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TABLE OF CONTENTS Description Part I
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission File No. 0-29092

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
(Exact name of registrant as specified in its charter)

(703) 902-2800
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share

        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 ý    No o

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        Non-affiliates of Primus Telecommunications Group, Incorporated held 51,065,784 shares of Common Stock as of June 30, 2003. The fair market value of the stock held by non-affiliates is $262,988,788 based on the sale price of the shares on June 30, 2003.

        As of February 27, 2004, 88,850,615 shares of Common Stock, par value $.01, were outstanding.

Documents Incorporated by Reference:

        Portions of the definitive Proxy Statement to be delivered to Stockholders in connection with the Annual Meeting of Stockholders are incorporated by reference into Part III.

TABLE OF CONTENTS

Description

Part I

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PART I

ITEM 1. BUSINESS

General

        We, Primus Telecommunications Group, Incorporated, are a global, facilities-based telecommunications services provider offering an integrated portfolio of international and domestic voice, Internet, voice-over-Internet protocol (VOIP), data and hosting services to business and residential retail customers and other carriers located primarily in the United States, Australia, Canada, the United Kingdom and Europe. Our focus is to service the demand for high quality, competitively priced international communications services that is being driven by the globalization of the world's economies, the worldwide trend toward telecommunications deregulation and the growth of Internet, VOIP and data traffic.

        We target customers with significant telecommunications needs, including small- and medium-sized enterprises (SMEs), multinational corporations, residential customers, and other telecommunications carriers and resellers. We provide services over our global network, which consists of:

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18 domestic and international gateway switching systems (the hardware/software devices that direct the voice traffic across the network) in North America, Australia, Europe and Japan;



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approximately 250 interconnection points to our network, or points of presence (POPs), within our service regions and other markets;



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undersea and land-based fiber optic transmission line systems that we own or lease and that carry voice and data traffic across the network; and



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global network and data centers that use a high-bandwidth network standard, asynchronous transfer mode, and Internet-based protocol (ATM+IP) to connect with the network. The global VOIP network is based on routers and gateways with an open network architecture which connects our partners in over 150 countries.

        The services we offer can be classified into three main product categories: voice, data/Internet and VOIP services. Within these three main product categories, we offer our customers a wide range of services, including:

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international and domestic long distance services;



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prepaid calling cards (including services which allow transmission of mobile voice traffic over our land-based network known as Virtual Mobile Network Services or VMNS), toll-free services and reorigination services;



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dial-up, dedicated and high-speed Internet access;



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local services;



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ATM+IP broadband services; and



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managed and shared Web hosting services and applications.

        Generally, we price our services competitively with the major carriers operating in our principal service regions. We expect to continue to generate net revenue from internal growth through sales and marketing efforts focused on customers with significant communications needs (international and domestic voice, Internet and data), including SMEs, multinational corporations, residential customers, particularly ethnic customers, and other telecommunications carriers and resellers, as well as acquisitions.

        Having completed our global network infrastructure deployment, our primary operational focus is on building scale in our core markets by adding customers and traffic. The combination of network

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ownership and increasing scale provides us with the ability to reduce our cost structure, improve service quality and reliability, and introduce new products and services.

Operating Highlights and Accomplishments in 2003 and subsequent events:

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We increased net revenue by 25.8% to $1.3 billion for the twelve months ended December 31, 2003 from $1.0 billion for the twelve months ended December 31, 2002.



•

Our income from operations increased to $69.6 million for the twelve months ended December 31, 2003, a $72.9 million increase from a loss of $3.3 million for the twelve months ended December 31, 2002.



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We increased net cash provided by operating activities by $32.3 million to $66.9 million for the twelve months ended December 31, 2003 from $34.6 million for the twelve months ended December 31, 2002.



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We received stockholder approval for and closed the remaining $9 million investment in our Series C convertible preferred stock ("Series C Preferred") by fund affiliates of American International Group, Incorporated (AIG).



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All outstanding shares of our Series C Preferred were converted into an aggregate of 22,616,990 shares of our common stock on November 4, 2003.



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We completed an offering of $132.0 million in principal amount of 3³/4% convertible senior notes due 2010 ("2003 Convertible Senior Notes"), which we used primarily to retire higher interest debt and to extend our debt maturity profile. The 2003 Convertible Senior Notes are convertible into shares of our common stock at an initial conversion price of $9.3234 per share.



•

In January 2004, we completed the sale of $240.0 million 8% senior notes due 2014 ("2004 Senior Notes"), which we used primarily to retire higher interest debt and also to extend our debt maturity profile.



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We continued our debt reduction efforts and improved liquidity by retiring $276.7 million in principal amount of our senior notes, which were funded in part through the proceeds from the 2003 Convertible Senior Notes and the 2004 Senior Notes. In particular, the following debt securities were retired during 2003: $87.2 million principal amount of the 11³/4% senior notes due 2004 ("1997 Senior Notes"), $6.5 million principal amount of the 11¹/4% senior notes due 2009 ("January 1999 Senior Notes"), and $3.6 million principal amount of the 9⁷/8% senior notes due 2008 ("1998 Senior Notes"). In addition, the following debt securities were retired during the three months ended March 31, 2004; $109.9 million principal amount of the January 1999 Senior Notes, $46.6 million of the 1998 Senior Notes and $22.9 million of the 12³/4% senior notes due 2009 ("October 1999 Senior Notes").



•

We further reduced debt by settling an outstanding vendor financing of $14.9 million for approximately $10.6 million, accelerating the payoff of $55.2 million for an equipment financing facility and repaying early 13.0 million CAD ($10.0 million at December 31, 2003) of a financing agreement during the three months ended March 31, 2004, which were funded in part through the proceeds from the 2003 Convertible Senior Notes and the 2004 Senior Notes.



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Our common stock is once again traded on the Nasdaq National Market after a period of trading on the Nasdaq SmallCap Market.



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On June 30, 2003, the Russell 3000 Index included our common stock.



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We acquired three Canadian Internet service providers (ISPs), one Canadian local wireless service provider and a Canadian prepaid calling card company for an aggregate purchase price of approximately $10.7 million in cash. The purchase price for the prepaid calling card company may increase based on additional consideration to be paid, as provided by the terms of the

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acquisition agreement, if the acquired company's adjusted revenues exceed certain targeted levels.

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In February 2004, we acquired Australian-based AOL/7 Pty Ltd (AOL/7) which is a joint venture between America Online Inc., a wholly-owned subsidiary of Time Warner Inc., AAPT Limited, a unit of the Telecom New Zealand Group, and Seven Network Limited. This acquisition provides us with the customer base, content, content development and online advertising business of AOL/7, as well as a license for the AOL brand in Australia, for a total consideration of $18.1 million.

Operating Highlights and Accomplishments from our Inception through 2002:

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We were incorporated in February 1994, and through the first half of 1995 we were a development stage enterprise involved in various start-up activities.



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We began generating revenue during March 1995.



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In March 1996, we completed our first acquisition with the purchases of Axicorp Pty. Ltd., a switchless reseller in Australia.



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In November 1996, we made our initial public offering to fund growth of our operating subsidiaries.



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In 1997, we raised $225 million in senior notes and warrants for continued expansion, including network equipment purchases, funding for general corporate purposes, and potential acquisitions. We entered the Canadian market, the Japanese market, the German market and expanded our service offerings in Australia through acquisitions.



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In June 1998, we acquired the operations of TresCom which expanded the scope and coverage of our communications network, thereby providing additional opportunities to migrate traffic onto the network.

        During 1998 and 1999, to continue our expansion, we raised an additional $645.5 million from three senior note issuances and conducted a secondary equity offering of 8 million shares.

        In 1999, among other things, we:

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acquired London Telecom, a Canadian long distance provider;



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purchased a residential long distance customer base, customer support assets and residential Internet customers and network from AT&T Canada and ACC;



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purchased Telegroup's global retail customer businesses, which included retail customers primarily in North America and Europe; and



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organized our Internet and data services business into a new subsidiary, iPRIMUS.com; acquired GlobalServe, a Canadian ISP; a majority interest in Matrix, a Brazilian ISP; TCP/IP and TouchNet, two independent German ISPs; and the remaining interest in Hotkey Internet Services; entered into agreements with Covad Communications and NorthPoint Communications to offer digital subscriber line (DSL) services; acquired Digital Select, a provider of DSL Internet access and Web content; 1492 Technologies, a Web site development, consulting and service firm; and began to build an IP-based network platform in Australia.

        In 2000, among other things, we:

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acquired LCR Telecom Group, Plc; an international telecommunications company operating principally in European markets, providing least cost routing, international callback and other value-added services, primarily to SMEs;



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purchased CTE Networks (CTE), a Canadian long distance reseller;

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purchased A-Tel GmbH, a German reseller of voice traffic to SMEs;



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expanded our Internet and data services business, enhanced by acquisitions such as Eco Software, Inc. ("Shore.Net"), a United States-based business-focused ISP, Seker BBS S.A. and Nexus Comunicaciones S.A., two Spanish ISPs, and Infinity Online Systems, a Canada-based ISP; and



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issued $300 million in convertible subordinated debentures.

        In 2001, we focused on debt reduction, cost containment and growth in cash flow from operations. These efforts resulted in the following:

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reduced debt to $667.6 million at December 31, 2001 from $1.3 billion in 2000, with a gain on early extinguishment of debt of $491.8 million for the year;



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reduced selling, general and administrative expenses by $27.4 million from the previous year; and



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reduced interest expense by $38.7 million over the prior year from the principal reduction of senior notes and convertible debentures.

        In addition, in 2001, we:

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recorded an asset impairment write-down of $526.3 million in goodwill, property and equipment, and customer lists; and



•

recorded a $15.0 million write-off of our investment in Pilot Network Services.

        In 2002, we focused our attention on continuing a three-pronged strategy that was initiated at the end of 2000, which involved improving operating results, reducing debt, and raising additional financing.

        Initiatives and results from our efforts to improve operating results:

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We focused on higher margin retail customers and services.



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We de-emphasized or exited certain low margin businesses, and emphasized operations in core markets including the United States, Australia, Canada and Europe.



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Our Australian and Canadian subsidiaries both achieved their highest levels to date of operating income for a full fiscal year.

        Initiatives and results from our efforts to reduce debt:

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We reduced debt during 2002 by $66.6 million to $601.0 million at December 31, 2002, with a gain on early extinguishment of debt of $36.7 million for the year.



•

We reduced interest expense by $27.3 million over the prior year from the principal reduction of senior notes and convertible debentures effected during 2001 and 2002.

        Initiatives and results from our efforts to raise additional funds:

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We signed an agreement to issue and sell $42 million of Series C Preferred (including commitments of $39.9 million from fund affiliates of AIG). We received $33 million on December 31, 2002 in the initial closing of the Series C Preferred offering.



•

We obtained $9.5 million of funding through an extension of an accounts receivable facility with Textron Financial, Inc. ("Textron").

        Growth initiatives in 2002:

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In September 2002, we signed an agreement to acquire the United States-based SME voice customer base of Cable & Wireless (C&W). We acquired the SME voice customer base during

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the three months ending December 31, 2002. The acquired customer base has migrated to our network and increased the size of our United States retail business.

        Other Events:

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Our 2002 results reflect the deconsolidation of three non-core foreign investments, which resulted from: the partial divestment of interests in Cards & Parts, our German mobile accessories business, which subsequently filed for insolvency administration; the relinquishment of control rights concerning Bekkoame Internet, Inc. ("Bekko"), our Internet and data investment in Japan; and an insolvency administration filing for InterNeXt, our Internet and data subsidiary in France.

Strategy

        Having completed our global network infrastructure deployment, our primary objectives are to continue to build scale in our core markets by adding customers, traffic and new services; and continue to improve our profitability, cash flow and balance sheet. Key elements of our strategy to achieve these objectives are the following:

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Focus on Profitable Markets and Higher Margin Retail Customers and Services: We are focused on specific, large, developed markets, where we look to take market share away from the dominant telecommunications carriers. Our target customer base consists of SMEs, multinational corporations and residential customers, particularly ethnic customers, who have international telecommunications needs, in addition to needs for domestic voice, Internet and data services. We offer our services at competitive prices and seek to differentiate ourselves based on customer service through experienced sales and service representatives. By bundling our traditional voice services with Internet and data services, we seek to increase net revenue per customer and improve our ability to attract and retain business and residential customers. In addition, we continually seek to add new services to offer to both existing and new customers. We are specifically targeting major growth areas of local, wireless and broadband.

We have grown our net revenue from $1.1 billion for the year ended December 31, 2001 to $1.3 billion for the year ended December 31, 2003, primarily as a result of our expanding prepaid calling card, Internet access and retail services, as well as our fourth quarter 2002 acquisition of the SME voice customer base of C&W in the United States. In addition, our net revenue growth was substantially improved in 2003 by the weakening of the United States dollar (USD) against the currencies of our principal foreign markets in Australia, Canada, the United Kingdom and Europe. For additional information regarding the impact of fluctuations in foreign currency exchange rates on our results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk."

In addition to focusing on net revenue growth initiatives, we also concentrate on high margin customers and products and monitor our cost structure to improve our income from operations. For instance, in 2001 and 2002, we de-emphasized or exited certain low margin businesses and emphasized operations in our core markets of the United States, Australia, Canada and Europe with corresponding reductions of approximately one-third of our personnel. As a result, we have improved our income from operations from a loss of $672.3 million for the year ended December 31, 2001 to income from operations of $69.6 million for the year ended December 31, 2003.

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Leverage Our Global Network Infrastructure: We have invested in developing our global, high capacity voice and data network and our product capabilities. By increasing the volume of voice and data traffic that we carry over our existing global network, we are able to reduce transmission costs and other operating costs as a percentage of net revenue, improve service

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quality and enhance our ability to introduce new products and services. In addition, by leveraging multiple customer segments in different geographical regions, including retail and carrier customers, we achieve greater utilization of our network assets, because our network experiences multiple periods of peak usage throughout each day. We believe the current network meets the near-term needs of our current and prospective customers and that capital expenditures will be in the range of 3% of net revenue in 2004. We expect these spending levels to remain consistent over the next few years.

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Improve Our Balance Sheet and Liquidity through Debt Reduction and Refinancing Activities: We have reduced our long-term obligations from $1.3 billion as of December 31, 2000, to $542.5 million as of December 31, 2003, and our interest expense from $132.1 million for the year ended December 31, 2000 to $60.7 million for the year ended December 31, 2003. In September 2003, we raised $132 million through the issuance of our 2003 Convertible Senior Notes, and in January 2004, we issued $240 million in debt through the completion of the sale of our 2004 Senior Notes. The proceeds of these offerings were used primarily to retire higher interest debt and extend our debt maturity profile. By extending the maturities of our obligations and reducing interest expense through refinancing activities, we seek to improve both our short-term and long-term liquidity. We believe that by further enhancing scale in our core markets, we will be able to grow cash provided by operating activities, which will enable us to continue to delever our balance sheet.



