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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)

        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

        Non-affiliates of Primus Telecommunications Group, Incorporated held 50,940,758 shares of Common Stock as of February 28, 2003. The fair market value of the stock held by non-affiliates is $84,561,659 based on the sale price of the shares on February 28, 2003.

        As of February 28, 2003, 65,081,097 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.

PART I

ITEM 1. BUSINESS

General

        We, Primus Telecommunications Group, Incorporated, are a global facilities-based telecommunications services provider offering international and domestic voice, Internet, and data services to business and residential retail customers and other carriers located in the United States, Canada, Brazil, the United Kingdom, continental Europe, Australia, India and Japan. We serve the demand for high-quality, competitively priced international communications services which is being driven by the globalization of the world's economies, the worldwide trend toward telecommunications deregulation and the growth of data and Internet traffic.

        We target customers with significant international long distance usage, including small- and medium-sized enterprises (SMEs), multinational corporations, ethnic residential customers and other telecommunications carriers and resellers. We provide services over our network, which consists of (i) 19 carrier-grade domestic and international gateway switching systems throughout Europe, North America, Australia and Japan; (ii) approximately 250 points of presence (POPs) within our principal service regions and other markets; and (iii) both owned and leased transmission capacity on undersea and land-based fiber optic cable systems. Utilizing this network, along with resale arrangements and foreign carrier agreements, we provide service to approximately 3.1 million customers, of which 0.9 million are prepaid Virtual Mobile Network Services (VMNS) and calling card customers. 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 VMNS and calling cards, toll-free services and reorigination services;



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local services in Australia, Canada and Puerto Rico;



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asynchronous transfer mode (ATM) + Internet protocol (IP) broadband services;



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



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managed and shared Web hosting services and applications;



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voice-over-Internet protocol (VoIP) services.

        We price our services at a savings compared to 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 international long distance usage, including SMEs, multinational corporations, ethnic residential customers and other telecommunications carriers and resellers.

        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.

Operating Highlights and Accomplishments in 2002 and Subsequent Events:

        In 2002, we focused our attention on implementing a three-pronged strategy 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 scaled back low margin businesses, and emphasized operations in core markets including Australia, Canada, the United Kingdom and the United States.



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Our Australia and Canada subsidiaries both achieved record levels of gross margin, operating income and customers in 2002, which were substantially greater than in 2001.



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Cost containment measures resulted in an increase in gross margin of $40.8 million and further reductions in selling, general and administrative expenses of $48.8 million from the previous year.



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For 2002, our gross margin percentage was 34.7% compared to 29.1% in 2001.



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Operating loss in 2002 improved to a loss of ($3.3) million, compared to a loss of ($672.3) million for 2001.



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Net cash provided by operating activities was $34.6 million in 2002, as compared to net cash used by operating activities of ($110.4) million in 2001 and ($131.0) million in 2000.

Initiatives and results from our efforts to reduce debt:

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Debt was reduced during 2002 by $66.6 million to $601.0 million at December 31, 2002, with an after-tax gain on early extinguishment of debt of $36.7 million for the year.



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$27.3 million in interest expense was saved over the prior year from the principal reduction of senior notes and convertible debentures.



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Nearest maturing senior notes were reduced to $87.2 million in 2002 and reduced further to $43.6 million in January 2003.



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A major equipment financing facility was restructured with a more favorable payment schedule and interest rate in February 2003.

Initiatives and results from our efforts to raise additional funds:

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A private offering of $42 million of convertible preferred stock to affiliates of American International Group (AIG) was signed. We received $33 million at December 31, 2002 with the remaining $9 million subject to stockholder approval.



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$9.5 million was raised through an extension of an accounts receivable facility with Textron Financial Inc.



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Our Canada subsidiary entered into a $13 million two-year secured credit facility in March 2003.

Other achievements in 2002:

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In September 2002, we signed an agreement to acquire the United States-based retail switched voice services customer base of Cable & Wireless USA, Inc. ("C&W"). We started acquiring the customer base during the three months ending December 31, 2002. Primarily consisting of SME customers, the acquired customer base is expected to increase the size of our United States retail business. C&W customers will be transitioned to our network and support systems during what is expected to be a migration period of approximately four months. Billing, customer support and other back-office functions will be assumed by us through the scaling of existing systems.

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Operating Highlights and Accomplishments from our Inception through 2001:

        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. We began generating revenue during March 1995.

        On March 1, 1996, we acquired Axicorp Pty. Ltd., a switchless reseller in Australia. In November 1996, we made our initial public offering to fund the build up of our operating subsidiaries to accommodate future growth. At the end of our first full year of generating revenue, we had sales of $173.0 million with a gross margin of 8.2%, negative net income and 50,000 customers.

        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 with our April 1997 acquisition of Cam-Net Communications Network, Inc., entered the Japanese and German markets with our October 1997 acquisition of TelePassport/USFI and expanded our service offerings in Australia with the March 1998 acquisition of a controlling interest in Hotkey Internet Services Pty. Ltd., an Australia-based ISP, and the April 1998 acquisition of Eclipse Telecommunications Pty. Ltd., an Australia-based data communications service provider. In June 1998, we acquired the operations of TresCom. The TresCom merger expanded the scope and coverage of our communications network, thereby providing additional opportunities to migrate traffic onto the network.

        From 1998 through 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, and certain related companies;



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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 Telenterprises;



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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, 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 DSL services, acquired Digital Select, a provider of DSL Internet access and Web content, and 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, 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., a United States-based business-focused ISP, Bekkoame Internet, Inc., a Japanese facilities-based ISP, InterNeXt S.A., a value-added ISP with national facilities in France, 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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Debt was reduced to $667.6 million at December 31, 2001 from $1.3 billion in 2000, with an after-tax gain on early extinguishment of debt of $486.8 million for the year;



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Selling, general and administrative expenses were reduced $27.4 million from the previous year; and



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$38.7 million in interest expense was saved over the prior year from the principal reduction of senior notes and convertible debentures.

Strategy

        Our objective is to become a leading global provider of international and domestic voice, Internet and data services. Key elements of our strategy include:

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Provide One-Stop Shopping for Voice, Internet and Data Services:  We offer a portfolio of voice, Internet and data services in selected markets and focus on those core services. We leverage multiple customer segments for greater utilization of network assets. We cross-sell additional services to customers to increase revenue per customer and traffic, and we are focusing on higher margin services and customer segments. By bundling our traditional voice services with data and Internet services, we believe that we can attract and retain a strong base of retail business and residential customers.



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Leverage Our Global Network Infrastructure:  By carrying our voice and data traffic over our existing global network, we expect to be able to continue to reduce transmission costs and operating costs as a percentage of revenue, improve gross margins, and improve service quality and reliability.



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Build Base of Retail Customers with Significant International Communications Usage:  We are focused on building a retail customer base of end-users who have international calling needs in addition to domestic needs for voice, Internet and data services. We focus on large, predominantly developed markets where we look to take market share away from the dominant carriers. Targeted customers typically include SMEs, multinational corporations and ethnic residential customers. By offering high quality services at competitive prices through experienced sales and service representatives and bundling a comprehensive portfolio of communications services, our goal is to further broaden our retail base.



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Grow Revenues Through Internal Growth and Selected Acquisitions:  We evaluate potential acquisitions with companies in the voice, data and Internet businesses. On an ongoing basis, we focus on identifying acquisitions in the countries where we already have a sizable operation, which will enhance our competitive position, scale, profitability and cash flow. We view acquisitions primarily as a means to expand our operations within existing markets and increase our customer base and revenue.

Description of Operating Markets

        The following is a description of our operations in each of our primary markets:

        United States.    The United States is one of our four primary markets. We provide long distance voice 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

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through owned and leased international fiber cable systems. We lease domestic fiber in the United States to interconnect our switches, data center, and domestic United States POPs. POPs are our interconnection points with other networks. We maintain direct sales organizations in New York, Massachusetts and Virginia to sell to business customers and have telemarketing centers in Florida, Virginia and Iowa. To reach residential customers, we advertise in national and regional ethnic newspapers, other publications, and on television to offer reduced rates for international and domestic telephone calls, and Internet 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 long distance carriers. We maintain customer service centers in Florida, Virginia and Iowa, and operate a 24-hour global network management control center in Virginia that monitors our network. In addition to international long distance services, we also provide local voice and Internet services in Puerto Rico. We offer digital subscriber line (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.

        Canada.    Canada is another of our primary markets. We provide long distance voice services to SMEs, residential customers and other telecommunication carriers and have sales and customer service offices in Vancouver, Toronto and Montreal. As the largest alternative consumer carrier, 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 two data centers co-located with our switch sites in Vancouver and Toronto through which we offer a complete line of shared and managed 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.

        Europe.    We operate as a licensed carrier in the United Kingdom, Germany, France, Spain, Italy, Denmark, Netherlands and Switzerland. Our network consists of core backbone voice/data nodes in London, Frankfurt and Paris with feeder nodes in Milan, Madrid, Copenhagen, Amsterdam and Zurich. Our European network interconnects with our global network. In London, we have a state-of-the-art data center for Web hosting and other services, and a 16 meter standard A earth station on Intelsat to carry voice, data and Internet traffic to and from countries in the Indian Ocean/Southeast Asia region.

        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 VMNS in most major European countries. Throughout Europe, a large portion of call origination is via mobile phones. In most cases, mobile carrier's tariffs for terminating international minutes are higher than fixed line operators. Through the selling 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.

        We operate an Ericsson AXE-10 switch in Paris and provide service to retail business and residential customers in France. In Germany, we operate an AXE-10 switch in Frankfurt. We have expanded our base of SME customers in Germany through our acquisitions of A-Tel and Citrus. We have acquired two Spanish Internet Service Providers (ISP), Nexus and Seker, which operate an Internet backbone in Spain.

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        Australia.    We are the fourth largest telephone company in Australia 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. 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 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. We are also the third largest ISP in Australia and second largest DSL provider.

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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Data and Internet Services.  We offer global ATM, frame relay, and Internet/IP services which are available to customers in Australia, Canada, Brazil, Germany, India, United Kingdom and the United States. In Australia, we offer data transfer services over ATM and frame relay networks in addition to Internet access services through 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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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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Voice-over-IP 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 personal computer (PC)-to-phone or PC-to-PC usage.



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



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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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Prepaid VMNS and Calling Cards.  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. We offer prepaid VMNS to mobile phone users which bring international minutes originating from a mobile phone onto our global network.

