money as contemplated by
                  Condition 8.1(a), and if that default is capable of remedy, it
                  has not been remedied within 45 days of its occurrence;

            (c)   if there is an acceleration by holders in payment of the
                  principal of the Senior Secured Notes or any Refinancing
                  thereof;

            (d)   unless the Senior Secured Notes have been Refinanced, there
                  occurs, at any time after all of the Senior Secured Notes have
                  matured or been redeemed, an event which, if the Senior
                  Secured Notes had not matured or been redeemed, would have
                  been an event of default under the Senior Secured Notes;

            (e)   if the Senior Secured Notes have been Refinanced, there occurs
                  at any time after all of the notes issued to Refinance have
                  matured or been redeemed, an event which, if those notes had
                  not matured or redeemed, would have been an event of default
                  under those notes; or

            (f)   an Event of Insolvency occurs in relation to the Issuer or the
                  Guarantor.



                                       14
<PAGE>



8.2         RIGHTS ON AN EVENT OF DEFAULT

            (a)   Subject to paragraph (b), if any Event of Default occurs and
                  is continuing in relation to a Note, then Noteholders who
                  alone or in aggregate hold at least 50% of the aggregate face
                  value of all Notes on issue may by written notice to the
                  Issuer declare the face value of the Notes together with all
                  accrued Interest , Default Interest and other moneys in
                  relation to a Note to be immediately due and payable.

            (b)   Noteholders shall not be entitled to accelerate repayment
                  after an Event of Default until the earlier of the date (i)
                  the Senior Secured Notes have been paid in full, (ii) 360 days
                  following the date on which any interest payment on the Notes
                  became due and payable pursuant to Condition 5 but was not
                  paid, (iii) of acceleration of the Senior Secured Notes, or
                  (iv) one business day following maturity of the Notes if all
                  amounts of principal and interest have not been paid in full;
                  provided, however, Noteholders may make a demand under the
                  Guarantee under the Note Deed Poll if the Guarantor no longer
                  guarantees the Senior Secured Notes.



- --------------------------------------------------------------------------------
9.          TRANSFER OF NOTES

9.1         FORM OF TRANSFER

            The Notes may be transferred:

            (a)   by written transfer instrument in any usual or common form or
                  in any other form approved by the directors of the Issuer; and

            (b)   to a person or entity that has executed and delivered to the
                  Issuer an undertaking to observe, perform and be bound by the
                  terms of this deed.

9.2         EXECUTION OF TRANSFER

            A written transfer instrument must be executed by the transferor.

9.3         REGISTRATION OF TRANSFER

            A written transfer instrument must be forwarded for registration to
            the Issuer together with the Note Certificate for the Notes to be
            transferred. Subject to compliance with Condition 9.5 and the
            provisions of any relevant Statute relating to stamp duties, the
            Issuer must register the transfer and issue a Note Certificate to
            the transferee for the number of Notes comprised in the transfer.

9.4         TRANSFERS WHERE NOTES ARE QUOTED

            If the Notes are, at the time of transfer, quoted on a financial
            market, then the Notes may alternatively be transferred in
            accordance with the rules of that financial market and the
            Corporations Act.

9.5         TRANSFER RESTRICTIONS

            It is understood that the Note Certificates may bear one or all of
            the following legends:

            (a)   "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
                  REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS


                                       15
<PAGE>



                  AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAW,
                  AND THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES
                  THAT THIS SECURITY MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE
                  TRANSFERRED ONLY (1) TO FORTESCUE METALS GROUP LTD OR FMG
                  CHICHESTER PTY LTD, (2) SO LONG AS THIS SECURITY IS ELIGIBLE
                  FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT
                  ("RULE 144A"), TO A PERSON WHO THE SELLER REASONABLY BELIEVES
                  IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A),
                  (3) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 903 OR RULE
                  904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT,
                  (4) PURSUANT TO AN EXEMPTION FROM REGISTRATION IN ACCORDANCE
                  WITH RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (5)
                  PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
                  SECURITIES ACT, OR (6) PURSUANT TO AN AVAILABLE EXEMPTION FROM
                  THE REGISTRATION REQUIREMENTS IF THE SELLER SHALL HAVE
                  FURNISHED SUCH CERTIFICATIONS AND/OR OPINION OF COUNSEL AS THE
                  ISSUER MAY REASONABLY REQUEST, IN EACH SUCH CASE IN ACCORDANCE
                  WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
                  STATES OR OTHER JURISDICTIONS."