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Capitalize on Our Experienced Management Team: Our management team is composed of seasoned executives with extensive expertise in the communications industry and knowledge of the markets in which we operate. Our core senior management team has been with us since the commencement of our operations, and these individuals have guided us through the recent telecommunications industry downturn. We expect that they will continue to be instrumental in expanding our services into new markets.

Description of Operating Markets

        The following is a description of our operations in each of our four primary markets. Management organizes the enterprise into geographic areas—North America, Europe and Asia-Pacific. The United States and Canadian operating markets are the significant portions of our North America segment, and the Australian market is the substantial portion of the Asia-Pacific segment. See the footnote within Item 8—"Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Operating Segment and Related Information," for further information regarding our segments.

        United States.    The United States is one of our four primary markets, representing 22% of our 2003 net revenue. We provide international and domestic voice, data, Internet and VOIP services to SMEs, residential customers, multinational corporations and other telecommunication carriers. We operate international gateway telephone switches in the New York City area and Los Angeles, which are connected with countries in Europe, Latin America and the Asia-Pacific region through owned and leased international fiber cable systems. We lease and own domestic fiber in the United States to interconnect our switches, data centers, and POPs. POPs are our interconnection points with other networks. We maintain direct sales organizations in Massachusetts and Virginia to sell to business customers and have inbound telemarketing centers in Florida, Virginia and Puerto Rico. To reach residential customers, we utilize telemarketing services and we advertise in national and regional ethnic newspapers, other publications, and on television to offer competitive rates for international and domestic telephone calls, data, Internet and VOIP services. We also utilize independent agents to reach and enhance sales to both business and residential customers and have a direct sales force for marketing international services to other telecommunication service providers, including long distance companies, ISPs and VOIP service providers. We maintain customer service centers in Florida and Virginia and also outsource selected customer service functions overseas. We operate a 24-hour global

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network management control center in Virginia that monitors our global voice, Internet and data. We offer dial-up and DSL Internet access services to business and residential customers. We also provide managed and shared Web hosting services through our data center located in Lynn, Massachusetts. Additionally, we provide local and international long distance voice services, VOIP, and Internet services in Puerto Rico.

        Australia.    We are the fourth largest full service telecommunications company, based on revenues, providing domestic and international long distance services, data and Internet access services, as well as local and cellular service on a resale basis, to corporate, SMEs and residential customers. Our Australian operations represent 26% of our 2003 net revenue. We have a nationwide domestic long distance network, and a five-city backbone network using Northern Telecom switches in Sydney, Melbourne, Perth, Adelaide and Brisbane with over 100 POPs covering more than 90% of Telstra (the dominant carrier and former monopoly in Australia) local exchanges. We maintain 24-hour customer service and network management control centers.

        We are the third largest ISP, based on market share, in Australia. We have a data center in Melbourne which offers hosting and e-commerce applications and services. We market our services through a combination of direct sales to corporate and SME customers and independent agents, which market to retail business and residential customers, and media advertising aimed at residential customers who make a high volume of international calls.

        Canada.    Canada is another of our primary markets, representing 17% of our 2003 net revenue. We are the largest alternative consumer carrier in Canada based on net revenue. We provide international and domestic voice services to SMEs, residential customers and other telecommunication carriers and have sales and customer service offices in key cities throughout Canada, including Vancouver, Toronto and Montreal. We operate international gateway switches in Toronto and Vancouver, maintain POPs in Ottawa, Montreal and Calgary, and operate a nationwide integrated network backbone for our voice, data, Internet and private line services. Each of the 24 nodes on the backbone is equipped with Sonet add/drop, ATM, frame and IP equipment to provide a complete spectrum of voice and data communications products to our customers. We operate two Nortel DMS 500 switches in Toronto and Vancouver, which provide on-net equal access coverage to an estimated 90% of the population of Canada. We also operate a voice dial access network which consists of some 70 POPs across the country.

        We have data centers co-located with our switch sites in Vancouver and Toronto through which we offer shared and dedicated hosting and co-location services. We have an extensive Internet footprint and provide dial-up and Integrated Services Digital Network (ISDN) Internet coverage to over 700 communities across Canada through a network of 51 POPs.

        We market our services through a combination of direct sales to corporate and SME customers and media advertising aimed at residential customers, and affinity channels.

        Europe.    We operate as a licensed carrier in the United Kingdom, Germany, France, Spain, Italy, Denmark, the Netherlands and Switzerland. The European market represents 33% of our 2003 net revenue. Our network consists of core backbone voice/data nodes in London, Frankfurt and Paris with nodes in Milan, Madrid, Copenhagen, Amsterdam and Zurich. Our European network interconnects with our global network. In London, we have a data center for Web hosting and other services.

        Our European operation is headquartered in London. We provide voice and data services to residential customers, small businesses, and other telecommunications carriers. We maintain a European multilingual customer service call center in Glasgow, Scotland. We market our services across Europe using a combination of direct sales, agents, and direct-media advertising. We offer prepaid services (including VMNS) in most major European countries, which are our largest and fastest growing products in Europe. Throughout Europe, a large portion of call origination is via mobile phones. In most cases, mobile carriers' tariffs for terminating international minutes are higher than fixed line operators. Through the sale of prepaid VMNS to mobile phone users, our European businesses are now targeting international minutes originated from a mobile phone to bring onto our global network for termination.

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        We operate Ericsson AXE-10 switches and provide services to retail business and residential and carrier customers in Paris, Frankfurt, and London.

Services

        We offer a broad array of communications services:

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International and Domestic Long Distance. We provide international long distance voice services terminating in over 240 countries, and domestic long distance voice services in our core operating markets.



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VOIP Services. We offer to ISPs, telecommunications carriers worldwide, and enterprise customers VOIP services both over the public Internet as well as direct point-to-point VOIP services over our ATM+IP network. In addition, we offer VOIP services for PC-to-phone or PC-to-PC usage through a partnership arrangement with Microsoft.



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Internet and Data Services. We offer global ATM, frame relay, and Internet/IP services which are available to customers in the United States, Australia, Canada and the United Kingdom. In Australia, we offer data transfer services over ATM and frame relay networks in addition to Internet access services through dial-up, accelerated dial-up and DSL. We also offer Web hosting, managed hosting, dedicated hosting, virtual private networking (VPN) and co-location services in our primary operating markets.



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Prepaid Services (including VMNS). We offer prepaid calling cards that may be used by customers for domestic and international telephone calls both within and outside of their home country. In Europe, we offer prepaid VMNS to mobile phone users which bring international minutes originating from a mobile phone onto our global network.



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Toll-free Services. We offer domestic and international toll-free services within selected countries in our principal service regions.



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Reorigination Services. In selected countries, we provide call reorigination services which allow non-United States country to country calling to originate from the United States, thereby taking advantage of lower United States accounting rates.



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Local Switched Services. We offer local service on a resale basis, primarily in Australia and Canada.



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Cellular. We offer cellular services on a resale basis in Australia and the United Kingdom.

Network

        General.    We operate a global telecommunications network consisting of international and domestic switches and related peripheral equipment, carrier-grade routers and switches for Internet and data services, undersea and trans-continental fiber optic cable systems, leased satellite and cable capacity. To ensure high-quality communications services, our network employs digital switching and fiber optic technologies, incorporates the use of SS7/C7 signaling, and is supported by comprehensive network monitoring and technical support services. Our fully deployed global network consists of the following:

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a global backbone connecting our international gateway switches, each of which is connected to our domestic and international network as well as those of other carriers in each particular market;



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a domestic long distance network presence within certain countries;

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•

a combination of owned and leased transmission facilities, resale arrangements and foreign carrier agreements; and



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ATM switches and IP routers in select markets around the world, which leverage our fiber optic cable facilities and are connected to our approximately 250 POPs, as well as Internet peering/transit points with other carriers. This network also allows us to provide VOIP on a global basis. In select markets, we have installed or leased DSL equipment to offer high-speed Internet access.

        Switching Systems.    Our network consists of 18 carrier-grade domestic and international gateway switch systems throughout Europe, North America, Australia, and Japan. We also have deployed and operate an additional 20 enhanced switching platforms in support of specialized products.

        The locations and types of our switching systems follow:

        In addition, we operate a global VOIP network based on Cisco Systems routers and gateways with an open network architecture which connects with our partners in over 150 countries through the use of open settlement protocol (OSP).

        Fiber Optic Cable Systems.    We have purchased and leased undersea and land-based fiber optic cable transmission capacity to connect our various switching systems. We either lease lines on a term basis for a fixed cost or purchase economic interests in transmission capacity through minimum assignable ownership units (MAOUs) or indefeasible rights of use (IRUs) to international traffic

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destinations. The following chart sets forth a listing of the undersea fiber optic cable systems in which we have capacity (which includes both MAOUs and IRUs):

        In December 1999, we agreed to purchase $23.2 million of fiber capacity from Qwest Communications, which provides us with ATM+IP based international broadband backbone. The backbone is comprised of nearly 11,000 route miles of fiber optic cable in the United States and overseas as well as private Internet peering at select sites in the United States and overseas. In March 2000, we agreed to purchase an additional $20.8 million of fiber capacity and as of June 30, 2001 had fulfilled the total purchase obligation. As of June 30, 2002, we had made cash payments of $27.6 million and settled our outstanding payment obligation of $16.4 million with Qwest Communications for $10.0 million in cash, which has been paid in full. We recorded this transaction in accordance with FIN No. 26, "Accounting for Purchase of a Leased Asset by the Lessee during the Term of the Lease," and accordingly, the transaction resulted in a reduction of property and equipment of $7.2 million during the three months ended June 30, 2002.

        In June 2000, we purchased from AT&T Canada for $20.6 million (26.7 million Canadian dollars (CAD)) six rings of SONET protected OC-12 capacity across Canada. This capacity provides a national backbone network for Primus Canada. This purchase price has been paid in full.

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        In December 2000, we entered into a financing arrangement to purchase fiber optic capacity in Australia for $38.3 million (51.1 million Australian dollars (AUD)) from Optus Networks Pty. Limited. As of December 31, 2001, we had fulfilled the total purchase obligation. We signed a promissory note payable over a four-year term ending in April 2005 bearing interest at a rate of 14.31%. During the three months ended June 30, 2003, we renegotiated the payment terms extending the payment schedule through April 2007, and lowering the interest rate to 10.2%. At December 31, 2003 and 2002, we had a liability recorded in the amount of $21.9 million (29.2 million AUD) and $17.2 million (30.4 million AUD), respectively.

        In the three months ended September 30, 2001, we accepted delivery of fiber optic capacity on an IRU basis from Southern Cross Cables Limited (SCCL). We and SCCL entered into an arrangement financing the capacity purchase. In the three months ended December 31, 2001, we renegotiated the payment terms with SCCL. Under the new terms, the payments for each capacity segment will be made over a five-year term ending in April 2008, which added two years to the original three-year term, and continues to bear interest at 6.0% above LIBOR (7.12% at December 31, 2003). We further agreed to purchase $12.2 million of additional fiber optic capacity from SCCL under the IRU agreement. As of December 31, 2003, we had fulfilled the total purchase obligation to SCCL. At December 31, 2003 and 2002, we had a liability recorded under this agreement in the amount of $18.6 million and $18.4 million, respectively.

        Foreign Carrier Agreements.    In selected countries where competition with the traditional Post Telegraph and Telecommunications companies (PTTs) is limited, we have entered into foreign carrier transit agreements with PTTs or other service providers which permit us to provide traffic into and receive return traffic from these countries. We have existing foreign carrier agreements with PTTs and other licensed operators in nearly every major country.

        Network Management and Control.    We own and operate network management control centers in McLean, Virginia; Toronto, Canada; London, England; and Sydney, Australia, which are used to monitor and control a majority of the switching systems, global data network, and other digital transmission equipment used in our network. These network management control centers operate seven days per week, 24 hours per day, 365 days per year.

        Network for Data and Internet Services.    We have built an Internet backbone network that enables our global network to carry Internet and data traffic for our business, residential, carrier and ISP customers. This network uses packet switched technology, including IP and ATM. This network allows us to offer to existing and new customers data and voice communications services, including, in selected geographic areas, dial-up and dedicated Internet access, Web hosting, e-commerce, managed VPN services, VOIP, ATM and frame relay data services.

Customers

        Our business sales and marketing efforts primarily target SMEs with significant international long distance traffic. We also target large multinational businesses. Many of the services we provide in the United States, Australia, Canada, the United Kingdom, and Europe include long distance voice, Internet, data and the resale of cellular services.

        Our residential sales and marketing strategy targets residential customers who generate high international and domestic long distance traffic volumes, particularly ethnic customers. We believe that such customers are attracted to us because of competitive pricing as compared to traditional carriers, and in-language customer service and support. We are now offering Internet access to our residential customers in select markets and expanding our Internet and data offerings to additional markets and bundling them with traditional voice services.

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        We compete for the business of other telecommunications carriers and resellers primarily on the basis of price and service quality. Sales to other carriers and resellers help us maximize the utilization of our network and thereby reduce our fixed costs per minute of use, as well as permitting our network to be interconnected with other major carriers, thereby providing global coverage.

        Business, residential and carrier revenues for the year ended December 31, 2003 were distributed 27%, 53%, and 20%, respectively, and for the year ended December 31, 2002 were distributed 28%, 48%, and 24%, respectively. No single customer accounted for greater than 10% of net revenue for the years ended December 31, 2003, 2002 and 2001.

Sales and Marketing

        We market our services through a variety of sales channels, as summarized below:

•

Direct Sales Force. As of December 31, 2003, our direct sales force included 211 full-time employees who focus on business customers with substantial international traffic, including multinational businesses and international governmental organizations. Direct sales personnel are compensated with a base salary plus commissions. We currently have sales offices in Boston (vicinity), McLean, Puerto Rico, Montreal, Toronto, Vancouver, London, Frankfurt, Adelaide, Brisbane, Melbourne, Perth, Sydney and Tokyo. In addition, approximately 117 full-time sales representatives focus on residential consumers, and 21 direct sales representatives exclusively sell services to other long distance carriers and resellers.



•

Independent Sales Agents. We also sell our services through independent sales agents and representatives, who typically focus on residential consumers and SMEs. An agent receives commissions based on revenue generated by customers obtained for us by the agent. We usually grant nonexclusive sales rights and require our agents and representatives to maintain minimum revenues. As part of the C&W SME voice customer base acquisition, we substantially increased the number of independent sales agents working for us in the United States.



•

Telemarketing. We employ full-time inbound telemarketing sales personnel, and we had been selectively outsourcing certain telemarketing functions to supplement sales efforts to residential consumers, particularly ethnic consumers, and SMEs.