Network

        General.    We operate a global telecommunications network consisting of international and domestic switches and related peripheral equipment, carrier-grade routers and switches for data/IP 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

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technologies, incorporates the uses of SS7/C7 signaling, and is supported by comprehensive network monitoring and technical support services. Our 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.

        By early 2002, we had substantially completed the deployment of our global voice, data and Internet network. Future network expansion will primarily be made to accommodate revenue growth and customer requirements.

        Switching System and Global Points of Presence.    Our network consists of 19 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. We also operate approximately 250 POPs and Internet access nodes.

        The locations and types of our switching systems follow:

        In addition, we operate a global VoIP network based on Cisco Systems switches and routers with an open network architecture which connects with our partners in over 60 countries.

        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 an 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. As of June 30, 2001, we had fulfilled the total purchase obligation. As of December 31, 2001, we had made cash payments of $27.1 million. In June 2002, we settled our outstanding payment obligation of $16.4 million with Qwest for $10 million in cash. $5 million was paid in June 2002. $5 million remained payable as of December 31, 2002, of which $3 million is due June 2003, and $2 million is due September 2003. We recorded this transaction in accordance with FASB Interpretations ("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.

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        In June 2000, we purchased from AT&T Canada for $16.9 million (C$26.7 million) six rings of SONET protected OC-12 capacity across Canada. This capacity provides a national backbone network for Primus Canada.

        In December 2000, we entered into a financing arrangement to purchase fiber optic capacity on an IRU basis in Australia for $28.9 million (51.1 million Australian dollars ("AUD")) from Optus Networks Pty. Limited. As of December 31, 2001, we had fulfilled the total purchase obligation. At December 31, 2002, we had a liability recorded in the amount of $17.2 million (30.4 million AUD), which reflects a promissory note payable over a four-year term bearing interest at a rate of 14.31%.

        During the three months ended September 30, 2001, we accepted delivery of fiber optic capacity on an IRU basis from Southern Cross Cables Limited ("SCCL"). The Company and SCCL entered into an arrangement financing the capacity purchase. During 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, which added two years to the original three-year term, and continues to bear interest at 6.0% above LIBOR (7.38% at December 31, 2002). We further agreed to purchase $12.2 million of additional fiber optic capacity from SCCL under the IRU agreement. We had purchased $9.3 million under the agreement as of December 31, 2002, and are scheduled to receive delivery of all capacity by May 2003. At December 31, 2002 and December 31, 2001, we had a liability recorded under this agreement in the amount of $18.4 million and $11.6 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 Cyprus, Greece, India, Iran, Italy, New Zealand, the Philippines, Belgium, Denmark, Israel, Ireland, Singapore, Malaysia, Japan, Australia, France, Switzerland, Argentina, the Bahamas and the Dominican Republic and maintain additional agreements with other foreign carriers in other countries.

        Network Management and Control.    We own and operate network management control centers in McLean, Virginia; Coralville, Iowa; Toronto, Canada; 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, and ATM and frame relay data services.

Customers

        As of December 31, 2002, we had approximately 3.1 million business and residential customers comprised of the following:

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Businesses.  Our business sales and marketing efforts target SMEs with significant international long distance traffic. We also have targeted larger multinational businesses. Many of the services we provide in the United States, Australia, Canada, the United Kingdom, Germany, France, Brazil, India, Japan and Italy include long distance voice, Internet, data and the resale of cellular services. We believe that businesses are and will continue to be attracted to us due to

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price savings compared to traditional carriers and our personalized approach to customer service and support, including customized billing and bundled service offerings.

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Residential Customers.  Our residential sales and marketing strategy targets residential customers who generate high international and domestic long distance traffic volumes. We believe that such customers are attracted to us because of price savings as compared to traditional carriers, simplified pricing structure, and multilingual 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. Included in this customer segment are 0.9 million prepaid VMNS and calling card customers.



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Telecommunications Carriers, Resellers and ISPs.  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.

        Business, residential and carrier revenues for 2002 were distributed 27%, 49%, and 24%, respectively. No single customer accounts for greater than 10% of annual revenue.

Sales and Marketing

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

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Direct Sales Force.  As of December 31, 2002, our direct sales force includes 232 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 New York City, Boston (vicinity), McLean, Tampa, Puerto Rico, Montreal, Toronto, Vancouver, London, Frankfurt, Adelaide, Brisbane, Melbourne, Perth, Sydney and Tokyo. In addition, approximately 140 full-time sales representatives focus on ethnic residential consumers, and 18 direct sales representatives exclusively sell services to other long distance carriers and resellers.



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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 acquisition, we substantially increased the number of independent sales agents working for us in the United States.



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Telemarketing.  We employ full-time telemarketing sales personnel to supplement sales efforts to ethnic residential consumers and SMEs.



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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.



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Third-party Distributions Agreements and Affinity Channels.  With the growing popularity 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.

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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. 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. We transitioned our European financial systems to handle the conversion to the Euro currency during 2001. 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 communications 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. We believe that as the international communications 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, WorldCom 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, which began in January 1998. This increase in competition could adversely affect net revenue per minute and gross margin as a percentage of net revenue.

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

North America

        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. AT&T is the largest supplier of long distance services, with WorldCom and Sprint being the next largest providers. As a result of federal legislation, we also compete with RBOCs, local exchange carriers (LECs) and ISPs in providing domestic and international long distance services.

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        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 incumbent telcos (Bell Canada, Telus and the former Stentor members) in their territory and Call-Net Enterprises (Sprint Canada) and other smaller resellers. In the highly competitive business market, we compete with Bell Canada and Telus, who are both expanding beyond their traditional territory and competing with each other across the country, and with AT&T Canada, Call-Net Enterprises and other smaller carriers.

Europe

        United Kingdom.    Our principal competitors in the United Kingdom are British Telecom, the dominant supplier of telecommunications services in the United Kingdom, Cable & Wireless Communications, Colt, Energis and WorldCom. We compete in the United Kingdom and continental European countries by offering competitively-priced stand-alone and bundled services, personalized customer service and value-added services.

        Germany.    Our principal competitor in Germany is Deutsche Telekom, the dominant carrier. We also compete with Vodafone, VIAG Interkom, MobilCom, Talkline, NTS/Colt and WorldCom. Additionally, we also face competition from other licensed public telephone operators, cable companies and switch-based resellers, including emerging German LECs.

Asia-Pacific

        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.

        Japan.    Our principal competitor in Japan is KDDI, the dominant carrier, as well as NTT Communications, Japan Telecom, Cable & Wireless IDC, WorldCom and a number of second tier carriers.

Data/Internet

        The market for data services and Internet 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 Internet service providers such as AOL and EarthLink, Web hosting companies, other long distance and international long distance telecommunications companies, including AT&T, WorldCom 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 a significantly greater market presence and brand recognition than we do.

Government Regulation

        As a global communications 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.

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        Regulation of the telecommunications industry is changing rapidly both domestically and globally. The Federal Communications Commission (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 effect our international business. 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. In addition, various RBOCs have either received or are seeking to receive approval from the FCC to sell in-region long distance services. The increase in providers vying for a limited market share will require us to maintain our competitive rate structures.

        The regulatory framework in certain jurisdictions in which we provide services is described below:

United States

        In the United States, our services are subject to the provisions of the Communications Act of 1934, 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, 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 classified as a non-dominant common carrier for domestic service and are not required to obtain specific prior FCC approval to initiate or expand domestic interstate services.

        International Service Regulation.    International common carriers like us are required to obtain authority under Section 214 of the Communications Act. 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. In 2001, the FCC ordered all carriers to physically terminate or withdraw their tariffs for international services on file with the FCC. We have taken this action and have replaced our international FCC tariff with a general service agreement and price list posted on our Web site (also as required by FCC order). 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 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. 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.

        As of July 31, 2001, the FCC ordered all common carriers of Domestic Interstate services to cancel their tariffs and provide service in accordance with contracts with customers. We took this action and replaced our FCC tariff for domestic interstate services with a general service agreement and price list posted on our Web site (also as required by FCC order). As a result, we will no longer be subject to protection under the "filed rate doctrine," which provides protection to carriers from customers' legal actions challenging terms and conditions of services.

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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. The FCC continues to grant incumbent LECs greater pricing flexibility and relaxed regulation of new switched access services in those markets where there are other providers of access services.

        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 and new regulations regarding carriers' pass-through of universal service costs to their customers. We cannot predict the outcome of these proceedings or their potential effect on us.

        State Regulation.    Our intrastate long distance operations are subject to various state laws and regulations, including, in most jurisdictions, certification and tariff filing requirements. 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 pricing approval or notification for certain stock or asset transfers or, in several states, for the issuance of securities, debt or for name changes. We have received the necessary certificate and tariff approvals to provide intrastate long distance service in 49 states. 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 TresCom, we hold a variety of 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 TresCom and 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.

Canada

        The operations of telecommunications carriers are regulated by the Canadian Radio-television and Telecommunications Commission (CRTC). Full facilities-based and resale competition was introduced in the provision of international services in Canada, effective October 1, 1998, coincident with the elimination of traffic routing limitations on switched hubbing through the United States. In addition, foreign ownership rules for facilities-based carriers were waived in relation to ownership of international submarine cables landed in Canada and satellite earth stations used for telecommunications purposes. Effective January 1, 1999, all international service providers must be licensed by the CRTC under the Telecommunications Act of 1993, and we received our international license as of December 23, 1998. Our international operations remain subject to conditions of our CRTC license, which address matters such as competitive conduct and consumer safeguards.

        We, as a reseller of domestic Canadian telecommunications, are largely unregulated by the CRTC. In particular, because we do not own or operate transmission facilities in Canada, we are not directly

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subject to the Canadian Telecommunications Act or directly regulated by the CRTC, except to the extent that our provision of international telecommunications services is subject to CRTC licensing and other regulations. Therefore, we may provide resold Canadian domestic long distance service without rate, price or tariff regulation, or ownership limitations.

        The CRTC implemented a revenue-based contribution regime to replace the per minute contribution. This new revenue-based contribution mechanism collects from a wider base of telecommunications service providers and has consequently lowered our contribution expenses considerably since 2001.

        In a recent price cap decision the CRTC lowered the prices incumbent providers can charge competitors for several competitor services that are required to provide telecommunications services. Several proceedings are currently underway and may lead to changes in interconnection costs retroactive 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 incumbent LECs 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 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 direct 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 lobbied to the Canadian government to review foreign ownership restrictions with a view to lowering these restrictions.