            (b)   Any legend required by applicable state "blue sky" securities
                  laws, rules and regulations.

            To the extent a Note bears the legend set forth in (a) above, the
            Issuer shall be entitled to require such certifications and/or
            opinions as it may reasonably request in connection with the
            registration of transfer of any Note.

            In order to permit resales pursuant to Rule 144A of the Securities
            Act, the Guarantor agrees that, for as long as any Notes are
            "restricted securities" within the meaning of Rule 144(a)(3) under
            the Securities Act, during any period in which the Guarantor is
            neither subject to Section 13 or 15(d) of the US Securities Exchange
            Act of 1934, nor exempt from reporting pursuant to Rule 12g3-2(b)
            thereunder, the Guarantor shall supply to (i) any holder of Notes or
            beneficial owner of a Note or (ii) a prospective purchaser of a Note
            or a beneficial interest therein designated by such holder or owner,
            the information specified in, and meeting the requirements of Rule
            144A(d)(4) under the Securities Act.

9.6         COMPLIANCE WITH LAW

            Notes may not be transferred within any jurisdiction in a manner
            which would result in a breach of any applicable securities
            legislation in that jurisdiction.

- --------------------------------------------------------------------------------
10.         PAYMENT TO NOTEHOLDERS

            Redemption moneys and any other moneys payable on or in respect of
            any Notes must be paid in US dollars by:

            (a)   cheque sent to the address of the Noteholder on the Register;

            (b)   deposit to an account with any bank in Australia or the United
                  States that the Noteholder, by written notice to the Issuer,
                  may direct; or

                                       16
<PAGE>



            (c)   any other method of transferring money agreed by the Issuer
                  and the relevant Noteholder from time to time.

- --------------------------------------------------------------------------------
11.         DEDUCTION OF TAXES

11.1        WITHHOLDING TAX

            The Issuer, or any person making payments on behalf of the Issuer,
            may deduct any Tax imposed by the Commonwealth of Australia or any
            foreign Government Authority under the Tax Act or any applicable
            laws from payments of interest in respect of the Notes where the
            Issuer, or such person, considers this is required in accordance
            with the Tax Act or such laws.

11.2        NO GROSS-UP

            No additional payment will be made to a Noteholder with respect to
            any amounts deducted from payment to that Noteholder under this
            Condition 11.

- --------------------------------------------------------------------------------
12.         JOINT NOTEHOLDERS

            (a)   Joint Noteholders will be entitled to one Note Certificate
                  only in respect of Notes held by them jointly and the Note
                  Certificate will be delivered to the joint Noteholder whose
                  name stands first in the Register.

            (b)   If several Persons are entered in the Register as joint
                  Noteholders in respect of a Note the receipt by any one of
                  such Persons for the payment or satisfaction of any principal
                  or interest from time to time payable or repayable to the
                  Joint Noteholders will be as effective a discharge to the
                  Issuer as if the Person accepting the payment were a sole
                  Noteholder in respect of that Note.

            (c)   The Issuer will not be bound to register more than three
                  Persons as the joint holders of any Notes.

            (d)   Subject to these Note Conditions, all of the joint Noteholders
                  in respect of any Note must execute any transfer form of the
                  relevant Note.

- --------------------------------------------------------------------------------
13.         TITLE TO NOTES, NON-RECOGNITION OF EQUITIES

            (a)   Subject to these Note Conditions, the Issuer will recognise
                  only the Noteholder whose name appears in the Register as the
                  absolute owner of the Note in respect of which the Noteholder
                  is entered in the Register.