•

Media and Direct Mail. We use a variety of print, television and radio advertising to increase name recognition and generate new customers. We reach ethnic residential customers by print advertising campaigns in ethnic newspapers, and by advertising on select radio and television programs.



•

Third party Distribution Agreements and Affinity Channels. With the growing recognition of the Primus brand and an increasing number of customers in our core markets, we have been able to establish relationships to market our services through external retailers, manufacturers, affinity and preferred partnerships and programs. These relationships allow us to increase awareness and credibility of our services among customers and reduce the cost of customer acquisition.

Management Information and Billing Systems

        We operate various management information, network and customer billing systems in our different operating subsidiaries to support the functions of network and traffic management, customer service and customer billing. For financial reporting, we consolidate information from each of our markets into a single database. For our billing requirements in the United States, we use a billing system developed by Electronic Data Systems Inc. (EDS) which supplies, operates and maintains this system and is responsible for providing backup facilities and disaster recovery. The EDS system is widely used in the telecommunications industry and has been customized to meet our specific needs.

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We also use several systems developed in-house to handle our billing requirements as well as a few third party systems. We bill all of our business, reseller and residential customers directly.

        We believe that our financial reporting and billing systems are generally adequate to meet our needs in the near term. As we continue to grow, we will need to invest additional capital to purchase hardware and software, license more specialized software and increase our capacity.

Competition

Voice

        The international telecommunications industry is highly competitive and significantly affected by regulatory changes, marketing and pricing decisions of the larger industry participants and the introduction of new services made possible by technological advances. We believe that long distance service providers compete on the basis of price, customer service, product quality and breadth of services offered. In each country of operation, we have numerous competitors including wireline, wireless and cable competitors. We believe that as the international telecommunications markets continue to deregulate, competition in these markets will increase, similar to the competitive environment that has developed in the United States following the AT&T divestiture in 1984 and the Telecommunications Act of 1996. Prices for long distance voice calls in the markets in which we compete have declined historically and are likely to continue to decrease. In addition, many of our competitors are significantly larger, have substantially greater financial, technical and marketing resources and larger networks.

        Privatization and deregulation have had, and are expected to continue to have, significant effects on competition in the industry. For example, as a result of legislation enacted in the United States, Regional Bell Operating Companies (RBOCs) are allowed to enter the long distance market; AT&T, MCI, Sprint and other long distance carriers are allowed to enter the local telephone services market; and cable television companies and utilities are allowed to enter both the local and long distance telecommunications markets. In addition, competition has begun to increase in the European Union (EU) communications markets in connection with the deregulation of the telecommunications industry. In most EU countries full liberalization took place in January 1998. In addition, alternatives to wireline services, such as wireless and VOIP services, are significant competitive threats. This increase in competition could adversely affect net revenue per minute.

        The following is a brief summary of the competitive environment in our principal service regions:

        United States.    In the United States, which is the most competitive and among the most deregulated long distance markets in the world, competition primarily is based upon pricing, customer service, network quality and the ability to provide value-added services and the bundling of services. AT&T is the largest supplier of long distance services, with MCI, Sprint and, as a result of federal legislation, RBOCs, local exchange carriers (LECs) and ISPs being significant competitors in providing domestic and international long distance services. The major wireless carriers are also substantial competitors for domestic long distance services.

        Australia.    Australia is one of the most deregulated and competitive communications markets in the Asia-Pacific region. Our principal competitors in Australia are Telstra, the dominant carrier, SingTel Optus and Telecom New Zealand. We compete in Australia by offering a comprehensive menu of competitively-priced products and services, including value-added services, and by providing superior customer service and support.

        Canada.    The Canadian communications market is highly competitive and is dominated by a few established carriers whose marketing and pricing decisions have a significant impact on the other industry participants, including us. In residential markets, we compete primarily with each of the

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incumbent telecommunication companies (of which the largest are those owned by BCE in eastern Canada and Telus in western Canada) in their respective territories. We also compete against Call-Net Enterprises and other smaller resellers. In the highly competitive business market, we compete with BCE and Telus, who are both expanding beyond their traditional territories and competing with each other across the country, and with Allstream, Call-Net Enterprises and other smaller carriers.

        United Kingdom.    Our principal competitors in the United Kingdom are British Telecommunications (BT), the dominant provider of telecommunications services in the United Kingdom, Cable & Wireless UK, Colt Telecom, Energis and MCI. Major wireless carriers are also a significant source of competition. We compete in the United Kingdom and European countries by offering competitively-priced stand-alone and bundled services, personalized customer service and value-added services.

Internet and Data

        The market for Internet services and data services is extremely competitive. We anticipate that competition will continue to intensify. Our current and prospective competitors offering these services include national, international, regional and local ISPs such as AOL and EarthLink, Web hosting companies, other long distance and international long distance telecommunications companies, including AT&T, MCI and Sprint, LECs such as Verizon and SBC, cable television, direct broadcast satellite, wireless communications providers and on-line service providers. Many of these competitors have significantly greater resources, market presence and brand recognition than we do.

Government Regulation

        As a global telecommunications company, we are subject to varying degrees of regulation in each of the jurisdictions in which we provide services. Local laws and regulations, and the interpretation of such laws and regulations, differ significantly among the jurisdictions in which we operate. There can be no assurance that future regulatory, judicial and legislative changes will not have a material adverse effect on us, that domestic or international regulators or third parties will not raise material issues with regard to our compliance or noncompliance with applicable regulations or that regulatory activities will not have a material adverse effect on us.

        Regulation of the telecommunications industry is changing rapidly both domestically and globally. Privatization and deregulation have had, and are expected to continue to have, significant effects on competition in the industry. For example, as a result of legislation enacted in the United States, RBOCs have been allowed to enter the long distance markets in many states. AT&T, MCI, Sprint and other long distance carriers have expanded their services to include local telephone services. In addition, competition has increased in the EU communications markets as a result of legislation enacted at the EU level. Beginning in 1990, a number of legislative measures were adopted which culminated in the full liberalization of telecommunications markets throughout most EU member states as of January 1, 1998. This increase in competition could adversely affect net revenue per minute. In addition, the World Trade Organization Agreement, which reflects efforts to dismantle government-owned telecommunications monopolies throughout Europe and Asia may affect us. Although we believe that these deregulation efforts will create opportunities for new entrants in the telecommunications service industry, there can be no assurance that they will be implemented in a manner that would benefit us. Further the increase in providers vying for a limited market share will require us to maintain competitive rate structures.

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        The regulatory frameworks in certain jurisdictions in which we provide services are described below:

United States

        In the United States, our services are subject to the provisions of the Communications Act of 1934, as amended, the Federal Communications Commission (FCC) regulations thereunder, as well as the applicable laws and regulations of the various states and state regulatory commissions.

        As a carrier offering services to the public, we must comply with the requirements of common carriage under the Communications Act of 1934, including the offering of service on a nondiscriminatory basis at just and reasonable rates, and obtaining FCC approval prior to any assignment of authorizations or any transfer of de jure or de facto control of the company.

        We are subject to various specific common carrier telecommunications requirements set forth in the FCC's rules, including operating, reporting and fee requirements. Both federal and state regulatory agencies have broad authority to impose monetary and other penalties on us for violations of regulatory requirements.

        International Service Regulation.    International common carriers like us are required to obtain authority under Section 214 of the Communications Act of 1934. We have obtained all required authorizations from the FCC to use, on a facilities and resale basis, various transmission media for the provision of international switched services and international private line services on a nondominant carrier basis. The FCC is considering a number of international service issues in the context of several policy rulemaking proceedings in response to specific petitions and applications filed by other international carriers. We are unable to predict how the FCC will resolve the pending international policy issues or how such resolution will affect our international business. In recent years, the FCC has taken steps to streamline regulation of international services where competition can provide consumers with lower rates and choices among carriers and services. To that end, with some exceptions, current FCC rules require facilities-based United States carriers, like us, with operating agreements with dominant foreign carriers, to abide by the International Settlements Policy by following uniform accounting rates, ⁵⁰/50 split in settlement rates, and proportionate return of traffic. United States carrier arrangements with nondominant foreign carriers are not subject to these requirements. Further, the FCC recently announced that it would lift the International Settlements Policy requirements from a substantial number of additional routes where competition exists. We may take advantage of these more flexible arrangements with nondominant foreign carriers, and the greater pricing flexibility that may result, but we may also face greater price competition from other international service carriers.

        Pursuant to a change in rules by the FCC, we have replaced our international and domestic FCC tariff with a general service agreement and price list posted on our Web site (also as required by FCC order). This "detariffing" has given us greater pricing flexibility in our service offerings, but we are no longer entitled to legal protection under the "filed rate doctrine," which provides protection to carriers from customers' legal actions challenging terms and conditions of service.

        Domestic Service Regulation.    We are considered a non-dominant domestic interstate carrier subject to minimal regulation by the FCC. We are not required to obtain FCC authority to initiate or expand our domestic interstate operations, but we are required to obtain FCC approval to transfer control or discontinue service and to file various reports and pay various fees and assessments. Among other things, interstate common carriers must offer service on a nondiscriminatory basis at just and reasonable rates. In addition, as a non-dominant carrier, we are subject to the FCC's complaint jurisdiction. In particular, we may be subject to complaint proceedings in conjunction with alleged noncompliance such as unauthorized changes in a customer's preferred carrier or violations of the FCC's Do-Not-Call telemarketing rules. We are also subject to the Communications Assistance for Law Enforcement Act and certain FCC regulations which require telecommunications common carriers to modify their networks to allow law enforcement authorities to perform electronic surveillance. The recently enacted Do-Not-Call Registry and related restrictions set out the specific parameters for telemarketing solicitation and prohibit outbound telemarketing in some circumstances.

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        Our costs of providing long distance services will be affected by changes in the switched access charge rates imposed by LECs for origination and termination of calls over local facilities. FCC rules currently cap the rates that both incumbent and competitive LECs may charge for switched access, and restrain incumbent LECs ability to change their charges. The FCC's decision to place caps on competitive LECs charges has been appealed in court and is on reconsideration at the FCC. The FCC continues to grant incumbent LECs greater pricing flexibility and relaxed regulation of access services in those markets where there are other providers of access services. Responding to a Congressional directive in the Telecommunications Act of 1996, the FCC has attempted several times over the past seven years to develop a list of Unbundled Network Elements (UNEs—portions of the incumbent local exchange carrier (ILECs) networks and services that are sold separately) that must be made available to competitive local exchange carriers (CLECs). On several occasions the courts have faulted the FCC for both its identification of the network elements to be unbundled, and its justifications for requiring UNEs to be made available. The FCC's most recent attempt is colloquially known as the Triennial Review Order (TRO). On March 2, 2004, the U.S. Court of Appeals in Washington D.C. in "U.S. Telecom Association v. FCC" vacated significant portions of the FCC's scheme governing unbundling of network elements for voice services, while upholding provisions excluding broadband network elements from unbundling. The court said its mandate would become effective upon at the later of 60 days after its order or the appeals court's rejection of petitions to rehear the decision. This ruling, which favors the ILECs, unsettles the regulatory landscape for CLECs dependent on UNEs. While we do not currently use UNEs in our services, the current regulatory landscape could make it more difficult for us to use UNEs in the future, should we decide to initiate local service, which could affect our cost of providing local services. Depending on the outcome of the litigation, any new rules promulgated by the FCC and the manner in which such these rules are implemented between LECs, we may have fewer competitive choices among LECs and, as a result, could see an increase in our termination and origination costs over time.

        All interstate telecommunications carriers, including us, are required to make contributions to support federal universal service programs. The FCC is currently considering revisions to its universal service funding mechanism. We cannot predict the outcome of these proceedings or their potential effect on us. Our VOIP service operations are not currently subject to direct regulation by the FCC or state regulatory commissions to the extent that they qualify as "enhanced" or "information" services. The FCC defines enhanced services as services that (1) employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber's transmitted information, (2) provide the subscriber additional, different or restructured information, or (3) involve subscriber interaction with stored information. In 1998, in a non-binding report, the FCC observed that "computer-to-computer" VOIP may be appropriately considered to be unregulated but that "phone-to-phone" VOIP may lack the characteristics that would render them unregulated "information" services. In February 2004, the FCC ruled that free computer-to-computer VOIP service is not "telecommunications service" and that it is an interstate "information service." Although this order clarifies some of the relevant VOIP issues, the FCC has not yet issued a formal decision as to whether other variations of VOIP services should be subject to traditional common carrier telecommunications service regulation or whether any of the VOIP services should be subject to universal service contribution and access charge obligations. In March 2004, the FCC released a Notice of Proposed Rulemaking ("NPRM") regarding VOIP Service. The NPRM specifically addresses the regulatory classification and jurisdiction of VOIP; the application of access charges; and how to preserve key public policy objectives such as universal service, 911/emergency services, law enforcement surveillance requirements, and the needs of persons with disabilities. While initial indications from the FCC suggest that any regulation of VOIP will be limited in nature, the future regulatory treatment of other variations of VOIP by the FCC and state regulatory bodies continues to be uncertain. Furthermore, Congressional dissatisfaction with the FCC's treatment of IP telephony could result in legislation requiring the FCC to impose greater or lesser regulation. Changes to, and further

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clarifications of, the treatment of VOIP services could result in the imposition of burdensome regulation and fees on some of our services and/or increase certain of our operating costs.

        State Regulation.    Our intrastate long distance operations are subject to various state laws and regulations, including, in most jurisdictions, certification and tariff filing requirements. Primus Telecommunications, Inc. (PTI), a wholly-owned subsidiary of ours, maintains the necessary certificate and tariff approvals, where approvals are necessary, to provide intrastate long distance service in 49 states and Puerto Rico. PTI also maintains the necessary certificate to provide local services in Puerto Rico. Certain of our other subsidiaries, such as Trescom USA, Inc. and Least Cost Routing, Inc., also maintain certificates and tariffs in some states. Some states also require the filing of periodic reports, the payment of various fees and surcharges and compliance with service standards and consumer protection rules. States often require prior approval or notification for certain stock or asset transfers or, in several states, for the issuance of securities, debt or for name changes. As a certificated carrier, consumers may file complaints against us at the public service commissions. Certificates of authority can generally be conditioned, modified, canceled, terminated, or revoked by state regulatory authorities for failure to comply with state law and/or the rules, regulations and policies of the state regulatory authorities. Fines and other penalties also may be imposed for such violations. Public service commissions also regulate access charges and other pricing for telecommunications services within each state. The RBOCs and other LECs have been seeking reduction of state regulatory requirements, including greater pricing flexibility which, if granted, could subject us to increased price competition. We may also be required to contribute to universal service funds in some states.