Australia

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

        We are licensed under the Telecommunications Act of 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 of 1997 covering matters such as compliance with the

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Telecommunications Act of 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 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 which do not satisfactorily deal with consumer complaints.

        There is no limit to the number of carriers who 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 of 1997, with certain commitments made in their industry development plan and with the telecommunications access regime and related facilities access obligations). Carriers also must meet the universal service obligation, to assist in providing all Australians, particularly in remote areas, with reasonable access to standard telephone services. The levy required to be paid in connection with this obligation has been set previously at a level that is not 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 of 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 (as the former protected fixed line carriers) and other carriers who may come to own or control important infrastructure or services necessary for competition.

        The access regime establishes a mechanism for the industry to develop an access code containing model terms and conditions for access to particular declared services. Once approved by the ACCC, those model terms and conditions may be adopted in an undertaking by individual carriers who are under an access obligation.

        Since July 1997, the ACCC has mandated progressively that Telstra provide access to a range of its facilities at specified rates to other service providers including us. We have negotiated access arrangements with Telstra in substitution for certain mandated arrangements. In July 1999, the ACCC

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mandated access to Telstra's local call network which has provided us with new opportunities as a full service carrier.

Japan

        Our services in Japan are subject to regulation by the Japanese Ministry of Public Management, Home Affairs and Post and Telecommunications under the Japanese Telecommunications Business Law. We have obtained licenses as a Type I business and as a Special Type II business. Our licenses allow us to provide selected international telecommunications services using our own facilities, as well as leased facilities, and domestic telecommunications services using leased facilities.

European Union

        In Europe, the regulation of the telecommunications industry 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 pan-European policies and, through legislation, developing a regulatory framework to ensure an open, competitive telecommunications market.

        In March 1996, the EU adopted the Full Competition Directive containing two provisions which required EU member states to allow the creation of alternative telecommunications infrastructures by July 1, 1996, and which reaffirmed the obligations of EU member states to abolish the PTTs' monopolies in voice telephony by 1998. Certain EU countries were allowed to delay the abolition of the voice telephony monopoly based on derogations established in the Full Competition Directive. These countries include Luxembourg (July 1, 1998), Spain and Ireland (which were liberalized on December 1, 1998), Portugal (January 1, 2000) and Greece (December 31, 2000).

        Each EU member state in which we currently conduct or plan to conduct our business has a different regulatory regime and such differences will continue for the foreseeable future. The requirements for us to obtain necessary approvals vary considerably from country to country and are likely to change as competition is permitted in new service sectors. Most EU member states require companies to obtain a license in order to provide voice telephony services or construct and operate telecommunications networks. However, the EU generally does not permit its member states to require individual licenses for other types of services. In addition, we have obtained and will continue to seek to obtain interconnection agreements with other carriers within the EU. While EU directives require that dominant carriers offer cost-based and non-discriminatory interconnection to competitors, individual EU member states have implemented and may implement this requirement differently. 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. Moreover, there can be no guarantee that long distance providers like us will be able to provide customers "equal access" to their networks, and the absence of such equal access could put such long distance companies at a disadvantage with respect to existing PTTs.

        The European Commission proposed a new legislative package to the European Parliament and Council on July 12, 2000. The proposed new regulatory regime seeks to reinforce competition, particularly at a local level, mainly by opening up the competition in the local loop. The Regulation of the European Parliament and Council on unbundled access to the local loop came into force on January 2, 2000 and the rest of the legislative package (comprising of directives on the new framework of the legislation, licensing and authorization, access and interconnection, universal service and data protection) was due to be in place during the course of 2002.

        Agreement has now been reached between the Council of Ministers and the European Parliament on a new package of directives that will establish a framework for the regulation of electronic

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communications networks, services and associated facilities throughout the EU. The directives are to be implemented on the same day, namely July 25, 2003, but from past experience this date may slip. None of these new directives should have any material impact on our business operations in Europe.

        During the course of the last couple of years, a number of alternative carriers operating in Europe either went out of business or contracted their operations, particularly in the United Kingdom, France and Germany. While this may provide short-term advantage to the remaining operators in these markets, the wider trend appears to be that customers may be reluctant to use alternative carriers and may go back to the local PTT. However, some of the alternative carriers that went out of business have recently re-emerged in a restructured form with little or no carried debt. This may give such carriers a competitive advantage in the market.

United Kingdom

        Our services are subject to the provisions of the United Kingdom Telecommunications Act 1984. The Secretary of State for Trade and Industry, acting on the advice of the United Kingdom Department of Trade and Industry, is responsible for granting United Kingdom telecommunications licenses, while the Director General of Telecommunications of Office of Telecommunications (Oftel) is responsible for enforcing the terms of such licenses. Oftel is responsible for promoting effective competition both in networks and in services to redress anti-competitive behavior.

        In 1991, the British government established a "multi-operator" policy to replace the duopoly that had existed between British Telecommunications Group, Plc (British Telecom) and Cable & Wireless Communications. Under the multi-operator policy, the Department of Trade and Industry recommends the grant of a license to operate a telecommunications network to any applicant that it believes has a reasonable business plan and where there are no other overriding considerations not to grant such license. All public telecommunications operators operate under individual licenses granted by the Secretary of State for Trade and Industry pursuant to the United Kingdom Telecommunications Act. An operator who is providing certain publicly available network or telecommunications services (bearer services) and running a system with which to interconnect to other operators can apply for listing in the United Kingdom as an Annex II operator under the Telecommunications (Interconnection) Regulations 1997 and as such will be entitled to request interconnection from other Annex II operators. Under the terms of British Telecom's license, it is required to allow any such Annex II licensed operator to interconnect its system to British Telecom's system, unless it is not reasonably practicable to do so (e.g., due to incompatible equipment).

        Our subsidiary, Primus Telecommunications Limited, holds an Annex II Public Telecommunications Operator (PTO) license that authorizes it to provide fixed link telecommunications services of all types in the United Kingdom, all international resale services and international facilities-based services including switched voice services over leased private lines to all international points and international and United Kingdom domestic facilities-based voice services. The PTO license enables the holder to acquire ownership interests in or construct the United Kingdom half circuit of any IRU as well as backhaul and to other United Kingdom domestic facilities provision. In addition the PTO license enables us to acquire ownership interests in the United Kingdom half-circuit of satellite space segment in order to provide satellite-based services. It is also necessary to apply for a Wireless Telegraphy Act 1949 license which authorizes the use of the spectrum.

        Telegroup UK Ltd., another of our subsidiaries, also holds an Annex II PTO license which was originally an international facilities-based license granted on December 30, 1997 amended as effective September 27, 1999.

        Tariffs.    Telecommunications tariffs on Annex II operators in the United Kingdom, excluding British Telecom, are generally not subject to prior review or approval by regulatory authorities, although Oftel has historically imposed price caps on British Telecom. British Telecom has advocated

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and will likely continue to advocate for greater pricing flexibility, including flexibility for pricing non-geographic numbers (e.g. toll free and other services). Greater pricing flexibility could allow British Telecom to charge us higher prices for certain services or to charge end user customers prices that are lower than we are able to charge.

        Interconnection and Indirect Access.    We must interconnect our United Kingdom network to networks of other service providers in the United Kingdom and allow our end user customers to obtain access to our services in order to compete effectively in the United Kingdom. In the United Kingdom, licensed long distance carriers like us can obtain interconnection to British Telecom at cost-based rates. As of December 2001, Oftel introduced a permanent Carrier Pre-Selection (CPS) obligation into British Telecom's license that allows customers to choose between different operators for different types of calls without dialing extra digits or using an auto dialer box. While restricted CPS became available in mid 2001, adoption by customers has been limited. All calls CPS became available from the beginning of 2002.

        Fair Trading Practices.    Under the general competition regime in the United Kingdom, the Office of Fair Trading (OFT) is the competent authority for dealing with anti-competitive agreements and abuses of market power across all sectors of the economy. Oftel is the sector specific regulator for telecommunications with a statutory duty to promote competition in the telecommunications market which works closely with OFT on competition issues involving the telecommunications sector. There are no foreign ownership restrictions that apply to telecommunications company licensing in the United Kingdom, although the Department of Trade and Industry does have a discretion as to whether to award licenses on a case by case basis. We also are subject to general European law, which, among other things, prohibits certain anti-competitive agreements and abuses of dominant market positions through Articles 81 and 82 of the Treaty of Rome.

        Anticipated Regulatory Changes.    On December 12, 2000, the United Kingdom government published its Communications White Paper on the reform of the regulatory framework of the telecommunications and broadcasting sectors. The White Paper does not indicate whether the existing legislative framework will be repealed in its entirety and new legislation introduced, or whether the Government will simply amend the current legislation. The Government has invited comments on the proposed reforms and the date/outcome of the next general election will dictate the formal implementation program. The consultation process is still proceeding, and there is no given date for legislation.

        Following on from the consultation period, the Government has enacted far reaching changes on the United Kingdom regulatory regime that will come into effect late 2003. These changes include the abolishment of Oftel and replacing it with Office of Communications (Ofcom), a "super regulator" which will regulate television and radio broadcasting as well as telecommunication companies, and the replacement of the current individual licensing regime with general and specific conditions for operators. The general conditions will form the "rulebook" with which operators will need to comply. The general conditions have not yet been finalized. There will also be a new system relating to fees payable by operators which also needs to be finalized.

Germany

        The German Telecommunications Act of 1996 liberalized all telecommunications activities as of January 1, 1998. The German Telecommunications Act has been complemented by several ordinances. Under the German regulatory scheme, licenses are required for the operation of transmission lines and the provision of voice telephony services. Licenses required for the operation of transmission lines are divided into 3 license classes: mobile telecommunications (license class 1), satellite (license class 2), and other telecommunications services for the general public (license class 3). In addition to the infrastructure licenses, a separate license is required for provision of voice telephony services to the

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general public on the basis of self-operated telecommunications networks (license class 4). A class 4 license does not include the right to operate transmission lines. All other telecommunications services (e.g. valued-added, data, etc.) are only subject to a notification requirement. We operate under a license class 4 which has been extended to a Germany-wide area license under a change of regulatory policy that requires Germany-wide area licenses for the Germany-wide offer of public switched voice telephony.