            (b)   The Issuer will not, except as otherwise ordered by a Court of
                  competent jurisdiction or as required by statute, be bound to
                  take notice of any trust or equity to which a Note may be
                  subject or otherwise affecting the ownership of a Note or
                  rights incidental thereto.

            (c)   The receipt of a Noteholder or one of Joint Noteholders for
                  interest in respect of and for any money payable on the
                  redemption of a Note will be a good discharge to the Issuer
                  despite any notice the Issuer may have, whether express or
                  otherwise, of the right, title or interest of any person to or
                  in that Note or money.



                                       17
<PAGE>



- --------------------------------------------------------------------------------
14.         MISCELLANEOUS

14.1        TERMS AND CONDITIONS BINDING

            Each Noteholder, and the Notes are issued on the condition that each
            Noteholder, is bound by the terms and conditions of the Note Deed
            Poll and the Note Conditions relating to the Notes held by that
            Noteholder.

14.2        SEVERANCE

            If at any time any provision of the Note Deed Poll or these Note
            Conditions is or becomes illegal, invalid or unenforceable in any
            respect under the law of any jurisdiction, that will not affect or
            impair:

            (a)   the legality, validity or enforceability in that jurisdiction
                  of any other provision of the Note Deed Poll or the Note
                  Conditions; or

            (b)   the legality, validity or enforceability under the law of any
                  other jurisdiction of that or any other provision of the Note
                  Deed Poll or the Note Conditions.

14.3        REMEDIES CUMULATIVE

            The rights and remedies conferred by the Note Deed Poll and the Note
            Conditions on the Issuer are cumulative and in addition to all other
            rights or remedies available to the Issuer by Statute, by general
            law or by virtue of any other document.

14.4        WAIVER

            (a)   A failure to exercise or enforce, or a delay in exercising or
                  enforcing, or the partial exercise or enforcement of, a right,
                  power or remedy provided by law or under the Note Deed Poll or
                  these Note Conditions by the Issuer does not preclude, or
                  operate as a waiver of, the exercise or enforcement, or
                  further exercise or enforcement, of that or any other right,
                  power or remedy provided by law or under the Note Deed Poll or
                  these Note Conditions.

            (b)   A waiver or consent given by the Issuer under the Note Deed
                  Poll or these Note Conditions is only effective and binding on
                  the Issuer if it is given or confirmed in writing.

            (c)   No waiver of a breach of a term of the Note Deed Poll or these
                  Note Conditions operates as a waiver of another breach of that
                  term or of a breach of any other term of the Note Deed Poll or
                  these Note Conditions.

14.5        SURVIVAL OF WARRANTIES

            The warranties, representations and covenants of the Noteholders,
            the Issuer and the Guarantor contained in or made pursuant to the
            Note Conditions shall survive the execution and delivery of the Note
            Deed Poll and shall in no way be affected by any investigation of
            the subject matter thereof made by or on behalf of the Noteholders,
            the Issuer or the Guarantor.

14.6        SUCCESSORS AND ASSIGNS

            Except as otherwise provided herein, these Note Conditions shall
            inure to the benefit of and be binding upon the respective
            successors and assigns of the parties (including transferees of any
            Notes). Nothing in the Note Deed Poll, express or implied, is
            intended to confer upon any party other than the parties hereto or


                                       18
<PAGE>



            their respective successors and assigns any rights, remedies,
            obligations, or liabilities under or by reason of the Note Deed
            Poll, except as expressly provided in the Note Deed Poll.

14.7        COUNTERPARTS

            The Note Deed Poll may be executed in two or more counterparts,
            including counterpart facsimile pages, each of which shall be deemed
            an original, but all of which together shall constitute one and the
            same instrument.