        Wireless Service Regulations.    Through subsidiaries of TresCom International, Inc., a wholly-owned subsidiary of ours, we hold several wireless licenses issued by the FCC. As a licensee authorized to provide microwave and satellite earth station services, we are subject to Title III of the Communications Act of 1934, as amended by the Telecommunications Act of 1996, and FCC regulations promulgated thereunder. Pursuant to Title III, foreign entities may not directly hold more than 20% of the stock or other ownership interests in an entity, including us, that holds certain types of FCC licenses, such as the wireless licenses held by the TresCom International, Inc. subsidiaries referred to above. In addition, unless granted an FCC waiver, foreign citizens and entities may not indirectly hold 25% or more of the stock or other ownership interest in such entities.

Australia

        The provision of our services is subject to federal regulation in Australia. The two primary instruments of regulation are the Australian Telecommunications Act 1997 and federal regulation of anti-competitive practices pursuant to the Australian Trade Practices Act 1974. The current regulatory framework came into effect in July 1997.

        We are licensed under the Telecommunications Act 1997 to own and operate transmission facilities in Australia. Under the regulatory framework, we are not required to maintain a carriage license in order to supply carriage services to the public using network facilities owned by another carrier. Instead, with respect to carriage services, we must comply with legislated "service provider" rules contained in the Telecommunications Act 1997 covering matters such as compliance with the Telecommunications Act 1997, operator services, regulation of land access, directory assistance, provision of information to allow maintenance of an integrated public number database and itemized billing.

        Two federal regulatory authorities exercise control over a broad range of issues affecting the operation of the Australian telecommunications industry. The Australian Communications Authority (ACA) is the authority regulating matters including the licensing of carriers and technical matters, and the Australian Competition and Consumer Commission (ACCC) has the role of promotion of competition and consumer protection and in particular dealing with carrier to carrier interconnection

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and network access. We are required to comply with the terms of our own license, are subject to the greater controls applicable to licensed facilities-based carriers and are under the regulatory control of the ACA and the ACCC. In addition, other federal legislation, various regulations pursuant to delegated authority and legislation, ministerial declarations, codes, directions, licenses, statements of Australian government policy and court decisions affecting telecommunications carriers also apply to us. As a carrier we must also be a member of the Telecommunications Industry Ombudsman (TIO) Scheme. The TIO is responsible for handling complaints from consumers about carriers and Internet service providers. The TIO may impose financial penalties upon carriers that do not satisfactorily deal with consumer complaints.

        There is no limit to the number of carriers that may be licensed. Any company that meets the relevant financial and technical standards and complies with the license application process can become a licensed carrier permitted to own and operate transmission facilities in Australia. Carriers are licensed individually, are subject to charges that are intended to cover the costs of regulating the telecommunications industry and are obliged to comply with license conditions (including obligations to comply with the Telecommunications Act 1997 and with the telecommunications access regime and related facilities access obligations). Carriers also must meet the Universal Service Obligations (USO), to assist in providing all Australians, particularly in remote areas, with reasonable access to standard telephone services and digital data services. Telstra is currently the sole universal service provider. One of our subsidiaries, Hotkey Internet Services, has been approved as a special digital service provider. Since 2000, the responsible Minister of the Australian government may make a determination of the amount of USO subsidies, with advice from the Australian Communications Authority. No methodology is provided in legislation and the Minister could make a determination of a Universal Service Legislation (USL) that would be material to us. However, the USL has been set until 2005 at levels (e.g., approximately 11 Australian dollars (AUD) per 1,000 AUD of eligible revenue for the 2001-02 financial year) that we do not consider material.

        Fair Trading Practices.    The ACCC enforces legislation for the promotion of competition and consumer protection, particularly rights of access (including pricing for access) and interconnection. The ACCC can issue a competition notice to a carrier which has engaged in anti-competitive conduct. Where a competition notice has been issued, the ACCC can seek pecuniary penalties, and other carriers can seek damages, if the carrier continues to engage in the specified conduct.

        The Telecommunications Act 1997 package of legislation includes a telecommunications access regime that provides a framework for regulating access rights for specific carriage services and related services through the declaration of services by the ACCC. The regime establishes mechanisms within which the terms and conditions of access can be determined. The Australian government intends the access regime to reduce the power of Telstra and Singtel Optus (as the former protected fixed line carriers) and other carriers who may come to own or control important infrastructure or services necessary for competition.

Canada

        We, as a reseller of domestic Canadian telecommunications services, are largely unregulated by the Canadian Radio-television and Telecommunications Commission (CRTC). In particular, because we do not own or operate transmission facilities in Canada, we are not subject to direct regulation by the CRTC pursuant to the Canadian Telecommunications Act. Therefore, we may provide resold Canadian domestic long distance service without regulation of our rates, prices or the requirement to file tariffs. In addition, as described below, as a reseller we are not subject to restrictions on foreign ownership or control.

        In 2000, the CRTC implemented a revenue-based contribution regime to replace the per minute contribution charge formerly in place to support universal access. This new revenue-based contribution

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mechanism collects from a wider base of telecommunications service providers and has consequently lowered our contribution expenses considerably since 2001, to 1.1% of our net Canadian telecommunications service revenues in 2003.

        In a price cap decision issued in May 2002, the CRTC lowered the prices incumbent providers can charge competitors for a range of competitor services—i.e., facilities and services required by competitors to provide telecommunications services to their customers. Several proceedings are currently underway that may lead to reductions in the costs incurred by us for the lease of certain incumbent facilities and the interconnection of our network with the incumbents' local access network. These reduced rates may be effective on a retroactive basis to June 2002.

        Competition.    Long distance competition has been in place in Canada since 1990 for long distance resellers and since 1992 for facilities-based carriers. Since 1994, the ILECs have been required to provide "equal access" which eliminated the need for customers of competitive long distance providers to dial additional digits when placing long distance calls. In June 1992, the CRTC issued its ground-breaking Telecom Decision CRTC 92-12 requiring the incumbent LECs to interconnect their networks with their facilities-based, as well as resale, competitors. However, these companies have now disbanded the Stentor alliance effective January 1, 1999, and former Stentor companies, Bell Canada and TELUS Communications, the two largest carriers in Canada, have begun to compete against one another. Other nationwide providers are Allstream (formerly AT&T Canada Corp.), Sprint Canada and 360 Networks. Additional long distance services competition is provided by a substantial resale long distance industry in Canada.

        Foreign Ownership Restrictions.    Under Canada's Telecommunications Act and certain regulations promulgated pursuant to such Act, foreign ownership restrictions are applicable to facilities-based carriers ("Canadian carriers"), CLECs and microwave license holders, but not to companies which do not own or operate facilities or to resellers, which may be wholly foreign-owned and controlled. These restrictions limit the amount of foreign investment in Canadian carriers to no more than 20% of the voting equity of a Canadian carrier operating company and no more than 33¹/3% of the voting equity of a Canadian carrier holding company. The restrictions also limit the number of seats which may be occupied by non-Canadians on the board of directors of a Canadian carrier operating company to 20%. In addition, under Canadian law, a majority of Canadians must occupy the seats on the board of directors of a Canadian carrier holding company. Although it is possible for foreign investors to also hold non-voting equity in a Canadian carrier, the law requires that the Canadian carrier not be "controlled in fact" by non-Canadians. Primus Canada, along with several other telecommunications service providers, has sought to have the Canadian government review foreign ownership restrictions with a view to lowering these restrictions or eliminating them altogether.

        In April 2003, a committee of the House of Commons (the Industry Committee) recommended the removal of the restrictions in their entirety, for both telecommunications common carriers and for broadcasting distribution undertakings (BDUs) such as cable companies. In June 2003, however, another committee of the House of Commons (the Heritage Committee) expressed concerns that changes in ownership restrictions for either telecommunications common carriers or BDUs could have an adverse impact on the broadcasting system. In its September 2003 response to the Industry Committee's recommendation, the government acknowledged the appropriateness of the committee's conclusion that removing foreign investment restrictions would benefit the telecommunications industry. However, the government also noted the concerns expressed by the Heritage Committee. The government recognized that it has a responsibility to determine how best to reconcile the conflicting recommendations of the two committees and undertook to analyze this question and be in a position to examine possible solutions by the spring of 2004. Therefore, it is premature to predict whether the recommendation to remove the restrictions for telecommunications common carriers will be implemented and if so, when.

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European Union

        In Europe, the regulation of telecommunications is governed at a supranational level by the European Parliament, Council and Commission, consisting of members from the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. These institutions are responsible for creating European Union-wide policies and, through legislation, have progressively developed a regulatory framework aimed at ensuring an open, competitive telecommunications market.

        In February 2002, the Council agreed to a new European regulatory framework for the communications sector which was formally adopted on March 7, 2002. The new regime comprises the following legislative texts:

•

Directive 2002/21 on a common regulatory framework for electronic communications networks and services ("Framework Directive");



•

Directive 2002/20 on the authorization of electronic communications networks and services ("Authorization Directive");



•

Directive 2002/19 on access to, and interconnection of, electronic communications networks and associated facilities ("Access Directive"); and



•

Directive 2002/22 on universal service and users rights relating to electronic communications networks and services ("Universal Service Directive").

        These directives were supposed to be implemented by EU member states and incorporated into the regulatory regime of each member state by July 25, 2003. However, a number of member states missed this deadline and are still in the process of implementation. We anticipate, but can make no assurance, that these new directives will not have any material impact on our business operations in Europe.

        One of the requirements of the Authorization Directive is that no company wishing to provide electronic communications networks or services should have to obtain prior authorization, although such a company could be required to notify relevant regulatory authorities in the member states where it is intending to operate of its intention to provide such networks or services.

        A further directive relating to privacy and electronic communications (Directive 2002/58) was added to the new regime at a later stage. This directive aims in a number of respects to harmonize national laws on personal data protection in the electronic communications age and deals with matters including the confidentiality of billing information, the use of caller identification devices, the use of subscriber directories and unsolicited communications. The directive was supposed to be implemented by EU member states and incorporated into the regulatory regime of each member state by October 31, 2003 but, as with the earlier directives referred to above, a number of member states have missed this deadline.

        Each EU member state in which we currently conduct or plan to conduct our business has historically had a different regulatory regime and we expect that, even after the adoption of the new EU regulatory regime, differences will continue for the foreseeable future. There may well be differences in the way in which the new EU regulatory regime is implemented from one member state to another. The requirements for us to obtain necessary approvals have varied considerably from one country to another. We have obtained and will continue to seek to obtain interconnection agreements with other carriers within the EU. While previous EU directives have required that carriers with significant market power offer cost-based and non-discriminatory interconnection to competitors, individual EU member states have implemented this requirement differently and may continue to do so under the new EU regulatory regime. As a result, we may be delayed in obtaining or may not be able to obtain interconnection in certain countries that would allow us to compete effectively.

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United Kingdom

        Until recently, the running of telecommunications systems and the provision of telecommunications services was governed by the Telecommunications Act 1984 (the "1984 Act"). Under the 1984 Act, it was a criminal offense for any person to run a telecommunications system unless authorized to do so by a license.

        Until 1991, the United Kingdom government operated a duopoly policy, under which licenses to run fixed link systems for the provision of voice telephony services were restricted to two companies, BT and Mercury Communications (now Cable & Wireless UK).

        In 1991, the United Kingdom government adopted a new "multi-operator" policy. Under this policy, any company wishing to run a telecommunications system was able to apply for a license to the Department of Trade and Industry (DTI), as it is now known. In deciding whether to recommend the award of a license, the DTI had to consider all applications made and would take into account matters such as the business plan of the applicant, the experience of the applicant's senior management team and the technical characteristics of the system it was intending to deploy. Licenses, known as Public Telecommunication Operator (PTO) licenses were awarded by the relevant Secretary of State, on the recommendation of the DTI, but were administered and enforced by the Director General, a sector-specific regulator for the telecommunications industry established under the 1984 Act. The Director General presided over Oftel.

        Over time, a number of so-called telecommunications "class licenses" were promulgated by the DTI to avoid the need for companies to have to apply for an individual PTO licence in all instances. However, the class licenses were of limited application, and generally any company wishing to operate systems to provide public services on a regional or national basis, had to apply for an individual license.

        Depending upon the technical characteristics of the system deployed and the services provided, a company might be required to obtain additional licenses not covered by the 1984 Act. For example, if the system made use of radio spectrum, including satellite links, a license under the Wireless Telegraphy Act 1949 was likely to be required.

        The detailed terms of telecommunications licenses evolved and became more complex over time and provisions were inserted into BT's license in particular, which were not to be found in other licenses. These included provisions giving the Director General the ability to exercise price controls in relation to BT's wholesale and retail services. The Director General used this ability to impose a series of successive price caps on BT, both in relation to its wholesale and retail prices, although BT was increasingly given greater pricing flexibility particularly at the retail level. The Director General launched a consultation in October 2003 as to whether BT should be able, at the retail level, to offer business customers discounted prices for bundles of services and discount schemes based on expenditure aggregated across a range of services. A final decision on this issue is still outstanding. Without existing price controls, or with greater pricing flexibility, BT would be able to charge us higher prices for certain services or to charge end user customers prices that are lower than we are able to charge, subject to any constraints imposed by general competition law.

        Any operator qualifying under the Telecommunications (Interconnection) Regulations 1997, was able to apply to Oftel to be recognized as a so-called "Annex II" operator. The effect was to confer an entitlement on an "Annex II" operator to request interconnection services from another "Annex II" operator and, conversely, an obligation to negotiate for the provision of interconnection services itself when requested to do so by another "Annex II" operator. The requirements imposed on BT as a result of these regulations went further, as it was considered to possess significant market power. BT was placed under an obligation to meet all reasonable requests for interconnection from other "Annex II" operators, to do so on non-discriminatory and cost-based terms and to publish a reference

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interconnection offer showing certain interconnect charges and arrangements for interconnection applicable to all "Annex II" operator interconnections.

        Until measures taken under the Communications Act 2003 ("the 2003 Act") came into force on July 25, 2003, our subsidiary Primus Telecommunications Limited held a PTO license with "Annex II" status, as did Telegroup UK Ltd, another of our subsidiaries.

        We must interconnect our United Kingdom network to the networks of other operators in the United Kingdom, including BT, to allow our end user customers to obtain access to our services in order to compete effectively in the United Kingdom. Long distance carriers, such as us, have been entitled to obtain interconnection to BT at cost-based rates.

        By virtue of further regulatory obligations imposed on it, BT began offering a permanent Carrier Pre-Selection (CPS) facility, which allows customers to choose between different operators for different types of calls without dialing extra digits or using an auto dialer box, with an "all calls" option from the end of 2001.