        Under the German Telecommunications Act, companies that desire to connect with Deutsche Telekom's network must enter into an interconnection agreement with the regulated interconnection tariffs. We entered into an interconnection agreement with Deutsche Telekom on February 27, 1998 at the regulated standard interconnection rates presently under court review. The interconnection agreement may be terminated by commencing a six-month notice period at the end of the calendar year. In 2002, Deutsche Telekom issued a statement establishing a new interconnection pricing model, the "Elementary Base of Charge" (EBC), which is now valid for all interconnected and licensed carriers.

        In 2003, the European Commission directed Germany to implement both call-by-call and preselect calling plans for city-to-city calls. Specifically, the customer now has the option of either preselecting a carrier, or dialing around on a call-by-call basis using the preferred carrier's codes. The RegTP, the German regulator of telecommuncations and post, also required that by the end of April 2003, Deutsche Telekom must now offer service to carriers with a class 4 license which will allow such carriers to complete city-to-city calls for their customer base.

France

        The French Telecommunications Act of 26 July 1996 further developed the new legal framework for the development of a competitive telecommunications market in France.

        As a result, the French Regulator (Autorite de Regulation des Telecommunications) was created on January 1, 1997 with the task of overseeing the development of a competitive telecommunications sector which would provide benefits to the user. In addition, the monopoly on the provision of voice telephony services to the public was abolished as of January 1, 1998.

        Under the French regulatory regime, an L33.1 license is required for the establishment and running by the operator of a telecommunications network open to the public (an infrastructure license), and the provision of public voice telephony services requires an L34.1 license. An infrastructure license is required by those operators who wish to install or purchase dark fiber for the running of a network. As with the L34.1 voice license, L33.1 infrastructure licenses are granted on a regional or nationwide basis and it is possible to be granted a license just for the region of Paris and its suburbs. Primus Telecommunications S.A. was awarded the first L34.1 only license on May 29, 1998. Callback operators and least cost routing operators not using their own leased lines as defined by the French Regulator, do not need to apply and obtain an L34.1 license.

        Effective January 1, 2000, Primus Telecommunications S.A. merged with Telecontinent S.A. and formed Primus Telecommunications France S.A. This merged company has both an L33.1 license and L34.1 license. Following the merger of the two entities, Primus Telecommunications France S.A. handed back to the French Regulator the 1633 carrier selection code held by Telecontinent S.A. The merged company has also the use of two "3PBQ" numbers which are equivalent to four digit free phone access numbers for use in regions where the carrier selection code is not operational due to the lack of point of interconnection.

        We are currently using our own 1656 prefix for the sole Paris and close suburb region where we have entered into an interconnection agreement with France Telecom. Because of a change in the current telecom regulations, we are now entitled to ask another operator fully interconnected with

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France Telecom to collect all the traffic on behalf of a third party. Primus Telecommunications France S.A. is looking for the implementation of such a solution that would enable us to sell our own 1656 prefix in all of the French territory.

Latin America

        Various countries in Latin America have taken steps towards deregulating their telecommunications markets. Each Latin American country has a different national regulatory regime and each country is in a different stage of liberalization. Historically, Latin American countries had reserved the provision of voice services to the state-owned PTTs. Over the last decade, the principal telecommunications markets in Latin America, including Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela, have liberalized provision of local, long distance, and/or wireless services, and have competitive operators in most sectors. For example, Brazil currently has competitors in the local, domestic long distance, wireless and international sectors, whose entry was subject to certain regulatory restrictions (e.g., build-out requirements, regional restrictions, etc.). Similar to other markets in the region, the Brazilian market continues in the implementation phase of liberalizing its telecommunications regulatory framework. In addition to liberalizing their voice markets, a number of countries also have liberalized markets for other services, such as data, value-added and other non-switched voice services. Finally, in the Central American region, Guatemala and El Salvador opened their telecommunications markets to competition. Other countries in Central America, such as Honduras, have been unable to privatize their state-owned carrier, and have been less successful in opening their telecommunications markets to competition.

Employees

        The following table summarizes the number of our full-time employees as of December 31, 2002, 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.

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ITEM 2. PROPERTIES

        We currently lease our corporate headquarters which is located in McLean, Virginia. Additionally, we also 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, Canada, Australia, the United Kingdom, Japan, Mexico, Germany and France, as well as other countries in which we operate, approximates 670,000 square feet and the total annual lease costs were approximately $13.1 million. The operating leases expire at various times with the longest commitment expiring in 2010. 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 Telecommunicaciones, 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 ultimate legal and financial liability with respect to such legal proceeding cannot be estimated with certainty at this time, while 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 financial results.

        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. Neither we nor any of our subsidiaries/affiliates own, or have ever owned, any interest in 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 have filed post-trial motions seeking to reverse or reduce the jury's award, and the plaintiffs have sought a new trial as to the Primus Defendants. The judge has not yet ruled on these motions. We do not believe there is any merit to the motion for a new trial involving the Primus Defendants. The New Jersey case was filed on September 24, 2002 and includes claims against the Primus Defendants. The Primus Defendants have moved to dismiss, and the case has been stayed pending further decision by the court in the Virginia case on Plaintiff's motion for a new trial. In both cases, we intend to vigorously defend against these actions and believe that the plaintiffs' claims 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 there is no entity 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 financial results.

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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 financial results.

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 ("Primus" or the "Company") common stock trades on the Nasdaq National Stock Market under the symbol "PRTL." On March 21, 2003, the last sale price of the Company's common stock was $2.18. The following table sets forth, for the period indicated, the high and low sales prices of the Company's common stock.

Dividend Policy

        The Company has not paid any cash dividends on its 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 the Company's earnings, its 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 the Company. It is the present intention of the Board of Directors to retain all earnings, if any, for use in the Company's 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 28, 2003, the Company had approximately 579 holders of record of its common stock. The Company believes that it has in excess of 10,000 beneficial owners.

Recent Sales of Unregistered Securities

        In December 2002, the Company signed an agreement to sell 559,950 newly-authorized shares of its Series C Convertible Preferred Stock (the "Series C Preferred") for an aggregate purchase price of $42 million. On December 31, 2002, the Company issued 438,853 shares of Series C Preferred stock for approximately $32.3 million, net of $0.6 million of offering costs. The Company's stockholders will vote on whether to approve the issuance of the remaining 121,097 shares of Series C Preferred stock for approximately $9 million in cash at a special meeting of the Company's stockholders.

        In March 2002, the Company settled its 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 the Company's common stock. $5.0 million was paid in March 2002. $1.5 million remains payable and is due April 2, 2003. The Company issued the shares in reliance upon Section 4(2) of the Securities Act of 1933. In June 2002, the 1,200,000 shares of the Company's stock were registered for resale.

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ITEM 6. SELECTED FINANCIAL DATA

        The following sets forth selected consolidated financial data of the Company for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 as derived from the historical financial statements of the Company:

Statement of Operations Data:

        As of December 31, 2002, 2001, 2000, 1999 and 1998, the Company's earnings were insufficient to cover the fixed charges by approximately $31.4 million, $301.3 million, $174.7 million, $113.0 million and $63.6 million, respectively.

Balance Sheet Data:

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

Overview

        Primus is a global facilities-based telecommunications services provider offering an integrated portfolio of international and domestic voice, Internet, data and Web hosting services to business and

26

residential retail customers and other carriers located in the United States, Canada, Brazil, the United Kingdom, continental Europe, Australia, India and Japan. As a customer-focused alternative to the dominant carriers and former monopolies in these countries, we have built leading market positions by serving the demand for high-quality, competitively-priced international communications services. Growth in worldwide demand is driven by the globalization of the world's economies, rate reductions, and the growth of data and Internet traffic.

        The Company targets customers with significant international long distance usage, including SMEs, multinational corporations, ethnic residential customers and other telecommunications carriers and resellers. It provides services over its network, which consists of (i) 19 carrier-grade domestic and international gateway switching systems throughout Europe, North America, Australia and Japan; (ii) approximately 250 POPs within its principal service regions and other markets; and (iii) both owned and leased transmission capacity on undersea and land-based fiber optic cable systems. Utilizing this network, along with resale arrangements and foreign carrier agreements, it provides service to approximately 3.1 million customers, of which 0.9 million were prepaid VMNS and calling card customers. The Company offers its customers a wide range of services, including:

•

international and domestic long distance services;



•

prepaid VMNS and calling cards, toll-free services and reorigination services;



•

local services in Australia, Canada and Puerto Rico;



•

ATM+IP broadband services;



•

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



•

managed and shared Web hosting services and applications;



•

VoIP services.

        The Company prices its services at a savings compared to the major carriers operating in its principal service regions. It expects to continue to generate net revenue from internal growth through sales and marketing efforts focused on customers with significant international long distance usage, including SMEs, multinational corporations, ethnic residential customers and other telecommunications carriers and resellers.

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

        In 2002, the Company focused its attention on implementing a three-pronged strategy which involved improving operating results, reducing debt, and raising additional financing.

Initiatives and results from its efforts to improve operating results:

•

It focused on higher margin retail customers and services.



•

It scaled back low margin businesses, and emphasized operations in core markets including Australia, Canada, the United Kingdom and the United States.



•

Its Australia and Canada subsidiaries both achieved record levels of gross margin, operating income and customers in 2002, which were substantially greater than in 2001.

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•

Cost containment measures resulted in an increase in gross margin of $40.8 million and further reductions in selling, general and administrative expenses of $48.8 million from the previous year.



•

For 2002, its gross margin percentage was 34.7% compared to 29.1% in 2001.



•

Operating loss in 2002 improved to a loss of ($3.3) million, compared to a loss of ($672.3) million for 2001.



•

Net cash provided by operating activities was $34.6 million in 2002, as compared to net cash used by operating activities of ($110.4) million in 2001 and ($131.0) million in 2000.

Initiatives and results from its efforts to reduce debt:

•

Debt was reduced during 2002 by $66.6 million to $601.0 million at December 31, 2002, with an after-tax gain on early extinguishment of debt of $36.7 million for the year.



•

$27.3 million in interest expense was saved over the prior year from the principal reduction of senior notes and convertible debentures.



•

Nearest maturing senior notes were reduced to $87.2 million in 2002 and reduced further to $43.6 million in January 2003.



•

A major equipment financing facility was restructured with a more favorable payment schedule and interest rate in February 2003.