14.8        AMENDMENT

            The Note Deed Poll or the Note Conditions may be amended by the
            Issuer at any time with the approval of Noteholders holding in
            aggregate 50% of the aggregate face value of all Notes on issue.
            However, without the consent of each Noteholder affected thereby, no
            amendment may:

            (a)   reduce the principal amount of Notes,

            (b)   reduce the rate of or extend the time for payment of Interest
                  on any Note;

            (c)   reduce the principal of, or extend the maturity of, any Note;

            (d)   make any Note payable in money other than US dollars;

            (e)   impair the right of any Noteholder to institute suit for the
                  enforcement of any payment on or with respect to such
                  Noteholder's Notes or any Guarantee;

            (f)   subordinate the Notes or the Guarantee to any other obligation
                  of the Issuer or Guarantor; or

            (g)   make any change to the Guarantee that would adversely affect
                  the Noteholders.

- --------------------------------------------------------------------------------
15.         OBLIGATIONS IN RELATION TO THE NOTES

15.1        LISTING ON AN EXCHANGE

            (a)   Subject to paragraph (b), the Issuer agrees that, if the
                  Senior Secured Notes are listed on any stock exchange, the
                  Issuer will, to the extent permitted by law and the rules of
                  the relevant stock exchange, use its best endeavours to obtain
                  a listing of the Notes on such stock exchange, provided that
                  the Notes satisfy the requirements of the relevant stock
                  exchange for listing and, if reasonably required by
                  Noteholders holding in aggregate 50% of the face value of all
                  Notes on issue , use its best efforts in connection with a
                  listing or otherwise, to cooperate in connection with a
                  secondary sale by such Noteholders of the Notes, including the
                  preparation of an offering memorandum, making management
                  reasonably available for investor presentations and the entry
                  into a customary purchase or underwriting agreement.

            (b)   The Issuer will not have an obligation to obtain a listing of
                  the Notes under paragraph (a) if the Issuer determines, acting
                  reasonably, that satisfying the requirements for such a
                  listing would be unduly onerous for the Issuer. In these
                  circumstances, the Issuer will identify another exchange
                  reasonably acceptable to Noteholders holding in aggregate 50%
                  of the face value of all Notes on issue on which the Notes may
                  be listed and in respect of which the Issuer is reasonably
                  satisfied that the listing requirements would not be unduly
                  onerous.




                                       19
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>4
<FILENAME>imc311.txt
<DESCRIPTION>IAN M. CUMMING EXHIBIT 31.1
<TEXT>

                                                        Exhibit 31.1


                                 CERTIFICATIONS

I, Ian M. Cumming, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of Leucadia National
         Corporation;

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

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

4.       The registrant's other certifying officers and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
         control over financial reporting (as defined in Exchange Act Rules
         13a-15(f) and 15d-15(f)) for the registrant and have:

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

         (b)      Designed such internal control over financial reporting, or
                  caused such internal control over financial reporting to be
                  designed under our supervision, to provide reasonable
                  assurance regarding the reliability of financial reporting and
                  the preparation of financial statements for external purposes
                  in accordance with generally accepted accounting principles;

         (c)      Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

         (d)      Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's third fiscal quarter of 2006 that has
                  materially affected, or is reasonably likely to materially
                  affect the registrant's internal control over financial
                  reporting; and

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

         (a)      All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

         (b)      Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.


Date:  November 9, 2006
                                          By: /s/ Ian M. Cumming
                                              -------------------------
                                              Ian M. Cumming
                                              Chairman of the Board and
                                              Chief Executive Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>5
<FILENAME>jss312.txt
<DESCRIPTION>JOSEPH S. STEINBERG EXHIBIT 31.2
<TEXT>


                                                             Exhibit 31.2

                                 CERTIFICATIONS

I, Joseph S. Steinberg, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of Leucadia National
         Corporation;

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

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

4.       The registrant's other certifying officers and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
         control over financial reporting (as defined in Exchange Act Rules
         13a-15(f) and 15d-15(f)) for the registrant and have:

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

         (b)      Designed such internal control over financial reporting, or
                  caused such internal control over financial reporting to be
                  designed under our supervision, to provide reasonable
                  assurance regarding the reliability of financial reporting and
                  the preparation of financial statements for external purposes
                  in accordance with generally accepted accounting principles;

         (c)      Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

         (d)      Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's third fiscal quarter of 2006 that has
                  materially affected, or is reasonably likely to materially
                  affect the registrant's internal control over financial
                  reporting; and

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

         (a)      All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

         (b)      Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.