        2002 saw the beginning of a transformation of the regulatory framework for telecommunications in the United Kingdom. The Office of Communications Act 2002 established OFCOM as a new statutory corporation. OFCOM was to become a new "super regulator," that is to say the single regulator for the telecommunications and broadcasting industries and, as such, would replace a number of existing regulators, including the Director General and, by extension, Oftel. However, OFCOM did not receive any regulatory powers or functions at that time. The more recent 2003 Act, which was enacted on July 17, 2003:

•

set out the duties, powers and functions of OFCOM, although since it was known that OFCOM would not be ready to commence operations until the end of 2003, special steps were taken under the 2003 Act to continue the role of the Director General and Oftel until that time;



•

replaced large parts of the 1984 Act; and



•

set out a new framework for the regulation of what are now called "electronic communications networks" and "electronic communications services" in the United Kingdom.

        OFCOM formally assumed its powers and functions under the 2003 Act on December 29, 2003 and the roles of the Director General and Oftel ceased to be effective as of the same date.

        The 2003 Act revoked all previous telecommunications licenses granted under the 1984 Act and made provision for them to be replaced by a general authorization which would apply to all operators. This stemmed from a requirement in the European Union legislation that no person wishing to provide a telecommunications network or service should have to obtain prior authorization. The revocation of licenses and their replacement by the general authorization occurred on July 25, 2003.

        The general authorization contains provisions which are now applicable to all operators and, additionally, provisions which are applicable only to certain operators such as those who have been designated as possessing significant market power in a number of different markets. In time, it is expected that further provisions will be added to the general authorization which will either be of general application or which will be applicable to particular operators or to operators of a particular type, such as those possessing significant market power in markets other than those already specified.

        Any provisions of the general authorization which are directed at particular operators or operators of a particular type, such as those which apply to operators designated as possessing significant market power in certain markets, can only be introduced pursuant to procedures set out in the 2003 Act. In most cases, these procedures require a prior, detailed review by OFCOM (previously the Director General) of the relevant markets involved and the production of a report on the outcome of each review which, in most cases, must be sent to the European Commission for comment.

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        As the European Commission took the view that it was not possible for any European regulatory authority to report on the outcome of any reviews until July 25, 2003 at the earliest, this meant that it was not possible for the Director General to finalize the provisions of the general authorization by the time it came into force on the same date. Accordingly, to ensure that there was no regulatory gap in the meantime, it was necessary for the Director General to continue some of the provisions of the old licenses, notwithstanding that the licenses themselves had been revoked. The intention was that the continued provisions would remain in force for as long as the Director General, or OFCOM in the future, determined to be necessary which, for the most part, meant until the results of the various market reviews had been finalized and either the continued provisions had been replaced with similar provisions in the general authorization, or a decision had been taken, based on the results the reviews, to remove them entirely.

        Provisions from BT's former license relating to BT's obligations to interconnect with other "Annex II" operators on cost-based, non-discriminatory terms were continued, along with the ability of the Director General to exercise price controls over certain of BT's wholesale and retail services.

        Prior to ceasing their functions on December 29, 2003, the Director General and Oftel made significant progress in carrying out a large number of market reviews and several of these reviews were finalized, resulting in new provisions being added to the general authorization and the discontinuation of corresponding provisions which had been continued from the old licenses. New provisions were imposed on BT as part of this process requiring BT to offer interconnection on cost-based, non-discriminatory terms and to publish a reference interconnection offer. Additional provisions imposed on BT also gave OFCOM the ability to continue to exercise price controls over certain of BT's wholesale and retail services. Reviews which remained outstanding as of December 29, 2003 will be completed by OFCOM.

        One of the reviews finalized prior to December 29, 2003 was a review of fixed geographic call termination markets. The Director General and Oftel concluded that each provider of a public electronic communications network, including us, has significant market power in the provision of call termination services on its own network. As a result, we, in common with all other similar operators, have become subject to a provision requiring us to provide call termination services to other operators on fair and reasonable terms if reasonably requested to do so. More extensive provisions have been imposed on BT, including the ability for OFCOM to exercise price controls in relation to BT's call termination services. It is not considered that the imposition of this new requirement on us will have a material adverse effect on our business.

        In November 2003, Oftel began a consultation on the options for regulating the reporting of quality of service information to consumers by telecommunications operators. The consultation closes in February 2004, after which time OFCOM (having replaced Oftel in the meantime) will announce its decision. One possible outcome is that we could, in common with other operators, become subject to a regulatory requirement to publish quality of service statistics in a form and at intervals specified by OFCOM so that consumers can compare operators on quality of service criteria.

        Prior to assuming its powers and functions on an official basis, OFCOM announced that one of its first key tasks would be to carry out a comprehensive review of the telecommunications market in the United Kingdom which, in turn, would shape the strategy through which OFCOM will promote competition and take future regulatory action. OFCOM announced that the review would commence in January 2004 and was expected to be completed in the Autumn of 2004. The review will be evidence-based and will include market surveys, advice from a wide range of external advisors to OFCOM and detailed consultation with operators and consumer representation groups. In February 2004, OFCOM announced the appointment of members to the Consumer Panel. The Consumer Panel is an independent body set up under the 2003 Act to advise OFCOM on consumer interests in the broadcastings and telecommunications sector. The Panel will function as a "critical friend" to OFCOM

25

to help inform its decisions. It will have access to a substantial research budget to ensure that the advice it provides to OFCOM is based on an accurate and independent understanding of the consumer interest. Their main duties will be the promotion of choice, quality and value in electronic communications services, and where appropriate, the encouragement of competition between the providers of those services. In developing its future strategy towards the regulation of the telecommunications market, the powers of OFCOM remain prescribed by the 2003 Act and by applicable European Union legislation.

        The impact of the 2003 Act on us was to revoke our licenses previously held under the 1984 Act and, like all other operators, we now provide services under and are subject to the applicable terms of the new general authorization. The transition has not, so far, affected our business. There are no foreign ownership restrictions which affect our ability to operate under the general authorization, although the Secretary of State retains residual powers to require the suspension of any operator's entitlement to operate in the interests of national security or on public health and safety grounds. The general authorization is of unfixed duration and, therefore, our ability to operate under it is not time constrained but may be affected by other matters such as any serious or repeated contravention of the provisions of the general authorization by us, as this would entitle OFCOM to suspend our entitlement to operate under it. Breaches of the provisions of the general authorization by us could also cause us to incur financial penalties. No assurances can be given that the general authorization, as finalized or as modified in the future, or any future regulatory decisions or interventions by OFCOM, will not have an adverse impact on our business. Furthermore, although the duties and powers of OFCOM and the provisions which OFCOM can insert into the general authorization are prescribed under the 2003 Act, there can be no guarantee that, on specific issues, OFCOM will adopt the same policy approach as was adopted previously by the Director General and Oftel.

        All operators providing public electronic communications services to end users, or providing electronic communications networks, services or network access to other communications providers, or making associated facilities available under the general authorization and, under a policy formulated by Oftel prior to ceasing its functions, whose annual revenue from those activities is $8.9 million (5.0 million British pounds (GBP)) at December 31, 2003 or more, are liable to pay annual administrative charges to OFCOM. The administrative charges have replaced the license fees paid under the previous licensing regime. The actual amount of the charges is based on a formula related to annual revenue of the regulated business. There can be no guarantee that OFCOM will not, in the future, adopt a different policy towards the payment of administrative charges or change the annual revenue threshold at which administrative charges currently become payable.

        The 2003 Act requires OFCOM to ensure that public communications providers provide codes of practice and dispute resolution schemes to their domestic and small business customers (where a small business is one with 10 or less employees/volunteers). Additionally the 2003 Act requires OFCOM to approve these dispute resolution schemes. The requirement to have an approved dispute resolution scheme is being implemented in the general conditions of entitlement. Primus Telecommunications Limited has submitted a code of practice for approval to OFCOM and is currently preparing a submission to OFCOM to meet the requirement of providing a dispute resolution scheme. OFCOM will consider using its formal powers under the 2003 Act to require the provision of this information by public communications providers.

        The revocation of licenses pursuant to the 2003 Act has affected only those licenses granted previously under the 1984 Act and does not affect any continuing requirement for a company to hold any other type of license.

        In the United Kingdom, the Competition Act 1998 prohibits certain anti-competitive agreements and abuses of a dominant position. In the communications sector, the Office of Fair Trading and OFCOM have concurrent jurisdiction to apply and enforce these rules. In general, OFCOM will deal

26

with an agreement or conduct which relates to communications matters. Both the Office of Fair Trading and OFCOM have broad powers to investigate breaches of the rules and to impose penalties on those found to be in breach. We are also subject to European Union competition law which also prohibits certain anti-competitive agreements and abuses of a dominant market position.

Employees

        The following table summarizes the number of our full-time employees as of December 31, 2003, by region and classification:

        We have never experienced a work stoppage. Only some of our employees in Australia are represented by a labor union and covered by a collective bargaining agreement. We consider our employee relations to be excellent.

        Our Internet address is www.primustel.com. We make available free of charge through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

ITEM 2. PROPERTIES

        We currently lease our corporate headquarters, which is located in McLean, Virginia. Additionally, we lease administrative, technical and sales office space, as well as space for our switches and data centers, in various locations in the countries in which we operate. Total leased space in the United States, Australia, Canada and the United Kingdom, as well as other countries in which we operate, approximates 690,000 square feet and the total annual lease costs are approximately $14.4 million. The operating leases expire at various times with the longest commitment expiring in 2012. We believe that our present administrative and sales office facilities are adequate for our anticipated operations and that similar space can be obtained readily as needed, and we further believe that the current leased facilities are adequate to house existing communications equipment.

        Certain communications equipment which includes network switches and transmission lines is leased through operating leases, capital leases and vendor financing agreements.

ITEM 3. LEGAL PROCEEDINGS

        On December 9, 1999, Empresa Hondurena de Telecomunicaciones, S.A. ("Plaintiff"), based in Honduras, filed suit in Florida State Court in Broward County against TresCom and one of TresCom's wholly-owned subsidiaries, St. Thomas and San Juan Telephone Company, alleging that such entities failed to pay amounts due to Plaintiff pursuant to contracts for the exchange of telecommunications traffic during the period from December 1996 through September 1998. We acquired TresCom in June 1998, and TresCom is currently our subsidiary. Plaintiff is seeking approximately $14 million in damages, plus legal fees and costs. We filed an answer on January 25, 2000, and discovery has commenced. A trial date has not yet been set. We have recorded an accrual for the amounts that management estimates to be the probable loss. Our legal and financial liability with respect to such legal proceeding would not be covered by insurance, and our ultimate liability, if any, cannot be

27

estimated with certainty at this time. Accordingly, an adverse result for the full amount sought or some significant percentage thereof could have a material adverse effect on our financial results. We intend to defend the case vigorously. Management believes that this suit will not have a material adverse effect on our consolidated financial position, results of operations and cash flows.

        We and certain of our executive officers have been named as defendants in two separate securities lawsuits brought by stockholders ("Plaintiffs") of Tutornet.com, Inc. ("Tutornet") in the United States District Courts in Virginia and New Jersey. The Plaintiffs sued Tutornet and several of its officers (collectively, the "Non-Primus Defendants") for an undisclosed amount alleging fraud in the sale of Tutornet securities. The Plaintiffs also named us and several of our executive officers (the "Primus Defendants") as co-defendants. No officer of Primus has ever served as an officer or director of Tutornet or acquired any securities of Tutornet. Neither we nor any of our subsidiaries or affiliates own, or have ever owned, any securities of Tutornet. In the Virginia case, the Primus Defendants were dismissed before the case went to the jury. The case continued against the Non-Primus Defendants, and the jury rendered a verdict of $176 million in favor of the Plaintiffs against the Non-Primus Defendants only. The Non-Primus Defendants filed post-trial motions seeking to reverse or reduce the jury's award, and the Plaintiffs sought a new trial involving the Primus Defendants. On April 2, 2003, the judge denied the Plaintiffs' motion for a new trial and/or to alter and amend the judgment, as well as their motion for directed verdicts involving the Primus Defendants. In May 2003, the Plaintiffs filed an appeal in the 4th Circuit of the United States Court of Appeals regarding the Primus Defendants' dismissal. Plaintiffs and the Primus Defendants have briefed the 4th Circuit of the United States Court of Appeals and oral arguments are scheduled for May 2004. The New Jersey case was filed on September 24, 2002 and includes claims against the Primus Defendants. The Primus Defendants moved to dismiss, and the case was stayed pending further decision by the court in the Virginia case on Plaintiffs' motion for a new trial. After the April 2, 2003 decision in the Virginia case, the parties in the New Jersey case agreed to a dismissal without prejudice of the claims against the Primus Defendants, pending a decision in the appeal by the Plaintiffs in the Virginia case. In both cases, we intend to defend vigorously against these actions and believe that the Plaintiffs' claims against the Primus Defendants are without merit. However, our ultimate legal and financial liability with respect to such legal proceedings cannot be estimated with any certainty at this time, and we do not have insurance coverage for these claims. Accordingly, an adverse result for the full amount sought or some percentage thereof could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

        On December 17, 2003, PTI, our principal United States operating subsidiary, was served with notice that the Enforcement Bureau of the FCC is conducting an inquiry concerning 96 alleged telephone calls made on behalf of PTI to residential telephone lines that were either (1) included on the Do-Not-Call Registry or (2) to consumers who directly requested not to receive telemarketing calls from PTI. PTI does not conduct outbound telemarketing to residential customers, but does use third-party telemarketers. PTI reviewed the circumstances surrounding the subject matter of the inquiry and responded to the original inquiry on January 23, 2004. On February 20, 2004, the FCC sent PTI a letter seeking additional information from PTI. PTI provided the FCC with a response to the request for additional information on March 11, 2004. Because the Do-Not-Call regulations are relatively new and little formal interpretive guidance exists regarding whether the matters identified in the inquiry represent a violation by PTI of these regulations, it is not clear what consequences the inquiry will have on PTI. PTI is in the process of investigating whether it has responsibility related to these allegations, or, notwithstanding the actions or inactions of third-party telemarketers that may have given rise to the inquiry, PTI has satisfied the standards set out by the FCC as part of its routine business practices. Penalties for violations of the rules associated with the Do-Not-Call Registry and the consumer requests not to receive telemarketing calls can reach up to $11,000 per call. We have recorded an accrual for the amounts that we estimate to be the probable loss. We believe that this inquiry will not have a material adverse effect on our consolidated financial position, results of operations and cash flows.

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        We are subject to certain other claims and legal proceedings that arise in the ordinary course of our business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be decided unfavorably to us. Management believes that any aggregate liability that may ultimately result from the resolution of these matters will not have a material adverse effect on our consolidated financial position and results of operations.

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

        None.

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PART II

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

Common Stock

        Primus Telecommunications Group, Incorporated ("we" or "us") common stock is traded on the Nasdaq National Market under the symbol "PRTL." On March 8, 2004, the last sale price of our common stock was $7.48. The following table provides the high and low sale prices for our common stock on the Nasdaq National Market for all periods indicated below, except from May 14, 2002 through March 21, 2003 when our common stock was listed on the Nasdaq SmallCap Market. These prices do not include retail markups, markdowns or commissions.