Initiatives and results from its efforts to raise additional funds:

•

A private offering of $42 million of convertible preferred stock to affiliates of American International Group (AIG) was signed. The Company received $33 million at December 31, 2002 with the remaining $9 million subject to stockholder approval.



•

$9.5 million was raised through an extension of an accounts receivable facility with Textron Financial Inc.



•

The Company's Canada subsidiary entered into a $13 million two-year secured credit facility in March 2003.

Other achievements in 2002:

•

In September 2002, the Company signed an agreement to acquire the United States-based retail switched voice services customer base of Cable & Wireless USA, Inc. ("C&W"). It started acquiring the customer base during the three months ending December 31, 2002. Primarily consisting of SME customers, the acquired customer base is expected to increase the size of the Company's United States retail business. C&W customers will be transitioned to its network and support systems during what is expected to be a migration period of approximately four months. Billing, customer support and other back-office functions will be assumed by the Company through the scaling of existing systems.

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

•

Debt was reduced to $667.6 million at December 31, 2001 from $1.3 billion in 2000, with an after-tax gain on early extinguishment of debt of $486.8 million for the year;



•

Selling, general and administrative expenses were reduced $27.4 million from the previous year; and

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•

$38.7 million in interest expense was saved over the prior year from the principal reduction of senior notes and convertible debentures.

        In 2000, among other things, the Company:

•

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;



•

purchased CTE Networks, a Canadian long distance reseller;



•

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



•

expanded its Internet and data services business, enhanced by acquisitions such as Eco Software, Inc., a United States-based business-focused ISP, Bekkoame Internet, Inc., a Japanese facilities-based ISP, InterNeXt S.A., a value-added ISP with national facilities in France, Seker BBS S.A. and Nexus Comunicaciones S.A., two Spanish ISPs, and Infinity Online Systems, a Canada-based ISP; and



•

issued $300 million in convertible subordinated debentures.

        Prices in the long distance industry have declined in recent years, and as competition continues to increase, the Company believes that prices are likely to continue to decline. Additionally, Primus believes that because deregulatory influences affect telecommunications markets outside the United States, the deregulatory trend will result in greater competition which could adversely affect Primus's net revenue per minute and gross margin as a percentage of net revenue. However, the Company believes that such decreases in prices will be offset by increased communications usage and decreased costs.

        As the portion of traffic transmitted over leased or owned facilities increases, cost of revenue increasingly will be comprised of fixed costs. In order to manage such costs, Primus pursues a flexible approach with respect to the expansion of its network. In most instances, Primus initially obtains transmission capacity on a variable-cost, per-minute leased basis, then acquires additional capacity on a fixed-cost basis when traffic volume makes such a commitment cost-effective, and ultimately purchases and operates its own facilities when traffic levels justify such investment. The Company also seeks to lower the cost of revenue through:

•

optimizing the routing of calls over the least cost route;



•

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; and



•

continuing to expand the network when traffic volumes justify such investment.

        In most countries, the Company generally realizes a higher gross margin as a percentage of net revenue on its international long distance as compared to its domestic long distance services and a higher gross margin as a percentage of net revenue on its services to both business and residential customers compared to those realized on its services to other telecommunications carriers. In addition, Primus generally realizes a higher gross margin as a percentage of net revenue on long distance services as compared to those realized on local switched and cellular services. Carrier services, which generate a lower gross margin as a percentage of net revenue 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 the Company to obtain greater volume discounts from its suppliers than it otherwise would realize. This interconnection also allows the Company to connect to all major carriers which provides worldwide coverage. Primus's overall gross margin as a percentage of net revenue may fluctuate based on the relative volumes of international

29

versus domestic long distance services, carrier services versus business and residential long distance services and the proportion of traffic carried on Primus's network versus resale of other carriers' services.

        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."

        Foreign currency—A significant portion of the Company's net revenue is derived from sales and operations outside the United States. The reporting currency for the Company's consolidated financial statements is the United States dollar. The local currency of each country is the functional currency for each respective entity. In the future, Primus expects to continue to derive the majority of net revenue and incur a significant portion of its 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 Primus's results of operations. Primus historically has not engaged in hedging transactions and does not currently contemplate engaging in hedging transactions to mitigate foreign exchange risks.

Critical Accounting Policies

        To aid in the understanding of the Company's financial reporting, the Company's most critical accounting policies are described below. These policies have the potential to have a more significant impact on the Company's 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, data and Internet 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 the Company's 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 the Company the ability to do a more timely and accurate analysis of revenue earned in a period. Separate prepaid VMNS and 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. Net revenue is also earned for the provision of data/Internet services. Data/Internet 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. The Company records payments received in advance for prepaid VMNS and calling card services 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 the Company's allowance for doubtful accounts receivable requires significant estimates. Due to the large number of customers that the Company serves, it is impractical to review the credit-worthiness of each of its customers, although a credit review is performed for larger carrier and retail business customers. The Company considers a

30

number of factors in determining the proper level of the allowance, including historical collection experience, current economic trends, the aging of the accounts receivable portfolio and changes in the credit-worthiness of the Company's customers. Systems to detect fraudulent call activity are in place within the network of the Company, but if these systems fail to identify such activity, the Company may realize a higher degree of uncollectible accounts. If the estimate of uncollectible revenue was 10% higher than the Company's current estimates, net revenue would have been reduced by approximately $2.8 million for the year ended December 31, 2002.

        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 Primus's 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 the Company's 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 Primus's activity shows or have invoiced at different rates, the Company will dispute the charges invoiced. There is no guarantee that the Company will prevail in the dispute but realizes a greater success with disputes concerning contracted rates. Primus uses significant estimates to determine the level of success in dispute resolution and considers past historical experience, basis of dispute, financial status and current relationship with vendor, and aging of prior disputes in quantifying its estimates.

        Valuation of long-lived assets—The Company reviews 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, the Company compares 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, the Company is 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. The Company makes 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 the Company believes that its 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, 2002, 2001 and 2000 (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, 2002, 2001 and 2000 (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, 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. The Company's data/Internet and VoIP 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.

32

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 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 $6.3 million in data/Internet in the United States and Brazil contributed to the decrease in net revenue.

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 VMNS and calling cards and an increase of $10.1 million from carrier services in the 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 the Company's German operations that is a result of a decrease in net revenue from its carrier services as well as a decline in its Cards & Parts subsidiary of $15.9 million. In October 2002, the Company's ownership percentage in Cards & Parts was reduced and as a result the Company began using the equity method of accounting. The increase was further offset by a decrease of $7.5 million in the Company's international agents operations and a decrease of $3.5 million in the Company's France data/Internet operations, InterNeXt S.A.("InterNeXt"). In July 2002, InterNeXt filed for insolvency administration and as a result the Company began using the equity method of accounting. See Note 20—"Equity Investment Write-off and Loss."

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 the Company's Australian operations, mainly resulting from the continued growth in Australia's data/Internet services as well as positive impact of the strengthening Australian dollar against the United States dollar, offset by a decline of $6.0 million in the Company's Japanese operations primarily due to Bekko. In October 2002, the Company amended its contractual agreements to give up its right to control the Board of Directors and operations of Bekko, the Company's Japanese data/Internet investment, and as a result began using the equity method of accounting. See Note 20—"Equity Investment Write-off and Loss."

        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 US and Canada, as well as a decrease of $25.3 million which resulted from favorable regulatory legislation which reduced the amount of access charge the Company is required to pay, and a higher percentage of traffic carried on the Company's network versus resold minutes in Canada. European cost of revenue decreased $8.6 million due to a decrease in the Company's 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 a result of an increase in

33

the usage of prepaid VMNS and calling cards 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 decrease in international variable costs and a decrease of $2.0 million in Japan mainly from its data/Internet operation, Bekko. Overall, gross margin percentage increased to 34.7% for the twelve months ended December 31, 2002 from 29.1% for the twelve months ended December 31, 2001 due to an increase in the mix of higher margin retail and data and Internet business, select price increases, as well as improved efficiencies in network routing and increasing the utilization of the Company's network.

        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 is 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 the Company's 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 the Company's adoption of 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 the Company's evaluation in 2001, it was determined that the estimated future cash flows were less than the carrying value of its voice and data center long-lived assets. Accordingly, during the fourth quarter of 2001, the Company adjusted the carrying value of its 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 the Company's assets was based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved. In 2002, the Company 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 the Company, and the goodwill of its German Internet subsidiary, iPrimus Telecommunications GmbH of $3.8 million identified through the Company's 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 the Company's senior notes and convertible debentures and extinguishment of its vendor debt and related obligations to Hewlett-Packard.

        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.

34

        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 the Company's 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. See Note 20—"Equity Investment Write-off and Loss."

        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 the Company's 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 2001when 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 million tax provision recorded for the alternative minimum taxes ("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 the Company's United States subsidiary by the Company's Canadian and Australian subsidiaries.

        Gain on early extinguishment of debt decreased to $36.7 million for the twelve months ended December 31, 2002 from $486.8 million for the twelve months ended December 31, 2001. The gain resulted from the Company's 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, the Company adopted SFAS No. 142, resulting in the impairment of the goodwill related to the InterNeXt reporting unit, a data/Internet subsidiary in France, of $11.0 million which has been reflected as a cumulative effect of a change in accounting principle.

Results of operations for the year ended December 31, 2001 as compared to the year ended December 31, 2000

        Net revenue decreased $116.9 million or 9.8% from $1,199.4 million for the year ended December 31, 2000 to $1,082.5 million for the year ended December 31, 2001. The Company's data/Internet and VoIP revenue contributed $112.8 million and $39.0 million, respectively, for the year ended December 31, 2001, as compared to $99.7 million and $22.0 million, respectively, for the year ended December 31, 2000.

North America: The Company's North American net revenue decreased $79.9 million or 15.0% to $453.1 million for the year ended December 31, 2001 from $533.0 million for the year ended December 31, 2000. The decrease is primarily attributed to the Company's effort to de-emphasize low margin businesses such as wholesale carrier services as well as reduced rates per minute caused by market pricing pressures. Carrier services revenue in the United States and Canada declined by $42.8 million, or 24.5% from the same period last year. Additionally, the negative impact of the declining value of the Canadian dollar against the United States dollar contributed to the decrease in net revenue. $12.5 million of the decrease is also attributed to $7 million in additional allowance for doubtful accounts receivable recorded from "dot-com" customers with no revenue being recognized in 2001 with 1492

35

Technologies. 1492 Technologies, was an acquired Web design/consulting business whose operations were discontinued during the three months ended March 31, 2001. The Company's 2000 acquisitions including Shore.Net (since the March 2000 acquisition) and CTE (since the June 2000 acquisition) partially offset the total decrease in revenue by $7.1 million.

Europe: The Company's European net revenue decreased $2.0 million or 0.5% to $357.0 million for the year ended December 31, 2001 from $359.0 million for the year ended December 31, 2000. The European net revenue decrease is primarily attributed to the negative impact of declining foreign currency exchange rates against the United States dollar and decreased retail voice traffic in other European countries. The decrease is partially offset by the increase attributed to increased carrier services, primarily in France, Germany, Denmark, Spain and Italy.

Asia-Pacific: The Company's Asia-Pacific net revenue decreased by $35.1 million or 11.4% to $272.3 million for the year ended December 31, 2001 from $307.4 million for the year ended December 31, 2000. $35.1 million of the decrease is associated with the Company's Australian operation, which was primarily driven by the negative impact of the declining value of the Australian dollar against the United States dollar, and to a lesser extent, a decline in revenue from reduced residential voice traffic and reduced provisioning of local access in Australia of $12.5 million. The decrease is partially offset by the growth in the data and Internet services in Australia. In addition, $6.2 million of the increase is due to the acquisition of Bekko (since the March 2000 acquisition) and DIPL (since the March 2000 acquisition).

        Cost of revenue decreased $93.4 million, to $767.8 million, or 70.9% of net revenue, for the year ended December 31, 2001 from $861.2 million, or 71.8% of net revenue, for the year ended December 31, 2000. With the majority of the cost of revenue being variable, based on minutes of use, the decrease in the cost of revenue is primarily attributable to the decrease in net revenue. Also, contributing to the decrease was the one-time retroactive refund of interconnect charges of $8.0 million. The net decrease of $93.3 million was partially offset by a $11.2 million increase attributable to the additional expense from acquired operations.

        Selling, general and administrative expenses decreased $27.4 million to $303.0 million, or 28.0% of net revenue, for the year ended December 31, 2001 from $330.4 million, or 27.5% of net revenue, for the year ended December 31, 2000. The decrease is primarily attributable to $10.2 million reduction in salaries and benefits, a reduction of $10.9 million in advertising and marketing, and a reduction of $10.8 million in professional fees and travel expenses. The reduction in salaries and benefits is attributable to the cost savings from the reduction of full-time and part-time employees since December 31, 2000, partially offset by additional expenses of severance pay and employee termination costs. The reduction in advertising, marketing, professional services and travel expenses is a result of management initiatives to reduce overhead spending.

        Depreciation and amortization increased $36.9 million to $157.6 million for the year ended December 31, 2001 from $120.7 million for the year ended December 31, 2000. The increase is comprised of $30.0 million in depreciation expense related to capital expenditures for fiber optic cable, switching, data center and other network equipment being placed into service and $6.9 million in amortization expense related to intangible assets arising from the Company's 2000 acquisitions.

        Asset impairment write-down for the twelve months ended December 31, 2001 was $526.3 million. Based on the Company's evaluation, it was determined that the estimated future cash flows were less than the carrying value of its voice and data center long-lived assets. Accordingly, during the fourth quarter of 2001, the Company adjusted the carrying value of its 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

36

equipment and $19.1 million in customer lists. The estimated fair value of the Company's assets was based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved.

        Interest expense decreased $31.4 million to $100.7 million for the year ended December 31, 2001 from $132.1 million for the year ended December 31, 2000. The decrease was driven by $38.7 million interest saved from principal reduction of the Company's senior notes and convertible debentures. The decrease is partially offset by interest related to indebtedness and obligations incurred in 2001 associated with additional leased fiber capacity, equipment financing, accounts receivable financing arrangements and the issuance of the $50 million Hewlett-Packard convertible note, paid in two installments in 2000.

        Interest income and other income (expense) decreased to an expense of $18.0 million for the year ended December 31, 2001 from income of $30.7 million for the year ended December 31, 2000. The decrease is primarily associated with the $15.0 million write-off of the Company's investment in Pilot Network Services because it became permanently impaired in March 2001. Other cost investments of $5.1 million were also written-off when they became permanently impaired. Interest income decreased by $23.1 million and is attributed to the lower cash balance during the twelve months ended December 31, 2001.

        Gain on early extinguishment of debt increased to $486.8 million for the year ended December 31, 2001 from $41.0 million for the year ended December 31, 2000. The increase is attributed to $445.8 million gain resulted from the Company's reduction of $616.7 million in principal amount of senior notes and debentures through open market purchases and conversion, prior to maturity, for $155.0 million in cash and shares, of which there were 19,178,926, of the Company's common stock, slightly offset by the write-off of related deferred financing costs. The increase is also due to $45.9 million gain resulted from the Company's early extinguishment of its vendor debt and related obligations to Hewlett-Packard of over $50 million with a cash payment of $5 million. In conjunction with the 2001 debt repurchases, the Company had recorded a $5.0 million income tax provision.

Liquidity and Capital Resources

Changes in Cash Flows

        The Company's liquidity requirements arise from cash used in operating activities, purchases of network equipment including switches, related transmission equipment and international and domestic fiber optic cable transmission capacity, satellite transmission capacity, interest and principal payments on outstanding indebtedness, and acquisitions. The Company has financed its growth to date through public offerings and private placements of debt and equity securities, bank debt, vendor financing and capital lease financing.

        Net cash provided by operating activities was $34.6 million for the year ended December 31, 2002 as compared to net cash used by operating activities of $110.4 million for the year ended December 31, 2001. The increase in operating cash generated was comprised of an increase in gross margin of $40.8 million due to cost savings generated through lower variable and fixed costs, a decrease in selling, general and administrative expenses of $48.9 million due to substantial cost savings measures, a decrease in cash paid for interest of $47.4 million, and $7.9 million in additional funds generated from working capital.

        Net cash used by investing activities was $31.6 million for the year ended December 31, 2002 compared to net cash used by investing activities of $89.4 million for the year ended December 31, 2001. Net cash used by investing activities during the year ended December 31, 2002 included $29.4 million of capital expenditures primarily for the enhancement of the Company's global network

37

and back office support systems as compared to $87.8 million during the year ended December 31, 2001.

        Net cash provided by financing activities was $1.0 million for the year ended December 31, 2002 as compared to net cash used by financing activities of $107.2 million for the year ended December 31, 2001. During the year 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 in a private offering to private equity funds and $9.5 million of financing received through an accounts receivable financing, offset by $25.9 million of principal payments on capital leases, vendor financing and other long-term obligations, and $15.0 million for the purchase of certain of the Company's debt securities. During the year ended December 31, 2001, cash used by financing activities consisted of $99.8 million for the purchase of certain of the Company's debt securities, $33.7 million of payments on capital leases, vendor financing and other long-term obligations, offset by $15.8 million of financing received through an accounts receivable financing and a drawdown on a line of credit and $10.0 million in cash received from Inktomi Corporation in exchange for 2,862,254 shares of the Company's common stock.

        The Company is party to a number of secured loans that were arranged under a facility to fund the purchase of telecommunications equipment (the "Equipment Facility"). The lenders under the Equipment Facility, NTFC Capital Corporation and General Electric Capital Corporation, signed an agreement with the Company in February 2003 to amend the terms of the Equipment Facility to, among other things, defer principal payments otherwise due during the period from January 2002 through June 2003, and decrease the interest rates to 8.0% from a range between 9.72% and 11.56%. The amended terms have been reflected in the consolidated financial statements and notes for the year ended December 31, 2002. As of December 31, 2002, the Company had outstanding borrowings of $57.7 million under the Equipment Facility. See Note 22—"Subsequent Events."

Short- and Long-Term Liquidity Considerations and Risks

        The Company believes that its existing cash and cash equivalents, $92.5 million as of December 31, 2002, and internally generated funds will be sufficient to fund the Company's debt service requirements, capital expenditures, and other cash needs for its operations at least through March 2004. Nonetheless, the Company will continue to have significant debt and debt service obligations during such period and on a long-term basis. The Company has $43.6 million in senior notes that will be due in August 2004 that the Company intends to pay with internally generated funds and/or possible additional financing. 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 the Company's financial condition or short-term or long-term liquidity position. As of December 31, 2002, the Company had $601.0 million of indebtedness with payments of principal and interest. In January 2003, the Company made an open market purchase of $43.7 million principal amount of high yield debt securities for which it paid $36.2 million in cash. Prior to this purchase, the Company entered into a Supplemental Indenture to amend the terms of its 11.75% Senior Notes due 2004 to eliminate substantially all of the covenants relating to such notes. The principal and interest payments are due as follows (includes effect of senior note purchase made in January 2003, amendment to the terms of the Equipment Facility signed in February 2003, amendment to the terms of the

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accounts receivable financing signed in March 2003, and additional C&W liability incurred in January 2003—amounts in thousands):

        Included in other long-term obligations in the table above is a liability from the C&W acquisition. The purchase price will be paid through a deferred payment arrangement over a two-year period up to a maximum amount of $32 million. 20% of the payment was made in the three month period ended March 31, 2003; the remaining 80% will be paid during the next eight quarters beginning with the first quarter in 2003, and is expected to be funded through revenues of the acquired customers.

        The Company from time to time maintains a dialogue with certain holders of its equipment financing arrangements, which includes capital leases and vendor financing obligations with various vendors. The Company from time to time also maintains an active dialogue with potential debt and equity investors for raising additional capital for additional liquidity, debt reduction, payment of debt obligations as they come due and for additional working capital and growth opportunities. There can be no assurance the Company will be successful in these efforts of obtaining new capital at acceptable terms. If the Company is successful in raising additional financing, securities comprising a significant percentage of the Company's fully-diluted capital may be issued in connection with the completion of such transactions. Additionally, if the Company's plans or assumptions change, including those with respect to its debt levels or the development of the network and the level of the Company's operations and operating cash flow, if its assumptions prove inaccurate, if it consummates additional investments or acquisitions, if it experiences unexpected costs or competitive pressures or if existing cash and any other borrowings prove to be insufficient, the Company may need to obtain such financing and/or relief sooner than expected.

        In light of the foregoing, the Company and/or its subsidiaries will evaluate and determine on a continuing basis, depending on market conditions and the outcome of events described under "Special Note Regarding Forward-Looking Statements," and future negotiations the Company may pursue with the holders of certain of its outstanding debt securities, the most efficient use of the Company's capital, including investment in the Company's network and systems, lines of business, potential acquisitions, purchasing, refinancing, exchanging or retiring certain of the Company's outstanding debt securities in privately negotiated transactions, open market transactions or by other means to the extent permitted by its existing covenant restrictions.

New Accounting Pronouncements

        In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." The Interpretation clarifies the application of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not

39

have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Interpretation applies immediately to variable interest entities created after January 31, 2003, or in which the Company obtains an interest after that date. The Interpretation is effective July 1, 2003 to variable interest entities in which the Company holds a variable interest acquired before February 1, 2003. The Company is in the process of assessing the impact of adopting this Interpretation, if any, on its financial position and results of operations.

        In December 2002, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has not elected to adopt the fair value based method of accounting for stock-based employee compensation and therefore believes SFAS No. 148 will not have a material effect on the Company's financial statements.

        In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The Interpretation addresses disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also clarifies requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the fair value of the obligations the guarantor has undertaken in issuing that guarantee. The initial recognition and measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for guarantees existing as of December 31, 2002.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material effect on its consolidated financial position, results of operations, or cash flows.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 requires the classification of gains and losses from extinguishments of debt as extraordinary items only if they meet certain criteria for such classification in Accounting Principles Bulletin ("APB") No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions." Any gain or loss on extinguishments of debt classified as an extraordinary item in prior periods that does not meet the criteria in APB No. 30 must be reclassified. These provisions are effective for fiscal years beginning after May 15, 2002. Additionally, SFAS No. 145 requires sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. These lease provisions are effective for transactions occurring after May 15, 2002. The Company will adopt the provisions of SFAS No. 145 during the three months ended March 31, 2003. For the twelve months ended December 31, 2002, 2001 and 2000, the Company recorded after-tax extraordinary gains on the early

40

extinguishment of debt of $36.7 million, $486.8 million and $41.0 million, respectively. Accordingly, reclassifications of these gains to income from continuing operations may be made throughout fiscal year 2003 to maintain comparability for the reported periods.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. This statement supercedes SFAS No. 121, "Impairment for Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for the disposal of a segment of a business. SFAS No. 144 retains many of the provisions of SFAS No. 121, but addresses certain implementation issues associated with that statement. The Company adopted the provisions of SFAS No. 144 in the three months ended March 31, 2002. The adoption of SFAS No. 144 did not have a material effect on the Company's consolidated financial statements.

        In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of SFAS No. 143 to have a material effect on its consolidated financial statements.

        In June 2001, the FASB issued two new statements: SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."

        Effective January 1, 2002, the Company adopted SFAS No. 141 that requires business combinations entered into after June 30, 2001 to be accounted for using the purchase method of accounting. Specifically identifiable intangible assets, other than goodwill, are to be amortized over their estimated useful economic life.

        SFAS No. 142 requires that goodwill not be amortized, but should be tested for impairment at least annually. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and applies to all goodwill and other intangible assets recognized in an entity's balance sheet at that date, regardless of when those assets were initially recognized. Effective January 1, 2002, the Company adopted SFAS No. 142 and in connection with its adoption, discontinued the amortization of goodwill and reviewed the estimated useful lives of previously recorded identifiable intangible assets, principally customer lists. Additionally, the Company recorded an impairment loss of $11.0 million related to the InterNeXt reporting unit which has been reflected as a cumulative effect of a change in accounting principle. The Company followed the two-step process prescribed in SFAS No. 142 to test its goodwill for impairment under the transitional goodwill impairment test. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The estimated fair value of the Company's assets was based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved. Under the guidelines of SFAS No. 142, the Company is required to perform an impairment test at least on an annual basis at any time during the fiscal year provided the test is performed at the same time every year. On October 1, 2002, the Company's designated annual testing date, based on the testing performed a goodwill impairment loss was recognized in the amount of $3.8 million. See Note 7—"Goodwill and Other Intangible Assets."

Special Note Regarding Forward Looking Statements

        Statements in this Annual Report on Form 10-K constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on current expectations, and are not strictly historical statements. Forward-looking statements include without limitation statements set forth in this document and elsewhere regarding, among other things: the Company's expectations of future capital endeavors

41

including equity, debt, restructuring, investment and acquisition transactions, liquidity, earnings before interest, taxes, depreciation and amortization, sales, net revenue, gross profit, operating profit, net income, cash flow, network development, Internet services development, traffic development, capital expenditures, selling, general and administrative expenses, goodwill impairment charges, service introductions and cash requirements; the Company's financing and/or debt repurchase, restructuring or exchange plans or initiatives; liquidity and debt service forecasts; ability to meet covenants/ratios; allowance for doubtful accounts receivable estimates; management's plans, goals, expectations, guidance, objectives, strategy, and timing for future operations; the revenue and funding impact of the Cable and Wireless customer acquisition; product plans and performance; predictions or expectations of future growth, results or cash flow; and management's assessment of market factors and future financial performance. Factors and risks, including certain of those described in greater detail herein, that could cause actual results or circumstances to differ materially from those set forth or contemplated in forward-looking statements include: changes in business conditions, prevailing trade credit terms or revenues arising from, among other reasons, further telecommunications carrier bankruptcies or adverse bankruptcy related developments affecting the Company's large carrier customers; the possible inability to raise additional capital when needed, or at all; the inability to reduce, exchange or restructure debt significantly, or in amounts sufficient to conduct regular ongoing operations; changes in the telecommunications or Internet industry or the general economy or capital markets; adverse tax rulings from applicable taxing authorities; DSL, Internet and telecommunication competition; changes in financial, capital market and economic conditions; changes in service offerings or business strategies; inability to lease space for data centers at commercially reasonable rates; difficulty in migrating customers, including Cable and Wireless customers, or integrating other assets; difficulty in provisioning VoIP services; changes in the regulatory schemes and regulatory enforcement in the markets in which the Company operates; restrictions on the Company's ability to follow certain strategies or complete certain transactions as a result of its capital structure or debt covenants; the inability to reduce debt significantly; risks associated with the Company's limited DSL, Internet and Web hosting experience and expertise; entry into developing markets; the possible inability to hire and/or retain qualified sales, technical and other personnel, particularly as we continue to attempt to grow our data-centric services, and manage growth; risks associated with international operations (including foreign currency translation risks); expanded FCC approval of in-region long distance services by RBOCs; changes in experience associated with doubtful accounts receivable and related estimates; dependence on effective information systems; dependence on third parties to enable us to expand and manage our global network and operations; dependence on the implementation and performance of the Company's global ATM+IP communications network; the inability to obtain requisite stockholder approval to consummate the proposed second closing equity financing transaction and escalation of hostilities or terroristic acts and adverse geopolitical developments. As such, actual results or circumstances may vary materially from such forward-looking statements or expectations. Readers are also cautioned not to place undue reliance on these forward-looking statements which speak only as of the date these statements were made. Primus is not necessarily obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors, which could cause results to differ from expectations, include risks described in greater detail below associated with:

        Liquidity Restrictions; Possible Inability to Obtain Necessary Financing. The Company believes that its existing cash and internally generated funds will be sufficient to fund its operating losses, debt service requirements, capital expenditures, acquisitions and other cash needs for its operations at least through March 2004. However, there are substantial risks, uncertainties and changes that could cause actual results to differ from our current belief. See for instance information under "Liquidity and Capital Resources—Short- and Long-Term Liquidity Considerations and Risks" and in this "Special Note Regarding Forward-Looking Statements." If adverse events referenced therein were to occur, the Company may not be able to service our debt or other obligations and could, among other things, be

42

required to seek protection under the bankruptcy laws of the United States or other similar laws in other countries.

        Substantial Indebtedness; Liquidity. The Company currently has substantial indebtedness and anticipates that it and its subsidiaries will incur additional indebtedness in the future. The level of the Company's indebtedness (i) could increase interest payment requirements and/or make it more difficult for it to make payments of interest on its outstanding debt; (ii) could limit the ability of the Company to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes; (iii) requires that a substantial portion of the Company's cash flow from operations, if any, be dedicated to the payment of principal and interest on its indebtedness and other obligations and, accordingly, will not be available for use in its business; (iv) could limit its flexibility in planning for, or reacting to, changes in its business; (v) results in the Company being more highly leveraged than some of its competitors, which may place it at a competitive disadvantage; and (vi) will make it more vulnerable in the event of a downturn in its business.

        Limited Operating History; Entry into Internet, Data and VoIP Business; Entry into Developing Markets. The Company was incorporated in February 1994, and began generating revenue in March 1995. Since 1999, the Company has been targeting businesses and residential customers for Internet and data services through the Primus brand, its subsidiary iPRIMUS.com and other acquired ISPs. The Company has been expanding and intends to continue to expand its offering of data/Internet and VoIP services worldwide. The Company anticipates offering a broad-range of Internet protocol-based data and voice communications over the global broadband ATM+IP network which the Company has deployed. The Company cannot provide assurance that it will successfully expand the business. Currently, the Company provides Internet services to business and residential customers in the United States, Australia, Canada, Japan, India, Brazil and Spain, and offers Internet transmission services in the Indian Ocean/Southeast Asia regions through its satellite earth station in London and its earth stations in India. The Company cannot provide assurance that its future operations involving these services will generate operating or net income, or positive cash flow on a predictable basis.

        The market for dial-up and broadband Internet connectivity and related services is extremely competitive. The Company's primary competitors include incumbent operators and other ISPs that have a significant national or international presence. Many of these carriers have substantially greater resources, capital and operational experience than the Company does. The Company also expects it will experience increased competition from traditional telecommunications carriers that expand into the market for Internet services.

        Managing Growth. The Company's history of rapid growth has placed a significant strain on the Company in the past. In order to manage its future growth effectively, the Company must continue to implement and improve its operational and financial systems and controls, purchase and utilize additional transmission facilities, and expand, train and manage its employees, all within a rapidly changing regulatory environment. Inaccuracies in the Company's forecast of traffic could result in insufficient or excessive transmission facilities and disproportionate fixed expenses.

        Historical and Future Operating Losses and Net Losses. Since inception, the Company had cumulative negative cash flow from operating activities. In addition, the Company incurred net losses since inception and has an accumulated deficit of $739.8 million as of December 31, 2002. There can be no assurance that the Company's revenue will grow or be sustained in future periods or that it will be able to achieve or sustain operating profitability, net income or positive cash flow from operations in any future period.

        Integration of Acquired Businesses. Acquisitions of businesses and customer lists, a key element in the Company's historical growth strategy, involve operational risks, including the possibility that an acquisition does not ultimately provide the benefits originally anticipated by management. Moreover, there can be no assurance that the Company will be successful in identifying attractive acquisition

43

candidates, completing and financing additional acquisitions on favorable terms, or integrating the acquired business or assets into its own. There may be difficulty in integrating the service offerings, distribution channels and networks gained through acquisitions with the Company's own. Successful integration of operations and technologies requires the dedication of management and other personnel which may distract their attention from the day-to-day business, the development or acquisition of new technologies, and the pursuit of other business acquisition opportunities, and there can be no assurance that successful integration will occur in light of such events.

        Intense Competition in Long Distance Telecommunications. The long distance telecommunications and data industry is intensely competitive and is significantly influenced by the marketing and pricing decisions of the larger industry participants. Competition in all of the Company's markets is likely to stay intense, or even increase in intensity and, as deregulatory influences are experienced in markets outside the United States, competition in non-United States markets is likely to become similar to the intense competition in the United States. Many of the Company's competitors are significantly larger and have substantially greater financial, technical and marketing resources and larger networks than the Company, a broader portfolio of service offerings, greater control over transmission lines, stronger name recognition and customer loyalty, as well as long-standing relationships with the Company's target customers. In addition, many of the Company's competitors enjoy economies of scale that result in a lower cost structure for transmission and related costs which could cause significant pricing pressures within the industry. Many companies emerging out of bankruptcy could also end up enjoying a lower cost structure and applying pricing pressure within the industry in order to gain market share.

        Dependence on Transmission Facilities-Based Carriers. The Company's ability to maintain and expand its business and effectuate its liquidity objectives is dependent upon whether the Company continues to maintain favorable relationships and credit terms with the transmission facilities-based carriers to carry the Company's traffic.

        International Operations. The Company has significant international operations. In many international markets, the incumbent carrier is most likely to control access to the local networks, enjoy better brand recognition and brand and customer loyalty, and have significant operational economies, including a larger backbone network and correspondent agreements. Moreover, the incumbent carrier may take many months to allow competitors, including the Company, to interconnect to its switches within its territory. There can be no assurance that the Company will be able to obtain the permits and operating licenses required for it to operate, obtain access to local transmission facilities or to market services in international markets. In addition, operating in international markets generally involves additional risks, including: unexpected changes in regulatory requirements, tariffs, customs, duties and other trade barriers; difficulties in staffing and managing foreign operations; problems in collecting accounts receivable; political risks; fluctuations in currency exchange rates; foreign exchange controls which restrict repatriation of funds; technology export and import restrictions; and seasonal reductions in business activity. With respect to currency exchange rates risks, adverse exchange rate developments have had a negative impact on recent operating results, and there can be no assurance that currency exchange rate conditions will improve.

        Dependence on Effective Information Systems. The Company's management information systems must grow as the Company's business expands and are expected to change as new technological developments occur. There can be no assurance that the Company will not encounter delays or cost-overruns or suffer adverse consequences in implementing new systems when required.

        Industry Changes. The international telecommunications industry is changing rapidly due to deregulation, privatization, technological improvements, expansion of infrastructure and the globalization of the world's economies. In order to compete effectively, the Company must adjust its contemplated plan of development to meet changing market conditions. The telecommunications industry is marked by the introduction of new product and service offerings and technological

44

improvements. The Company's profitability will depend on its ability to anticipate, assess and adapt to rapid technological changes and its ability to offer, on a timely and cost-effective basis, services that meet evolving industry standards.

        Network Development; Migration of Traffic. The long-term success of the Company is dependent upon its ability to design, implement, operate, manage and maintain a reliable and cost effective network. The Company could experience delays or cost overruns in the implementation of the network, or its ability to migrate traffic onto its network, which could have a material adverse effect on the Company.

        Dependence on Key Personnel. The loss of the services of K. Paul Singh, the Company's Chairman and Chief Executive Officer, or the services of its other key personnel, or the inability of the Company to attract and retain additional key management, technical and sales personnel, could have a material adverse effect upon the Company.

        Government Regulation. The Company's operations are subject to constantly changing regulation. There can be no assurance that future regulatory changes will not have a material adverse effect on the Company, or that regulators or third parties will not raise material issues with regard to the Company's compliance or non-compliance with applicable regulations, any of which could have a material adverse effect upon the Company.

        Natural Disasters. Many of the geographic areas where the Company conducts its business may be affected by natural disasters, including hurricanes and tropical storms. Hurricanes, tropical storms and other natural disasters could have a material adverse effect on the business by damaging the network facilities or curtailing voice or data traffic as a result of the effects of such events, such as destruction of homes and businesses.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company's primary market risk exposures relate to changes in foreign currency exchange rates and to changes in interest rates.

        Foreign currency—A significant portion of net revenue is derived from sales and operations outside the United States. The reporting currency for the Company's consolidated financial statements is the United States dollar. The local currency of each country is the functional currency for each respective entity. In the future, the Company expects to continue to derive a significant portion of its net revenue and incur a significant portion of its operating costs outside the United States, and changes in exchange rates have had and may continue to have a significant, and potentially adverse effect on the Company's results of operations. The Company's primary risk of loss regarding foreign currency exchange rate risk is caused primarily by fluctuations in the following exchange rates: United States dollar/Australian dollar, United States dollar/Canadian dollar, United States dollar/United Kingdom pound, and United States dollar/Euro dollar. Due to the large percentage of the Company's revenues derived outside of the United States, strengthening of the United States dollar would have an adverse impact on the Company's results of operations. The operations of affiliates and subsidiaries in foreign countries have been funded with investments and other advances. Historically, such investments and advances have been long-term in nature, and the Company accounted for any adjustments resulting from translation as a charge or credit to "accumulated other comprehensive income (loss)" within the stockholders' deficit section of the consolidated balance sheets. In 2002, agreements with certain subsidiaries were put in place for repayment of investments and advances made to the subsidiaries. As the Company is anticipating repayment in the foreseeable future of these amounts, the Company recognized the unrealized gains in foreign currency transaction gain (loss) on the consolidated statements of operations.

45

        Interest rates—A substantial majority of the Company's long-term debt obligations are at fixed interest rates. The Company is exposed to interest rate risk as additional financing may be required and certain of its long-term obligations are at variable interest rates. The Company's primary exposure to market risk stems from fluctuations in interest rates. The Company's interest rate risk related to the variable interest rate long-term obligations results from changes in the United States LIBOR, British Pound LIBOR, Bloomberg BBSWIB, United States Prime and Canada Prime rates. The Company does not currently anticipate entering into interest rate swaps and/or similar instruments. The estimated fair value of the Company's 2000 Convertible Debentures, 1999, 1998 and 1997 Senior Notes (carrying value of $440 million), based on quoted market prices, at December 31, 2002 was $226 million.

        The interest rate sensitivity table below summarizes our market risks associated with fluctuations in interest rates as of December 31, 2002 in United States dollars, which is the Company's reporting currency. The table presents principal cash flows and related weighted average interest rates by year of expected maturity for our senior notes, convertible subordinated debentures, leased fiber capacity, equipment financing, and other long-term obligations in effect at December 31, 2002. In the case of the senior notes, and convertible debentures the table excludes the potential exercise of the relevant redemption and conversion features.

46

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

        None.

47

PART III

        Certain of the information required by Part III will be provided in the Company's definitive proxy statement for the Company's 2003 annual meeting of stockholders (involving the election of directors), which definitive proxy statement will be filed pursuant to Regulation 14A not later than April 30, 2003 ("2003 Proxy Statement"), and is incorporated herein by this reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Information relating to directors of the Company is set forth under the caption entitled "Election of Directors" in the Company's 2003 Proxy Statement and is incorporated herein by reference. Information relating to the executive officers of the Company is set forth in the Company's 2003 Proxy Statement under the caption "Executive Officers, Directors and Key Employees" and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

        The information regarding compensation of officers and directors of the Company is set forth under the caption entitled "Executive Compensation" in the Company's 2003 Proxy Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        Information regarding ownership of certain of the Company's securities is set forth under the captions entitled "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Company's 2003 Proxy Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Information regarding certain relationships and related transactions with the Company is set forth under the caption entitled "Certain Relationships and Related Transactions" in the Company's 2003 Proxy Statement and is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

        Within the 90 days prior to the date of filing this Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief Executive Officer and the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings.

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

48

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

a)

Financial Statements and Schedules

        The financial statements as set forth under Item 8 of this report on Form 10-K are incorporated herein.

        All other financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

b)

Reports on 8-K

        None.

c)

Exhibit listing

49

50

51

*

Filed herewith

**

Compensatory benefit plan

52

SIGNATURES

        Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned, thereunto duly authorized.

        KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints K. Paul Singh, Neil L. Hazard and Tracy R. Book, and each of them, his and her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and her and in his and her name, place and stead, in any and all capacities to sign any and all amendments to this Form 10-K of the Securities and Exchange Commission for the fiscal year of Primus Telecommunications Group, Incorporated ended December 31, 2002, and to file the same, with all exhibits thereto, and other documents in connection therewith, with authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his and her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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

53

54

CERTIFICATIONS

        I, K. Paul Singh, certify that:

1.

I have reviewed this annual report on Form 10-K of Primus Telecommunications Group, Incorporated;



2.

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



3.

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



4.

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

a)

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



b)

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



c)

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

5.

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

a)

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



b)

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

6.

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

55

CERTIFICATIONS

        I, Neil L. Hazard, certify that:

1.

I have reviewed this annual report on Form 10-K of Primus Telecommunications Group, Incorporated;



2.

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



3.

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



4.

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

a)

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



b)

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



c)

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

5.

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

a)

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



b)

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

6.

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

56

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
of Primus Telecommunications Group, Incorporated

        We have audited the accompanying consolidated balance sheets of Primus Telecommunications Group, Incorporated and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity (deficit), cash flows and comprehensive loss for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule on page S-1. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

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

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Primus Telecommunications Group, Incorporated and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        As explained in Note 2, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."

DELOITTE & TOUCHE LLP

McLean, Virginia
February 27, 2003

F-2

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

See notes to consolidated financial statements.

F-3

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)