Date:  November 9, 2006
                                          By: /s/ Joseph S. Steinberg
                                              --------------------------
                                              Joseph S. Steinberg
                                              President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>6
<FILENAME>jao313.txt
<DESCRIPTION>JOSEPH A. ORLANDO EXHIBIT 31.3
<TEXT>

                                                           Exhibit 31.3

                                 CERTIFICATIONS

I, Joseph A. Orlando, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of Leucadia National
         Corporation;

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

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

4.       The registrant's other certifying officers and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
         control over financial reporting (as defined in Exchange Act Rules
         13a-15(f) and 15d-15(f)) for the registrant and have:

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

         (b)      Designed such internal control over financial reporting, or
                  caused such internal control over financial reporting to be
                  designed under our supervision, to provide reasonable
                  assurance regarding the reliability of financial reporting and
                  the preparation of financial statements for external purposes
                  in accordance with generally accepted accounting principles;

         (c)      Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

         (d)      Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's third fiscal quarter of 2006 that has
                  materially affected, or is reasonably likely to materially
                  affect the registrant's internal control over financial
                  reporting; and

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

         (a)      All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

         (b)      Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.


Date:  November 9, 2006
                                             By: /s/ Joseph A. Orlando
                                                 --------------------------
                                                 Joseph A. Orlando
                                                 Chief Financial Officer


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>7
<FILENAME>imc321.txt
<DESCRIPTION>IAN M. CUMMING EXHIBIT 32.1
<TEXT>




                                                              Exhibit 32.1


                                  CERTIFICATION
                       PURSUANT TO 18 U.S.C. SECTION 1350,
           AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



     I, Ian M. Cumming,  as Chairman of the Board and Chief Executive Officer of
Leucadia National Corporation (the "Company") certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to my knowledge:

     (1) the  accompanying  Form 10-Q report for the period ending September 30,
2006 as filed with the U.S.  Securities and Exchange  Commission  (the "Report")
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and

     (2)  the  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Company.



Dated:  November 9, 2006



                                     By: /s/ Ian M. Cumming
                                         -------------------------
                                         Ian M. Cumming
                                         Chairman of the Board and
                                         Chief Executive Officer




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>8
<FILENAME>jss322.txt
<DESCRIPTION>JOSEPH S. STEINBERG EXHIBIT 32.2
<TEXT>







                                                     Exhibit 32.2


                                  CERTIFICATION
                       PURSUANT TO 18 U.S.C. SECTION 1350,
           AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



     I, Joseph S. Steinberg,  as President of Leucadia National Corporation (the
"Company")  certify,  pursuant to 18 U.S.C.  ss.  1350,  as adopted  pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

     (1) the  accompanying  Form 10-Q report for the period ending September 30,
2006 as filed with the U.S.  Securities and Exchange  Commission  (the "Report")
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and

     (2)  the  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Company.



Dated:  November 9, 2006



                                        By: /s/ Joseph S. Steinberg
                                            ------------------------
                                            Joseph S. Steinberg
                                            President




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>9
<FILENAME>jao323.txt
<DESCRIPTION>JOSEPH A. ORLANDO EXHIBIT 32.3
<TEXT>


                                                          Exhibit 32.3


                                  CERTIFICATION
                       PURSUANT TO 18 U.S.C. SECTION 1350,
           AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



     I, Joseph A.  Orlando,  as Chief  Financial  Officer of  Leucadia  National
Corporation (the "Company") certify,  pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

     (1) the  accompanying  Form 10-Q report for the period ending September 30,
2006 as filed with the U.S.  Securities and Exchange  Commission  (the "Report")
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and

     (2)  the  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Company.



Dated:  November 9, 2006



                                     By: /s/ Joseph A. Orlando
                                         --------------------------
                                         Joseph A. Orlando
                                         Chief Financial Officer

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