Dividend Policy

        We have not paid any cash dividends on our common stock to date. The payment of dividends, if any, in the future is within the discretion of the Board of Directors and will depend on our earnings, our capital requirements and financial condition. Dividends are currently restricted by the senior note indentures, and may be restricted by other credit arrangements entered into in the future by us. It is the present intention of the Board of Directors to retain all earnings, if any, for use in our business operations, and accordingly, the Board of Directors does not expect to declare or pay any dividends in the foreseeable future.

Holders

        As of February 27, 2004, we had approximately 534 holders of record of our common stock.

Recent Sales of Unregistered Securities

        In September 2003, we completed the sale of $132 million in aggregate principal amount of our 2003 Convertible Senior Notes with semi-annual interest payments due on March 15^th and September 15^th, with the first payment due on March 15, 2004. Holders of these notes may convert their notes into our common stock at any time prior to maturity at an initial conversion price of $9.3234 per share, which is equivalent to an initial conversion rate of 107.257 shares per $1,000 principal amount of the notes, subject to adjustment in certain circumstances. The notes are convertible in the aggregate into 14,157,925 shares of our common stock.

        In December 2002, we signed an agreement to sell 559,950 newly-authorized shares of our Series C Preferred for an aggregate purchase price of $42 million. On December 31, 2002, we issued 438,853 shares of Series C Preferred stock for approximately $32.3 million, net of $0.6 million of offering costs. At a special meeting of our stockholders on March 31, 2003, our stockholders voted to approve the

30

issuance of the remaining 121,097 shares of Series C Preferred for approximately $9 million in cash. In November 2003, all 559,950 shares of Series C Preferred were converted into 22,616,990 shares of common stock which have been registered for resale. During a 270-day period commencing November 4, 2003, certain selling security holders' shares will be subject to the terms of a lock-up agreement with us, which will generally prohibit the resale of 13,540,008 of such shares.

        In March 2002, we settled our outstanding equipment lease obligations of approximately $15.0 million with CISCO Systems Capital Corporation for $6.5 million in cash and 1,200,000 shares of our common stock. $5.0 million was paid in March 2002, and $1.5 million was paid in April 2003. We issued the shares in reliance upon Section 4(2) of the Securities Act of 1933. In June 2002, the 1,200,000 shares of our stock were registered for resale.

ITEM 6. SELECTED FINANCIAL DATA

        The following sets forth our selected consolidated financial data for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 as derived from our historical financial statements:

Statement of Operations Data:

        As of December 31, 2003, our ratio of earnings to fixed charges was 1.94. As of December 31, 2002, 2001, 2000 and 1999, our earnings were insufficient to cover the fixed charges by approximately

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$23.6 million, $301.0 million, $174.6 million and $112.4 million respectively. See Exhibit 12 for definitions and calculation of ratio of earnings to fixed charges.

Balance Sheet Data:

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

Overview

        We are a global, facilities-based telecommunications services provider offering an integrated portfolio of international and domestic voice, Internet, VOIP, data and hosting services to business and residential retail customers and other carriers located primarily in the United States, Australia, Canada, the United Kingdom and Europe. Our focus is to service the demand for high quality, competitively priced international communications services that is being driven by the globalization of the world's economies, the worldwide trend toward telecommunications deregulation and the growth of Internet, VOIP and data traffic.

        Generally, we price our services competitively with the major carriers operating in our principal service regions. We expect to continue to generate net revenue from internal growth through sales and marketing efforts focused on customers with significant communications needs (international and domestic voice, Internet and data), including SMEs, multinational corporations, residential customers, particularly ethnic customers, and other telecommunications carriers and resellers, as well as acquisitions.

        Having completed our global network infrastructure deployment, our primary operational focus is on building scale in our core markets by adding customers and traffic. The combination of network ownership and increasing scale provides us with the ability to reduce our cost structure, improve service quality and reliability, and introduce new products and services.

        Prices in the long distance industry have declined in recent years, and as competition continues to increase with each of the service segments and each of the product lines, we believe that prices are likely to continue to decrease. Additionally, we believe that because deregulatory influences have begun to affect telecommunications markets outside the United States, the deregulatory trend will result in greater competition that could adversely affect our net revenue per minute. However, we believe that any such decreases in our prices will be more than offset by increased communications usage of our network and decreased costs. In addition to the global economy's expanding need for communications services, we believe that we can achieve growth through the taking of market share from our competitors or the possible acquisition of customer bases or competing companies.

        As the portion of traffic transmitted over leased or owned facilities increases, cost of revenue increasingly is comprised of fixed costs. In order to manage such costs, we pursue a flexible approach with respect to the expansion of our network capacity. In most instances, we initially obtain transmission capacity on a variable-cost, per-minute leased basis, then acquire additional capacity on a fixed-cost basis when traffic volume makes such a commitment cost-effective, and ultimately purchase and operate our own facilities when traffic levels justify such investment. We also seek to lower the cost of revenue through:

•

optimizing the cost of traffic by using the least expensive cost routing;



•

negotiating lower variable usage based costs with domestic and foreign service providers and negotiating additional and lower cost foreign carrier agreements with the foreign incumbent carriers and others;



•

continuing to expand the capacity of our network when traffic volumes justify such investment; and



•

increased use of the public Internet.

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We believe the current network meets the near-term needs of our current and prospective customers and that capital expenditures will be in the range of 3% of net revenue in 2004. We expect these spending levels to remain consistent over the next few years.

        In most countries, we generally realize a higher margin on our international long distance as compared to our domestic long distance services and a higher margin on our services to both business and residential customers compared to those realized on our services to other telecommunications carriers. In addition, we generally realize a higher margin on long distance services as compared to those realized on local switched and cellular services. We also generally realize a higher margin on our Internet access and data services as compared to voice services. Carrier services over a fixed line network, which generate a lower margin than retail business and residential services, are an important part of net revenue because the additional traffic volume of such carrier customers improves the utilization of the network and allows us to obtain greater volume discounts from our suppliers than we otherwise would realize. Also, carrier services over VOIP have higher margins than carrier services over a fixed line network. Overall carrier revenue accounted for 20%, 24% and 27% of total revenue during the twelve months ended December 31, 2003, 2002 and 2001, respectively. The provision of carrier services also allows us to connect our network to all major carriers, which enables us to provide global coverage. Our overall margin may fluctuate based on the relative volumes of international versus domestic long distance services, carrier services versus business and residential long distance services, Internet and data services versus voice services and the proportion of traffic carried on our network versus resale of other carriers' services.

        We have also selectively targeted opportunities for us to participate in major growth areas for telecommunications—local, wireless and broadband. Our approach in each of these areas has common elements: focus on bundling services to end-user customers with international calling patterns; leverage our existing global voice, data and Internet network; and utilize our established distribution channels and back office systems.

        We believe the local services market is an untapped opportunity for revenue growth for us, as the regulatory environment promotes more competition. We recently began offering local line service in Canada, bundled with our other product offerings of long distance and Internet access, in competition with the ILECs. We are currently a local service provider in Australia offering resale and DSL services. We will explore opportunities for providing local services in the United States. The ability to bundle local service for our existing customer base and attract new customers to our existing services presents future growth opportunities for us.

        Our wireless initiative will target as potential new customers all wireless users in our existing major markets—Europe, United States, Canada, and Australia—who wish to make international calls using their mobile phones. Currently, many wireless users are blocked by their service provider from making international calls, and those that can make international calls are charged excessively high rates. Through a combination of service initiatives, including "dial-around" services, special PIN (personal identification number) services, and PRIMUS-branded "intelligent" handsets, we will target the users of wireless carriers and offer substantially reduced international rates. Even with reduced rates, we believe our services would generate substantial margins. From the wireless customer's perspective, there is no need to change their underlying wireless service provider or phone number—what we will offer is a value-added service that will provide a customer substantial cost savings on international calls. The current high rates for international calls from wireless phones has artificially suppressed this potentially large market; we intend to make international calling easy and affordable for wireless users.

        The target customers for our broadband VOIP products will be anyone who has a broadband connection anywhere in the world. We have been in the carrier VOIP market now for several years and carried over one billion minutes of international voice traffic in 2003 over the public Internet. We are preparing currently to launch retail enterprise, reseller and residential VOIP services around the globe

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which are expected to have higher profit potential than fixed line carrier services. We will leverage our already deployed next generation VOIP network connecting approximately 150 countries and supported by the most up to date voice technology.

        We anticipate that these three additional product lines—local, wireless and broadband—have the potential to become as large as our existing wireline products and drive future growth in our revenues.

        Selling, general and administrative expenses are comprised primarily of salaries and benefits, commissions, occupancy costs, sales and marketing expenses, advertising and administrative costs. All selling, general and administrative expenses are expensed when incurred, with the exception of direct-response advertising, which is expensed in accordance with Statement of Position 93-7, "Reporting on Advertising Costs." To further the above initiatives, we expect our sales and marketing expenses to increase as a percentage of net revenue until our net revenue growth is realized and expect to leverage our current spending levels for future initiatives.

        We have seen our debt reduction efforts result in a trend of decreasing interest expense since such efforts began in December 2000. We will continue to reduce debt through regularly scheduled principal payments and will also consider other available means. We will also continue to seek opportunities to secure more favorable financing terms that will enhance liquidity by either extending the principal payment schedule or reducing interest rates.

        Foreign currency. Currently in excess of 75% of our net revenue is derived from sales and operations outside the United States. The reporting currency for our consolidated financial statements is the USD. The local currency of each country is the functional currency for each of our respective entities operating in that country. In the future, we expect to continue to derive the majority of our net revenue and incur a significant portion of our operating costs from outside the United States, and therefore changes in exchange rates have had and may continue to have a significant, and potentially adverse, effect on our results of operations. Our primary risk of loss regarding foreign currency exchange rate risk is caused primarily by fluctuations in the following exchange rates: USD/AUD, USD/CAD, USD/GBP, and USD/Euro dollar (EUR). Due to the large percentage of our revenue derived outside of the United States, strengthening of the USD relative to one or more of the foregoing currencies, could have an adverse impact on our future results of operations. We have agreements with certain subsidiaries for repayment of a portion of the investments and advances made to these subsidiaries. As we anticipate repayment in the foreseeable future, we recognize the unrealized gains and losses in foreign currency transaction gain (loss) on the consolidated statements of operations. We historically have not engaged in hedging transactions and do not currently contemplate engaging in hedging transactions to mitigate foreign exchange risks. However, the exposure of our income from operations to fluctuations in foreign currency exchange rates is reduced in part because a majority of the costs that we incur in connection with our foreign operations are also denominated in local currencies.

        We are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our international subsidiaries. We translate the local currency statements of operations of our foreign subsidiaries into USD using the average exchange rate during the reporting period. Changes in foreign exchange rates affect the reported profits and losses and cash flows and may distort comparisons from year to year. By way of example, when the USD strengthens compared to the EUR, there is a negative effect on the reported results for Europe and takes more profits in EUR to generate the same amount of profits in USD. The opposite is also true. That is, when the USD weakens there is a positive effect.

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        In the year ended December 31, 2003, the USD weakened compared to the AUD, CAD, GBP and EUR. The following table demonstrates the impact of currency fluctuations on our revenue for the years ended December 31, 2003 and 2002 (in thousands, except percentages):

Revenue by Country — in USD

Revenue by Country — in Local Currencies

Recent Operating Highlights and Other Events

        In order to better understand our discussion of results of operations, financial condition and liquidity presented herein, we summarize below certain operating highlights and other events that occurred during the last three fiscal years.

Operating Highlights and Accomplishments in 2003

•

We received stockholder approval for and closed the remaining $9 million investment in our Series C Preferred by fund affiliates of AIG.



•

All outstanding shares of our Series C Preferred were converted into an aggregate of 22,616,990 shares of our common stock on November 4, 2003.



•

We completed an offering of $132.0 million in principal amount of our 2003 Convertible Senior Notes, which we used primarily to retire higher interest debt and to extend our debt maturity profile. The 2003 Convertible Senior Notes are convertible into shares of our common stock at an initial conversion price of $9.3234 per share.



•

We continued our debt reduction efforts by retiring $97.3 million in principal amount of our senior notes, which were funded in part through the proceeds from the 2003 Convertible Senior Notes. In particular, the following debt securities were retired during 2003: $87.2 million principal amount of the 1997 Senior Notes, $6.5 million principal amount of the January 1999 Senior Notes, and $3.6 million principal amount of the 1998 Senior Notes.



•

We further reduced debt by settling an outstanding vendor financing of $14.9 million for approximately $10.6 million and the accelerated payoff of $55.2 million for an equipment financing facility, which were funded in part through the proceeds from the 2003 Convertible Senior Notes.



•

We acquired three Canadian ISPs, one Canadian local service provider and a Canadian prepaid calling card company for an aggregate purchase price of approximately $10.7 million in cash.

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The purchase price for the prepaid calling card company may increase based on additional consideration to be paid, as provided by the terms of the acquisition agreement, if the acquired company's adjusted revenues exceed certain targeted levels.

Operating Highlights and Other Events in 2002

        In 2002, we focused our attention on continued implementation of our three-pronged strategy that was initiated at the end of 2000, which involved improving operating results, reducing debt, and raising additional financing.

        Initiatives and results from our efforts to improve operating results:

•

We focused on higher margin retail customers and services.



•

We de-emphasized or exited certain low margin businesses, and emphasized operations in core markets including the United States, Australia, Canada and Europe.



•

Our Australian and Canadian subsidiaries both achieved their highest levels to date of operating income for a full fiscal year.

        Initiatives and results from our efforts to reduce debt:

•

We reduced debt during 2002 by $66.6 million to $601.0 million at December 31, 2002, with a gain on early extinguishment of debt of $36.7 million for the year.



•

We reduced interest expense by $27.3 million over the prior year from the principal reduction of senior notes and convertible debentures effected during 2001 and 2002.

        Initiatives and results from our efforts to raise additional funds:

•

We signed an agreement to issue and sell $42 million of Series C Preferred (including commitments of $39.9 million from fund affiliates of AIG). We received $33 million on December 31, 2002 in the initial closing of the Series C Preferred offering.



•

We obtained $9.5 million of funding through an extension of an accounts receivable facility with Textron.

        Growth initiatives in 2002:

•

In September 2002, we signed an agreement to acquire the United States-based SME voice customer base of C&W. We acquired the SME voice customer base during the three months ending December 31, 2002. The acquired customer base has migrated to our network and therefore increased the size of our United States retail business. We assumed billing, customer support and other back-office functions through the scaling of existing systems.

        Other Events:

•

Our 2002 results reflect the deconsolidation of three non-core foreign investments, which resulted from: the partial divestment of interests in Cards & Parts, our German mobile accessories business, which subsequently filed for insolvency administration; the relinquishment of control rights concerning Bekko, our Internet and data investment in Japan; and an insolvency administration filing for InterNeXt, our Internet and data subsidiary in France.

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Operating Highlights and Other Events in 2001

        In 2001, we focused on implementing our three-pronged strategy and concentrated on debt reduction, cost containment and growth in cash flow from operations. These efforts resulted in the following:

•

reduced debt to $667.6 million at December 31, 2001 from $1.3 billion in 2000, with a gain on early extinguishment of debt of $491.8 million for the year;



•

reduced selling, general and administrative expenses by $27.4 million from the previous year; and



•

reduced interest expense by $38.7 million over the prior year from the principal reduction of senior notes and convertible debentures.

        In addition, in 2001, we:

•

recorded an asset impairment write-down of $526.3 million in goodwill, property and equipment, and customer lists; and



•

recorded a $15.0 million write-off of our investment in Pilot Network Services.

Critical Accounting Policies

        To aid in the understanding of our financial reporting, our most critical accounting policies are described below. These policies have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.

        Revenue recognition—Net revenue is derived from carrying a mix of business, residential and carrier long distance traffic, Internet and data traffic, and also from the provision of local and cellular services. For voice and VOIP, net revenue is earned based on the number of minutes during a call and is recorded upon completion of a call, adjusted for allowance for doubtful accounts receivable, service credits and service adjustments. Revenue for a period is calculated from information received through our network switches. Customized software has been designed to track the information from the switch and analyze the call detail records against stored detailed information about revenue rates. This software provides us the ability to analyze timely and accurately the revenue generated in a period. Separate prepaid calling card software is used to track additional information related to the cards' usage such as activation date, monthly usage amounts and expiration date. Revenues on these cards are recognized as service is provided until expiration, when all unused minutes which are no longer available to the customers, are recognized as revenue. Provision of Internet and data services also generates net revenue. Internet and data services include monthly fees collected for the provision of dedicated and dial-up access at various speeds and bandwidths. These fees are recognized as access is provided on a monthly basis. Additionally, service activation and installation fees are deferred and amortized over the longer of the average customer life or the contract term. We record payments received in advance for prepaid calling card services (including VMNS) and services to be provided under contractual agreements, such as Internet broadband and dial-up access, as deferred revenue until such related services are provided. Deferred revenue is reported in accrued expenses and other current liabilities. Net revenue represents gross revenue, net of allowance for doubtful accounts receivable, service credits and service adjustments.

        Allowance for doubtful accounts receivable—Determining our allowance for doubtful accounts receivable requires significant estimates. Due to the large number of customers that we serve, it is impractical to review the creditworthiness of each of our customers, although a credit review is performed for larger carrier and retail business customers. We consider a number of factors in determining the proper level of the allowance, including historical collection experience, current

38

economic trends, the aging of the accounts receivable portfolio and changes in the creditworthiness of our customers. Systems to detect fraudulent call activity are in place within our network, but if these systems fail to identify such activity, we may realize a higher degree of uncollectible accounts. If the estimate of uncollectible revenue was 10% higher than our current estimates, net revenue would have been reduced by approximately $2.2 million, $2.8 million and $4.0 million for the year ended December 31, 2003, 2002 and 2001, respectively.

        Cost of revenue—Cost of revenue is comprised primarily of costs incurred from other domestic and foreign telecommunications carriers to originate, transport and terminate calls. The majority of our cost of revenue is variable, based upon the number of minutes of use, with transmission and termination costs being the most significant expense. Call activity is tracked and analyzed with customized software that analyzes the traffic flowing through our network switches and calculates the variable cost of revenue with predetermined contractual rates. If the domestic or foreign telecommunications carriers have tracked and invoiced the volume of minutes at levels different than what our activity shows or have invoiced at different rates, we will dispute the charges invoiced. There is no guarantee that we will prevail in the dispute. We use significant estimates to determine the level of success in dispute resolution and consider past historical experience, basis of dispute, financial status and current relationship with vendor, and aging of prior disputes in quantifying our estimates.

        Valuation of long-lived assets—We review intangible and other long-lived assets whenever events or changes indicate that the carrying amount of an asset may not be recoverable. In making such evaluations, we compare the expected future cash flows to the carrying amount of the assets. If the total of the expected future cash flows is less than the carrying amount of the assets, we are required to make estimates of the fair value of the long-lived assets in order to calculate the impairment loss equal to the difference between the fair value and carrying value of the assets. We make significant assumptions and estimates in this process regarding matters that are inherently uncertain, such as estimating cash flows, remaining useful lives, discount rates and growth rates. The resulting cash flows are computed over an extended period of time, which subjects those assumptions and estimates to an even larger degree of uncertainty. While we believe that our estimates are reasonable, different assumptions regarding such cash flows could materially affect the valuation of the long-lived assets.

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Results of Operations

        The following information for the years ended December 31, 2003, 2002 and 2001 reflects all the items included in consolidated statements of operations as a percentage of net revenue:

40

        The following information for the years ended December 31, 2003, 2002 and 2001 (in thousands, except percentages) is provided for informational purposes and should be read in conjunction with the Consolidated Financial Statements and Notes.

        The following information reflects net revenue by product line for the years ended December 31, 2003, 2002 and 2001 (in thousands, except percentages) and is provided for informational purposes and should be read in conjunction with the Consolidated Financial Statements and Notes.

Results of operations for the year ended December 31, 2003 as compared to the year ended December 31, 2002

        Net revenue increased $263.7 million or 25.8% to $1,287.8 million for the twelve months ended December 31, 2003 from $1,024.1 million for the twelve months ended December 31, 2002. Our data/Internet and VOIP revenue contributed $129.9 million and $70.4 million, respectively, for the twelve months ended December 31, 2003, as compared to $111.4 million and $57.8 million, respectively, for the twelve months ended December 31, 2002.

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North America: North American net revenue increased $124.5 million or 32.6% to $506.1 million for the twelve months ended December 31, 2003 from $381.6 million for the twelve months ended December 31, 2002. The increase is attributed to an increase of $75.0 million in the United States, which is comprised of a $66.1 million increase in retail voice traffic resulting primarily from the acquisition of the C&W customer base, a $15.9 million increase from carrier services and a $10.7 million increase in the usage of prepaid calling cards. The increase is partially offset by a decrease of $14.2 million in sales from our third-party agent division and international consumer division in the United States. The increase in North America's revenue is also attributed to an increase of $51.4 million in our Canadian operations, $19.9 million of which is associated with the increased retail voice business and $26.3 million of which is from the prepaid calling cards business as a result of the acquisition of Telesonic Communications Inc. (TCI). The strengthening of the CAD against the USD accounted for $24.2 million of the total $51.4 million revenue increase in Canada. The following table reflects net revenue for each major country within North America for the years ended December 31, 2003 and 2002 (in thousands, except percentages):

Revenue by Country — in USD

Europe: European net revenue increased $61.5 million or 16.9% to $425.2 million for the twelve months ended December 31, 2003 from $363.7 million for the twelve months ended December 31, 2002. The European net revenue increase is mainly attributable to an $85.7 million increase in prepaid VMNS and prepaid calling cards in Netherlands and the United Kingdom, and a $5.8 million increase in carrier services in the United Kingdom. The increase is partially offset by a $16.3 million decrease in retail voice traffic in the United Kingdom and a $10.6 million decrease in carrier services, primarily in Germany, France and Switzerland. In addition, the decrease is attributable to a $6.5 million decrease in our German mobile phone accessory business, Cards & Parts, with the business' closing in 2002. The strengthening of the European currencies against the USD accounted for $55.6 million of the total $61.5 million revenue increase in Europe. The following table reflects net revenue for each major country within Europe for the years ended December 31, 2003 and 2002 (in thousands, except percentages):

Revenue by Country — in USD

Asia-Pacific: Asia-Pacific net revenue increased $77.7 million or 27.9% to $356.5 million for the twelve months ended December 31, 2003 from $278.8 million for the twelve months ended

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December 31, 2002. The increase is attributable to an increase of $77.3 million from our Australian operation, which is comprised of $54.7 million in retail voice business and a $24.1 million increase in data/Internet business. The strengthening of the AUD against the USD accounted for $56.1 million of the total $77.3 million net revenue increase in Australia. The following table reflects net revenue for each major country within Asia-Pacific for the years ended December 31, 2003 and 2002 (in thousands, except percentages):

Revenue by Country — in USD

        Cost of revenue increased $117.7 million to $786.3 million, or 61.1% of net revenue, for the twelve months ended December 31, 2003 from $668.6 million, or 65.3% of net revenue, for the twelve months ended December 31, 2002. With the majority of cost of revenue being variable, based on minutes of use, the increase in cost of revenue is primarily attributable to the increase in traffic which is also reflected in the increase in net revenue.

North America: North American cost of revenue increased $58.6 million, primarily due to an increase of $39.1 million in retail voice business in the United States resulting from the acquisition of the C&W customer base in December 2002, and an increase of $15.1 million in the United States carrier operations. The increase is further attributed to an increase of $23.3 million in prepaid calling cards in the United States and Canada. The increase is partially offset by a decrease of $13.3 million from our third party agent division and international consumer division in the United States. The strengthening of the CAD against the USD accounted for $9.6 million of the total $13.1 million cost of revenue increase in Canada.

Europe: European cost of revenue increased $23.2 million due to an increase in prepaid VMNS and prepaid calling cards of $46.6 million and an increase of $6.0 million in carrier services in the United Kingdom. The increase is partially offset by a decrease of $12.7 million in retail voice business in the United Kingdom and a decrease of $10.9 million in carrier services, primarily in Germany, France and Switzerland. The increase is further offset by a decrease in our German operations of $6.2 million from the elimination of our mobile phone accessory business, Cards & Parts. The strengthening of the European currencies against the USD accounted for $38.6 million, of the total $23.2 million cost of revenue increase in Europe.

Asia-Pacific: Asia-Pacific cost of revenue increased $35.8 million, primarily due to a $36.8 million increase in Australia's retail voice business. The strengthening of the AUD against the USD accounted for $33.0 million of the total $36.8 million cost of revenue increase in Australia.

        Selling, general and administrative expenses increased $88.2 million to $342.4 million, or 26.6% of net revenue, for the twelve months ended December 31, 2003 from $254.2 million, or 24.8% of net revenue, for the twelve months ended December 31, 2002. The increase is primarily attributable to a $64.8 million increase in sales and marketing costs due to increased commissions expense as a result of increased revenue generated from prepaid VMNS and prepaid calling card sales and for agent commissions related to the C&W acquisition. The increase is also attributable to a $17.0 million increase in salaries and benefits and a $4.9 million increase in professional fees which includes efforts related to Sarbanes-Oxley compliance and strategic tax planning. The strengthening of foreign

43

currencies against the USD accounted for $34.6 million of the total $88.2 million selling, general and administrative increase in 2003.

        Depreciation and amortization expense increased $3.8 million to $86.0 million for the twelve months ended December 31, 2003 from $82.2 million for the twelve months ended December 31, 2002. The increase consists of an increase in depreciation expense of $4.9 million related to capital expenditures for fiber optic cable, switching, and other network equipment being placed into service, offset by a decrease in amortization expense of $1.1 million.

        Loss on sale of assets was $0.8 million for the twelve months ended December 31, 2003. The loss was associated with the sale of our satellite earth station in the United Kingdom during 2003.

        Asset impairment write-down expense decreased to $2.7 million for the twelve months ended December 31, 2003 from $22.3 million for the twelve months ended December 31, 2002. The impairment for the twelve months ended December 31, 2003 consisted of a write-off of $1.0 million switching equipment in the United Kingdom, a write-off of $0.8 million for switching equipment in the United States, and a write-off of $0.5 million in assets related to our fax-over-IP business in India.

        Interest expense decreased $7.6 million to $60.7 million for the twelve months ended December 31, 2003 from $68.3 million for the twelve months ended December 31, 2002. The decrease is primarily attributed to $8.5 million in interest saved from the principal reduction of our senior notes and $0.4 million in interest saved from the reduction of capital lease obligations, partially offset by $1.5 million in additional interest expense for the new 2003 Convertible Senior Notes.

        Equity investment write-off and loss decreased to $(2.7) million for the twelve months ended December 31, 2003 from $(3.2) million for the twelve months ended December 31, 2002. The loss for the twelve months ended December 31, 2003 is related to the write-down of our equity investment in Bekko as a result of its impaired future recoverability. See Note 20—"Equity Investment Write-off and Loss."

        Gain on early extinguishment of debt decreased to $12.9 million for the twelve months ended December 31, 2003 from $36.7 million for the twelve months ended December 31, 2002. The $12.9 million gain consists of an $8.6 million net gain as a result of our purchase of $97.4 million in principal amount of senior notes, prior to maturity, for $86.1 million in cash, slightly offset by the write-off of related deferred financing costs and discount on the notes, and a $4.3 million gain related to the settlement of an outstanding vendor debt obligation of $14.9 million in Europe for approximately $10.6 million in cash.

        Interest income and other income decreased to $1.1 million for the twelve months ended December 31, 2003 from $2.5 million for the twelve months ended December 31, 2002. The decrease is primarily attributable to a $0.9 million write-off of our Ambri Limited investment in Australia in 2003.

        Foreign currency transaction gain (loss) increased to $39.4 million for the twelve months ended December 31, 2003 from $8.5 million for the twelve months ended December 31, 2002. The increase is attributable to the positive impact of foreign currency exchange rate changes on intercompany debt balances and on receivables and payables denominated in a currency other than the subsidiaries' functional currency where the settlement of the debt is anticipated within the foreseeable future. The principal components of the 2003 gain are $14.9 million of unrealized gain on an intercompany receivable held by United States subsidiaries but denominated and payable in CAD, as well as $21.5 million of unrealized gain on an intercompany receivable held by United States subsidiaries but denominated and payable in AUD. The remaining gain of $3.0 million was earned on the valuation or settlement of customer receivables or vendor payables denominated in other currencies throughout our subsidiaries.

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        Income tax benefit (expense) was an expense of $5.8 million for the twelve months ended December 31, 2003 versus a benefit of $3.6 million for the twelve months ended December 31, 2002. The expense primarily consists of $1.7 million of income tax recognized by our Canadian subsidiary and $3.8 million of foreign withholding tax on intercompany interest owed to our United States subsidiary by our Canadian and Australian subsidiaries. The 2002 income tax benefit included the reversal during the three months ended March 31, 2002 of a $5.0 million tax provision recorded for the alternative minimum taxes (AMT) at December 31, 2001 that resulted from the Job Creation and Workers Assistance Act of 2002, which suspended the 90% limitation of net operating loss carryforward for AMT. Also, an additional tax benefit was recorded during the twelve months ended December 31, 2002 of $3.2 million related to a deferred tax asset created by foreign operating loss carryforwards.

        Extraordinary Item was a gain of $0.9 million for the twelve months ended December 31, 2003. In connection with the purchase of certain acquisitions, the fair value of the net assets acquired exceeded the purchase price (excess of cost). In accordance with SFAS No. 141, the excess of cost was allocated as a reduction to the acquired assets except for monetary assets, such as cash and deferred tax assets. The remaining excess of cost after this allocation was recognized as an extraordinary gain of approximately $0.9 million.

Results of operations for the year ended December 31, 2002 as compared to the year ended December 31, 2001

        Net revenue decreased $58.4 million or 5% to $1,024.1 million for the twelve months ended December 31, 2002 from $1,082.5 million for the twelve months ended December 31, 2001. Our Internet/data and VOIP net revenue contributed $111.4 million and $57.8 million, respectively, for the twelve months ended December 31, 2002, as compared to $112.8 million and $39.0 million respectively, for the twelve months ended December 31, 2001.

North America: North American net revenue decreased $71.5 million or 16% to $381.6 million for the twelve months ended December 31, 2002 from $453.1 million for the twelve months ended December 31, 2001. The decrease is primarily attributable to a decrease of $54.2 million or 41% from the prior year, in wholesale carrier services in the United States and Canada, which resulted from several factors: de-emphasizing or exiting certain low margin businesses, refraining from dealing with the growing number of carriers that did not meet our credit policies, and market pricing pressures in the United States. Additionally, a decrease of $6.2 million in retail voice traffic in the United States and Canada, and a decrease of $3.2 million in Internet and data in the United States contributed to the decrease in net revenue. The following table reflects net revenue for each major country within North America for the years ended December 31, 2002 and 2001 (in thousands, except percentages):

Revenue by Country — in USD

Europe: European net revenue increased $6.7 million or 2% to $363.7 million for the twelve months ended December 31, 2002 from $357.0 million for the twelve months ended December 31, 2001. The increase is mainly attributed to an increase of $36.6 million in the usage of prepaid calling cards (including VMNS) and an increase of $10.1 million from carrier services in the

45

United Kingdom, Denmark, France, Spain and Switzerland, as well as an increase of $8.9 million from the addition of a carrier business in Italy beginning in December 2001. The increase is partially offset by a decrease of $35.4 million from our German operations that is a result of a decrease in net revenue from our carrier services as well as a decline in our Cards & Parts subsidiary of $15.9 million. In October 2002, our ownership percentage in Cards & Parts was reduced and as a result we began using the equity method of accounting. The increase was further offset by a decrease of $7.5 million in our international agents' operations and a decrease of $3.5 million in our French Internet and data subsidiary, InterNeXt. The following table reflects net revenue for each major country within Europe for the years ended December 31, 2002 and 2001 (in thousands, except percentages):

Revenue by Country — in USD

Asia-Pacific: Asia-Pacific net revenue increased $6.5 million or 2% to $278.8 million for the twelve months ended December 31, 2002 from $272.3 million for the twelve months ended December 31, 2001. The increase is attributed to an increase of $11.3 million in our Australian operations, mainly resulting from the continued growth in Australian Internet and data services as well as positive impact of the strengthening AUD against the USD, offset by a decline of $6.0 million in our Japanese operations primarily due to Bekko. In October 2002, we amended its contractual agreements to give up our right to control the board of directors and operations of Bekko, our Japanese Internet and data subsidiary, and as a result we began using the equity method of accounting. The following table reflects net revenue for each major country within Asia-Pacific for the years ended December 31, 2002 and 2001 (in thousands, except percentages):

Revenue by Country — in USD

        Cost of revenue decreased $99.2 million to $668.6 million, or 65.3% of net revenue, for the twelve months ended December 31, 2002 from $767.8 million, or 70.9% of net revenue, for the twelve months ended December 31, 2001. With the majority of cost of revenue being variable, based on minutes of use, the decrease in cost of revenue is primarily attributable to the decrease in net revenue. North American cost of revenue decreased $86.6 million primarily due to a decrease of $51.4 million in wholesale carrier services in the United States and Canada, as well as a decrease of $25.3 million which resulted from favorable regulatory legislation which reduced the amount of access charge we are

46

required to pay, and a higher percentage of traffic carried on our network versus resold minutes in Canada. European cost of revenue decreased $8.6 million due to a decrease in our German operation of $30.5 million that was a result of the decline in Cards & Parts of $13.8 million, as well as a decrease of $11.2 million in Germany's wholesale carrier services. The decrease in Europe is partially offset by an increase of $18.2 million that was primarily a result of an increase in the usage of prepaid calling cards (including VMNS) and an increase of $8.6 million in wholesale carrier services in Italy. The decrease of $4.0 million in cost of revenue in Asia-Pacific is mainly attributable to a $2.4 million decrease in Australia due to a decrease in international variable costs and a decrease of $2.0 million in Japan mainly from our Internet and data subsidiary, Bekko.

        Selling, general and administrative expenses decreased $48.8 million to $254.2 million, or 24.8% of net revenue, for the twelve months ended December 31, 2002 from $303.0 million, or 28.0% of net revenue, for the twelve months ended December 31, 2001. The reduction is primarily attributable to a $27.3 million reduction in salaries and benefits, a reduction of $14.5 million in general and administrative expenses, of which $5.6 million resulted from renegotiation of various repairs and maintenance contracts in the United States and $2.7 million resulted from switching to an in-house billing system in Europe during the year ended December 31, 2002, as well as a reduction of $6.9 million in occupancy costs, professional fees and travel expenses. The reduction in salaries and benefits is a result of the reduction of full-time and part-time employees in 2001 and severance costs paid in 2001. The reduction in general and administrative expenses and the decrease in occupancy costs, professional services and travel expenses was a result of management initiatives to reduce overhead spending.

        Depreciation and amortization expense decreased $75.4 million to $82.2 million for the twelve months ended December 31, 2002 from $157.6 million for the twelve months ended December 31, 2001. The decrease consists of reductions of $38.1 million in amortization expense and $37.3 million in depreciation expense. The decrease is primarily associated with our asset impairment write-down of $526.3 million during the three months ended December 31, 2001 in goodwill, property and equipment, and customer lists. The decrease in goodwill amortization expense is also a result of our adoption of Statement of Financial Accounting Standards (SFAS) No. 142 on January 1, 2002, under which goodwill is no longer amortized. Goodwill amortization expense for the twelve months ended December 31, 2001 was $24.8 million.

        Asset impairment write-down expense decreased $504.0 million to $22.3 million for the twelve months ended December 31, 2002 from $526.3 million for the twelve months ended December 31, 2001. Based on our evaluation in 2001, it was determined that the estimated future cash flows were less than the carrying value of our voice and data center long-lived assets. Accordingly, during the fourth quarter of 2001, we adjusted the carrying value of our long-lived assets, including property and equipment and intangible assets, to their estimated fair value of $485.0 million. This adjustment resulted in an asset impairment write-down of $526.3 million or $9.85 per share, consisting of the following specific asset write-downs: $357.3 million in goodwill, $149.9 million in property and equipment, and $19.1 million in customer lists. The estimated fair value of our assets was based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved. In 2002, we recognized $22.3 million of additional specific write-offs which included $17.4 million of fiber cable in Europe which will no longer be used by us, and the goodwill of our German Internet subsidiary, iPrimus Telecommunications GmbH of $3.8 million identified through our annual impairment test performed on October 1, 2002.

        Interest expense decreased $32.4 million to $68.3 million for the twelve months ended December 31, 2002 from $100.7 million for the twelve months ended December 31, 2001. The decrease is primarily attributed to $30.8 million in interest saved from the principal reduction of our senior notes and convertible debentures and extinguishment of our vendor debt and related obligations to Hewlett-Packard.

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        Foreign currency transaction gain (loss) increased to a gain of $8.5 million for the twelve months ended December 31, 2002 from a loss of $(2.0) million for the twelve months ended December 31, 2001. The increase is attributable to the positive impact of foreign currency exchange rate changes on intercompany debt balances and on receivables and payables denominated in a currency other than the subsidiaries' functional currency where the settlement of the debt is anticipated within the foreseeable future. The principal components of the 2002 gain are $0.7 million of unrealized gain on an intercompany receivable held by United States subsidiaries but denominated and payable in CAD, as well as $5.5 million of unrealized gain on an intercompany receivable held by United States subsidiaries but denominated and payable in AUD. The remaining gain of $2.3 million was earned on the valuation or settlement of customer receivables or vendor payables throughout our subsidiaries.

        Equity investment write-off and loss was $(3.2) million for the twelve months ended December 31, 2002. Equity investment losses began to be recognized after the deconsolidation of three of our subsidiaries, Bekko, InterNeXt and Cards & Parts. Two of those subsidiaries, InterNeXt and Cards & Parts, were subsequently written-off when their valuation was deemed to be permanently impaired after each filed for insolvency administration.

        Interest income and other income (expense) increased to an income of $2.5 million for the twelve months ended December 31, 2002 from an expense of $(18.0) million for the twelve months ended December 31, 2001. The increase is primarily attributable to the $15.0 million write-off of our investment in Pilot Network Services during the three months ended March 31, 2001 when the investment became permanently impaired. Other cost investments of $5.1 million were also written-off in 2001 when they became permanently impaired.

        Income tax benefit was a $3.6 million benefit for the twelve months ended December 31, 2002. This benefit was mainly comprised of a reversal of a $5.0 million tax provision recorded for the AMT at December 31, 2001 that resulted from the signing into law of the Job Creation and Workers Assistance Act of 2002 that suspended the 90% limitation of net operating loss carryforward for AMT. The income tax benefit also reflected the net unrealized amount of $3.2 million of deferred tax assets that were created by Canada operating loss carryforwards that are no longer offset by a valuation allowance since the first quarter of 2002. It is anticipated that this $3.2 million will be utilized during the year ending December 31, 2003. The benefit was partially offset by $3.5 million of foreign withholding tax on intercompany interest owed to our United States subsidiary by our Australian and Canadian subsidiaries.

        Gain on early extinguishment of debt decreased to $36.7 million for the twelve months ended December 31, 2002 from $491.8 million for the twelve months ended December 31, 2001. The gain resulted from our purchase of $53.0 million in principal amount of senior notes, prior to maturity, for $15.0 million in cash, slightly offset by the write-off of related deferred financing costs.

        Cumulative effect of a change in accounting principle.    Effective January 1, 2002, we adopted SFAS No. 142, resulting in the impairment of the goodwill related to the InterNeXt reporting unit, an Internet and data subsidiary in France, of $11.0 million which was reflected as a cumulative effect of a change in accounting principle.

Liquidity and Capital Resources

Changes in Cash Flows

        Our principal liquidity requirements arise from cash used in operating activities, purchases of network equipment including switches, related transmission equipment and capacity, interest and principal payments on outstanding debt and other obligations, and acquisitions. We have financed our growth and operations to date through public offerings and private placements of debt and equity securities, vendor financing, capital lease financing and other financing arrangements.

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        Net cash provided by operating activities was $66.9 million for the twelve months ended December 31, 2003 as compared to net cash provided by operating activities of $34.6 million for the twelve months ended December 31, 2002. The increase in operating cash generated was comprised of an increase in revenue of $263.7 million, and a decrease in cash paid for interest of $5.4 million. This increase is offset by cash used by operating activities which includes an increase of $117.7 million in cost of sales, an increase in sales, general and administrative expenses of $88.2 million, and additional funds used to pay down our current liabilities, including accounts payable and accrued interconnection costs to reduce further our short-term cash requirements.

        Net cash used by investing activities was $26.9 million for the twelve months ended December 31, 2003 compared to net cash used by investing activities of $31.6 million for the twelve months ended December 31, 2002. Net cash used by investing activities during the twelve months ended December 31, 2003 included $24.7 million of capital expenditures primarily for our global network and back office support systems as compared to $29.4 million during the twelve months ended December 31, 2002. Most of our acquisitions of businesses were financed through short-term debt arrangements, totaling $11.2 million of such arrangements in 2003 with the most significant acquisition being the United States customer list of C&W.

        Net cash used by financing activities was $70.1 million for the twelve months ended December 31, 2003 as compared to net cash provided by financing activities of $1.0 million for the twelve months ended December 31, 2002. During the twelve months ended December 31, 2003, cash used by financing activities consisted of $87.2 million for the purchase or redemption of certain of our debt securities and $129.4 million of principal payments on capital leases, vendor financing and other long-term obligations, offset by $126.8 million of net proceeds from the sale of our 2003 Convertible Senior Notes, $8.9 million of financing received through issuance of the second tranche of our Series C Preferred and $9.1 million received from other financing. During the twelve months ended December 31, 2002, cash provided by financing activities consisted of $32.3 million of net proceeds from issuance of 438,853 shares of the Series C Preferred stock and $9.5 million received from an accounts receivable financing, offset by $25.9 million on principal payments on capital leases, vendor financing and other long-term obligations, and $15.0 million for the purchase of certain of our debt securities.

Short- and Long-Term Liquidity Considerations and Risks

        We believe that our existing cash and cash equivalents and internally generated funds from operating activities will be sufficient to fund our debt service requirements and other fixed obligations (such as capital leases, vendor financing and other long-term obligations), capital expenditures, and other cash needs for our operations through at least the next twelve months. Long-term funding may require the issuance of additional debt or equity. Based on historical results and our business forecasts, we believe our plan for short-term and long-term funding expectations are accurate and achievable. We believe the current network meets the near-term needs of our current and prospective customers and that capital expenditures will be in the range of 3% of net revenue in 2004. We expect these spending levels to remain consistent over the next few years. These capital expenditures are expected to be funded through existing cash and cash equivalents and/or internally generated funds. We have agreed to purchase AOL/7 Pty Ltd (AOL/7) for $18.1 million which will be paid in cash in the first quarter of 2004. We will continue to have significant debt and debt service obligations during the next twelve months and on a long-term basis. However, there can be no assurance that changes in assumptions or conditions, including those referenced under "Legal Proceedings" and "Special Note Regarding Forward-Looking Statements" will not adversely affect our financial condition or short-term or long-term liquidity position. As of December 31, 2003, we have $40.8 million in future operating lease payments and $542.5 million of indebtedness with payments of principal and interest due as follows (includes effect of redemption of $109.9 million principal amount of the January 1999 Senior Notes and

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$46.6 million principal amount of the 1998 Senior Notes, retirement of $22.9 million of the October 1999 Senior Notes and repayment of $10.0 million of a financing agreement during the three months ended March 31, 2004, and the issuance of $240.0 million principal amount of 2004 Senior Notes in January 2004: