FLAG TELECOM GROUP LTD - 10-K Annual Report

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

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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-29207

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FLAG TELECOM GROUP LIMITED
(SUCCESSOR TO FLAG TELECOM HOLDINGS LIMITED)
(Exact name of registrant as specified in its charter)

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BERMUDA CEDAR HOUSE
(State or other jurisdiction of 41 CEDAR AVENUE
incorporation or organization) HAMILTON HM12, BERMUDA
(Address of principal executive office)
www.flagtelecom.com

+1-441-296-0909
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Shares,
$1.00 par value

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 / / No /X/

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 registrant's 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. / /

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

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of FLAG Telecom Holdings Limited, the predecessor company of
the registrant ("Predecessor"), as of June 30, 2002 was $35,350,000, based on
the closing price of the Predecessor's common shares on June 28, 2002, the last
business day of the Predecessor's most recently completed second fiscal quarter.
Solely for the purpose of this calculation and for no other purpose, the
non-affiliates of the Predecessor are assumed to be all shareholders of the
Predecessor other than (i) directors of the Predecessor, (ii) executive officers
of the Predecessor and (iii) any shareholder that beneficially owns 10% or more
of the Predecessor's common shares as identified in the Predecessor's Form 10-K
for the fiscal year ended December 31, 2001 filed on April 1, 2002. Such
exclusion is not intended, nor shall it be deemed, to be an admission that such
persons are affiliates of the Predecessor or the registrant.

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

The number of the registrant's Common Shares outstanding as of June 15, 2003
was 2,000,000.

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A NOTE ABOUT FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this Form 10-K, including in the
sections entitled "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", that are based on our
management's beliefs and assumptions and on information currently available to
our management. Forward-looking statements include the information concerning
our possible or assumed results of operations, liquidity and capital resources,
cash flows, business strategies, financing plans, competitive position and
potential growth opportunities. Forward-looking statements include all
statements that are not historical facts and can be identified by the use of
forward-looking terminology such as the words "believes", "expects",
"anticipates", "intends", "plans", "estimates" and similar expressions.

Forward-looking statements involve risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in these
forward-looking statements. You should not put undue reliance on any
forward-looking statements. We do not have any intention or obligation to update
forward-looking statements after we distribute this Form 10-K.

You should understand that many important factors could cause our results to
differ materially from those expressed in these forward-looking statements.
Among the factors that could cause our future results to differ from those
reflected in forward-looking statements are the risks discussed in this
Form 10-K under the heading "Business--Risk Factors" beginning on page 13.
Please read those risk factors carefully.

FLAG TELECOM GROUP LIMITED
TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

References in this Annual Report on Form 10-K to "FLAG Telecom", "we" or
"us" refer to FLAG Telecom Group Limited, a Bermuda company, and, unless the
context otherwise requires or is otherwise expressly stated, its predecessor and
its subsidiaries. FLAG Telecom Holdings Limited, a Bermuda company
("Predecessor") is the predecessor company of FLAG Telecom. On October 9, 2002
(the "Effective Date"), Predecessor transferred substantially all of its assets
and certain liabilities, at fair value, to FLAG Telecom, as a part of
transactions contemplated by a Plan of Reorganization (the "Plan") of
Predecessor and certain of its subsidiaries under chapter 11 of the United
States Bankruptcy Code and its Bermuda equivalent, the Bermuda Schemes of
Arrangement. See "Legal Proceedings" for a more detailed discussion of the Plan.

We file reports with the Securities and Exchange Commission, including
Annual Reports on Form 10K, Quarterly Reports on Form 10Q and other information.
The public may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.

INTRODUCTION

We are a multinational corporate organization made up of multiple corporate
entities. We operate a global telecommunications network comprised of advanced
fiber-optic cable systems and interfaces that are owned by, leased to, or
otherwise available to our company. Over our global network, we offer a variety
of telecommunications products and services, including internet protocol ("IP")
transit, IP point-to-point, leased capacity services, managed bandwidth service,
co-location services and long-term rights of use in capacity. We are a
"carriers' carrier", meaning that our target customer base is the international
wholesale broadband market, consisting of established carriers or major public
telephone operator incumbents, alternate carriers, application service providers
("ASPs"), internet service providers ("ISPs") and other bandwidth intensive
users, rather than individual telecommunications consumers.

At the time of Predecessor's inception, we set out to build a global
telecommunications network and to leverage the revenue generating ability of
that network by overlaying a range of products and services focused on serving
the needs of the telecommunications industry. We have built out our systems on
budget and developed an established base of over 180 customers, many of which
are the world's leading telecommunications companies. Our network is currently
fully operational.

Our market and business strategy since Predecessor's inception has not
changed in principle. What has changed, quite dramatically, is the economic
climate and the financial challenges imposed on our competitors, customers,
potential customers and us. Overcapacity in many regions, as well as lower than
anticipated demand, have led to dramatic declines in prices, the unavailability
of new capital and a number of chapter 11 filings in the industry, including a
filing by Predecessor and certain subsidiaries in April 2002. Although we
emerged from chapter 11 on October 9, 2002 with our global network intact and
successfully restructured, many of our customers have limited or are limiting
their capital commitments to an absolute minimum, only committing to investments
where directly warranted by underlying demand. In these difficult market
conditions we intend to continue to operate our business conservatively, with a
view to serving our customers, conserving our resources and managing our company
prudently in the current difficult telecommunications market.

1

Going forward, our operating strategy in the current economic climate is to
leverage the network we have in place today to the maximum extent possible. This
involves continuing to serve our customers, focusing our capital expenditures,
carefully managing our costs and growing the business by:

- serving the core backbone needs of larger telecommunications and Internet
companies;

- focusing on regions where we have competitive advantages, such as the
Middle East and Asia, and specializing in hard to reach places with
favorable competitive dynamics; and

- increasing the revenue generating capability of the network by adding
another tier of services, focusing on developing the IP layer, increasing
our points of presence ("PoPs"), when financially feasible, and entering
into new bandwidth intensive markets.

We intend to continue to operate our business in a focused manner, providing
capacity to traditional and financially stable new carriers, internet service
providers and other content providers and concentrating on geographic regions in
which we have a competitive advantage. We have managed and intend to continue to
manage our business conservatively and have attempted and continue to attempt to
focus on our core products and services and only to build our own networks where
economical.

OUR GLOBAL NETWORK

We have developed a global fiber-optic network through our own build out and
collaboration with third parties. We set out below the principal features,
geographical reach and status of development of our global network.

OUR OWN NETWORK

The following table provides information on the network that we have built
since our Predecessor's inception.

CAPACITY ACQUIRED FROM OTHER CARRIERS

Where rapid access to a market is required, or where we do not believe it is
economically feasible to expand our network on our own, we seek to enter into
arrangements with third parties to develop network extensions using their
existing networks. Purchasing or leasing capacity from other industry
participants enables us to extend our global network into geographical regions
where we do not have a network footprint at normally a lower cost than
constructing our own capacity. In today's market conditions, purchasing and
leasing enables us to access capacity where we might not be able to construct
our own network.

For example, in 2002 we purchased or leased the following third party
network assets:

- Capacity on the Japan-U.S. consortium cable system between Tokyo and Los
Angeles in order to link FNAL with the west coast of the U.S.;

- Capacity on the PC-1 cable system between Tokyo and San Francisco in order
to link FNAL with the west coast of the U.S.;

- Capacity on the U.S. network of Global Crossing between Los Angeles, San
Francisco and New York, in order to fulfill our requirements for carrying
traffic across the U.S.;

- Capacity into Singapore in order to meet both customer and regulatory
requirements; and

- Capacity on the FLAG Europe system (see below).

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The above network assets also include five PoPs located in Amsterdam,
Singapore, Madrid, San Francisco and Los Angeles. In each case, management
believed that it was more cost effective to acquire or lease capacity from third
parties than to expand our network independently.

We believe that this flexible approach to expanding our network allows us to
benefit from the assets of our partners, while also reducing the capital
expenditures required to develop our network. It also allows us to better match
revenues and costs as the purchasing or leasing of off-network capacity is
driven by underlying demand. This approach also increases the speed with which
we can add new destinations to our network.

The FLAG Europe system, which originally linked Paris to Brussels,
Amsterdam, Dusseldorf and Frankfurt, and which we developed in association with
Verizon Communications Inc. and was acquired from KPNQwest, is no longer in
service as a result of the KPNQwest liquidation. In May 2003 we announced a new
agreement with Verizon Global Solutions, which will provide a new European
network. This agreement will improve our ability to meet our customers'
connectivity needs between Europe, the United States and Asia by providing
connectivity to two new POPs, which we intend to establish in Amsterdam and
Frankfurt. These new PoPs are expected to support our full range of bandwidth
and IP services and will provide seamless connectivity to our submarine cable
systems, FA-1, FEA and FNAL. Supplementing our existing European PoPs in London
and Paris is expected to enable us to offer direct connectivity into and out of
Europe's four largest international traffic hubs. The two new PoPs and European
network are expected to be fully in service during the first quarter of 2004,
with Verizon providing capacity, project management services and the
installation and commissioning of Synchronous Digital Hierarchy ("SDH")
equipment at no additional cost to FLAG as part of a new Commercial Agreement.

NETWORK OPERATING CENTERS

We monitor our global network on a proactive basis from two network
operating centers which use advanced monitoring technology, one of which
provides 24 hours a day, seven days a week coverage. These centers are equipped
to detect and handle incidents and, where possible, quickly re-route traffic in
the event of a fault.

Our network operating centers are located at Heathrow in England and
Fujairah in the United Arab Emirates. The Heathrow network operating center,
together with local emergency server facilities, can monitor our entire global
network. The Fujairah network operating center can presently only monitor FEA
but we are planning to implement a project to allow the monitoring of FA-1 and
FNAL from Fujairah.

METRO RING SITES AND POINTS OF PRESENCE

We have developed metro rings in New York, Paris, London and Tokyo. A metro
ring is a metropolitan fiber ring, which connects our PoPs with the major
telehouses in a metropolitan area and facilitates traffic terminating at a
customer's site from our major traffic routes.

4

We currently have or have access to 25 PoPs or Virtual Points of Presence
("vPoPs") (as described below under "Business Strategy") in 14 countries on four
continents. We have PoPs or vPoPs in the following locations:

For additional details regarding metro rings, PoPs and vPoPs, see "Business
Strategy" below.

BUSINESS STRATEGY

Our goal is to establish FLAG Telecom as a leading independent global
transport and network services provider. We aim to offer an innovative range of
products and services to the international carrier community and content
providers, including ASPs and ISPs, across our global network. We believe that
our network is optimized to support the next generation of IP services.

Our global network makes it possible for us to offer our customers one of
the widest ranges of destinations available. As well as serving high volume
routes, our network provides connectivity into many hard-to-reach locations,
including the Middle East and Asia Pacific regions. Our network can connect our
customers to the majority of the world's population (in conjunction with
appropriate domestic access networks) and most of the world's major business
centers. We have strong relationships with other network operators and local
providers that enable us to offer end-to-end service straight to the markets our
customers want to serve.

Since February 2000, when Predecessor consummated its initial public
offering of common shares, much of our attention has been focused on completing
the construction of our global network to provide seamless service capability
and improving our range of products and services. In 2002, despite filing for
chapter 11 protection and undergoing a major financial restructuring, we were
able to achieve a number of key milestones:

- The FNAL system was brought into full commercial service;

- PoPs were established in Los Angeles, Taipei and Seoul;

- vPoPs were established in Karachi and Tehran;

- Connectivity to major Internet exchanges, PAIX, LINX, NYIX, JPIX, AMSIX,
HKIX, KINX, ESPANIX and SFINX, was established;

- The Cairo Regional Internet Exchange was developed and launched; and

- A program of demand-led capacity upgrades on certain segments of the FEA
system was initiated.

5

Our network is now operational on all the routes we own. To increase the
revenue generating capability of our global network in a time of sharply
declining prices, we have moved our focus away from the construction of our
global network and into a phase of leveraging our global network by building the
volume of traffic and the value of that traffic on our network.

The principal elements of our business strategy to achieve these objectives
include:

- enhancing the connectivity between our network and other networks to
enable new customers to readily move their traffic onto our global
network;

- deepening and broadening our relationships with our customers; and

- expanding the range of products and services that we offer our customers.

ENHANCING THE CONNECTIVITY BETWEEN OUR NETWORK AND OTHER (REGIONAL FEEDER)
NETWORKS TO ENABLE NEW CUSTOMERS TO READILY MOVE THEIR TRAFFIC ONTO OUR GLOBAL
NETWORK

Our global network serves the world's major traffic routes. In order to
attract new customers and to retain existing customers, we aim to make it easier
for them to access our network. In 2002, we achieved this by:

- acquiring backbone network in areas where we have not built networks
ourselves;

- building metro rings in major cities so as to provide access in a broader
range of commercial telehouses; and

- extending our network of PoPs or vPoPs into cities near our global network
or our customers.

ACQUIRING BACKBONE NETWORK IN AREAS WHERE WE HAVE NOT BUILT NETWORKS OURSELVES

We believe that, in order to achieve our goal of being a leading independent
international network services provider, we must offer broad international
reach. Major changes in market conditions have caused us to shift away from
"build" towards "buy" in most areas. In 2000, we had hoped to build out our
network infrastructure independently, believing that owning network
infrastructure would offer significant competitive advantages by securing both
an end-to-end control of capacity and a low unit cost structure. We still
believe that there are advantages to owning the underlying infrastructure which
we operate end-to-end. However, we acknowledge that the economics of building
new systems have been altered by the current levels of supply and demand, the
state of the capital markets and the ability to purchase capacity over different
systems. We believe we can still achieve our business needs by purchasing
capacity, wavelengths or fiber on existing infrastructure with appropriate
service level guarantees on an end-to-end basis. This has been our primary focus
with respect to new network commitments in 2002 and in the latter part of 2001,
since we decided to discontinue an intended build out across the Pacific (for
details see "Capacity Acquired From Other Carriers" in the "Our Global Network"
section above).

By utilizing capacity on third party networks in this way, we have expanded
our global network to enable us to reach new customers in important markets and
to offer our existing customers a broader range of destinations. By building and
using our own high capacity global network we are able to offer low cost
bandwidth and IP services to the many regional carriers and ISPs that do not
have their own networks outside their home territory. Additionally, having an
extensive network under the control of our own network management systems
enables us to offer end-to-end solutions for customers who otherwise might have
to piece together multiple components purchased from different providers.

We intend to pursue multiple approaches to obtaining city-to-city
connectivity to increase the attractiveness of our global network and to meet
increasing customer demand for connectivity into the major international
business centers.

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METRO RINGS IN MAJOR CITIES

Following the completion of the FA-1 cable system, we constructed metro
rings in New York, Paris and London, the three cities in which FA-1 terminates.
These metro rings act as hubs in the critical origination/termination points for
our trans-Atlantic customer traffic. The benefits of metro rings are that they:

- allow us to reach a much larger number of customers directly on our own
network;

- improve the quality of service we provide; and

- offer an alternative to the costly and time-consuming process required for
a customer to build its own connections from telehouses into our global
network.

In addition, in March 2002, we completed a metro ring between our three PoPs in
Tokyo to service customers in Japan.

EXTENDING OUR NETWORK OF POPS

We look to establish PoPs at locations near to our global network or our
customers so as to increase traffic volume on our core network. We currently
have 25 PoPs or vPoPs in 14 countries on four continents. The majority of our
PoPs are equipped to provide managed bandwidth service (as described below),
while a growing number are also able to offer IP services to enable our
customers to connect into the major Internet exchanges. At most PoPs, our
customers are able to install and operate their own equipment with our
co-location service. Through our relationships with local network providers, we
can often set up and manage the local connection from our PoPs to our customers'
sites.

We select the locations of our PoPs in an effort to maximize the potential
of attracting local customer traffic onto our global network. We attempt to
maximize this potential in two ways:

- We choose locations for our PoPs where we believe there will be demand for
our global network and where we can connect the PoP to the main traffic
routes on our network in a cost effective manner.

- Our PoPs, which are a physical presence in a location, form a basis of,
and give momentum to, sales and marketing activity in that region that we
would otherwise not be able to achieve.

DEEPENING AND BROADENING OUR RELATIONSHIPS WITH OUR CUSTOMERS

We believe that we have established a reputation as a leading carriers'
carrier. We are now overlaying our network with a range of value-added services
that will enable carriers, ISPs, ASPs and other content providers worldwide to
take advantage of the latest generation of telecommunications and internet
services.

In 2002, we deepened and broadened our relationships with our customers by:

- meeting the needs of major carriers for the core international network;

- using our innovative vPoP model to gain deeper access to regulated
markets; and

- expanding our customer base to encompass new participants.

MEETING CARRIER NEEDS FOR CORE INTERNATIONAL NETWORK

Our main target carrier customers are the largest carriers and ISPs in the
world. Typically these are incumbent public telephone operators ("PTOs") or
major global operators. Our aim is for our carrier customers to use our global
network to meet their core international network needs so that our network
effectively becomes part of the backbone of their international carrier network.

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USING OUR INNOVATIVE VPOP MODEL TO GAIN DEEPER ACCESS TO REGULATED MARKETS

Like most of our competitors, we are restricted from providing
telecommunications services directly to customers in regulated countries such as
Egypt, China, Iran and Pakistan. We believe that our experience in operating in
such markets is a competitive advantage when it comes to forming alliances with
incumbent operators in such regulated territories. We have developed a business
proposition which we call the virtual point of presence or "vPoP", designed to
enable us to form key relationships with incumbents in regulated territories and
help position us to develop our own networks at such time as the territories
deregulate. The vPoP concept is a commercial arrangement under which we
collaborate with a local incumbent to provide a city center point of presence
connected to the nearest landing point on our global network, and to sell
city-to-city services on an end-to-end basis. Revenues are generated for us and
our local partner both through local customers using the service out of the city
vPoP, and from international customers using the service into the city vPoP. The
revenues generated are shared in an agreed percentage between the local partner
and ourselves.

With existing vPoPs in Egypt and China already in place, we announced during
2002 milestone agreements to establish vPoPs in Pakistan and Iran. The service
to Karachi, Pakistan is provided with the network and support of Pakistan
Telecommunication Limited Company. The service to Tehran, Iran is provided with
the network and support of the Telecommunications Company of Iran.

EXPANDING OUR CUSTOMER BASE TO ENCOMPASS NEW PARTICIPANTS

We believe that we are well positioned to serve content providers who have
very high bandwidth demand that requires them to move vast amounts of digital
information quickly between two distant points on the globe.

EXPANDING THE RANGE OF PRODUCTS AND SERVICES WE OFFER OUR CUSTOMERS

Our core market continues to be based on providing traditional transport
services in the form of bandwidth sales to carriers. Contract values from these
traditional carrier service offerings accounted for approximately 80% of total
contract values in 2002. We continue to offer traditional carrier service
offerings, including "lifetime of the system" right of use ("ROU") products and
leased services (usually one-year leases) designed to assist carriers in
managing their international network capacity needs in a flexible way.

In addition to these traditional services, we offer a portfolio of network
services to both existing and new customers. These network services, which
consist of managed bandwidth service, flexible bandwidth service, IP services
and co-location services, accounted for 20% of our total contract values for
2002. Our growing IP services business accounted for 2% of our total contract
values for 2002.

We offer a range of products and services which use a state-of-the-art
SDH-based and IP-enabled global network infrastructure and are designed to meet
the needs of a wide range of international carriers, ISPs and content providers.
The FLAG global network, except FEA, offers multi-terabit scalability around the
globe. Our current product and service offerings are as follows:

RIGHT OF USE ("ROU") AND LEASED CAPACITY SERVICESS: Our traditional carrier
service offerings include "lifetime of the system" ROU products and shorter
term leased capacity products. We offer these products on all routes on our
global network. These services are offered with the option of restoration on
alternative systems where capacity is bought or leased on non-redundant
systems. We undertake the responsibility of operating and maintaining the
system and the services on the system. An annual operations and maintenance
fee is charged to customers buying lifetime ROU capacity. For shorter term
leases, this fee is typically included in the annual lease charge.

OTHER TRADITIONAL CARRIER SERVICES: Customers are finding it increasingly
difficult to predict their future needs for bandwidth capacity and we have
responded by offering a range of products that

8

help our customers manage their network capacity in a flexible way. Leasing
periods range from a few months to five years. We also offer a lease-to-buy
option that enables our customers to convert a capacity lease into a
lifetime ROU.

We also offer a growing range of value-added services including:

MANAGED BANDWIDTH SERVICE: Our managed bandwidth service provides customers
with a seamless, full-channel service that packages in-country backhaul with
submarine and terrestrial cable systems to extend service to our city center
PoPs. Connectivity is available at speeds of E1, DS3, STM-1, STM-4, STM-16
and STM-64 throughout Asia, Europe, North America and the Middle East. The
service is backed by a high quality service level availability guarantee for
service delivery and availability. We also offer a range of flexible and
competitive commercial terms for one, two and five-year periods, with a
range of billing and currency options.

FLEXIBLE BANDWIDTH SERVICE: Our flexible bandwidth service gives our
customers a high degree of control of the network capacity they lease from
us. Customers have short turn-up times and the flexibility to turn up, turn
down, or turn off capacity to match demand without the penalty of up-front
payment.

CO-LOCATION SERVICE: Our co-location service offers customers who connect
directly to our global network the ability to install and operate their
equipment in our co-location centers. Co-location is available at our PoPs
in Hong Kong, Seoul, Taipei, Tokyo, Singapore, London, Paris, Madrid, New
York and Los Angeles.

IP SERVICES: We own and manage the FLAG Global IP network, providing
end-to-end control over quality and cost and the ability to deliver traffic
both eastward and westward around the globe. Carrier grade routers are
meshed across the network and multi protocol label switching ("MPLS") is
used to increase speed of delivery and traffic management. The network
consists of a single autonomous system designed to maximize efficiency.
Customers can access our IP services from multiple gateways across North
America, Europe, the Middle East and Asia. We have established peering
relationships across each of these continents allowing us to retrieve
Internet content as close to source as possible, minimizing latency (time
delay), overhead and maximizing quality. We offer a range of advanced IP
services that address specific requirements for global content retrieval and
traffic delivery:

- OUR GLOBAL IP TRANSIT SERVICE provides high quality connection to the
global Internet via public and private peering arrangements at speeds up
to a gigabit per second. Access is offered from any city on our global
network. We have peering arrangements at most global Internet traffic
exchanges and we are continually enhancing the coverage and depth of our
service.

- OUR VIRTUAL NETWORK ACCESS POINT ("V-NAP") SERVICE delivers the twin
benefits of cost-efficiency and improved performance to ISPs and content
providers seeking extended peering. V-NAP uses advanced IP technologies
(including Layer 2 VPN (Virtual Private Network) technology and MPLS
tunneling techniques) to offer customers fast, cost-effective secure IP
connectivity to the world's major Internet exchange points. Implementation
of MPLS in an IP network is intended to improve scalability, performance,
reliability and efficiency. Our V-NAP service includes the physical
connectivity and routing equipment at the network access point ("NAP"),
co-location and management services. This allows our customers to save
time and cost compared with installing dedicated connections and routers
in the same NAPs.

- OUR GLOBAL ETHERNET SERVICE enables customers to easily extend their local
area networks, wide area networks or Internet backbone to major global
business centers on the FLAG network. Customers are able to connect
through their existing equipment and enjoy the benefits of a standard,
ubiquitous interface, low unit cost, extremely high speed and flexible
turn up in small

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increments up to 1,000 megabits per second. Global ethernet is extended
locally through local loop partnership arrangements.

MARKETING AND SALES

We currently market our network capacity and telecommunications products and
services globally through a sales and marketing force of approximately 60 people
in the following locations:

- regional sales offices for North America (New York), Europe (London), the
Middle East and Africa (Dubai) and Asia Pacific (Hong Kong); and

- local sales offices or other sales presences in Spain (Madrid), France
(Paris), Germany (Frankfurt), Korea (Seoul), Italy (Rome), China
(Beijing), Japan (Tokyo), Egypt (Cairo) and Taiwan (Taipei).

Each of our regional sales offices is led by a team of senior sales
representatives or advisors who are based locally in that region. Our marketing
and sales team has extensive experience in the telecommunications industry and
has very strong ties to the regions in which our offices are located.

Our regional and local offices are our primary points of customer contact.
The sales representatives in these offices are responsible for promoting sales,
providing customer information, facilitating customer purchases on our network
and ensuring customer satisfaction. To enhance this regional focus to our
marketing and sales efforts, and to address the special needs of our global
customers, we have also adopted a global customer support strategy. This
strategy is designed to provide multiple points of contact and support for our
customers in our organization, at both the regional and senior executive level,
so that we can efficiently and conveniently meet the global telecommunications
needs of these customers. Members of our senior management participate in these
strategic sales relationships.

CUSTOMERS

We have an established customer base of over 180 customers, many of which
are the world's leading telecommunications and Internet companies. Our principal
customers are international licensed telecommunications companies, emerging
telecommunications companies and ISPs. Our customers have experienced slower
growth in demand than had been expected and this has led to a higher risk of
financial distress or even bankruptcy for our customers. Many of our customers
are capital constrained or heavily indebted and are willing to invest in network
capacity only if it is earmarked by underlying demand.

As many capacity sales in the international wholesale market are based on
long-term ROUs, customers place great emphasis on the long-term financial
viability of potential suppliers. Despite our financial restructuring during
2002, we signed over 70 new contracts during the period in which we were
involved in bankruptcy proceedings. We believe that our timely exit from chapter
11 in early October 2002, ahead of many of our competitors, with our global
network substantially intact, has enhanced our credibility in the market as a
viable operator for the long-term. This customer confidence is evidenced by
continued sales in all regions and many sales prospects, some of them
substantial, at the end of 2002.

We have perceived that customers are more demanding in terms of service
quality levels and cost effectiveness of solutions, and are increasingly
concerned by the financial stability of their telecommunications service
providers. The products and key attributes driving the purchasing decisions

10

of our customers vary by the type of customers we serve. We believe that the
trends affecting the types of customers we serve are as follows:

- GLOBAL CARRIERS. The market downturn has significantly affected global
carriers. They are now entering a period of focus, consolidation and tight
cash flow management. We believe that their own network expansion and
upgrade will be driven by short-term planning in response to customer
demand, rather than speculative expansion.

- INCUMBENT PUBLIC TELEPHONE OPERATORS ("PTOS") AND REGIONAL CARRIERS. These
customers contribute significantly to our revenues. They use us to
supplement existing club system (consortium) investments, as most purchase
capacity on multiple systems to meet resiliency needs. We believe that
they will continue to be attracted by our ability to bundle in managed IP
services with the provision of capacity, route either way around the
world, and our independent status, as evidenced by our high level of
repeat business. Quality of service, financial security and price
competitiveness are key attributes to win business with these customers.
These customers typically purchase capacity in the form of ROUs and
leases. While the adoption of short-term leases gains pace, we still sell
a significant proportion of our capacity in the form of long-term ROUs.
The typical purchases are at the STM-1 (Synchronous Transport Module) to
STM-4 capacity level delivered into a city telehouse or internet exchange.

- TIER TWO CARRIERS, ISPS, ASPS AND OTHER CONTENT PROVIDERS. These customers
typically demand high quality of service at low prices. Increasingly,
customers require a high degree of flexibility in provisioning and may
demand a "pay per use" approach. We are seeing trends towards purchase on
demand for these types of customers, mainly for short-term leases. Most
services are delivered into the customer premises and the services are
bundled with very strict service level agreement terms.

No individual customer accounted for greater than 10% of revenues in 2002.

We derive all of our revenue from customers located outside of Bermuda. The
revenue generated by geographic location of our customers, consisting of
capacity in various segments on our global network, is as follows:

($ in thousands)

COMPETITION

As a global network services provider, we compete in a wide variety of
geographic markets, in which we face, and expect in the future to face, specific
regional competitors including consortium cable companies, generally owned by
PTOs. We also compete against a small number of other companies that have built
global networks.

11

We believe that there is substantial oversupply in many key markets, such as
the trans-Atlantic and intra-European routes. The announcements by
360networks, Inc. (now known as 360networks Corporation), Global Crossing Ltd.,
WorldCom, Inc., KPNQwest N.V., Carrier 1 International S.A. and others that they
have filed for bankruptcy protection under chapter 11 or have gone into
liquidation, have exacerbated the oversupply situation by putting further
downward pressures on margins as a result of the need to dispose of assets at
distressed prices. However, these bankruptcies, along with the withdrawal of
some competitors from certain regional markets, does make the market for our
services slightly less competitive in some areas.

We anticipate that certain assets from distressed companies will be recycled
and acquired by others at a lower cost than has been incurred by those companies
that built the networks themselves and that this may cause further price
erosion. However, since our financial restructuring, our lower debt levels and
reduced operating cost base should put us in a position to compete. In addition,
we believe that keeping our network intact following our exit from chapter 11
will give us a good competitive advantage in a market where customers are
increasingly concerned about quality of service and reliability.

We compete, or expect to compete, in five key geographical markets:

- global network services;

- trans-Atlantic services;

- Middle Eastern services;

- intra-Asian services; and

- Europe-Asia long haul services.

A small number of companies have global networks. We continue to believe
that because of the high cost and complexity of building and operating global
networks, there will continue to be a limited number of companies in the global
capacity market. Our main competitors in the global capacity market are Cable &
Wireless, plc ("Cable & Wireless"), TyCo Telecommunications, Inc. ("Tyco"),
Global Crossing Ltd. ("Global Crossing") and WorldCom, Inc. ("WorldCom"), and
the club systems developed by consortium cable systems.

We believe our key competitors in the trans-Atlantic services market are
TyCom Atlantic, the TAT-14 consortium system, Cable & Wireless/Apollo, Global
Crossing (AC-1/AC-2), and Level 3 Communications, Inc. ("Level 3"). In addition,
resellers of capacity on these systems and on our FA-1 system, are putting
pressure on margins at lower levels of capacity, such as at the STM-1 to STM-4
levels. We are aware that other competitors who are experiencing financial
difficulties are trying to offload excess inventory. Recycling excess inventory
has had the effect of putting downward pressure on pricing.

We currently believe that demand in the Middle East remains strong. Our key
competitors in the Middle Eastern market are the Sea Me We 3 ("SMW3") consortium
cable system and a small number of incumbent carriers in the IP sector. Prices
have fallen gradually over time but price declines are not as severe as has been
witnessed in the more competitive regions such as Europe and trans-Atlantic.

We believe our key competitors in the intra-Asian services market are the
Asia Pacific Cable Network 2, Asia Global Crossing (now Asia Netcom), Reach
Telecom Ltd. ("Reach"), the C2C cable network and the SAFE (a consortium cable
system led by South Africa Telekom, France Telecom and Singtel) cable
interconnecting with other cable systems in the region. The arrival of new cable
systems in 2002 has caused a dramatic fall in prices on most routes in North
Asia and we expect further price declines in 2003. Routes to South East Asia
have seen much less severe price declines to date.

In the Europe-Asia long haul market, SMW3, and if it proceeds, SMW4, are the
primary direct competitors. However, we expect the strongest competition in the
future to come from an alternative routing from Europe to Asia across the
Atlantic Ocean, trans-U.S., and across the Pacific Ocean to Japan.

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For our managed services, the competition in most markets is mainly from the
network service companies listed above. For our wholesale IP services, the main
competition is from the global Tier 1 ISPs such as Cable & Wireless, UUNet
(WorldCom) and Genuity (now acquired by Level 3).

EMPLOYEES

At December 31, 2002, we had 234 full-time employees. Our relations with our
employees are good. As part of Predecessor's chapter 11 activities, we reduced
total employee headcount from 382 to 234, which affected all regions and
functional areas, however, we have retained the key employees and skills
necessary to support the Plan.

REGULATIONS

In the ordinary course of development, construction and operation of our
fiber-optic cable systems and expansion of our network services business, we are
required to obtain and maintain various permits, licenses and other
authorizations in both the U.S. and in other jurisdictions where our cables land
and where we wish to provide services, and we are, or will be, subject to
applicable telecommunications regulations in such jurisdictions.

We have obtained applicable licenses to operate our various cable systems.
These include the licenses for our FA-1 system, for which we have obtained a
U.S. Landing License, a UK Public Telecommunications Operator License and a
French Article L33.1 License. For our FNAL system, we have obtained the Fixed
Carrier License in Hong Kong and Type I Telecommunications Licenses in Taiwan
and Japan. In Korea, we purchased 49% (the maximum permitted investment we are
entitled to acquire under the current regulatory restrictions) of the
outstanding shares of Seoul Telenet Inc., a local operator. We operate in Korea
through our ownership of Seoul Telenet Inc., which is permitted to operate under
its Facilities Based Telecommunications Business license.

In addition, with the expansion of our managed services, we have acquired
applicable licenses in the countries in which we operate to enable us to operate
as we consider necessary in each such country. We have been granted
infrastructure licenses in Spain, Italy, Belgium, The Netherlands, Germany,
France, Switzerland, Ireland, Norway, Sweden, Japan and Singapore and licenses
for resale activities in Belgium and Italy.

RISK FACTORS

The following factors could cause our actual results to differ materially
from historical results or anticipated results:

RISKS RELATING TO CURRENT MARKET ENVIRONMENT

PROBLEMS BEING EXPERIENCED BY THE TELECOMMUNICATIONS INDUSTRY ARE ADVERSELY
AFFECTING OUR COMPANY

The global telecommunications industry is experiencing significant and
well-publicized problems. A number of industry participants, including Global
Crossing, MFN, 360networks, Interroute, Carrier 1, PSINet, Teleglobe, WorldCom
and KPNQwest, have either filed for chapter 11 protection, been liquidated or
restructured. Customers, lenders, suppliers and investors have expressed
increasing concern about an inability to sustain a large number of industry
participants. Share prices across the sector have declined dramatically over the
past three years, and the capital markets generally have closed to industry
participants. These industry-wide factors have affected share prices and the
ability to raise capital, and have led to concern regarding viability of
industry participants as expressed by customers and suppliers.

Substantial excess fiber capacity in most markets has driven prices
dramatically lower over the past two years. Prices are continuing to fall. We
expect that the insolvency of various industry participants

13

will create further downward pressure on prices. To the extent that
well-financed competitors acquire distressed assets from insolvent companies,
they will be able to offer capacity at significantly lower marginal costs than
the companies that originally built the systems.

The financial difficulties faced by a number of our competitors, suppliers
and customers, such as Global Crossing, 360networks, Reach, Carrier 1, PSINet,
Teleglobe, WorldCom and KPNQwest, as referred to above, have exacerbated the
oversupply situation by putting further downward pressures on margins as a
result of the need to dispose of so-called distressed assets to achieve some
return on initial capital investments. We anticipate that assets may be recycled
and obtained by competitors at a much lower cost structure than has been
achieved by those companies that built the networks themselves. Continuing
weakness in prices caused by overcapacity, together with continued problems
experienced by other industry participants and skepticism about the sector
generally, can be expected to adversely affect our business and our liquidity.

RISKS RELATING TO OUR BUSINESS

OUR ABILITY TO DEFEND CHALLENGES FROM CERTAIN CUSTOMERS WHO ARE CHALLENGING AND,
IN CERTAIN CASES, REFUSING TO PAY CERTAIN OPERATIONS AND MAINTENANCE CHARGES ON
OUR FEA SYSTEM COULD RESULT IN A MATERIAL ADVERSE EFFECT ON OUR BUSINESS OR
FINANCIAL CONDITION

A number of our original customers who purchased certain capacity from us on
our FEA cable system are challenging the operations and maintenance ("O&M")
charges on the system, pursuant to the FEA Construction and Maintenance
Agreement ("FEA C&MA"). In certain cases, despite their contractual obligations,
some of these customers refuse to pay the O&M charges which are due, claiming
that they should be lowered to better reflect current market prices, even though
such a price adjustment mechanism is not contemplated by the FEA C&MA.

While we are in the process of obtaining an agreement with these customers
that the O&M fees are appropriate and in line with their payment obligations
under the FEA C&MA, we cannot guarantee that all of them will be persuaded and
continue their payments. If we are not able to collect fees relating to the O&M
charges or if we are forced to take a reduction on the charges by agreeing upon
an amendment to the FEA C&MA, which cannot be reflected by reducing underlying
third party O&M costs, we could experience a material adverse effect on our
business or financial condition.

IF WE ARE UNABLE TO OBTAIN CONTINUED SUPPORT FROM EXISTING CUSTOMERS, WE MAY NOT
BE ABLE TO REACH OUR RECURRING QUARTERLY REVENUES TARGETS

A number of our existing customers, who have purchased capacity from us, are
experiencing financial difficulties which affect their quarterly or yearly
capital expenditure and operating costs budgets. In turn, this may have an
adverse effect on our recurring revenues on a quarterly basis. We are dependent
on the capital expenditure and purchase decisions of our customers, and cannot
assure you that we will be able to reach our recurring quarterly revenues
targets.

THE FINANCIAL DIFFICULTIES OF OUR SUPPLIERS AND PARTNERS MAY IMPAIR OUR ABILITY
TO OPERATE OUR NETWORKS

We utilize a number of different suppliers and partners who provide
essential elements for the operations of our subsea cables, such as cable
landing facilities, backhaul (the connection between the landing station and the
PoP) or PoPs. In the case of our FNAL cable system, we are dependent on a number
of suppliers, most specifically Reach, the co-builder of the FNAL cable system.
Although Reach has a contractual obligation to transfer the ownership of its
half of the FNAL sub-sea cable segments, it currently still owns half of these
FNAL segments. On the other hand, it owns the cable landing stations in Japan
and Taiwan, whereas Korea Telecom owns the cable landing station in Korea. Our
company or our local affiliate is, and as in the case of Taiwan and Korea, close
to finalizing further details of long-term rights of use or similar lease
arrangements relating to these assets, as we

14

have for the terrestrial backhaul of FNAL in Taiwan and Korea with Eastern
Broadband Telecom Company Limited and Hansol iGlobe Company Limited ("Hansol")
respectively. With Chief Telecom, Inc. in Taiwan and Hansol in Korea, our
company or our local affiliates, have long-term lease arrangements for our PoPs
located in our telehouse facilities in Taipei and Seoul. In case of any
financial difficulties of any of these suppliers or partners, our ability to
operate our networks may be significantly impaired and/or be at a higher cost.

IF WE FAIL TO MAINTAIN CO-OPERATIVE RELATIONSHIPS WITH OUR LANDING PARTIES AND
LOCAL OPERATORS, OUR OPERATIONS OR UPGRADE MAY BE IMPAIRED

We utilize a number of different landing parties to provide access to the
origination and termination points necessary for continued operations and any
future upgrades, such as cable landing stations, at various locations on our
global network, especially for the FEA cable system. Our ability to offer
city-to-city services on the FEA cable system is dependent on our landing
parties' willingness to provide cost-effective terrestrial services and to agree
to connect other terrestrial networks to our systems. Each of these landing
parties has entered into a construction and maintenance agreement with us and
some of our customers, under which each of the landing parties commits to
provide access, to charge reasonable and uniform rates to all customers
accessing our global network through the landing party's landing station and to
maintain the terrestrial portion of our system in the landing party's country.
Despite obligations to act in the best interest of the FEA system and these
commitments, we cannot assure you that the landing parties will perform their
contractual obligations or that there will not be political events or changes in
relation to the landing parties which have adverse effects on us. In addition,
the construction and maintenance agreement does not explicitly grant us the
right to install further equipment into cable landing facilities without the
consent of our landing parties. We cannot assure you that we will be able to
obtain the consent of our landing parties to proposed future modifications of
our landing facilities that may be advantageous to us or necessary to operate
our global network.

Although the implementation of the FEA Construction and Maintenance
agreement is governed by a management committee who can decide by majority vote
which needs to include FLAG in case of financial impact on FLAG, a change of the
FEA Construction and Maintenance Agreement would require unanimity.

CONTINUED SEVERE COMPETITION ON MOST OF THE ROUTES OF OUR SYSTEMS WILL LIMIT OUR
ABILITY TO MAINTAIN OR IMPROVE OUR MARGINS AND OUR ABILITY TO IMPROVE OUR MARKET
SHARE

Competition remains strong in many markets, especially in North Asia and the
Atlantic. Many of our competitors are undergoing restructuring, which makes them
extremely aggressive in pricing. Even though customers may not want to buy from
these companies, the price quotes they receive from them influence market
pricing levels and customer expectations. Whereas our current business plan
anticipates a degree of price erosion, which we are currently experiencing to a
large extent, it is contingent on pricing stabilizing on the Atlantic and Middle
Eastern routes, and on not having excess capacity in the over-supplied market in
the next two years.

CONTINUING PRICING PRESSURES, TECHNOLOGY AND OTHER FACTORS THAT COULD LEAD TO
THE RECOGNITION OF FURTHER ASSET IMPAIRMENTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR FINANCIAL POSITION

We intend to retain capacity on all our systems for our own account, to
bundle this capacity with our other products and to sell these bundled products.
The future demand for such bundled products, or the prices we can obtain for
these products, may not be sufficient to allow us to fully utilize the retained
capacity or to recover our capital invested in the projects. The trend toward
shorter-term capacity purchases and continued declining prices makes it
increasingly uncertain that we will be able to recover our costs.

15

The telecommunications industry is subject to rapid and significant changes
in technology. If we do not replace or upgrade technology and equipment that
becomes obsolete, we will be unable to compete effectively because we will not
be able to meet the expectations of our customers. Additionally, in recent
years, the useful economic life of telecommunications equipment has declined
significantly. Although we believe that, for the foreseeable future,
technological changes will not materially affect the use of our fiber-optic
system, we cannot predict the effect of technological changes on our business.
We cannot assure you that technological developments will not render the
infrastructure and technologies in which we invest obsolete before we can
adequately utilize them.

Given the high degree of competition in terms of alternative supply, price
erosion and continued lack of demand, an impairment charge of $359.0 million on
our FA-1 cable system was recognized in the year ended December 31, 2001. Our
adoption of statement of Financial Accounting Standards No. 144 and the
subsequent review of future cash flows based on current service potential in the
light of the current depressed telecommunications market conditions has resulted
in an impairment of the FEA cable system of $327.9 million and an impairment of
the FNAL cable system of $225.0 million during 2002, in addition to the
impairment charge recorded upon adoption of fresh start accounting. We will
continue to review the operating performance of our systems, and we cannot
assure you that continuing pricing pressure will not require us to recognize
further impairments in the future. If we determine at any time that we are
required to recognize a further impairment and write down the value of the
system, this could be expected to have a material adverse effect on our
financial condition.

GOVERNMENTAL INVESTIGATIONS WITH RESPECT TO OTHER INDUSTRY PARTICIPANTS MAY
ADVERSELY AFFECT US

The SEC and the Federal Bureau of Investigation are conducting
investigations into the financial reporting of Global Crossing, and the SEC and
U.S. House of Representatives are also investigating the financial reporting of
other industry participants, such as Qwest. In connection with the SEC's Global
Crossing and Qwest investigations, we and other industry participants have
received third party subpoenas from the SEC requesting documents relating to our
transactions with Global Crossing and Qwest. Although we have given full
disclosure, and co-operated fully with the SEC requests, and the SEC has not
made any adverse comments to us, it is possible that the SEC will determine to
investigate other industry participants, including us.

CUSTOMERS MAY DEMAND SHORTER-TERM ARRANGEMENTS WHICH MAKES IT DIFFICULT TO
MAINTAIN OUR CUSTOMER BASE AND MAY PUT GREATER PRESSURE ON OUR OPERATING MARGINS
OR SHORT-TERM CASH FLOWS

As prices continue to soften, excess capacity continues to overhang the
market and customers continue to fear that suppliers are financially unstable,
customers may become increasingly unwilling to purchase capacity on an ROU basis
over an extended period of time, typically 15 years. Capacity sales may be
structured as short-term arrangements with annual repricing or, in the case of
continued long-term arrangements, increasingly spread payments are agreed. This
potential shift to shorter-term or spread payments arrangements makes it
increasingly difficult for us to maintain our existing customer base and may put
greater pressure on our operating margins or short-term cash flow. If market
conditions are materially different to the assumptions in our forecast, an
increase in short-term arrangements may have a detrimental impact on operating
margins or short-term cash flow.

OUR DEPENDENCE ON THIRD PARTIES FOR THE CRITICAL "LAST MILE" CONNECTION TO OUR
CUSTOMERS MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE

As an independent carrier, we regularly have to rely on established
telephone companies, some of whom are our competitors, for the "last mile"
connection to the individual customer's network. Our largest competitors, such
as the dominant regional operating companies and the incumbent PTO companies,
often have end-to-end connectivity and are often not reliant on third parties
for the "last mile". As a result, they may be able to provide services similar
to those which we provide on a more

16

cost-effective basis than we can. This lack of access, and the cost of acquiring
it, may adversely affect our ability to compete.

BECAUSE OUR COMPANY AND OUR INDUSTRY ARE HIGHLY REGULATED, OUR ABILITY TO
COMPETE IN SOME MARKETS IS RESTRICTED

The telecommunications industry is highly regulated. The regulatory
environment varies substantially from country to country and restricts our
ability to compete and/or operate in some markets. We cannot assure you that we
will be able to obtain the authorizations that we need to implement our business
plan or enter new markets or that these authorizations, if obtained, will not be
later revoked. Regulation of the telecommunications industry is changing
rapidly, which affects our opportunities, competition and other aspects of our
business. Our operations may be subject to risks such as the imposition of
governmental controls and changes in tariffs.

IF ADVERSE FOREIGN ECONOMIC OR POLITICAL EVENTS OCCUR, OUR NETWORK AND CUSTOMER
BASE MAY BE ADVERSELY AFFECTED AND OUR FINANCIAL RESULTS COULD SUFFER

We derive substantially all of our revenues from international operations.
We have, and expect to have, substantial physical assets in several foreign
jurisdictions along our global network. International operations are subject to
political, economic and other uncertainties, including, the risk of war,
revolution, expropriation, renegotiation or modification of existing contracts,
labor disputes and other uncertainties arising out of foreign government
sovereignty over our international operations. Some regions of the world along
our routes have a history of political and economic instability. This
instability could result in new governments or the adoption of new policies that
are hostile to foreign investment.

BECAUSE MANY OF OUR CUSTOMERS DEAL PREDOMINANTLY IN FOREIGN CURRENCIES, WE MAY
BE EXPOSED TO EXCHANGE RATE RISKS

We invoice all capacity sales and maintenance charges in U.S. Dollars.
However, we invoice some managed services products in local currencies and most
of our customers and many of our prospective customers derive their revenues in
currencies other than U.S. Dollars. The obligations of customers with
substantial revenues in foreign currencies may be subject to unpredictable and
indeterminate increases in the event that such currencies devalue relative to
the U.S. Dollar. Furthermore, these customers may become subject to exchange
control regulations restricting the conversion of their revenue currencies into
U.S. Dollars. In this event, the affected customers may not be able to pay us in
U.S. Dollars.

BECAUSE SOME OF OUR CUSTOMERS OPERATE IN A WEAK ECONOMIC ENVIRONMENT WITH A LACK
OF EXTERNAL INVESTMENT, WE MAY BE EXPOSED TO BAD DEBT RISKS

As a result of the current uncertain global economic environment and
challenges facing the industry, we may experience collection delays or
non-payment and we have experienced, and may continue to experience, deferrals
of purchases of our products and services by our customers.

RISKS RELATING TO OUR COMPANY

OUR ABILITY TO OPERATE SUCCESSFULLY UNDER A REDUCED BUDGET AFTER EMERGENCE FROM
CHAPTER 11 MAY DIRECTLY IMPACT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

We emerged from chapter 11 proceedings with a reduced debt liability, a
reduced budget and a smaller organization. In the event of further deterioration
in the market, we cannot assure you that we will have sufficient resources to
implement our business plan and secure additional growth.

17

OUR FAILURE TO MAINTAIN OUR KEY SKILLS COULD SEVERELY IMPAIR OUR ACTIVITIES AND
THE IMPLEMENTATION OF OUR STRATEGY

Our business is managed by a number of key people who have the expertise and
experience which are critical to our global business and the implementation of
our strategy. Competition for key skills remains intense in the current unstable
telecommunications market. If we are unable to retain our key skills, our
activities could be severely impaired and our ability to carry out our strategy
could be materially and adversely affected.

IF WE FAIL TO HAVE OUR COMMON SHARES LISTED ON NASDAQ OR A NATIONAL SECURITIES
EXCHANGE, OUR ABILITY TO RAISE CAPITAL MAY BE ADVERSELY IMPACTED

Our common shares currently trade on the over-the-counter market. Pursuant
to the Plan, we must use commercially reasonable efforts to cause our common
shares to be listed on the Nasdaq National Market or a national securities
exchange. However, we must first fulfill the minimum market price and other
requirements set out by Nasdaq or a national securities exchange, and our
listing applications will be subject to review and approval by Nasdaq or such
exchange. We cannot assure you that we will be able to re-list our common shares
on the Nasdaq National Market or a national securities exchange in the imminent
future.

Although our current plans do not assume additional financing, it may be
difficult for us to raise equity capital, especially through the sale of our
common shares, while our common shares are trading on the over-the-counter
market because of the substantially lower liquidity in that market relative to
the Nasdaq National Market or a national securities exchange such as the New
York Stock Exchange. Even if we were able to raise equity capital while our
common shares are trading on the over-the-counter market, it is likely that it
would be at a discount relative to what we could receive for our common shares
if they were listed on the Nasdaq National Market or a national securities
exchange. If we need to raise a certain amount of cash, this discount could
result in the sale of a greater number of shares, which could result in
additional dilution to existing holders of our common shares.

THE PRICES OF OUR COMMON SHARES CAN BE EXPECTED TO BE VOLATILE

The market price of our common shares, like the stock prices of many
publicly traded telecommunications companies, may be highly volatile. The market
price of the common shares could be affected by:

- The depth and liquidity of the market for the common shares (there are
relatively few shares outstanding and they are currently thinly traded, on
average);

- Investor perceptions of our financial condition and results of operations;

- Increased price competition;

- Quarterly variations in our operating results; and

- Changes in general economic conditions of the telecommunications industry
and volatility in the financial markets.

U.S. PERSONS WHO OWN OUR COMMON SHARES MAY HAVE MORE DIFFICULTY IN PROTECTING
THEIR INTERESTS THAN U.S. PERSONS WHO ARE SHAREHOLDERS OF A U.S. CORPORATION

The Companies Act 1981 of Bermuda (the "Bermuda Act"), which applies to us,
differs in certain material respects from laws generally applicable to U.S.
corporations and their shareholders. Set forth below is a summary of certain
significant provisions of the Bermuda Act (including modifications adopted
pursuant to our Bye-Laws) applicable to us, which differ in certain respects
from provisions of Delaware corporate law. Because the following statements are
summaries, they do not purport to deal with all aspects of Bermuda law that may
be relevant to our company and our shareholders.

18

INTERESTED DIRECTORS. Bermuda law requires that a director declare, at the
first opportunity at a meeting of the directors or by writing to the directors,
his interest in any material contract or proposed material contract with the
company or any of the subsidiaries, or his material interest in any person that
is a party to a material contract or proposed material contract with the company
or any of its subsidiaries. Any director or officer who fails to make such
declaration is deemed not to be acting honestly and in good faith. Our Bye-Laws
provide that no director is accountable to our company in respect of any
remuneration or other benefits received as a director of our company or person
promoted by our company or in which our company has an interest. Under Delaware
law such transaction would not be voidable if (1) the material facts as to such
interested director's relationship or interests are disclosed or are known to
the board of directors and the board in good faith authorizes the transaction by
the affirmative vote of a majority of the disinterested directors, (2) such
material facts are disclosed or are known to the stockholders entitled to vote
on such transaction and the transaction is specifically approved in good faith
by vote of the majority of shares entitled to vote thereon or (3) the
transaction is fair as to the corporation as of the time it is authorized,
approved or ratified. Under Delaware law, such interested director could be held
liable for a transaction in which such director derived an improper personal
benefit.

MERGERS AND SIMILAR ARRANGEMENTS. We may acquire the business of another
Bermuda exempted company or a company incorporated outside Bermuda. We will be
permitted, with the approval, as required under Bye-Law 96 of the Bye-Laws, of
75% of votes cast at a general meeting of its shareholders at which the quorum
required under Bye-law 39 (consisting of two persons holding or representing in
person or by proxy in excess of 50% of the outstanding shares) is present, to
amalgamate with another Bermuda company or with a body incorporated outside
Bermuda. Any shareholder of a Bermuda company that is amalgamating may, subject
to meeting certain requirements, apply to a Bermuda court for a determination of
the fair value of such shareholder's shares. Under Delaware law, with certain
exceptions, a merger, consolidation or sale of all or substantially all the
assets of a corporation must be approved by the board of directors and a
majority of the outstanding shares entitled to vote thereon. For example, under
Delaware law, a stockholder of a corporation participating in certain major
corporate transactions may, under certain circumstances, be entitled to
appraisal rights pursuant to which such stockholder may receive cash in the
amount of the fair value of the shares held by such stockholder (as determined
by a court) in lieu of the consideration such stockholder would otherwise
receive in the transaction.

TAKEOVERS. Bermuda law provides that where an offer is made for shares of a
company and, within four months of the offer, the holders of not less than 90%
of the shares which are the subject of the offer accept, the offeror may by
notice require the non-tendering shareholders to transfer their shares on the
terms of the offer. Dissenting shareholders may apply to the court within one
month of the notice objecting to the transfer. Bermuda law also affords the
holder of 95% or more of the issued shares of a company the right to acquire the
balance of the issued shares, but also gives a right to the minority
shareholders to apply to the court for an appraisal of the fair value of their
shares. Delaware law provides that a parent corporation, by resolution of its
board of directors and without any shareholder vote, may merge with any
subsidiary of which it owns at least 90% of each class of capital stock. Upon
any such merger, dissenting stockholders of the subsidiary would have appraisal
rights.

SHAREHOLDER'S SUIT. The rights of shareholders under Bermuda law are not as
extensive as the rights of shareholders under legislation or judicial precedent
in many United States jurisdictions. Class actions and derivative actions are
generally not available to shareholders under the laws of Bermuda. However, the
Bermuda courts ordinarily would be expected to follow English case law
precedent, which would permit a shareholder to commence an action in the name of
the company to remedy a wrong done to the company where the act complained of is
alleged to be an infringement of a personal right vested in the shareholder, or
to be beyond the corporate power of the company, or is illegal, or would
constitute a fraud against the minority shareholders. The court in Bermuda has
discretion to require

19

one party to pay a proportion of the legal costs of the other party. Usually,
the winning party in such an action would be able to recover from the losing
party a portion of attorneys' fees incurred in connection with such action. Our
Bye-Laws provide that shareholders waive all claims or rights of action that
they might have, individually or in the right of the company, against any
director or officer for any act or failure to act in the performance of such
director's or officer's duties, except with respect to any fraud or dishonesty
of such director or officer. Class actions and derivative actions generally are
available to stockholders under Delaware law for, among other things, breach of
fiduciary duty, corporate waste and actions not taken in accordance with
applicable law. In such actions, the court has discretion to permit the winning
party to recover attorneys' fees incurred in connection with such action.

INDEMNIFICATION OF DIRECTORS. Under Bermuda law, we may indemnify our
directors or officers in their capacity as directors or officers for any loss
arising or liability attaching to them by virtue of any rule of law in respect
of any negligence, default, breach of duty or breach of trust of which a
director or officer may be guilty in relation to the company other than in
respect of his own fraud or dishonesty. Under Delaware law, a corporation may
indemnify a director or officer of the corporation against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in defense of an action, suit or proceeding by reason of
such position if (i) such director or officer acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation and (ii) with respect to any criminal action or
proceeding, such director or officer had no reasonable cause to believe his or
her conduct was unlawful.

INSPECTION OF CORPORATE RECORDS. Members of the general public will have
the right to inspect our public documents at the office of the Registrar of
Companies in Bermuda, which will include our memorandum of association
(including its objects and powers) and any alteration to our memorandum of
association and documents relating to any increase or reduction of authorized
capital. Our shareholders have the additional right to inspect our Bye-Laws,
minutes of general meetings and audited financial statements, which must be
presented to the general meeting of shareholders. The register of our
shareholders is also open to inspection by shareholders without charge, and to
members of the public for a fee. We are required to maintain our share register
in Bermuda but may establish a branch register outside Bermuda. We are required
to keep at our registered office a register of our directors and officers which
is open for inspection by members of the public without charge. Bermuda law does
not, however, provide a general right for shareholders to inspect or obtain
copies of any other corporate records. Delaware law permits any shareholder to
inspect or obtain copies of a corporation's shareholder list and its other books
and records for any purpose reasonably related to such person's interest as a
shareholder.

ENFORCEMENT OF JUDGMENTS AND OTHER MATTERS. We have been advised by Appleby
Spurling & Kempe, our Bermuda counsel, that a Bermuda court will not enforce, in
the courts of Bermuda, judgments of United States courts based upon the civil
liability provisions of the United States federal securities laws, unless such
judgments are monetary judgments, and certain criteria are met. Additionally,
Appleby Spurling & Kempe has advised us that an investor would not be able to
bring an original action in the Bermuda courts to enforce liabilities against us
or our directors and officers who reside outside the United States based solely
upon United States federal securities laws, but could enforce rights which
constituted rights capable of enforcement under Bermuda law which might be
equivalent to the rights of such investors under the requirements of the United
States federal securities law.

We have been advised by Appleby Spurling & Kempe that there is no treaty in
effect between the United States and Bermuda providing for the enforcement in
Bermuda of a monetary judgment entered by a United States court. Because of the
absence of such a treaty a litigant's ability to enforce a United States
monetary judgment against us will be impaired to the extent that the litigant is
actually

20

required to bring an action to enforce the judgment in a Bermuda court. Appleby
Spurling & Kempe has advised that, assuming that they meet certain criteria,
such judgments are the proper subject of an action in the Supreme Court of
Bermuda and that, on general principles, such an action should be successful
without having to prove any of the facts underlying the judgment as long as two
standard principles are established: first, the United States court rendering
the judgment must have been competent to hear the action, and second, the
judgment may not be contrary to Bermuda public policy, obtained by fraud or in
proceedings contrary to natural justice of Bermuda and should not be based on an
error in Bermuda law.

Some of our directors and officers reside outside the United States, and all
or a substantial portion of their assets and our assets may be located in
jurisdictions outside the United States. Therefore, it may be difficult for
investors to effect service of process within the United States upon non-U.S.
directors and officers or to recover against our company, or non-U.S. directors
and officers on judgments of U.S. courts, including judgments predicated upon
the civil liability provisions of the U.S. federal securities laws. However, we
may be served with process in the United States with respect to actions against
it arising out of or in connection with violations of U.S. federal securities
laws relating to offers and sales of our common shares by serving our U.S. agent
irrevocably appointed for that purpose. We have retained CT Corporation System,
111 Eighth Avenue, New York, New York 10011, as our U.S. agent irrevocably
appointed for the service of process as described in the preceding sentence.

CERTAIN SHAREHOLDERS MAY BE SUBJECT TO THE CONTROLLED FOREIGN CORPORATION RULES

United States shareholders who, directly or indirectly (taking into account
certain complex attribution rules), own or will own 10% or more of the total
combined voting power of all classes of our shares (each a "10% United States
shareholder") should consider the possible application of the controlled foreign
corporation ("CFC") rules. If five or fewer 10% United States shareholders
collectively own more than 50% of the total combined voting power or total value
of our capital stock, we will be treated as a CFC. Each 10% United States
shareholder of a CFC generally must include in its gross income for U.S. federal
income tax purposes its pro rata share of the CFC's "subpart F income," even if
the subpart F income has not been distributed, and is also subject to current
U.S. tax on its pro rata share of the CFC's earnings invested in U.S. property.
In addition, gain from the sale or exchange of stock in a CFC by a U.S. person
that is or was a United States shareholder may be treated as ordinary income
under certain circumstances.

LIMITATIONS IMPOSED BY THE INDENTURE GOVERNING CERTAIN OF OUR NEW NOTES IMPOSE
CERTAIN RESTRICTIONS ON OUR OPERATIONS

The indenture between ourselves and Bank of New York, the Trustee, dated as
of the Effective Date, which we entered into pursuant to the Plan, imposes
certain restrictions on our operations. Under the indenture, we are not allowed
to freely issue parental guarantees and changes to our corporate structure or
dispositions of any surplus subsidiaries must be approved by the Board of
Directors subject to restrictions in the indenture and with consent from the
Trustee. Our inability to issue parental guarantees could adversely impact our
ability to retain new business.

Certain of our notes become immediately due and payable in the event of a
change of control or an event of default. There is a risk that we could not
cover these repayments in these circumstances. In addition, pursuant to the
Indenture (as defined below) for the Series A Notes we have the right to redeem
the aggregate principal amount of these Notes at a discount until April, 2004.
If a "Change in Control" (as defined in the Indenture) were to occur, we would
lose the right to redeem the notes at a discount.

21

WE MAY BE UNABLE TO REPAY OR SERVICE DEBT

Our ability to pay the principal of and interest on the Notes issued by us
on Effective Date, described under Item 7 of this Form 10-K, and to satisfy our
other payment obligations will depend upon our future performance, which will be
affected by prevailing economic conditions and financial, business and other
factors and our level of indebtedness from time to time. Many of these
conditions and factors are beyond our control.

THE MARKET VALUE OF OUR ASSETS IS SUBJECT TO MARKET FLUCTUATIONS, AND WE MAY NOT
REALIZE SUFFICIENT VALUE ON THE SALE OF COLLATERAL TO SATISFY OUR PAYMENT
OBLIGATIONS IF WE WERE TO DEFAULT ON OUR NOTES

Certain of the Notes issued by us on Effective Date are secured by a first
priority lien on all of our assets. In the event that we default on our
obligations to make payments in respect of the Notes, holders of the Notes would
be entitled to payment out of proceeds from the sale of the collateral prior in
right to any general unsecured creditors. Our ability to realize such value upon
the sale of the collateral and to satisfy our obligations with respect to these
Notes, however, will depend upon general market and economic conditions, the
physical condition of the collateral, the availability of buyers and other
similar factors at the time of sale. The value of the collateral will decline
over time due to usage and wear and tear or in response to market fluctuations,
and there can be no assurance that the future value of the collateral will not
be considerably less than their current appraised value or the amount actually
paid for such assets. Accordingly, there can be no assurance that the proceeds
of any sale of the collateral following an event of default on the Notes would
be sufficient to satisfy payments due on the Notes.

IF FUTURE COSTS EXCEED OUR CURRENT ESTIMATE OF FUTURE PERFORMANCE OBLIGATIONS,
OUR FINANCIAL RESULTS COULD SUFFER

In accordance with fresh start accounting rules, we have made a provision
for future costs in respect of services for which we have already received
payment. Whilst this is an estimate and we do not expect any material variation
from this, we cannot guarantee that these costs will be as predicted when they
arise.

If we determine at any time that we are required to recognize a further
provision in respect of these costs, this could be expected to have a material
adverse effect on our financial condition.

CERTAIN ASPECTS OF OUR CORPORATE STRUCTURE MAY RESTRICT OUR ABILITY TO SATISFY
OUR PAYMENT OBLIGATIONS

FLAG Telecom Group Limited has no business operations of its own and has no
significant assets other than the shares of its subsidiaries. It derives all of
its cash flow from dividend and other payments from its direct and indirect
subsidiaries, which in turn derive all of their cash flows from payments from
their respective subsidiaries.

Our ability to pay the principal of, premium, if any, and interest on our
indebtedness is dependent on the generation of cash flow by these subsidiaries
and their ability to make such cash available to us by dividend or otherwise.
The ability of these subsidiaries to transfer funds by dividend or otherwise may
be restricted by their ability to generate cash flow from operations, the law of
the jurisdiction of their incorporation, applicable bankruptcy, federal, state
or foreign fraudulent conveyance or dividend restriction laws and any financing
agreements to which they are parties.

22

THERE ARE ANTI-TAKEOVER PROVISIONS CONTAINED IN OUR BYE-LAWS THAT COULD IMPEDE
AN ATTEMPT TO REPLACE OR REMOVE OUR MANAGEMENT OR DELAY OR PREVENT THE SALE OF
OUR COMPANY, WHICH COULD DIMINISH THE VALUE OF OUR COMMON SHARES

Our Bye-Laws contain provisions that could delay or prevent changes in our
management or a change of control that a shareholder might consider favorable,
including:

- election of our directors is staggered, meaning that the members of only
one of three classes of our directors are elected each year;

- shareholders have limited ability to remove directors; and

- shareholders must give advance notice to nominate directors at shareholder
meetings.

These provisions may prevent a shareholder from receiving the benefit from any
premium over the market price of our common shares offered by a bidder in a
potential takeover. Even in the absence of a takeover attempt, these provisions
may adversely affect the prevailing market price of our common shares if they
are viewed as discouraging takeover attempts in the future.

OTHER RISKS

CHANGES ARISING FROM THE RECENTLY IMPLEMENTED SARBANES-OXLEY ACT OF 2002 (THE
"SARBANES-OXLEY ACT") WHICH FOCUS ON FINANCIAL REPORTING PRINCIPLES AND
CORPORATE GOVERNANCE ISSUES COULD MAKE IT DIFFICULT FOR US TO MAINTAIN OUR
TIMELY CORPORATE GOVERNANCE COMPLIANCE AND ARE LIKELY TO INCREASE OUR COSTS.

The Sarbanes-Oxley Act that became law in July 2002 has increased the focus
on our financial reporting principles and corporate governance compliance. The
Sarbanes-Oxley Act also requires the Securities and Exchange Commission to
promulgate new rules and regulations on a variety of subjects. The introduction
of the Sarbanes-Oxley Act with increased and newly introduced emphasis on
various financial reporting and corporate governance has prompted changes in our
financial reporting procedures and corporate governance measures. As the
Sarbanes-Oxley Act introduces substantial changes within a relatively short
period of time, we cannot assure you that we would not unintentionally find
ourselves in violation of some of the changes. We expect that the Sarbanes-Oxley
Act and these new rules and regulations will increase our legal and financial
compliance costs and will make some activities more difficult, time consuming
and/or costly.

IF THERE IS ANY CHANGE IN OUR TAX STATUS OR INCOME TAX REGULATIONS OF THE
COUNTRIES WHERE WE OPERATE, OUR FINANCIAL RESULTS COULD BE NEGATIVELY AFFECTED.

We believe that a significant portion of our income will not be subject to
tax by Bermuda, which currently has no corporate income tax, or by certain other
countries in which either we conduct activities or in which our customers are
located. However, we base this belief upon the anticipated nature and conduct of
our business, which may change, and upon our understanding of our position under
the tax laws of the various countries in which we have assets or conduct
activities, or upon the location of our customers. Our tax position is subject
to review and possible challenge by taxing authorities and to possible changes
in law which may have retroactive effect. We cannot determine in advance the
extent to which certain jurisdictions may require us to pay tax or to make
payments in lieu of tax. In addition, payments due to us from our customers may
be subject to withholding tax or other tax claims in amounts that exceed the
taxation that we expect based on our current and anticipated business practices
and current tax regimes.

CHANGES IN U.S. FEDERAL INCOME TAX LAW COULD MATERIALLY ADVERSELY AFFECT
SHAREHOLDERS' INVESTMENT.

Recently proposed U.S. legislation targeting so-called "inversion
transactions" would under certain circumstances treat a foreign corporation as a
U.S. corporation for U.S. federal income tax purposes and under other
circumstances would require obtaining IRS approval of the terms of related-party

23

transactions. In addition, interest deductions on debt borrowed from or
guaranteed by a related non-U.S. party would be more severely limited than under
existing so-called "earning stripping" provisions.

We would appear generally not to be subject to the proposed legislation
directed at inversion transactions as currently drafted. However, the proposed
changes to the earnings stripping provisions could impose significant
restrictions on the amount of interest deductible by our U.S. subsidiaries on
certain debt owed to or guaranteed by related non-U.S. parties. We cannot
predict whether the proposed legislation (or any similar legislation) will be
enacted or, if enacted, what the specific provisions or the effective date of
any such legislation would be, or whether it would have any effect on our
company.

If the inversion legislation were enacted and made applicable to us, we
could be treated as a U.S. corporation. If we were treated as a U.S.
corporation, we would be subject to taxation in the U.S. at regular corporate
rates, in which case our earnings and shareholders' investments would be
materially adversely affected. If the inversion legislation were to apply,
however, the earnings stripping provisions would, if also enacted, be
inapplicable to the extent the non-U.S. related-party lender or guarantor was
treated as a U.S. corporation under the inversion legislation.

Enactment of this legislation could materially adversely affect our earnings
and shareholders' investment.

WE MAY BECOME SUBJECT TO TAXES IN BERMUDA AFTER 2016

The Bermuda Minister of Finance, under The Exempted Undertakings Tax
Protection Act 1966 of Bermuda, assured Predecessor that if any legislation is
enacted in Bermuda that would impose tax computed on profits or income, or
computed on any capital asset, gain or appreciation, or any tax in the nature of
estate duty or inheritance tax, then the imposition of any such tax will not be
applicable to us or to any of our operations or our shares, debentures or other
obligations until March 28, 2016. We cannot assure you that we will not be
subject to any Bermuda tax after that date.

THE IMPACT OF BERMUDA'S LETTER OF COMMITMENT TO THE ORGANIZATION FOR ECONOMIC
COOPERATION AND DEVELOPMENT TO ELIMINATE HARMFUL TAX PRACTICES IS UNCERTAIN AND
COULD ADVERSELY AFFECT OUR TAX STATUS IN BERMUDA

The Organization for Economic Cooperation and Development, which is commonly
referred to as the OECD, has published reports and launched a global dialogue
among member and non-member countries on measures to limit harmful tax
competition. These measures are largely directed at counteracting the effects of
tax havens and preferential tax regimes in countries around the world. In the
OECD's report dated June 26, 2000, Bermuda was not listed as a tax haven
jurisdiction because it had previously signed a letter committing itself to
eliminate harmful tax practices by the end of 2005 and to embrace international
tax standards for transparency, exchange of information and the elimination of
any aspects of the regimes for financial and other services that attract
business with no substantial domestic activity. We cannot predict what changes
will arise from the commitment.

ITEM 2. PROPERTIES

Our tangible assets include a substantial investment in telecommunications
equipment. Our network and its component assets are the principal properties we
own. Our network includes undersea fiber-optic cable crossing the Atlantic Ocean
(FA-1), in the Far East (FNAL), and a route from the U.K., via the
Mediterranean, Arabian Sea, Indian Ocean and China Seas Far East (FEA). We also
own or lease various cable landing stations and PoPs in several countries
related to our undersea and terrestrial cable systems.

24

We maintain our registered office at Cedar House, 41 Cedar Avenue, Hamilton
HM12, Bermuda. We also lease corporate office space in London and lease or
retain serviced office space in London (network operations center), New York
City, Hong Kong, Taipei, Tokyo, Dublin, Paris, Rome, Seoul, Cairo, Beijing,
Dubai, Madrid, Frankfurt and Fujairah, U.A.E. (network operations center).
Pursuant to the Plan, we closed, or scaled down, office space in New Delhi,
Beijing, Seoul, Singapore, Madrid, Amsterdam, Dubai, Bangkok, Tokyo, Miami and
Frankfurt. Predecessor closed office space in the period from January 1, 2002 to
October 8, 2002 in San Francisco, Washington D.C., Athens and Istanbul.

ITEM 3. LEGAL PROCEEDINGS

BANKRUPTCY AND PLAN OF REORGANIZATION

On October 9, 2002 (the "Effective Date"), Predecessor transferred
substantially all of its assets, and certain liabilities, at fair value, to FLAG
Telecom, as part of transactions contemplated by the Plan. The liabilities
subject to compromise of $1.4 billion were retained by Predecessor and, as a
result, Predecessor is now insolvent and is being liquidated under Bermuda law.

Following the consummation of the transactions contemplated by the Plan, the
common shares of FLAG Telecom became registered under Section 12 (g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as provided by
Rule 12g-3 under the Exchange Act. For purposes of Rule 12g-3, FLAG Telecom is
the successor issuer to the Predecessor.

FLAG Telecom's authorized capital stock consists of 3,000,000 common shares
and no preferred shares. As of the Effective Date, there were 2,000,000 common
shares issued and outstanding. FLAG Telecom has reserved 222,222 common shares
to be issued pursuant to its 2002 Stock Incentive Plan. The holders of common
shares are entitled to one vote for each share held of record on all matters
submitted to a vote of shareholders. Shareholders are entitled to receive
ratably such dividends as may be declared by our Board of Directors out of the
funds legally available for payment of dividends. However, we do not presently
anticipate that dividends will be paid on the common shares in the foreseeable
future. Furthermore, payment of dividends is restricted by the terms of an
indenture between FLAG Telecom and The Bank of New York, as Indenture Trustee,
dated October 9, 2002. In the event of a liquidation, dissolution or winding up
of our company, shareholders will be entitled to share ratably in all assets
remaining after payment of liabilities. Shareholders have no pre-emptive,
subscription, redemption or conversion rights.

As of the Effective Date, FLAG Telecom ceased to be a "foreign private
issuer" within the meaning of Rule 3b-4 promulgated under the Exchange Act and
is filing periodic reports under the Exchange Act as a domestic registrant.

Pursuant to the Plan, the following transactions were completed on or about
the Effective Date;

(1) Holders of Predecessor's 11 5/8% Senior Dollar Notes due 2010 and 11 5/8%
Senior Euro Notes due 2010 received, in the aggregate, (i) $245 million in
cash, less certain fees and expenses, (ii) notes in the original principal
amount of $45 million, bearing simple interest between 6.67% and 8% over a
three year period of maturity, with a call right by us during the first
18 months after the Effective Date at $30 million, and (iii) 100,000 common
shares (approximately 5% of the issued and outstanding common shares);

(2) Holders of FLAG Limited's 8 1/4% Notes due 2008 received 1,255,800 common
shares (approximately 63% of the issued and outstanding common shares);

(3) Bank lenders under a credit facility previously extended to FLAG Atlantic
Limited received 525,000 common shares (approximately 26% of the issued and
outstanding common shares) and were permitted to retain $82 million they
seized just prior to the filing of chapter 11 proceedings on April 12, 2002;

25

(4) Certain significant trade creditors amended agreements with Predecessor and
received other consideration, including, among other things, promissory
notes, common shares and cash, as further detailed in the Plan;

(5) Trade creditors of Predecessor and its affiliates, other than trade
creditors of FLAG Atlantic Holdings Limited and its debtor subsidiaries,
received a negotiated amount, reinstatement of their claims or payment in
full in the sum of $6.1 million; and

(6) Trade creditors of FLAG Atlantic Holdings Limited and those of its
subsidiaries that are debtors in the chapter 11 cases received pro rata
rights to recoveries attributable to avoidance actions belonging to the
entity against which such trade creditors hold their claims.

As set forth in the Plan, equity holders of Predecessor did not receive any
consideration.

As a companion to the Plan, a Scheme of Arrangement was proposed for each of
Predecessor and FLAG Limited (the "Schemes"). The Schemes were submitted to the
Bermuda Court on August 7, 2002 and became effective on the Effective Date.

By orders of the Supreme Court of Bermuda on October 11, 2002, the joint
provisional liquidators of FLAG Limited and FLAG Asia Limited were discharged
and leave was granted to withdraw the petitions for the winding up of these two
entities. On the same day, the powers of the joint provisional liquidators of
Predecessor and FLAG Atlantic Limited were extended thereby extinguishing any
residual power of the board and management of these entities. In addition, on
October 11, 2002, a petition was filed seeking a winding up order in respect of
FLAG Atlantic Holdings Limited, and an order appointing joint provisional
liquidators of that company was granted.

On November 15, 2002, a winding up order was made in respect of Predecessor,
FLAG Atlantic Holdings Limited and FLAG Atlantic Limited by the Supreme Court of
Bermuda. Pursuant to this order, the appointment of Mr. Richard Heis and
Ms. Chris Laverty, both of KPMG LLP in England and Mr. Robert D. Steinhoff of
KPMG in Bermuda, as Joint Provisional Liquidators of these entities, was
continued. As a result, Predecessor, FLAG Atlantic Holdings Limited and FLAG
Atlantic Limited are now in liquidation under Bermuda law.

LOFTIN ACTION--CLASS ACTION LAWSUIT

Five class action complaints against Predecessor and some of its past and
present officers, brought by certain of Predecessor's shareholders on behalf of
a proposed class of those who purchased Predecessor's stock between
February 16, 2000 and February 13, 2002 (the "Class Period"), were filed in the
United States District Court for the Southern District of New York, beginning in
April 2002. A sixth action was filed in the same court against certain past and
present officers and directors of Predecessor, Salomon Smith Barney, Inc. and
Verizon Communications, Inc. All these actions have now been consolidated by
order of the Court (the "Loftin action").

The consolidated amended complaint (the "Complaint") was filed by the
plaintiffs on March 20, 2003 and asserts claims under sections 11, 12(a)(2) and
15 of the Securities Act and sections 10(b) and 20(a) of the Exchange Act, as
well as Rule 10b-5. More specifically, the Complaint alleges, among other
things, that the defendants: knew but failed to tell the market about the glut
of capacity and falling bandwidth prices that allegedly existed at the time of
the initial public offering and throughout the Class Period; engaged in, or
caused Predecessor to engage in, transactions with competitors whereby they
would sell each other cable that neither needed, for the sole purpose of
increasing revenue; and accounted for, or caused Predecessor to account for,
these transactions improperly and to overstate revenue. The Complaint does not
name Predecessor as a defendant, but it does name FLAG Telecom. The Plan
provides that we shall have no liability for any claims relating to the period
prior to the Plan's Effective Date. The claims asserted in the Complaint relate
solely to that period. The amount of damages sought from the defendants is not
specified.

26

As we, per the Plan, have no liability for any claims relating to the period
prior to the Effective Date, we believe there is no potential liability for us
and therefore no reserves have been established. There is a contingent
liability, on the part of the Company, of $3.25 million for a defense fund in
case the Directors' & Officers' Liability policy ("D&O policy") is invalidated
or attempted to be by the insurance company. No provision for these liabilities
has been made in our financial statements.

Predecessor and the insurers under the D&O policy have executed an interim
funding agreement by which the insurers are willing to advance reasonable and
necessary costs and expenses in connection with the above matters. In the
meantime, the insurers have confirmed the existence of the D&O policies.

RESOLUTION OF PSINET ACTION

FLAG Atlantic Limited and FLAG Atlantic USA Limited were defendants in
litigation filed by PSINet, Inc. and its related affiliates and subsidiaries
("PSINet"). On May 31, 2001, PSINet initiated chapter 11 bankruptcy proceedings
in the United States Bankruptcy Court in the Southern District of New York.
Pursuant to those proceedings, PSINet commenced litigation against FLAG Atlantic
Limited and FLAG Atlantic USA Limited to recover an alleged preference payment
under the Bankruptcy Code. Prior to PSINet filing for bankruptcy, FLAG Atlantic
Limited and FLAG Atlantic USA Limited entered into a Capacity Right of Use
Agreement with three affiliated PSINet entities. After PSINet defaulted on
payments due on that agreement, on or about March 20, 2001, the parties entered
into a Restated Capacity Right of Use Agreement, amended the capacity, amended
the term and PSINet paid FLAG Atlantic Limited and FLAG Atlantic USA Limited
$23.8 million. PSINet claimed that this payment could be avoided as a preference
because it was made within 90 days of PSINet's bankruptcy, was on account of a
prior debt and allowed FLAG Telecom, as a creditor of PSINet, to recover more
than it would have if the payment had not occurred and it instead filed a claim
in PSINet's bankruptcy. PSINet alleged that it was entitled to recover the
amount of the payment, together with interest. FLAG Telecom filed an answer to
the complaint in which it denied the allegations of the complaint and asserted
several affirmative defenses. Because of Predecessor's own bankruptcy
proceedings, PSINet's action was stayed. The PSINet action was settled in
connection with the Plan and no further payments were made.

RESOLUTION OF SOGETREL ACTION

On July 15, 2002, Sogetrel, a company domiciled and doing business in
France, commenced litigation against the French subsidiary of FLAG Atlantic
Limited and FLAG Atlantic France Sarl, for alleged unpaid invoices. The amount
of the claim was approximately E6,689,374. The claim was the subject of a motion
for summary judgment, which was dismissed on March 27, 2002. In December 2002,
the Sogetrel action was settled in an amount of E2,096,647.

RESOLUTION OF EMPLOYMENT DISPUTE

FLAG Limited was involved in a dispute with two former employees,
Messrs. Reda and Jalil, which centered on the lawfulness of the termination of
their employment contracts and the sums payable in that termination. The Court
of Appeal of Bermuda ruled on this issue in our favor. Messrs. Reda and Jalil
subsequently appealed to the Privy Council in the United Kingdom and the hearing
took place on April 16-18, 2002. The Privy Council ruled on this issue in FLAG
Telecom's favor on July 11, 2002. The only issue remaining in the case is that
of the amounts payable to Messrs. Reda and Jalil in respect of their lawful
termination. FLAG Telecom paid L1,690,990 into an escrow account in Bermuda in
October 2000. In 1999, Reda and Jalil received the sum of $855,000 which was
paid into Court. In October 2000, a further sum of $500,539 was paid to them out
of the escrow account. After the Privy Council decision another $557,744 was
paid out of the escrow. The

27

remaining money in the escrow account was distributed to FLAG Telecom, part of
which was used to pay the costs incurred in the Court of Appeal and the Privy
Council.

OTHER

We are also involved in litigation from time to time in the ordinary course
of business. In management's opinion, with the exception of the disputes
described above, the litigation in which we are currently involved, individually
and in the aggregate, is not material to our company.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2002.

PART II

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

RECENT SALES OF UNREGISTERED SECURITIES

As described in more detail under Item 3, "Legal Proceedings", we issued on
the Effective Date an aggregate of 2,000,000 common shares in connection with
the implementation of the Plan. In addition, upon the Effective Date, all
outstanding common shares of Predecessor were cancelled and deemed null, void
and of no further force or effect. Of the common shares issued by us on the
Effective Date, 100,000 shares were issued to the holders of Predecessor's
11 5/8% Senior Dollar Notes due 2010 and 11 5/8% Senior Euro Notes due 2010;
1,255,800 shares were issued to holders of FLAG Limited's 8% Notes due 2008;
525,000 shares were issued to bank lenders under a credit facility previously
extended to FLAG Atlantic Limited; and 119,200 shares were issued to certain
significant trade creditors of Predecessor.

The issuance of our common shares on the Effective Date was exempt from the
registration requirements of the Securities Act of 1933, as amended, and
equivalent provisions of state securities laws, in reliance upon
Section 1145(a) of Bankruptcy Code. Such Section generally exempts from
registration the issuance of securities if the following conditions are
satisfied: (i) the securities are issued by a debtor under a plan of
reorganization, (ii) the recipients of the securities hold a claim against an
interest in, or a claim for an administrative expense against the debtor and
(iii) the securities are issued entirely in exchange for the recipient's claim
against or interest in the debtor, or are issued principally in such exchange
and partly for cash or property.

PRICE RANGE OF OUR COMMON SHARES

Predecessor's common shares began trading on the Nasdaq National Market and
the London Stock Exchange ("LSE") under the symbols "FTHL" and "FTL",
respectively, on February 11, 2000. Effective from the open of business on
June 13, 2002, Predecessor's common shares were delisted from the Nasdaq
National Market and began to trade on the over-the-counter market. On July 15,
2002, Predecessor's common shares were de-listed from the London Stock Exchange
in the United Kingdom.

Pursuant to the Plan, we must use our commercially reasonable efforts to
cause our common shares to be listed on the Nasdaq National Market or a national
securities exchange. Initial application and filings with Nasdaq has commenced
and we expect that our common shares will be listed on the Nasdaq National
Market as soon as possible in the course of 2003, subject to the fulfillment of
relevant Nasdaq market and listing rules.

The following table shows, for the fiscal quarters during the past two
years, (i) the high and low bid price for the common shares of Predecessor as
reported on the Nasdaq Stock Market, (ii) the high

28

and low sales prices for the common shares of Predecessor as reported on the
London Stock Exchange and (iii) the high and low bid price for our common shares
as quoted on the over-the-counter market. DUE TO THE NEW CAPITAL STRUCTURE OF
OUR COMPANY ARISING FROM THE PLAN, THE PRICES OF OUR COMMON SHARES AFTER
OCTOBER 9, 2002 ARE NOT COMPARABLE TO THOSE OF PREDECESSOR PRESENTED IN THE
TABLE BELOW.

(1) Prices are based on the high and low bid price on the Nasdaq National Market
from January 1, 2001 to June 12, 2002 and the high and low bid price on the
over-the-counter market from June 13, 2002 to December 31, 2002. Such
over-the-counter quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not necessarily represent actual
transactions. On June 13, 2002, Predecessor's common shares were de-listed
from the Nasdaq National Market and began to trade on the over-the-counter
market.

(2) London Stock Exchange sales prices are denominated in Sterling. On July 15,
2002, Predecessor's common shares were de-listed from the London Stock
Exchange in the United Kingdom.

(3) Prices are based on the high and low bid price on the over-the-counter
market. Such over-the-counter quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions, and may not necessarily
represent actual transactions. Successor's common shares started trading on
the over-the-counter market as of October 9, 2002.

As of June 15, 2003, there were 25 registered holders of our common shares.

DIVIDEND POLICY

We have never declared or paid any dividends on our common shares. Our board
of directors currently intends to retain any earnings for use in the operation,
expansion and financing of our business and does not anticipate paying any
dividends on our common shares for the foreseeable future.

Furthermore, any payment of dividends would be restricted by the terms of an
indenture between FLAG Telecom and the Bank of New York, as Indenture Trustee,
dated October 9, 2002. In the event of a liquidation, dissolution or winding up
of the FLAG Telecom, shareholders will be entitled to share ratably in all
assets remaining after payment of liabilities.

In the event we change our policy on the payment of dividends, declarations
will be subject to the discretion of the board of directors. The board of
directors will take into account such matters as general business conditions,
our financial results, capital requirements, contractual, legal and regulatory

29

restrictions on the payment of dividends by us or to our shareholders or by our
subsidiaries and such other factors as the board of directors may deem relevant.

FLAG Telecom is incorporated in Bermuda. Bermuda law does not restrict the
export or import of capital to or from Bermuda in the form of dividends or
otherwise.

WITHHOLDING TAX FOR U.S. SHAREHOLDERS

Under current Bermuda law, no income, withholding or other taxes or stamp or
other duties are imposed upon the issue, transfer or sale, or on any payments
made on, our common shares. As there is no withholding tax in Bermuda, there is
necessarily no reciprocal tax treaty between Bermuda and the United States.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents our selected consolidated historical financial
data including selected historical financial data for Predecessor and FLAG
Limited, Predecessor's predecessor, for the periods indicated. The financial
data as of and for the year ended December 31, 1998 and for the period from
January 1, 1999 to February 26, 1999 are derived from FLAG Limited's audited
consolidated financial statements which are adjusted for certain revenue
recognition matters and are not contained herein. The financial data of
Predecessor at December 31, 1999 and for the period from incorporation,
February 3, 1999 to December 31, 1999; are derived from FLAG Telecom Holdings
Limited audited consolidated financial statements which are adjusted for certain
revenue recognition matters and are not contained herein. The financial data as
of and for the years ended December 31, 2000 and 2001 and for the period from
January 1, 2002 to October 8, 2002, are each derived from Predecessor's audited
consolidated financial statements contained elsewhere in this report, which have
been audited by Ernst & Young. The financial data at December 31, 2002 and for
the period from October 9, 2002 to December 31, 2002 is derived from our audited
consolidated financial statements contained elsewhere in this report, which have
been audited by Ernst and Young.

The consolidated financial statements of Predecessor for the period from
January 1, 2002 to October 8, 2002 have been prepared while Predecessor was
still involved in chapter 11 proceedings and, accordingly, have been prepared in
accordance with Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"). As a result, the
selected historical financial data for such period does not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that have resulted due
to Predecessor not continuing as a going concern.

Upon the emergence from bankruptcy proceedings on October 9, 2002, we
adopted fresh start reporting, which resulted in material adjustments to the
historical carrying amounts of our assets and liabilities. As a result, the
historical consolidated financial information of Predecessor may not be entirely
comparable to the historical consolidated financial information of our company
and may be of limited value in evaluating our financial and operating prospects
in the future.

Our financial statements have been consolidated to eliminate inter-company
transactions and balances. Investments in which we have an interest of 20% to
50% or investments in which we can assert significant influence, but not
control, are accounted for under the equity method. Since December 6, 2000,
there have been no equity method investments.

We have prepared our financial statements and related notes included in this
annual report in accordance with accounting principles generally accepted in the
United States ("U.S. GAAP"). The financial statements are expressed in U.S.
Dollars ("Dollars").

30

You should read the selected consolidated financial information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this report.

(1) During the course of our 2002 audit and 2001 re-audit there were adjustments
identified that related to previous periods and as a result, our 2000
financial statements were re-audited. The restatements related to guidance
issued by the SEC relating to accounting for reciprocal transactions,
adjustments for other revenue recognition matters to comply with SAB 101,
and other adjustments arising from the re-audit. Certain other
reclassifications and audit adjustments have been made to conform to current
year presentation. The following summarizes the impact of the restatements:

RECIPROCAL TRANSACTIONS

Sales made as part of reciprocal transactions totaled $263.5 million for the
year ended December 31, 2001, and were recorded as deferred revenue in those
amounts. Purchases made as part of reciprocal transactions entered into by us
totaled $232.8 million for the year ended December 31, 2001, and were recorded
as prepaid expenses, property and equipment or other assets. During 2002, we
signed a sales contract and a purchase contract in respect of a reciprocal
transaction. The transaction did not meet our accounting policy for the
recognition of a reciprocal transaction and it has been accounted for on a
carry-over basis.

ADJUSTMENTS TO OPENING RETAINED EARNINGS

The accounting for sales of capacity has evolved over the last few years as
the interpretation and application of certain pronouncements by the SEC and
accounting standard setting bodies have been clarified. To take account of these
developments and to be consistent with current industry practice, the accounting
for certain sales transactions has been re-stated as follows:

- A contract signed in September 1998, but related to a customer commitment
in an earlier period was treated as a sales type lease because the
customer had a fixed period to commit to draw down the capacity and to
start paying maintenance charges for certain specifically identified
capacity on our network, otherwise the customer would lose the capacity
with no refund. On re-evaluation of the contract the Company has accounted
for these capacity sales as operating leases as and when drawn down.

- A contract, which was signed in September 1999, was treated as a sales
type lease contract because the customer had committed to the purchase in
an earlier period and some capacity had been activated prior to June 1999.
On re-evaluation of the contract and taking account of the criteria stated
in FIN 43 and SFAS 66 for the "transfer of title" for capacity contracts
entered into after June 1999, the Company has accounted for the contract
as an operating lease.

- The Company had entered into a contract in August 1998, which involved the
sale of capacity and the customer having a "rent free" period from paying
standby operations and maintenance charges. The entire contract was
treated as a sales type lease contract and the Company set up a provision
for costs to be incurred during the free maintenance period. Subsequently
the

33

Company also recognised capacity credits as revenues in 2001. On
re-evaluation of the terms and components of the contract adjustments have
been made to revenues in 1998, 1999, 2000 and 2001.

- The impact of these adjustments has been a decrease to 2000 opening
retained earnings of $58.8 million.

OTHER ADJUSTMENTS TO 2000 AND 2001

- The items listed above also impacted the revenues for the years 2000 and
2001.

- The Company also adjusted the revenues for the years 2000 and 2001, upon
further analysis of the deliveries of capacity to the customers, in
compliance with the current revenue recognition policy.

- In December, 2001, the Company accrued for an upgrade on the FA-1 system,
which was committed to be purchased. Upon further analysis by management,
the accruals and related assets have been reversed to reflect the fact
that the work had not been undertaken by the supplier in 2001.

- The Company identified additional fixed assets for which depreciation had
to be charged in 2001.

- Adjustments to cash and expense accounts to reflect payments made to
suppliers but not posted to the accounts payable ledger in 2001.

- Upon further analysis, the Company identified certain accruals at December
2001, which were not required and therefore reversed.

- Correction of book keeping and accounting errors

The total impact of all adjustments in 2001 and 2000 is to reduce previously
reported net income in 2001 and 2000 is $20.4 million and $6.2 million,
respectively.

(2) Included in operating expenses for FLAG Telecom for the year ended
December 31, 2001, are the following non-cash compensation expenses:
$0.3 million in operations and maintenance expenses; $0.2 million in sales
and marketing expenses; and $0.6 million in general and administrative
expenses. Included in operating expenses for FLAG Telecom for the year ended
December 31, 2000, are the following non-cash compensation expenses:
$2.0 million in operations and maintenance expenses; $1.2 million in sales
and marketing expenses; and $4.5 million in general and administrative
expenses.

(3) Included in general and administrative expenses for the years ended
December 31, 1998 are program management expenses which include
reimbursements to Bell Atlantic Network Systems Company, then a shareholder
of FLAG Limited, for all costs and out-of-pocket expenses incurred by Bell
Atlantic Network Systems Company in performing project management services
for FLAG Limited. In addition, Bell Atlantic Network Systems Company
received a fee equal to 16% of payroll costs and of certain outside
contractor and consultant costs. Bell Atlantic Network Systems Company was a
subsidiary of Bell Atlantic Corporation, a predecessor of Verizon
Communications.

(4) In the year ended December 31, 1998, in connection with FLAG Limited's
issuance of 8 1/4% Senior Notes due 2008 and its entry into its credit
facility with Barclays Bank plc ("Barclays"), FLAG Limited recorded an
extraordinary loss of $59.8 million, representing the write-off of
unamortized deferred financing costs related to its old credit facility.

(5) In the year ended December 31, 1998, in connection with FLAG Limited's
issuance of 8 1/4% Senior Notes due 2008 and its entry into its credit
facility with Barclays, FLAG Limited redeemed its then outstanding preferred
stock at a redemption price of 105% of the liquidation preference. The
excess of the redemption value over the carrying value of the preferred
stock on the date of the redemption of $8.5 million has been reflected as a
decrease in other shareholders' equity.

34

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

We are a multinational corporate organization made up of multiple corporate
entities. We operate a global telecommunications network comprised of advanced
fiber-optic cable systems and interfaces that are owned by, leased to, or
otherwise available to our company. Over our global network, we offer a variety
of telecommunications products and services, IP transit, IP point-to-point,
leased capacity services, managed bandwidth service, co-location services and
long-term rights of use in capacity. We are a "carrier's carrier", meaning that
our target customer base is the international wholesale broadband market,
consisting of established carriers or major public telephone operator
incumbents, ASPs and ISPs, alternate carriers and other bandwidth intensive
users, rather than individual telecommunications consumers. On the Effective
Date, Predecessor transferred substantially all of its assets, and certain
liabilities, at fair value, to FLAG Telecom, as a result of transactions
contemplated by the Plan of Reorganization of Predecessor and certain of its
subsidiaries under chapter 11 of the United States Bankruptcy Code and its
Bermuda equivalent, the Bermuda Schemes of Arrangement. See Bankruptcy and Plan
of Reorganization under Item 3 for a more complete description of the
restructuring of our company.

The financial information presented in this report comprises the
consolidated financial information of (i) FLAG Telecom at December 31, 2002 and
for the period from October 9, 2002 to December 31, 2002; and (ii) Predecessor
at and for the years ended December 31, 2001 and 2000 and for the period from
January 1, 2002 to October 8, 2002. In consultation with our independent
auditors, we restated our audited financial statements for the years ended
December 31, 2000 and 2001. Our initial intention was to restate our 2001
financial statements for the impact of recently issued accounting guidance by
the SEC in August 2002. Subsequently, we identified accounting errors which
related to 2001 and 2000, which have been corrected. Details of the adjustments
are discussed in Item 6.

The consolidated financial statements of Predecessor for the period from
January 1, 2002 to October 8, 2002 have been prepared while Predecessor was
still involved in chapter 11 proceedings and, accordingly, have been prepared in
accordance with SOP 90-7. These financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that have resulted due
to Predecessor not continuing as a going concern.

We emerged from chapter 11 bankruptcy proceedings on October 9, 2002.
Effective as of the Effective Date, we adopted fresh start reporting in
accordance with SOP 90-7. Unlike the consolidated financial statements for
Predecessor contained herein, the consolidated financial statements for FLAG
Telecom, reflect reorganization adjustments for the discharge of debt and the
adoption of fresh start reporting. This resulted in significant changes to the
following balance sheet captions: Construction in progress, Other long-term
assets, Property and equipment, Deferred revenue, Short-term debt and Accounts
payable.

You should read this Management's Discussion and Analysis of Financial
Condition and Results of Operations in conjunction with Predecessor's
consolidated financial statements and the notes thereto and FLAG Telecom's
consolidated financial statements and the notes thereto included elsewhere in
this report.

CURRENT MARKET ENVIRONMENT

The bandwidth market, as a whole, has deteriorated rapidly over the last
three years and we do not expect market conditions to improve significantly in
2003. While traffic volume growth remains steady, particularly in our core
markets in the Middle East and South East Asia, we have seen severe downward
pressure on pricing in most regions with the competitive routes such as
trans-Atlantic and intra-European markets being most affected. We anticipate
that the competitive routes will remain depressed this year as the situation of
oversupply continues. However, we remain cautiously optimistic

35

about the competitive outlook for the second half of 2003, based on the general
sentiment in our industry expressed by our customers and reflected in the
competitive environment as fewer and fewer suppliers are perceived to be stable
players.

OUR RESPONSE TO THE CURRENT MARKET CONDITIONS

For 2003, in the challenging context of a substantial deterioration of the
telecom sector since April 2000, slower economic growth and the high pressure on
the sector from distressed assets of insolvent competitors, we intend to
continue to manage our business in a prudent, conservative and focused manner.
We intend to serve our customers, focus our capital expenditures, carefully
manage our costs, drive revenues and leverage our regional advantages in
under-serviced areas where we have a strong geographical presence, like the
Middle East and Asia.

In view of the difficult market conditions observed in 2002 and expected for
2003, we sought to restructure our finances, to secure our long-term financial
viability. During April 2002, Predecessor and certain of its subsidiaries filed
voluntary petitions for relief under chapter 11 of the U.S. Bankruptcy Code. As
part of the bankruptcy proceedings, we negotiated with our bondholders, bank
lenders and other creditors a comprehensive financial restructuring package,
reflected in Predecessor's Plan of Reorganization, which was approved and
confirmed by the U.S. bankruptcy court on September 26, 2002.

As a result, we emerged from chapter 11 on October 9, 2002, having
successfully restructured more than $1.4 billion of liabilities (including
approximately $1.3 billion of debt), with new debt of approximately
$76 million. As part of our restructuring, we also streamlined our operating
cost base, by cutting approximately 40% of our workforce and implementing
various network cost saving initiatives, including the rationalization of PoP
sites and circuit holdings, along with renegotiations on existing supplier
contracts, in order to better align costs with future revenues expectations.

Although there is a great deal of uncertainty facing global economic
recovery and our industry, we remain cautiously optimistic about the future for
FLAG Telecom:

- Our financial re-structuring has strengthened our balance sheet and
reduced dramatically our indebtedness and operating cost base going
forward through renegotiation of contracts and reduction in employee
headcount, allowing us to be more competitive and giving us valuable
long-term credibility with customers;

- We have strong customer relationships as evidenced by the high proportion
of our repeat business. A large proportion of our business is with more
stable, "blue-chip" incumbent operators, which are likely to emerge the
strongest players in the current downturn;

- We have a global network that is resilient and reliable. Following the
completion of FNAL in 2002, and the withdrawal of some of our competitors
from some regional markets, we can reasonably claim to have one of the
most extensive global networks of any wholesale operator;

- We have strong Middle Eastern and Asian coverage where we believe we are
able to compete effectively;

- We have a low overhead structure and our focus on the wholesale market
means we have limited our exposure to the high costs of serving the
enterprise or mass retail market;

- We have a fast moving and flexible approach to customer requirements;

- We have a short development cycle for new product initiatives; and

- We have an international management team and key employees who have the
know-how to run a global company and operate a modern telecommunications
network.

36

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Accounting estimates are an integral part
of the financial statements prepared by management and are based on management's
current judgments. Those judgments are based on knowledge and experience about
past and current events and on assumptions about future events.

Management believes the following to be our company's critical accounting
policies because they are both important to the portrayal of our financial
condition and results of operations and they require critical management
judgments and estimates about matters that are uncertain. If actual results or
events differ materially from those contemplated by management in making these
estimates, our results of operations for future periods could be materially
affected.

ACCOUNTING FOR RIGHTS OF USE ("ROU") TRANSACTIONS

It is critical, when looking at our business, that an investor or other user
of the financial statements understands that the cash flows of the business can
vary significantly from the amounts recorded as revenues in our income
statement. When a customer enters into an ROU contract to use capacity on our
global network, that customer typically makes an upfront payment of cash. In
accordance with U.S. accounting practices, we do not recognize that cash as
revenue upfront on the date it is received. Instead, we record the cash as
deferred revenue in the balance sheet. When all the relevant criteria for
revenue recognition are met (generally when the customer circuit has been
activated, the customer has accepted the circuit and the customer becomes liable
for any agreed maintenance charges), we begin to recognize the revenue in the
income statement by amortizing the deferred revenue balance on a straight-line
basis over the term of the relevant agreement. We believe this accounting
treatment is appropriate because, even though the cash for the ROU is received
upfront, we have not earned that revenue in full until the ROU agreement has run
its full term. ROU agreements may have terms for the lifetime of the system,
which tends to be up to 15 years. As a result, the income statement in any
period will reflect as revenues in the period amounts relating to agreements
that were signed, and for which cash was received, in a prior period.

We also sell services and capacity on a short-term lease basis whereby
payments are generally made in installments over the term of the agreement as
opposed to upfront payments. Accordingly, in the case of sales of services and
short-term leases there tends to be a closer approximation, in the profile of
cash received and the recognition of revenues in the income statement, than is
the case with right of use agreements.

RECIPROCAL TRANSACTIONS FOR CAPACITY

In August 2002, the staff of the Securities and Exchange Commission (the
"SEC") indicated that the SEC staff had concluded that all non-monetary exchange
transactions for telecommunications capacity should be accounted for as an
exchange of assets, irrespective of whether the transaction involved the lease
of assets. The conclusion was based on the SEC staff's view that the right to
use an asset (that is, a lease), is in fact an asset and not a service contract,
irrespective of whether such asset is characterized as an asset on the balance
sheet. This conclusion requires that non-monetary exchange transactions for
telecommunications capacity involving the exchange of one or more operating
leases be recognized based on the carrying value of the assets exchanged, rather
than at fair value, resulting in no recognition of revenue for the transactions.
Prior to the SEC's communication on this issue, Predecessor's accounting for
these transactions, which resulted in Predecessor recognizing revenue, had

37

been consistent with industry guidance for these types of transactions. In
addition, the revenue recognition approach for these transactions that
Predecessor followed was an acceptable practice in not only the communications
industry but other industries as well. The SEC indicated that it expects
affected companies to retroactively apply this guidance to historical
non-monetary exchange capacity transactions that occurred in prior years and, if
appropriate, restate their financial statements.

We have entered into transactions in which we provide capacity, services, by
way of leases, ROUs or service agreements to other telecommunications companies
and service providers at approximately the same time that we lease or purchase
capacity from the same companies or their affiliates. We call these transactions
"reciprocal transactions".

Historically, we treated reciprocal transactions as if they were
non-monetary transactions in accordance with Accounting Principles Board Opinion
No. 29 "Accounting for Non-monetary Transactions" ("APB No. 29").

During the periods presented, neither Predecessor nor FLAG Telecom was a
party to any reciprocal transaction that would require them to recognize
revenues upfront.

During the course of our 2002 audit and 2001 re-audit for the SEC guidance
on non-monetary transactions, there were adjustments identified that related to
previous periods and as a result, our 2000 financial statements were re-audited.
The Company's previously issued consolidated financial statements as of and for
the fiscal years ended December 25, 2000 and December 31, 2001 are restated to
correct the accounting for certain items, as described below.

Sales made as part of reciprocal transactions totaled $1.0 million and
$263.5 million for the years ended December 31, 2002 and 2001, respectively, and
were recorded as deferred revenue in those amounts. Purchases made as part of
reciprocal transactions entered into by us totaled $1.0 million and
$232.8 million for the years ended December 31, 2002 and 2001, respectively, and
were recorded as prepaid expenses, property and equipment or other assets.
During 2002, we signed a sales contract and a purchase contract in respect of a
reciprocal transaction. The transaction did not meet our accounting policy for
the recognition of a reciprocal transaction and it has been accounted for on a
carry-over basis.

We are aware that one of our customers, Global Crossing, announced that it
has filed for bankruptcy protection under chapter 11. In the year ended
December 31, 2001, we entered into three transactions with Global Crossing and
its affiliates. Cash was received in connection with these transactions in the
year ended December 31, 2001 and the last receipt was in October 2001. As at
December 31, 2002, Global Crossing and its affiliates owed us $0.2 million
($0.6 million at December 31, 2001). Global Crossing has $24.7 million of
credits to be used on our fiber-optic system, subject to certain provisions
under a governing agreement, which cannot be offset against any monies owing to
us.

Other customers have credits totaling $28.2 million to be used on our
fiber-optic system, subject to certain provisions under our agreements with
these customers.

REVENUE RECOGNITION

Our customers generally purchase capacity on our network through agreements
providing for an outright sale of, or the sale of an ROU of, the capacity for
the lifetime of a system. In addition, the customer becomes responsible for
paying the agreed maintenance charges. In accordance with guidance provided by
the Financial Accounting Standards Board Interpretation No. 43 ("FASB
Interpretation No. 43"), we account for sales of fiber-optic cable capacity in
the same manner as sales of real estate with property improvements or integral
equipment. In accordance with FASB Interpretation No. 43, we defer revenue
recognition for U.S. GAAP purposes and we account for capacity contracts as
leases. Amounts invoiced to customers before the requirements of FASB
Interpretation No. 43 are satisfied

38

are included in deferred revenue and, when the relevant criteria for revenue
recognition are satisfied, are amortized through the income statement on a pro
rata basis evenly over the lifetime of the system, which generally tends not to
exceed 15 years. This accounting treatment does not affect our cash flows from
customers, who continue to be liable for payments in accordance with the signed
agreements.

Our network services activities are a growing part of our business and
include managed bandwidth service, flexible bandwidth service, IP services and
co-location services. We expect these services to generate recurring revenues
for us. As a result of extending our range of products and services, we expect
the greater part of our sales to be pursuant to agreements which will require us
to recognize revenues over the relevant term of these agreements. To the extent
that we enter into contracts in the future that satisfy the requirements for
sales type lease accounting, we will recognize revenues without deferral.

We recognize revenues from providing operations and maintenance services in
the period in which we provide these services.

FRESH START REPORTING

The consolidated financial statements of Predecessor for the period from
January 1, 2002 to October 8, 2002 have been prepared while Predecessor was
still involved in chapter 11 proceedings and, accordingly, have been prepared in
accordance with SOP 90-7. These financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that have resulted due
to Predecessor not continuing as a going concern.

You should not interpret the combined financial information for the year
ended December 31, 2002 as the results of operations that we would have achieved
had the reorganization occurred prior to January 1, 2002.

Upon the emergence from bankruptcy proceedings, we adopted fresh start
reporting, which resulted in material adjustments to the historical carrying
amounts of our assets and liabilities. Fresh start reporting was applied in
accordance with SOP 90-7, which required us to allocate the reorganization value
to our assets and liabilities based upon their estimated fair value in
accordance with the procedures specified by Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS No. 141"). The fair values of
the assets as determined for fresh start reporting were based on estimates of
anticipated future cash flows of assets discounted at rates consistent with the
discount rates used in the Plan. Liabilities existing at the Plan confirmation
date are stated at the present values of amounts to be paid discounted at
appropriate current rates. Deferred taxes are reported in conformance with
existing generally accepted accounting principles. Debt issued in connection
with the Plan is recorded at the fair value. Any excess net fair value remaining
after the reduction is recognized as a reorganization item. The determination of
the net fair values of the assets and liabilities is subject to significant
estimation and assumptions. Actual results could differ from the estimates made.

PERFORMANCE OBLIGATIONS

As part of fresh start accounting, we wrote off any deferred revenue
balances and created a performance obligations reserve to cover future expenses
resulting from sale activity recognized, and for which benefit was also received
prior to the adoption of fresh start accounting. This reserve will be amortized
to revenue in line with the relevant costs associated with performance of
contracts. Whilst this is an estimate, and we do not expect any material
variation from this, we cannot guarantee that these costs will be as predicted
when they arise. If we determine at any time that we are required to recognize a
further provision in respect of these costs, this could be expected to have a
material adverse effect on our financial condition.

39

NETWORK EXPENSES

Costs relating to the short-term lease of capacity are recognized over the
period of the contract. The costs of network service products are expensed over
the period of the recognition of the corresponding revenue. Where network
service rebates are received, costs are reduced by the amount of the rebate
received. Since the determination of network expense is subject to certain
estimation and assumption processes, actual results could differ from these
estimates.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful debts. Payments due from purchasers of
capacity are generally payable within 30 days; however, we have outstanding
receivables greater than 30 days. We have established a provision for doubtful
accounts based on our historical experience with potential uncollectable
receivables and our expectations as to payments. As of December 31, 2002, we had
an allowance of $10.4 million (2001 $5.1 million). This allowance could require
adjustments based on changing circumstances, including changes in the economy or
in the particular circumstances of individual customers. Accordingly, we may be
required to increase or decrease the provision.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with SOP 90-7 and SFAS 141, we constructed a valuation model
to determine the values of our long-term assets, telecoms and non-telecoms plant
and equipment assets upon emergence from bankruptcy as part of fresh start
accounting. The forecast period was assessed to be 15 years and the assumptions
used reflect lighting dark fiber expenditures, taxation and working capital
requirements. The value of the property and equipment was calculated to be
$322.0 million, resulting in an impairment write-down of $1,447.8 million. This
was recorded as part of the fresh start adjustments in the income statement.

On January 1, 2002, we adopted Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("SFAS 144").

The determination of whether an impairment has occurred is based on
management's estimate of undiscounted future cash flows attributable to the
assets as compared to the carrying value of the assets. Following the adoption
of SFAS 144, we prepared Discounted Cash Flow ("DCF") models for each of our
fiber-optic systems. In order to assess whether any impairment has arisen, we
determined that Predecessor's fiber-optic telecommunication FEA and FNAL systems
were impaired as at June 30, 2002. The main causes of the impairments effecting
the DCF models were the high level of competition in terms of alternative
supply, lower than generally expected demand for the trans-Atlantic route,
significant over-supply for the trans-Atlantic route and higher than expected
price erosion on various routes connecting Hong Kong. Given the above, we have
reviewed the revenue opportunities used in the DCF models on these routes and
now believe that Predecessor's networks are impaired. Predecessor has recognized
an impairment charge of $327.9 million in respect of the FEA system and
$225.0 million in respect of the FNAL system in the second quarter of 2002.

The DCF models were prepared based on management's financial forecasts for
2002 to 2006. For the purpose of the impairment exercise, the financial
forecasts were projected up to the useful lives of the fiber-optic systems in
question with no further terminal value assumed beyond their useful lives.
Forecasts beyond 2006 were based on 2006 revenues either remaining flat or
reducing as individual systems along the network run out of capacity, and with
2006 costs increasing with inflation. For each of the fiber-optic systems,
lighting dark fiber expenditures is forecasted to meet the sales targets for the
year. Indirect costs were allocated to the fiber-optic systems based on their
overall weighting of sales. The forecasts for each fiber-optic system were
projected net of intercompany transactions. In determining the appropriate cost
of capital, the capital asset pricing model was used. All valuation metrics were
referenced and benchmarked against comparable company and market data.

40

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001

The following discussion provides a comparison of the results of operations
of our company and Predecessor on a combined basis for the year ended
December 31, 2002 with the historical results of operations of Predecessor for
the year ended December 31, 2001. The discussion is provided for comparative
purposes only, but the value of such a comparison may be limited. The results of
operations for the year ended December 31, 2002 combines the results of
operations for Predecessor for the period from January 1, 2002 to October 8,
2002 with the results of operations for Successor for the period from
October 9, 2002 to December 31, 2002. Such combined financial information does
not reflect the results of operations that either Predecessor or Successor would
have achieved during 2002. The combined financial information for the year ended
December 31, 2002 is merely additive and does not give pro forma effect to the
acquisition of assets by Successor and other transactions related to the Plan.
In addition, Successor has a significantly different capital structure than
Predecessor as a result of the reorganization.

ADJUSTED CONSOLIDATED RESULTS

The table below shows the selected statement of operations and cash flow
data for the years ended December 31, 2002 and December 31, 2001 being a
combination of the results of Predecessor, for the year ended December 31, 2001
and the period from January 1, 2002 to October 8, 2002 and the results of
Successor, for the period from October 9, 2002 to December 31, 2002. These
adjustments have not been and will not be reflected in our current and future
financial statements.

REVENUES

We recognized total revenue during the period from January 1, 2002 to
October 8, 2002 of $177.9 million compared to $163.6 million for the fiscal year
ended December 31, 2001. For the period from October 9, 2002 to December 31,
2002, total revenue was $22.0 million. For the fiscal year ended December 31,
2002, total revenue on a combined basis was $199.9 million, an increase of 22.2%
over the fiscal year ended December 31, 2001. This increase is primarily due to
an increase in network services revenue (IP Transit, managed bandwidth, vPoP,
co-location and lease). The FLAG Atlantic cable was brought into commercial
service in May and June 2001, allowing a full year of movement of deferred
revenue. Additionally, upon emergence from chapter 11 we began to amortize
performance obligations under long-term contracts within revenues. As of
December 31, 2002, we have amortized $9.9 million to the income statement. These
performance obligations under long-term contracts arose upon the adoption of
fresh start accounting, as referred to in "Critical Accounting Policies".

We recognized revenue from the sale of capacity of $85.8 million in the
period from January 1, 2002 to October 8, 2002, or 48.2% of total revenue for
such period, compared to $68.0 million for the fiscal year ended December 31,
2001. For the period from October 9, 2002 to December 31, 2002, capacity revenue
was $2.2 million, or 10.2% of total revenue for such period. For the fiscal year
ended December 31, 2002, revenue from the sale of capacity on a combined basis
was $88.1 million, or 44.0% of total revenues, an increase of 29.6% over the
fiscal year ended December 31, 2001. The increase is primarily due to additional
sections of our global network entering into commercial service mid 2001 (the
FA-1 system), which was offset by the reduction of deferred revenue balances and
related revenue recognition.

We recognized revenue from operations and maintenance services of
$51.0 million in the period from January 1, 2002 to October 8, 2002, or 28.7% of
total revenue for such period, compared to $60.1 million for the fiscal year
ended December 31, 2001. For the period from October 9, 2002 to

42

December 31, 2002, revenue from operations and maintenance services was
$1.7 million, or 7.6% of total revenue for such period. For the fiscal year
ended December 31, 2002, revenue from operations and maintenance services on a
combined basis was $52.7 million, or 26.4% of total revenues, a decrease of
12.3% over the fiscal year ended December 31, 2001. This decrease is
attributable to deferred revenues totaling $3.3 million, which were written off
in 2002 on the FA-1 system, relating to Teleglobe, KPNQwest and PSINet.

We recognized revenue from network services of $41.1 million in the period
from January 1, 2002 to October 8, 2002, or 23.1% of total revenue for such
period, compared to $35.5 million for the fiscal year ended December 31, 2001.
For the period from October 9, 2002 to December 31, 2002, revenue from our
network services business was $8.2 million, or 37.5% of total revenue for such
period. For the fiscal year ended December 31, 2002, revenue from network
services on a combined basis was $49.3 million, or 24.7% of total revenues, an
increase of 38.8% over the fiscal year ended December 31, 2001. The network
services business consists of managed bandwidth service, flexible bandwidth
service, IP services and co-location services. The managed bandwidth product,
which offers customers fully protected international city-to-city circuits
backed by service delivery and availability guarantees, represented
approximately 46.5% of the revenue of network services for the year ended
December 31, 2002, a decrease from approximately 59.5% of network services
revenues in the year ended December 31, 2001. Our leased capacity services
business and our IP services business represented approximately 21% and 19.7%
respectively of our network services revenue in the year ended December 31,
2002. Reasons for the increase in network services revenue in fiscal year ended
2002 can be attributed to the reluctance of customers to commit to long-term ROU
agreements, instead opting for short term, lower risk, lease agreements.

As of December 31, 2002, we had entered into sales transactions with more
than 210 international telecommunication carriers and Internet service providers
compared to 130 as of December 31, 2001.

OPERATING EXPENSES

In the period from January 1, 2002 to October 8, 2002, we recorded
$126.8 million of depreciation, compared to $132.0 million for the fiscal year
ended December 31, 2001. For the period from October 9, 2002 to December 31,
2002, we recorded $7.3 million of depreciation. For the fiscal year ended
December 31, 2002, depreciation on a combined basis was $134.2 million, an
increase of 1.6% over the fiscal year ended December 31, 2001. The depreciation
charge increased as a result of the additional sections of our global network
entering commercial service during 2001 and 2002. In 2001 and 2002 as legs of
the FA-1 and FNAL systems entered into commercial service, amounts held within
Construction In Progress relating to these systems were transferred to Property
And Equipment and subsequently depreciated. This increase is offset by the lower
depreciation resulting from impairment charges of $327.9 million in respect of
the FEA system and $225.0 million in respect of the FNAL system that we
recognized in June 2002. The assets of our company were further impaired as part
of the fresh start accounting process on emergence from chapter 11. See
"Impairment of Long-Lived Assets" above.

In the period from January 1, 2002 to October 8, 2002, we incurred
$40.8 million in network expenses, or 22.9% of total revenue for such period,
compared to $45.6 million for the fiscal year ended December 31, 2001. For the
period from October 9, 2002 to December 31, 2002, we recorded $8.0 million of
network expenses, or 36.5% of total revenue for such period. For the fiscal year
ended December 31, 2002, network expenses on a combined basis were
$48.8 million, or 24.4% of total revenues, an increase of 7.1% over the fiscal
year ended December 31, 2001. These costs relate primarily to the utilization of
third party capacity, including local backhaul costs, connection and access
fees, restoration charges and other network procurement costs. The cost increase
reflects the expansion of the network & increased connectivity in conjunction
with additional customer traffic. Cost increases were partially offset by the
migration of third party capacity onto our global network with regard to our
FA-1 and FNAL systems.

43

In the period from January 1, 2002 to October 8, 2002, we incurred
$55.8 million in operations and maintenance costs, or 31.3% of total revenue for
such period, compared to $50.2 million for the fiscal year ended December 31,
2001. For the period from October 9, 2002 to December 31, 2002, we recorded
$19.3 million of operations and maintenance costs, or 87.5% of total revenue for
such period. For the fiscal year ended December 31, 2002, operations and
maintenance costs on a combined basis were $75.0 million, or 37.5% of total
revenues, an increase of 49.4% over the fiscal year ended December 31, 2001.
Operations and maintenance costs relate primarily to the provision of standby
maintenance under maintenance zone agreements as well as salaries and overhead
directly associated with operations and maintenance activities. These increases
reflect the additional sections of our global network entering commercial
service. As legs of the FA-1 and FNAL systems entered into commercial service in
2001 and 2002, we became liable for the contractual commitments under
maintenance zone agreements and started to recognize the salaries and overhead
expenses relating to the operations and maintenance of these systems in the
income statement.

In the period from January 1, 2002 to October 8, 2002, we incurred
$57.7 million of sales, general and administrative expenses, or 32.4% of total
revenue for such period, compared to $69.5 million during the fiscal year ended
December 31, 2001. For the period from October 9, 2002 to December 31, 2002, we
recorded $15.6 million of general and administrative expenses, or 71.0% of total
revenue for such period. For the fiscal year ended December 31, 2002, general
and administrative expenses on a combined basis were $73.3 million, or 36.7% of
total revenues, an increase of 5.5% over the fiscal year ended December 31,
2001. The increase in sales, general and administrative expenses in 2002 is
attributable to retention payments to management and key employees and increased
general overhead required to support the growth of our global network across
Europe, the United States and the Far East, partially offset by the reduction in
the administrative workforce and office closures as anticipated in the Plan,
along with a reduction in advertising and marketing costs.

In the period from January 1, 2002 to October 8, 2002, we incurred
$15.6 million in respect of bad debt expense, or 8.7% of total revenue for such
period, compared to a $0.2 million credit incurred during the fiscal year ended
December 31, 2001. For the period from October 9, 2002 to December 31, 2002, we
recorded $1.0 million in respect of bad debt expense, or 4.7% of total revenue
for such period. For the fiscal year ended December 31, 2002, provisions for
doubtful debts on a combined basis were $16.6 million, or 8.3% of total
revenues. The increase in provisions for doubtful debts in 2002 is attributable
to the deterioration of the market and economic problems experienced by certain
of our customers.

RESTRUCTURING COSTS

In the period from January 1, 2002 to October 8, 2002, we incurred
$2.1 million in restructuring costs under the Plan, compared to $0.2 million in
restructuring costs incurred during the fiscal year ended December 31, 2001. For
the period from October 9, 2002 to December 31, 2002, we recorded $4.1 million
of restructuring costs. For the fiscal year ended December 31, 2002,
restructuring costs on a combined basis were $6.2 million. This represents items
arising from the application of EITF 94-3 (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). Specifically, these relate to headcount reductions and employee
related costs paid during our chapter 11 proceedings

During the third quarter of 2002, the Predecessor implemented a
restructuring plan to reduce the employee base and close certain offices in
order to reduce the level of fixed costs. The employees

44

affected were in Sales (51), Operations (47) and Finance and Administration
(15). The following summarizes the costs incurred by Predecessor.

The costs have been recorded as restructuring costs on the income statement.

Upon emergence from Bankruptcy, we initiated a further plan for a number of
office closures, employee relocations and further employment terminations, the
details of which were finalized during 2002 and early 2003. The employees
affected were in Sales (4), Operations (17) and Finance and Administration (14).
The Successor expects to incur $4.9 million in costs, as part of the plan. The
Successor has incurred $4.1 million in one-time termination costs in
December 31, 2002. There are a further $0.6 million of one-time termination and
$0.2 million of other associated costs expected to be incurred and paid in 2003.
The costs have been recorded on the income statement in accordance with
Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities", which we adopted on
October 9, 2002, in accordance with SOP 90-7.

The last office closure occurred in April 2003 and the final employee
termination is expected in August 2003.

The following summarizes the activity for the restructuring costs incurred
by the Successor:

(1) Represents employee termination benefits of Predecessor paid by Successor.

REORGANIZATION COSTS

In the period from January 1, 2002 to October 8, 2002, we incurred
$64.7 million in reorganization costs. These costs represent items arising from
the application of SOP 90-7, as referred to in "Critical Accounting Policies"
above. Specifically, these costs relate to professional fees, retainers,
interest income, underwriter's fees and write-off of capitalized interest paid
during the period we commenced chapter 11 proceedings.

LONG-LIVED ASSET IMPAIRMENT

As discussed above in "Impairment of Long-Lived Assets", during fiscal year
2002 we recognized an impairment charge of $327.9 million in respect of the FEA
system and $225.0 million in respect of the FNAL system, and $1,447.8 million
across the entire network as part of fresh start adjustments, totaling
$2,000.7 million. During 2001 we recognized an impairment charge of
$359.0 million in respect of the FA-1 system and $26.6 million in respect of the
FP-1 system.

45

GAIN ON SETTLEMENT OF LIABILITIES SUBJECT TO COMPROMISE

Upon emergence from chapter 11, we recognized a gain on settlement of
liabilities subject to compromise of $749.6 million as a result of transactions
contemplated by the Plan. This is primarily comprised of gains on settlements to
third parties as a result of restructuring.

AMORTIZATION OF PERFORMANCE OBLIGATIONS UNDER LONG-TERM CONTRACTS

Upon emergence from chapter 11 we began to amortize performance obligations
under long-term contracts. As of December 31, 2002, we have amortized
$9.9 million to the income statement. These performance obligations under
long-term contracts arose upon the adoption of fresh start accounting, as
referred to in "Critical Accounting Policies".

FRESH START ADJUSTMENTS

Fresh start adjustments impact the period from January 1, 2002 to
October 8, 2002 and consist of impairments to the cable systems of
$1,447.8 million, impairment of other long-term assets of $17.4 million and
performance obligations under long-term contracts of $142.5 million, partially
offset by the elimination of deferred revenues of $1,298.4 million and the
elimination of deferred taxes of $0.6 million.

INTEREST EXPENSE, FOREIGN CURRENCY GAIN, AND INTEREST INCOME

In the period from January 1, 2002 to October 8, 2002, interest expense on
borrowings decreased to $42.4 million, compared to $109.2 million for the fiscal
year ended December 31, 2001. For the period from October 9, 2002 to
December 31, 2002, we recorded $2.6 million of interest expense. For the fiscal
year ended December 31, 2002, interest expense on a combined basis was
$45.0 million, a decrease of 58.8% over the fiscal year ended December 31, 2001.
Interest expense decreased due to fresh start reporting when we stopped accruing
interest upon filing for bankruptcy. The restructuring of the debt after
emergence resulted in lower interest charges.

In the period from January 1, 2002 to October 8, 2002, we experienced a
foreign exchange loss of $24.5 million, compared to $7.2 million for the fiscal
year ended December 31, 2001. For the period from October 9, 2002 to
December 31, 2002, we recorded $0.6 million loss. For the fiscal year ended
December 31, 2002, foreign exchange loss on a combined basis was $25.1 million,
an increase of 249.9% over the fiscal year ended December 31, 2001. The foreign
exchange loss of $24.5 million in the period to October 8, 2002 arose primarily
from the translation of the net Euro denominated borrowings from Euro to U.S.
Dollars until the Euro-denominated borrowings were redeemed as part of the Plan.

During 2002, we capitalized $2.2 million of interest costs as a component of
construction in progress, compared to $16.2 million during 2001 due to the
reduced level of construction in 2002.

We earned interest income of $4.0 million during the year ended
December 31, 2002 prior to entering our chapter 11 process, and interest income
of $3.4 million during the reorganization process (being a reorganization item),
compared to $42.9 million earned during the year ended December 31, 2001,
reflecting our lower cash balances during 2002. Interest was earned on:

- cash balances, restricted cash and short-term investments held by the
collateral trustee for FLAG Limited's credit facility;

- the restricted cash balances in FLAG Atlantic Limited; and

- the balance of the proceeds from the initial public offering of
Predecessor and high yield funds held by Predecessor.

46

PROVISION FOR TAXES

The provision for taxes was a credit of $3.1 million for the year ended
December 31, 2002, compared to a charge of $7.4 million for the year ended
December 31, 2001. The movement from a tax charge for 2001 of $7.4 million to an
overall tax credit, on a combined basis, for 2002 of $3.1 million arises because
certain provisions made in 2001 were not required in 2002, and from the release
of certain of the 2001 provisions as certain tax liabilities are now not
expected to crystallize.

NET LOSS AND LOSS PER SHARE

In the period from January 1, 2002 to October 8, 2002, net loss decreased to
$358.6 million, compared to $603.5 million for the fiscal year ended
December 31, 2001. For the period from October 9, 2002 to December 31, 2002, we
recorded a net loss of $36.8 million. For the fiscal year ended December 31,
2002, net loss on a combined basis was $395.4 million, a decrease of 34.5% over
the fiscal year ended December 31, 2001.

Basic and diluted loss per common share was $2.66 and $2.67, and $18.42 and
$18.42 for the period from January 1, 2002 to October 8, 2002 and the period
from October 9, 2002 to December 31, 2002, respectively, compared to a basic
loss of $4.49 per common share and a diluted loss per common share of $4.50 for
the year ended December 31, 2001.

YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000

REVENUES

We recognized total revenue during the year ended December 31, 2001 of
$163.6 million compared to $100.3 million for the year ended December 31, 2000,
an increase of 63.2%. This increase is due to an increase in our network
services business revenues and the continued growth in capacity sales and
activations on our global network. During 2001, we achieved a number of
significant milestones in the construction of our global network bringing parts
of our network into commercial service and thereby permitting the recognition of
revenue from presales in the statement of operations, which had previously been
deferred. The southern leg of the FA-1 system entered into commercial service in
June 2001 and the full loop was completed when the northern leg of the system
entered into commercial service in September 2001. With the full loop of the
FA-1 system in commercial service, the full amount of the presale payments began
to be recognized over the lifetime of the system from June 2001. In addition,
revenues in relation to the agreed maintenance charges on the FA-1 system
started to be recognized. The eastern leg of the FNAL system also entered into
commercial service in June 2001. Prior to the year ended December 31, 2001, only
the FEA system was in commercial service.

We recognized revenue from the sale of capacity of $68.0 million for the
year ended December 31, 2001 compared to $34.8 million during the year ended
December 31, 2000, an increase of 95.1%. This increase is due to the
construction milestones achieved on our global network in 2001 which enabled us
to start amortizing deferred revenue through the income statement over the
lifetime of the system or over the life of the lease and services agreements.

We recognized revenue from operations and maintenance services of
$60.1 million for the year ended December 31, 2001 compared to $43.8 million for
the year ended December 31, 2000, an increase of 37.1%. This increase is a
result of the construction milestones achieved on our global network in the
year, which enabled us to start billing the agreed maintenance charges on the
systems brought into commercial service.

We recognized revenue from network services of $35.5 million for the year
ended December 31, 2001 compared to $21.6 million for the year ended
December 31, 2000, an increase of 64.6%. The network services business consists
of managed bandwidth service, IP services and co-location services.

47

The managed bandwidth product, which offers customers fully protected
international city-to-city circuits backed by service delivery and availability
guarantees, represents approximately 70% of the network services revenue for the
year ended December 31, 2001, an increase from approximately 50% of network
services revenues in the year ended December 31, 2000. Our leased circuit
services business and our IP services business, new in the year, represented
approximately 14% and 9% respectively of the network services revenue in the
year ended December 31, 2001.

As of December 31, 2001, we had entered into sales transactions with more
than 130 international telecommunication carriers and Internet service providers
compared to 100 as of December 31, 2000.

OPERATING EXPENSES

For the year ended December 31, 2001, we recorded $132.0 million of
depreciation compared to $81.3 million for the year ended December 31, 2000, an
increase of 62.0%. The depreciation charge for 2001 has increased as
construction milestones on our global network were achieved. As legs of the FA-1
and FNAL systems entered into commercial service, amounts held within
construction in progress relating to these systems were transferred to property
and equipment. We depreciate property and equipment on a straight-line basis
over the estimated useful life of the asset, generally no more than 15 years.

During the year ended December 31, 2001, we incurred $45.6 million in
network expenses compared to $18.8 million for the year ended December 31, 2000,
an increase of 142.6%. These costs primarily relate to our utilization of third
party capacity, including backhaul expenses, connection and access charges,
restoration charges and other network procurement costs.

During the year ended December 31, 2001, we incurred $50.2 million in
operations and maintenance costs compared to $36.2 million for the year ended
December 31, 2000, an increase of 38.7%. Operations and maintenance costs relate
primarily to the provision of standby maintenance under maintenance zone
agreements as well as salaries and overhead expenses directly associated with
operations and maintenance activities. The increase in 2001 reflects the
construction milestones on our global network achieved in that year. As legs of
the FA-1 and FNAL systems entered into commercial service, we became liable for
the contractual commitments under maintenance zone agreements and started to
recognize the salaries and overhead expenses relating to the operations and
maintenance of these systems in the income statement.

During the year ended December 31, 2001, we incurred $69.5 million of sales,
general and administrative expenses compared to $48.2 million during the year
ended December 31, 2000, an increase of 44.1%. The increase in sales, general
and administrative costs is largely due to recruitment of additional staff,
higher personnel costs arising from the increased sales activity to support our
growing range of products and services, and increased office related costs
incurred as FLAG expanded its geographical diversity and our global network was
expanded in Europe, the USA and the Far East.

Costs for the year ended December 31, 2001 include $1.0 million in charges
for non-cash compensation expense in respect of stock option awards under our
long-term incentive plan, compared to $7.7 million in charges for the year ended
December 31, 2000. These charges are required under U.S. accounting practices
and are purely accounting charges having no effect on cash flows.

LONG-LIVED ASSET IMPAIRMENT

Given the high degree of competition in terms of alternative supply, price
erosion and lack of demand on the trans-Atlantic route, we reviewed the
prospects for demand on that route and we determined that our FA-1 system was
impaired. We determined that the carrying value of the FA-1 system exceeded its
fair value and we recognized an impairment charge of $359.0 million in 2001. We

48

derived the fair value based on the present value of future cash flows expected
to be generated by the FA-1 system according to the latest demand forecasts
available to management at that time.

In addition, asset impairment charges of $26.6 million were recorded in the
third quarter of 2001. On August 7, 2001, we announced that we had decided not
to proceed with the FLAG Pacific--1 ("FP-1") project in association with TyCo
Telecommunications that had been announced in the second quarter. The agreement
with TyCo Telecommunications was conditional upon our obtaining financing on
satisfactory terms. However, despite substantial efforts on our part and given
the capital market conditions prevailing at the time, the financing proposal
received fell short of expectations. We had commissioned a marine survey for the
construction of the FP-1 project and entered into other project related
expenditure commitments. Following the decision not to proceed, the residual
value of the costs incurred was $nil and the consequent asset impairment charge
was $26.6 million, comprising $24.0 million in abandoned survey and preliminary
build costs and $2.6 million of other project related costs.

RESTRUCTURING CHARGES

Following the decision not to proceed with the FP-1 project, certain
employment agreements were terminated and amounts already paid or due in
connection with preliminary build evaluation was written off. We recognized a
restructuring charge of $0.2 million related to staff reduction costs. The cash
expenditures concerning the workforce reduction charge had been paid by the end
of the year.

INTEREST EXPENSE, FOREIGN CURRENCY GAIN, AND INTEREST INCOME

Interest expense on borrowings increased to $109.2 million for the year
ended December 31, 2001, from $102.5 million for the year ended December 31,
2000, an increase of 6.4%. Interest expense has increased by $6.7 million due to
an increase in borrowings and because, as elements of the construction of our
global network were brought into commercial service, interest on related
borrowings may no longer be capitalized and must be expensed in accordance with
U.S. accounting practices.

We experienced a foreign currency exchange loss of $7.2 million for the year
ended December 31, 2001, as compared to a foreign currency exchange gain of
$16.8 million for the year ended December 31, 2000. The foreign currency
exchange loss of $7.2 million arose from the translation at the year-end of the
net Euro-denominated borrowings from Euro to U.S. Dollars at the balance sheet
exchange rate.

During 2001, we capitalized $16.2 million of interest costs as a component
of construction in progress.

We earned interest income of $42.9 million during the year ended
December 31, 2001, compared to $69.8 million earned during the year ended
December 31, 2000. Interest was earned on:

- cash balances and short-term investments held by the collateral trustee
for FLAG Limited's credit facility;

- the restricted cash balances in FLAG Atlantic Limited; and

- the balance of the proceeds from the IPO and high yield funds held by FLAG
Telecom.

PROVISION FOR TAXES

The provision for taxes was $7.4 million for the year ended December 31,
2001, compared to $1.1 million for the year ended December 31, 2000. The tax
charge has increased from $1.1 million for 2000 to $7.4 million for 2001
primarily as a result of provisions being made during 2001 for potential tax
liabilities in a number of jurisdictions.

49

NET LOSS AND LOSS PER SHARE

For the year ended December 31, 2001, we recorded a net loss of
$603.5 million, compared to a net loss of $95.6 million for the year ended
December 31, 2000.

Basic loss per common share was $4.49 and diluted loss per common share was
$4.50 for the year ended December 31, 2001, compared to a basic and diluted loss
of $0.73 per common share for the year ended December 31, 2000.

TAXES

The provision for income taxes reflected in the statements of operations
included in our financial statements contained in this report consists of taxes
incurred on the income earned or activities performed by us in jurisdictions
where we are deemed to have a taxable presence or are otherwise subject to tax.
We believe that a significant portion of our company's income will not be
subject to tax by Bermuda, which currently has no corporate income tax, or by
certain other countries in which either we conduct activities or in which our
customers are located. However, this belief is based upon the anticipated nature
and conduct of our business, which may change, and upon management's
understanding of our company's position under the tax laws of the various
countries in which we have assets or conduct activities, or upon the location of
our customers. Our tax position is subject to review and possible challenge by
taxing authorities and to possible changes in law, which may have retroactive
effect. We cannot determine in advance the extent to which certain taxing
jurisdictions may require us to pay tax or to make payments in lieu of tax. In
addition, payments due to us from our customers may be subject to withholding
tax or other tax claims in amounts that exceed the taxation that we anticipate
based upon our current and anticipated business practices and current tax
regimes.

We have obtained from the Minister of Finance of Bermuda, under the Exempted
Undertakings Tax Protection Act 1966, an undertaking that, in the event that
Bermuda enacts any legislation imposing tax computed on profits or income or
computed on any capital asset, gain or appreciation, or any tax in the nature of
estate duty or inheritance tax, then the imposition of such tax will not be
applicable to our company or to any of our operations, or to the shares, capital
or common stock of FLAG Telecom, until March 28, 2016. This undertaking does
not, however, prevent the imposition of property taxes on any real property or
leasehold interests in Bermuda.

As Bermuda does not impose an income tax, the statutory amount of tax is
zero. The provision for income taxes for the years ended December 31, 2002, 2001
and 2000, results in an effective tax charge that differs from the Bermuda tax
charge as follows:

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2002, our available sources of liquidity consisted of
$125.8 million of unrestricted cash and cash equivalents.

As of December 31, 2002, we had $8.4 million of restricted cash. This amount
represents monies held in an escrow account with the Bank of New York pursuant
to a payment plan with a third party for maintenance services and collateral for
guarantees and deposits. During the first half of 2003, we expect a decrease in
our unrestricted cash and cash equivalents as we make payments to suppliers due
under a number of deferred payment plans currently in place to clear liabilities
with these suppliers.

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Prices are reducing in 2003 and this will have an impact on our results when
compared to 2002. However, based on existing market conditions, financial
conditions and financial projections, our amount of unrestricted cash and cash
equivalents is sufficient to enable us to continue to meet in full our financial
obligations as they fall due in the next 12 months.

CASH FLOWS

For the period from January 1, 2002 to October 8, 2002, total cash used by
operating activities was $35.0 million, total cash used in financing activities
was $421.8 million and total cash provided by investing activities was
$152.2 million. For the period from October 9, 2002 to December 31, 2002, total
cash used in operating activities was $18.1 million, total cash used in
financing activities was $nil and total cash and cash equivalents provided by
investing activities was $2.0 million.

At December 31, 2002, total cash and cash equivalents had decreased to
$125.8 million from $417.4 million at December 31, 2001 primarily as a result of
further payments on the construction of the FLAG Telecom network and the
Effective Date payments made on emergence from chapter 11.

As at December 31, 2002, we had liquid resources of $125.8 million and have
forecasted positive cash flows for at least the next 12 months. As a result, we
believe that our exposure to short-term liquidity risk is limited.

On a long-term basis, in addition to continued operating requirements, we
will need to repay or refinance the majority of our debt. Specifically, this
includes the Series A Notes, which can be redeemed at $30 million prior to
April 2004, which increases to $45 million prior to the due date of
October 2005. Also included is the FNAL Note (as defined below), which is due in
three installments-$6.0 million in September 2003, $6.9 million in
September 2004, and $14.4 million in September 2005.

Factors which could impact our ability to have sufficient liquidity to
conduct our business are our ability to generate sufficient sales to new and
existing customers, changes in the competitive environment of the markets in
which we serve, and changes in technology.

ACCOUNTS RECEIVABLE

At December 31, 2002, we had an accounts receivable balance of
$81.9 million, which includes $0.7 million relating to sales contracts payable
in accordance with agreed payment schedules over periods between 30 days and one
year from the balance sheet date. The comparable figures at December 31, 2001
were $148.9 million and $11.6 million, respectively.

INDEBTEDNESS

Prior to the Effective Date, Predecessor had outstanding 11 5/8% Senior
Dollar Notes due 2010 in the aggregate principal amount of $300 million and
11 5/8% Senior Euro Notes due 2010 in the aggregate principal amount of
E300 million. In addition, prior to the Effective Date, FLAG Limited had
outstanding 8 1/4% Notes due 2008 in the aggregate principal amount of
$430 million. On the Effective Date and pursuant to the Plan, these notes were
exchanged in favor of new notes, cash and common shares, and subsequently
discharged. See "Legal Proceedings" for a more detailed discussion of the Plan
and these transactions

Upon our emergence from chapter 11 proceedings our company and our
subsidiaries entered into various financing agreements. Our debt instruments are
described below:

THE SERIES A NOTES

We issued Series A Notes to the bondholders of Predecessor in the original
principal amount of $45 million, which are due and payable on October 1, 2005,
and bear simple interest on this amount, less any principal repayments made, at
the following rates: 6.67% per annum for the first 12 months

51

after the Effective Date; 7.33% per annum for months 13 through 24 after the
Effective Date; and 8% per annum for months 25 through 36 after the Effective
Date.

At any time up until April 2004, we have the right, in our sole and absolute
discretion, provided that no default or event of default has occurred or is
continuing, to redeem all of the Series A Notes by paying the sum of
$30 million, plus accrued but unpaid interest. Such discount redemption must be
done via Board resolution with 30 days prior notice to the trustee and can only
be done in a situation where there is no default. Each subsequent month, the
repayment sum increases by $0.833 million until October 1, 2005 whereby the
total sum would be $45 million.

In the event of a liquidation event or Change of Control (defined below),
the original principal amount of $45 million will be payable in full plus
accrued but unpaid interest, less any principal repayments made. "Change of
Control" is defined to mean, in summary: (i) when any person or group becomes
the beneficial holder of more than 50% of our voting stock; or (ii) when we
consolidate or merge with or into any other person or sell all or substantially
all of our assets.

To secure payment of the Series A Notes liens were granted on substantially
all of the assets of our company and certain of our subsidiaries in favor of The
Bank of New York, as Trustee to the Indenture (the "Indenture"). Such lien ranks
PARI PASSU in priority and right of payment with the Series B Note and the
Series C Note.

THE SERIES B NOTE

We issued the Series B Note to The Blackstone Group, which acted as our
financial advisor during our chapter 11 proceedings, on the Effective Date. The
Series B Note has an original principal amount of $4 million, is due and payable
on October 1, 2004 and bears simple interest on this amount, less any principal
repayments made, at the following rates: 10% per annum until October 1, 2003;
and 11% thereafter. Unlike the Series A Notes, the Series B Note is not
redeemable at a discount.

We may issue senior secured debt obligations equal and ratable to the
Series B Note upon payment by us of $15 million of the original principal amount
of the Series A Notes.

In the event of a liquidation or Change of Control, the original principal
amount of $4 million plus a $2 million premium is payable in full plus accrued
but unpaid interest, less any principal repayments made.

The Series B Note is cross-defaulted with both the Series A Notes and the
Series C Note. The Series B Note is secured by liens on the same assets as the
Series A Notes and ranks PARI PASSU in priority and right of payment with the
Series A Notes and the Series C Note. Upon the payment by us of $5 million of
the original principal amount of the Series A Notes, the liens securing the
Series B Note will be cancelled and released.

SERIES C NOTE

We issued the Series C Note to Houlihan Lokey Howard & Zukin Capital
("Houlihan"), which acted as the financial advisor to the Unsecured Creditors'
Committee during our chapter 11 proceedings, on the Effective Date. The
Series C Note has an original principal amount of $1.25 million, is due and
payable on October 1, 2004 and has the same material terms and conditions as the
Series B Note.

In the event of a liquidation or Change of Control, the original principal
amount of $1.25 million is payable in full plus accrued but unpaid interest,
less any principal repayments made. The Series C Note is cross-defaulted with
both the Series A Notes and the Series B Note. The Series C Note is secured by
liens on the same assets as the Series A Notes and ranks PARI PASSU in priority
and right of payment with the Series A Notes and the Series B Note. Upon the
payment by us of $5 million of the original principal amount of the Series A
Notes, the liens securing the Series C Note will be cancelled and released.

52

We may issue senior secured debt obligations equal and ratable to the
Series C Note upon the payment by us of $15 million of the original principal
amount of the Series A Notes.

INDENTURE FOR SERIES A, B AND C NOTES

The Series A Notes, the Series B Note and the Series C Note are each
governed by an Indenture, dated as of October 9, 2002, between FLAG Telecom and
The Bank of New York, as indenture trustee. We are prohibited from retiring any
debt prior to its scheduled maturity, other than the Series A, B and C Notes,
non-recourse debt, and intercompany debt. Therefore, we cannot retire the FNAL
Note (see below) without the consent of the Series A, B and C Noteholders.
However, the FNAL Note and other indebtedness does not prevent us from
repurchasing the Series A, B and C Notes.

Furthermore, any payment of dividends would be restricted by the terms of an
Indenture between FLAG Telecom and the Bank of New York, as Indenture Trustee,
dated October 9, 2002. The Indenture provides that any dividend or distribution
paid pursuant to the provisions of the Security and Pledge Agreement, also with
the Bank of New York, as Collateral Trustee, dated October 9, 2002, shall be
paid to the Bank of New York and such dividend or distribution paid will be used
to redeem the Series A, B & C Notes on a pro rata basis. Any and all dividends
and interest paid or payable in case in respect of any Security Collateral (i.e.
Pledged Stock, Pledged Notes, additional shares of Capital Stock and additional
indebtedness from time to time) in connection with a partial or total
liquidation or dissolution or in connection with a reduction of capital surplus
or paid-in-surplus, and cash paid, payable or otherwise distributed in respect
of principal of, or redemption of, or in exchange for, any Security Collateral,
shall be forthwith delivered to the Collateral Trustee to be held as Security
Collateral.

Pursuant to the terms of the Indenture, each of our subsidiaries other than
FLAG Telecom Korea Limited, Seoul Telenet, Inc. and FLAG Telecom Switzerland
Network AG has granted a guarantee of the full and punctual payment of
principal, premium and interest of each of the Series A, B and C Notes and all
other obligations of the Company under the Notes.

We also entered into a Security and Pledge Agreement, dated as of
October 9, 2002, with The Bank of New York, as collateral trustee, under which
we have pledged and granted a security interest in substantially all of our
current and future assets to secure the payment of all the Series A Notes, the
Series B Note and the Series C Note.

OTHER INDEBTEDNESS

In addition to the notes described above, we, and/or certain of our
subsidiaries, issued several promissory notes to trade creditors in connection
with the Plan. In particular, on May 16, 2002, FLAG Asia Limited issued a
promissory note (the "FNAL Note") to a trade creditor in the principal amount of
$27.4 million. The FNAL Note is secured by certain assets of FLAG Asia Limited,
including one fiber pair and related equipment and rights on FNAL, and
guaranteed by FLAG Telecom. The guarantee issued by FLAG Telecom to the holder
and the collateral agent of the FNAL Note provides that, for the term of the
FNAL Note, FLAG Telecom will guarantee the payment and performance of the FNAL
Note until the date on which the note is paid in full. As a result, FLAG Telecom
is obligated fully and to the same extent as FLAG Asia Limited for the full
amount of the FNAL Note until it is paid in full. The FNAL Note bears an
interest rate of 7% per annum payable quarterly in arrears commencing on the
Effective Date. Of the principal amount, $6 million is due and payable on
September 30, 2003, $6.9 million is due and payable on September 30, 2004 and
the remaining principal is due and payable on September 30, 2005.

In the event of a liquidation event or Change of Control (defined below),
the original principal amount of $27.4 million will be payable in full plus
accrued but unpaid interest, less any principal repayments made. "Change of
Control" is defined to mean, in summary: (i) when any person becomes the
beneficial holder of 100% of FLAG Asia Limited's issued capital stock; or
(ii) when FLAG Asia

53

Limited consolidates or merges with or into any other person or sell all or
substantially all of our assets.

On the Effective Date, we also issued a promissory note to another trade
creditor in the principal amount of $2.4 million with an 18-month term and 7%
interest. A further note will be issued to the same creditor in the amount of
$4 million or such lesser amount to be determined at the time of issuance. This
further note is also to have an 18-month term and 7% interest. This note is only
to be issued once we have recovered the E16 million VAT return from the French
authorities. To the extent less is received a proportionate amount will be
payable. Upon receipt of the VAT refund and the issuance of the note, a cash
payment will be made to a trade creditor in an amount equal to the note.

Also on the Effective Date, FLAG Asia Limited issued an unsecured promissory
note to another trade creditor in the principal amount of $1 million with an
18 month term and 7% interest payable monthly, maturing on 25 March, 2004.

On the Effective Date, we also issued an unsecured note to another trade
creditor of $3.42 million, repayable in 12 equal monthly installments. This note
is not interest bearing.

DEBT COVENANTS

We review the covenants of our debt instruments on a monthly basis to ensure
compliance, and to enable the Chief Financial Officer to make the certifications
regarding these covenants that are required by certain of these instruments.

The major covenants can be categorized as follows:

Operational Covenants

- No incurrence of additional Indebtedness

- Conduct of business

- Restrictions on payments and investments

- Restrictions on transactions with affiliates

- Record keeping required

- Compliance with laws and payment of taxes

Perfection and dealings with creditors and creditors' agents

- Payment of principal and interest

- Perfection of security interests

- Reporting to trustees and bondholders

Structural Covenants

- Corporate existence

- Maintenance, retention and insurance of assets

- No creation of additional liens

Currently, we are of the opinion that we are in compliance with the
covenants contained in all of our debt instruments.

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DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table provides a summary of our expected obligations and
commitments to make future payments under contracts, contractual obligations and
commercial commitments as at December 31, 2002:

(1) These represent the contractual maturities of our indebtedness. At any time
up until April 1, 2004, we have the right, in our sole and absolute
discretion, provided that no default or event of default has occurred or is
continuing, to redeem all of the Series A Notes by paying the sum of
$30 million, plus accrued but unpaid interest. Such discount redemption must
be done via Board resolution with 30 days prior notice to the trustee and
can only be done in a situation where there is no default. Each subsequent
month, the repayment sum increases by $0.833 million until October 1, 2005
whereby the total sum would be $45 million.

NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets".

Under SFAS 142, goodwill will no longer be amortized, but will be tested for
impairment on an annual basis and whenever indicators of impairment arise. We
adopted SFAS 142 on January 1, 2002. This adoption did not impact our results of
operations, financial position or cash flows since our goodwill balance was
impaired during 2001 and we no longer have goodwill recorded on our books.

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting requirements for
retirement obligations associated with tangible long-lived assets, including
(1) the timing of the liability recognition, (2) initial measurement of the
liability, (3) allocation of asset retirement cost to expense, (4) subsequent
measurement of the liability and (5) financial statement disclosures. SFAS 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset and depreciated over the
life of the associated fixed asset. An entity shall measure changes in the
liability for an asset retirement obligation due to passage of time by applying
an interest method of allocation to the amount of the liability at the beginning
of the period. The interest rate used to measure that change shall be the
credit-adjusted risk-free rate that existed when the liability was

55

initially measured. That amount shall be recognized as an increase in the
carrying amount of the liability and as an expense classified as an operating
item in the statement of income.

We adopted SFAS 143 in accordance with the principles of fresh start
accounting. This adoption resulted in the calculation of a liability of
$4.7 million, which will be accreted over the remaining life of the assets.

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes a single
accounting model for long-lived assets to be disposed of by sale consistent with
the fundamental provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". While it
supersedes portions of APB Opinion 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", it
retains the discontinued operations presentation, yet it broadens that
presentation to include a component of an entity (rather than a segment of a
business). However, discontinued operations are no longer recorded at net
realizable value and future operating losses are no longer recognized before
they occur. SFAS 144 also establishes criteria for determining when an asset
should be treated as held for sale.

We adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 and the
subsequent review of future cash flows based on current service potential in the
light of the current depressed telecommunications market conditions has resulted
in an impairment of our FLAG Europe-Asia ("FEA") cable system of $327.9 million
and an impairment of our FLAG North Asian Loop ("FNAL") cable system of
$225.0 million. In April 2002, FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement 13 and Technical Corrections".

This statement rescinds FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt", and an amendment of that statement, FASB Statement
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-fund Requirements".
This statement also rescinds FASB Statement No. 44, "Accounting for Intangible
Assets of Motor Carriers". This statement amends FASB Statement No. 13,
"Accounting for Leases", to eliminate inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions.

We adopted SFAS 145 as required under SOP 90-7. This had no impact on our
results of operations, our financial position or our cash flows.

In June 2002, FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities."

This statement nullifies Emerging Issues Task Force (EITF) 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)". For
purposes of this Statement, an exit or disposal activity is initiated when
management, having the authority to approve the action, commits to an exit or
disposal plan or otherwise disposes of a long-lived asset (disposal group) and,
if the activity involves the termination of employees, the criteria for a plan
of termination in paragraph 8 of this Statement are met. The provisions of
Issue 94-3 shall continue to apply for an exit activity initiated under an exit
plan that met the criteria of Issue 94-3 prior to this Statement's initial
application.

The principal difference between this Statement and Issue 94-3 relates to
its requirements for recognition of a liability for a cost associated with an
exit or disposal activity. This Statement requires

56

that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a liability for an
exit cost as defined in Issue 94-3 was recognized at the date of an entity's
commitment to an exit plan. A fundamental conclusion reached by the Board in
this Statement is that an entity's commitment to a plan, by itself, does not
create a present obligation to others that meets the definition of a liability.
Therefore, this Statement eliminates the definition and requirements for
recognition of exit costs in Issue 94-3. This Statement also establishes that
fair value is the objective for initial measurement of the liability.

SFAS 146 was adopted upon emergence from bankruptcy as required under
SOP 90-7. The impact of this adoption was that certain restructuring costs which
previously would have been allowed under EITF-94-3 were not allowed under
SFAS 146, consequently certain restructuring costs were deferred until 2003.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure" (SFAS 148) that amends SFAS 123 to
provide alternative methods of transition for a voluntary change to SFAS 123's
fair value method of accounting for stock-based employee compensation. SFAS 148
also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28,
"Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. We adopted this
standard in accordance with the provisions of SOP 90-7. We do not expect the
adoption of SFAS 148 to have a material effect on our financial position,
results of operations, or cash flows. We have elected to continue to follow the
intrinsic value method of accounting as prescribed by APB Opinion No. 25 to
account for employee stock options.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. We do not expect
the adoption of this statement to have a material impact on our operating
results of financial position.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and measurement provisions of FIN 45 apply on a prospective
basis to guarantees issued or modified after December 31, 2002. We adopted this
standard in accordance with SOP 90-7. We do not expect the adoption of FIN 45 to
have a material effect on our financial position, results of operations, or cash
flows.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses the financial
reporting by enterprises involved with variable interest entities. FIN 46
addresses both unconsolidated variable interest entities and any new variable
interest entities that are created subsequent to the issuance of the
interpretation. As of December 31, 2002, we did not have any unconsolidated
variable interest entities. Any future variable interest entities will be
accounted for in accordance with FIN 46.

57

In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. We are currently evaluating the effect
that the adoption of EITF Issue No. 00-21 will have on our results of operations
and financial condition.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CURRENCY RISK

We do not believe that our operations are exposed to significant risk from
movements in foreign currency exchange rates. All capacity and operations and
maintenance revenues are payable in U.S. Dollars. All contracts for the
provision by third parties of restoration are invoiced to us in U.S. Dollars. We
invoice some network services products in local currencies. Some contracts with
suppliers of services to our network services business are payable in currencies
other than U.S. Dollars. Some vendor contracts for the provision of operations
and maintenance services to the FEA cable system and local operating expenses of
our subsidiary companies are payable in currencies other than U.S. Dollars. Our
head office is located in London and costs associated with this are incurred in
Sterling. Approximately 10% of our assets, liabilities and commitments are
denominated in currencies other than U.S. Dollars as at December 31, 2002. We
enter into forward foreign currency contracts to hedge exposures that are
considered material to our financial position. As at December 31, 2002, we had
not entered into any forward foreign currency contracts since the second quarter
of 2001.

On January 1, 1999, 12 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and a new currency called the "Euro". These countries adopted the Euro as their
common legal currency on that date. The Euro trades on currency exchanges and is
available for non-cash transactions. Until January 1, 2002, the existing
sovereign currencies remained legal tender in these countries. On January 1,
2002, the Euro replaced the sovereign legal currencies of these countries. We
have operations within the European Union including many of the countries that
have adopted the Euro. We continue to evaluate the impact the Euro will have on
our continuing business operations within the overall scope of managing currency
risk.

Exchange rate fluctuations have resulted in losses of $0.6 million,
$24.5 million and $7.2 million in the periods from October 9, 2002 to
December 31, 2002, from January 1, 2002 to October 8, 2002 and the year ended
December 31, 2001, respectively. Our exposure to losses in the period from
October 9, 2002 to December 31, has been reduced as a result of all our debt now
being recorded in U.S. Dollars.

58

INTEREST RATE RISK

Historically we have been exposed to interest rate risk on bank debt
incurred by FLAG Limited and FLAG Atlantic Limited, and interest rate swap
transactions were entered to manage this risk. FLAG Limited's bank debt was
repaid in full in March 2002, and FLAG Atlantic Limited's debt was redeemed
pursuant to the Plan. All of our debt is now subject to fixed rates of interest
so we have no longer have significant exposure to interest rate risk.

In August 2000, FLAG Limited entered into an interest rate collar
transaction for an initial notional amount of $60.0 million, reducing in
increments to $20.0 million in the final quarter of 2001. The transaction was
due to terminate on April 30, 2002. However, due to the initiation of chapter 11
proceedings, the final payment was not made until June 28, 2002. The collar was
comprised of a LIBOR cap at 8% and a floor of 5.85%. We recognized the net cash
amount received or paid on interest rate hedging instruments as an adjustment to
interest cost on the related debt.

Commodity price risk is not material to our company.

59

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Pages F-1 through F-51 setting forth the financial statements that are
filed as a part of this Form 10-K.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth, as of June 15, 2003, the names, ages and
positions of our directors and executive officers. Additional biographical
information concerning these individuals is provided in the text following the
table.

PATRICK GALLAGHER

Mr. Gallagher has served as Co-Chairman of the Board of Directors and Chief
Executive Officer of our company since March 1, 2003. Before joining us,
Mr. Gallagher worked for British Telecommunications plc in the United Kingdom
since 1995. His last position was Group Director--Strategy and Development from
2000 to 2002. Prior to this, he was President of BT Europe from 1995 to 2000.

60

ROBERT AQUILINA

Mr. Aquilina has served as Co-Chairman of the Board of Directors of our
company since October 2002. He currently serves as an independent consultant to
various corporations. Mr. Aquilina held several senior executive positions with
AT&T Corporation from 1980 to 2001. From 2000 to 2001, he served as Co-President
of AT&T Consumer Services, a $15 billion unit with approximately 60 million
customers. From 1997 to 1999, he served as President and Managing Director of
the company's Europe Middle East and Asia region. From 1996 to 1997, he served
as Vice President of Business Product Management.

EUGENE DAVIS

Mr. Davis has served as Co-Chairman of the Board of Directors of our company
since October 2002. He has served as Chairman and Chief Executive Officer of
Pirinate Consulting Group L.L.C., a privately held consulting firm, since 1999.
Mr. Davis has also served as the Chairman and Chief Executive Officer of RBX
Industries, Inc., a manufacturer and distributor of rubber and plastic based
foam products serving North America, since September 2001. From January 2001 to
September 2001, Mr. Davis served as the Chief Restructuring Officer of RBX
Industries, Inc. From 1999 to 2001, Mr. Davis served as Chief Executive Officer
of Smartalk Teleservices, Inc., a provider of prepaid calling cards in the
United States, which filed for chapter 11 in January 1999. From 1998 to 1999,
Mr. Davis served as the Chief Operating Officer of Total-Tel USA
Communications, Inc. (now Covister Communications), an integrated
telecommunications provider.

EDWARD MCCORMACK

Mr. McCormack has served as Chief Operating Officer and as a member of the
Board of Directors of our company since October 2002. Mr. McCormack had served
on the board of Predecessor from October 1999 to October 2002 and served as
Deputy Chairman of the board of Predecessor from March 2000 to October 2002. He
served as the Chief Financial Officer of Predecessor from February 1996 to
November 2000 and was appointed Chief Operating Officer in March 2000.
Mr. McCormack was a director and officer of Predecessor at the time it filed for
chapter 11 protection in April 2002. Prior to his service with Predecessor,
Mr. McCormack spent 17 years with Bechtel, an engineering and construction
company. His final position with Bechtel was Chief Financial Officer of Bechtel
Europe, Africa, Middle East and South West Asia.

MICHEL CAYOUETTE

Mr. Cayouette has served as Chief Financial Officer of our company since
October 2002. He served as Chief Financial Officer of Predecessor from
January 2002 to October 2002, during which time Predecessor filed for chapter 11
protection in April 2002. Prior to joining Predecessor, Mr. Cayouette was the
Executive Vice President and Chief Financial Officer of TIW Asia N.V., a global
communications investment fund, from January 2001 to November 2001. Prior to
that, he held several senior executive positions at Teleglobe Communications
Corporation and Teleglobe Inc., from June 1992 to December 2000. Mr. Cayouette
informed us that he will resign as Chief Financial Officer of the company in
July 2003. He will be replaced by Mr. Alex Gersh.

KEES VAN OPHEM

Mr. van Ophem has served as General Counsel and Assistant Secretary of our
company since October 2002. He served as General Counsel and Assistant Secretary
of Predecessor from October 2001 to October 2002, during which time Predecessor
filed for chapter 11 protection in April 2002. Prior to this, he worked for
Carrier 1 in Zurich, a Nasdaq and Frankfurt Neuer Market listed company which
provides access, internet, bandwidth, data center and voice outsourcing
solutions

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to large telecommunications users, where he was co-founder and Executive Vice
President, Corporate Services and General Counsel, from March 1998 to
October 2001. Carrier 1 filed for bankruptcy in February 2002. Prior to that,
Mr. van Ophem was the General Counsel for Unisource Carrier Services in Zurich
from 1994. Before this, Mr. van Ophem was in-house counsel to Royal PTT
Netherlands (KPN) in The Hague and an associate with various law firms both in
the U.S. and Europe.

ANDREW EVANS

Mr. Evans has served as Chief Technology Officer of our company since
October 2002. He served as Chief Technology Officer of Predecessor from
January 14, 2002 to October 2002, during which time Predecessor filed for
chapter 11 protection in April 2002. From March 2001 to January 2002, he was
Head of Strategy & Partnerships with Netscalibur, a European business Internet
Service Provider. Prior to this, he was Vice President of Strategy and Marketing
of Predecessor from April 1998 to March 2001. From 1990 to 1998, Mr. Evans
worked at McKinsey & Company, where he served as a Senior Telecommunications
Specialist in the European Telecommunications practice. Mr. Evans started his
career with British Telecom in 1982, subsequently becoming an Executive Engineer
and leading the development of British Telecom's real-time network traffic
management systems.

IAN AKHURST

Mr. Akhurst has served as a member of the Board of Directors of our company
since October 2002. He has over 30 years of experience with Barclays Bank plc,
in both its European and United States offices. Mr. Akhurst was most recently
Director and Chief Credit Officer for the Latin America Region, where he was
jointly responsible for the reduction and restructuring of the Bank's exposure
in Argentina and Brazil during 2001 and 2002. Prior to that, Mr. Akhurst was the
Head of Large Corporate and International Credit, leading a team of over 40
credit professionals, and he has held various positions in both the Banking
Division and the former BZW Risk Management Division, and as a Relationship
Director in Corporate Banking.

ANTHONY CASSARA

Mr. Cassara has served as a member of the Board of Directors of our company
since October 2002. He currently serves as the President of Cassara Management
Group, Inc., a business counseling practice focused on the telecommunications
industry. From 2001 to 2002, Mr. Cassara served as the President and Chief
Executive Officer of Pangea Ltd., a European fiber-optic network start-up that
targeted the carrier market. From 1999 to 2000, he served as President of
Carrier Services for Global Crossing Ltd., where he oversaw global operations
and the North American carrier organization with over 600 people. Global
Crossing Ltd. filed for chapter 11 in January 2002 and is currently
reorganizing. From 1996 to 1999, Mr. Cassara served as President of Carrier
Services for Frontier Corporation.

JACK DORFMAN

Mr. Dorfman has served as a member of the Board of Directors of our company
since October 2002. He has over 40 years of experience as a senior credit
executive, most significantly with Nat West USA, the United States subsidiary of
National Westminster Bank plc. At Nat West, Mr. Dorfman held the positions of
Senior Vice President, Co-Manager of the bank's Asset Recovery Division and Vice
Chairman of the Senior Loan Committee, with responsibility for reviewing all
requests for credit in excess of the presenting unit's lending authority. Most
recently, Mr. Dorfman was affiliated with two financial consulting firms that
assisted troubled commercial debtors in the development of remedial strategies
and the location of replacement lenders.

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HARRY HOBBS

Mr. Hobbs has served as a member of the Board of Directors of our company
since October 2002. He has held several senior executive positions for
PSINet, Inc. which filed for chapter 11 in June 2001, from August 1997 to
May 2002. From 2001 to 2002, he served as PSINet, Inc.'s President and Chief
Executive Officer. From 2000 to 2001, he served as President and Chief Operating
Officer of PSINet, Inc. and PSINet International, Inc. From 1998 to 2000, he
served as President and Chief Operating Officer of PSINet Europe, Inc. From 1997
to 1998, he served as Vice President of Customer Administration. Prior to
joining PSINet, from 1995 to 1997, Mr. Hobbs served as Vice President of
Customer Care for American Personal Communications, LP.

CHARLES MACALUSO

Mr. Macaluso has served as a member of the Board of Directors of our company
since October 2002. He is a founding principal and the Chief Executive Officer
of East Ridge Consulting, Inc., a management consulting and corporate advisory
firm founded in 1996. From 1996 to 1998, Mr. Macaluso was a partner at Miller
Associates, Inc., a company principally involved in corporate workouts. From
1989 to 1996, Mr. Macaluso was a partner at The Airlie Group, LLP, a
$1.5 billion fund specializing in leveraged buyout, mezzanine and equity
investments. Mr. Macaluso currently serves as Chairman of the Board for NCH
NuWorld Marketing Limited, Crescent Public Telephone, Inc., and Prime
Succession, Inc., an entity which filed for chapter 11 in July 2000 and emerged
in December of the same year. He also currently serves on the board of directors
of each of Lazy Days Recreational Vehicles, Inc. and Elder Beerman Stores, where
he is a member of the audit and finance committee and the executive committee.
Elder Beerman Stores filed for chapter 11 in October 1995 and emerged in 1997.

ANTHONY PACCHIA

Mr. Pacchia has served as a member of the Board of Directors of our company
since October 2002. He is the founder of Traxi LLC, a boutique advisory and
restructuring firm based in New York City. Mr. Pacchia has served as the
Managing Director of Traxi and its predecessor entity since 1994. Prior to
establishing Traxi, Mr. Pacchia spent 11 years at First Fidelity Bank in a
variety of legal and executive positions. In addition to his service on the
Board of Directors of our company, Mr. Pacchia was appointed by the U.S.
Bankruptcy Court to be Plan Administrator of the FLAG Atlantic Debtors.

BRADLEY SCHER

Mr. Scher has served as a member of the Board of Directors of our company
since October 2002. He has served as the Managing Member of Ocean Ridge Capital
Advisors, LLC, a financial advisory company established to assist financially
and operationally underperforming companies, since February 2002. From
September 1996 to February 2002, Mr. Scher served as a Managing Director of PPM
America, Inc., where he managed investments in four distressed investment
vehicles with aggregate capital in excess of $1 billion. From 1990 to 1996,
Mr. Scher held several positions for Teachers Insurance and Annuity Association
of America, where he managed a number of investments in a variety of industries.

MARK SPAGNOLO

Mr. Spagnolo has served as a member of the Board of Directors of our company
since October 2002 and served as interim Chief Executive Officer of the Company
from October 2002 to February 2003, when Mr. Gallagher was appointed Chief
Executive Officer. Mr. Spagnolo has served as President of Spagnolo Group, LP,
an executive consulting firm focused on telecommunications, since May 2002. From
July 2000 to September 2001, Mr. Spagnolo served as Chairman, President and
Chief Executive Officer of Sitesmith, an internet infrastructure management
services company which was

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acquired by Metromedia Fiber Network, Inc. ("MFN") in February 2001.
Mr. Spagnolo became President and Chief Operating Officer of MFN in
October 2001 and later President and Chief Executive Officer, which position he
held until April 2002. MFN filed for chapter 11 in May 2002 and is currently
reorganizing. From 1997 to 2000, Mr. Spagnolo served as President and Chief
Executive Officer of UUNET, a subsidiary of WorldCom.

DAVID WILSON

Mr. Wilson has served as a member of the Board of Directors of our company
since October 2002. He currently is President of Gateway Associates, a business
development firm working with public and private companies in the areas of
strategic planning, venture capital financing, deal structuring, market
research, strategic partnering, mergers and acquisitions and international
expansion. Mr. Wilson has over 25 years of U.S. and international business
experience, including as a Managing Director of Wang Development and Investment
Corporation and the Managing General Partner of the Golden Gate Development and
Investment Fund, a venture capital fund raised in Taiwan for the purpose of
investing in U.S. high technology companies. Mr. Wilson also was a senior
corporate attorney at Wang Laboratories, an entity which emerged from chapter 11
in September 1993 and was subsequently acquired by Centronics in January 1999.
Prior to that, Mr. Wilson was the Assistant General Counsel for a $600 million
privately- held international manufacturing company.

There is no family relationship among any of the above-named officers or
directors of our company.

We have adopted a written Code of Ethics, the "FLAG Telecom Group Limited
Code of Business Conduct and Ethics", which is applicable to all of our
directors, officers and employees, including our principal executive officer,
principal financial officer, principal accounting officer or controller and
other executives officers identified above (collectively, the "Selected
Officers"). In accordance with the rules and regulations of the Securities and
Exchange Commission, the code is posted on our website. We intend to disclose
any changes or waivers from our code of ethics applicable to any Selected
Officer or director on our website at www.flagtelecom.com.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities and Exchange Act requires that our
directors, executive officers, and the persons who beneficially own more than
ten percent of our common stock file reports of ownership and changes of
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission.
Executive officers, directors and greater-than-ten-percent shareholders are
required by regulations promulgated by the Securities and Exchange Commission to
furnish us with copies of all Forms 3, 4 and 5 they file.

Based solely on the reports received by us and on the written
representations of the reporting persons, we believe that no director, executive
officer or greater-than-ten-percent shareholder failed to file on a timely basis
the reports required by Section 16(a) of the Exchange Act during, or with
respect to, fiscal 2002, except that Mr. McCormack, Mr. Cayouette, Mr. Evans and
Mr. van Ophem, each inadvertently failed to file on a timely basis a Form 3 upon
the change of our reporting status from a foreign private issuer to a domestic
registrant as of the Effective Date of the Plan. Each of Mr. McCormack,
Mr. Cayouette, Mr. Evans and Mr. Van Ophem subsequently filed the necessary
Form 3. At the Effective Date and at the time of the filing of their respective
Form 3s, none of them owned any of our common shares.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The table below sets forth information concerning compensation paid to
(i) each person who served as Chief Executive Officer or interim Chief Executive
Officer of our company during 2002 and,

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(ii) our four most highly compensated executive officers other than the Chief
Executive Officer or interim Chief Executive Officer who were serving as
executive officers as of December 31, 2002 (collectively, the "Named Executive
Officers"). Mr. Patrick Gallagher joined our company on March 1, 2003 as the
Co-Chairman and Chief Executive Officer. Mr. Gallagher is not included in the
Summary Compensation Table or the other tables below, as he received no
compensation from us for the fiscal year 2002.

(1) For Mr. Bande, 2002 other annual compensation consists of $96,555 for
reimbursement of tax payments and a housing allowance of $122,400. For
Mr. McCormack, 2002 other annual compensation includes a housing allowance
of $120,000 and $120,000 cash in lieu of an allowance for other benefits.
For Mr. van Ophem, 2002 other annual compensation includes a housing
allowance of $72,000. For Mr. Evans, 2002 other annual compensation includes
a housing allowance of $58,611. For Mr. Cayouette, 2002 other annual
compensation includes $38,313 for reimbursement of tax payments and a
housing allowance of $64,374.

(2) The numbers in this column represent options to acquire the common shares of
Predecessor. Pursuant to the Plan, all such options outstanding on the
Effective Date were cancelled and are now null and void.

(3) All other compensation for 2002 consists of the following: For Mr. Bande, a
lump sum in relation to his termination of $1,000,000, a consulting fee of
$350,000 for his services from October 10, 2002, when he ceased serving as
our Chief Executive Officer, to December 31, 2002, reimbursement of fees
paid to professional advisors of $6,200, life insurance contribution of
$12,111, accident insurance contributions of $1,120, health insurance
contributions of $5,368 and company pension contributions of $25,521; for
Mr. McCormack, company pension contributions of $25,000, accident insurance
contributions of $1,344, life insurance contribution of $1,945 and health
insurance contributions of $11,569; for Mr. van Ophem, school fees of
$56,688, fees paid to

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professional advisors of $1,209, life insurance contribution of $732, health
insurance contributions of $11,026, accident insurance contributions of
$1,344, company pension contributions of $25,000 and an accommodation
allowance of $72,000; for Mr. Evans, accident insurance contributions of
$1,492, life insurance contribution of $1,004, health insurance
contributions of $2,196 and company pension contributions of $13,997; and
for Mr. Cayouette, a relocation allowance of $19,090, accident insurance
contributions of $1,232, life insurance contribution of $671, flight ticket
allowance of $18,000, fees paid to professional advisors of $1,199, health
insurance contributions of $3,155 and company pension contributions of
$25,000.

(4) Mr. Spagnolo served as interim Chief Executive Officer from October 10, 2002
to February 28, 2003 and received $80,000 per month as compensation pursuant
to an agreement with our company.

(5) Mr. Bande served as Chief Executive Officer of Predecessor until
October 10, 2002. The 2002 bonus amount for Mr. Bande consists of: (i) a
retention bonus of $1,250,000 and (ii) a bonus for fiscal year 2002 of
$450,000 that was paid in January 2003.

(6) The 2002 bonus amount for Mr. McCormack consists of: (i) a retention bonus
of $750,000 paid on April 9, 2002; and (ii) a bonus for fiscal year 2002 of
$200,000 that was paid in January 2003.

(7) Mr. van Ophem joined Predecessor on October 1, 2001. The 2002 bonus amount
for Mr. van Ophem consists of: (i) a retention bonus of $500,000 paid on
April 9, 2002; and (ii) a bonus for fiscal year 2002 of $135,000 paid in
January 2003.

(8) Mr. Evans joined Predecessor on January 14, 2002 as Chief Technology
Officer. The 2002 bonus amount for Mr. Evans consists of: (i) a retention
bonus of $375,000 paid on April 9, 2002; (ii) a bonus for fiscal year 2002
of $109,133 paid in January 2003; and (iii) a sign on bonus of $108,000 paid
in January 2002.

(9) Mr. Cayouette joined Predecessor on January 14, 2002 as Chief Financial
Officer. The 2002 bonus amount for Mr. Cayouette consists of: (i) a
retention bonus of $375,000 paid on 9 April ,2002; (ii) a bonus for fiscal
year 2002 of $132,500 paid in 2003; and (iii) a sign on bonus of $50,000
paid in January 2002.

OPTION GRANTS

The table below sets forth information concerning options granted in 2002 to
the Named Executive Officers.

(1) These options were granted during 2002 under Predecessor's Stock Options
plan. Pursuant to the Plan, all options outstanding on the Effective Date to
acquire shares of Predecessor were cancelled and such options are now null
and void.

(2) The Dollar amounts under these columns are the results of calculations
assuming that the market price of the common shares appreciates in value
from the date of grant to the end of the option term at the 5% and 10%
annual appreciation rates set by the SEC for illustrative purposes and are
not intended to forecast future financial performance or possible future
appreciation, if any, in the price of the common shares.

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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

None of the Named Executive Officers exercised any stock options during the
last fiscal year. As of the Effective Date, all outstanding options to acquire
common shares of Predecessor were cancelled, including the options held by the
Named Executive Officers. None of the Named Executive Officers held any options
as of the end of the last fiscal year.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table provides information as of December 31, 2002 about the
common shares that may be issued upon the exercise of options, warrants and
rights granted to employees, consultants or members of the Board of Directors
under all of our existing equity compensation plans, including the FLAG Telecom
Group Limited 2002 Stock Incentive Plan (the "Incentive Plan"), each as amended.

(1) The Incentive Plan was approved by the Board of Directors on January 28,
2003 and will be submitted to shareholders for their approval at the next
annual meeting of shareholders. The number of common shares that may be
subject to awards under the Incentive Plan may not exceed 222,222. The
general terms of the Incentive Plan were approved in connection with the
Plan which was confirmed by the U.S. Bankruptcy Court in September 2002. See
below for a description of the material features of the Incentive Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors consists of
Messrs. Wilson, Aquilina and Pacchia. None of these individuals is an officer or
employee of our company.

REPORT OF THE COMPENSATION COMMITTEE

The policy of FLAG Telecom is to offer our executive officers competitive
compensation opportunities based upon their personal performance, our financial
performance and their contribution to that performance. One of the primary
objectives is to have a substantial portion of each executive officer's
compensation contingent upon our financial success as well as upon such
executive officer's own level of performance. Each executive officer's
compensation package is generally comprised of three elements: (i) base salary,
which is determined on the basis of the individual's position and
responsibilities with our company, the level of his or her performance and our
financial performance, (ii) incentive performance awards tied to the achievement
of specified performance goals and (iii) long-term incentive awards designed to
strengthen the mutuality of interests between the executive officers and our
shareholders. Generally, as an executive officer's level of responsibility
increases, a greater portion of that individual's total compensation is
dependent upon our financial performance.

The Compensation Committee of the Board of Directors (the "Committee") has
been established to: (a) discharge the Board's responsibilities relating to the
establishment of the compensation policies and procedures of our company;
(b) assist the Board in ensuring that a proper system of long-term and
short-term compensation is in place to provide performance-oriented incentives
to management, and compensation plans are appropriate and competitive and
properly reflect the objectives and

67

performance of management and our company; (c) evaluate the retention of the
Chief Executive Officer and recommend to the Board his or her remuneration
package; (d) prepare an annual report on executive compensation for inclusion in
our company's annual proxy statement; (e) make recommendations to the Board with
respect to incentive compensation plans and equity-based plans; (f) assist the
Board in overseeing the process of succession planning for our executive
officers and (g) perform such other functions as the Board may from time to time
assign to the Committee. In performing its duties, the Committee shall seek to
maintain an effective working relationship with the Board and management.

In addition, the Committee (a) reviews and approves goals and objectives
relevant to the Chief Executive Officer's compensation package, (b) establishes
a procedure for evaluating the Chief Executive Officer's performance,
(c) annually evaluates such performance in light of the goals and objectives
established and (d) reviews with the Chief Executive Officer the results of the
Committee's evaluation of the Chief Executive Officer's performance and reviews,
at least annually, and recommends to the Board the base salary and annual and
long-term incentive compensation of the Chief Executive Officer. Similar
proceedings are taken by the Committee with respect to other executive officers.

THE COMPENSATION COMMITTEE
David Wilson
Robert Aquilina
Anthony Pacchia

COMPENSATION OF THE EXECUTIVE OFFICERS OF PREDECESSOR

The compensation philosophy of Predecessor was to relate the compensation of
executive officers to measures of company performance to ensure that
compensation policies are appropriately aligned with the value Predecessor
created for shareholders, taking into account various corporate goals that
enhance shareholder value:

- to sustain a competitive and performance-oriented environment that
motivates executive officers to achieve a high level of individual and
corporate results in the business environment in which they operate;

- to relate incentive based compensation to the performance of each
executive officer, as measure by financial and strategic performance
goals; and

- to enable Predecessor to attract and retain top quality management.

The Compensation Committee of Predecessor periodically reviewed the
components of compensation for Predecessor's executive officers on the basis of
this philosophy. The major components of compensation for executive officers
were base salary, annual bonuses and stock option grants.

Base salaries for executive officers were initially set based on recruiting
requirements (i.e. market demand), competitive pay practices, individual
experience and breadth of knowledge, internal equity considerations and other
objective and subjective factors. Increases to base salaries were determined
after an evaluation of competitive data, the individual's performance and his or
her contribution to Predecessor's overall performance. Base salaries were
reviewed annually and adjusted as deemed appropriate.

Predecessor relied to a large degree on annual bonus compensation to
attract, retain and reward executives of outstanding abilities and to motivate
them to perform to the full extent of their abilities. Target bonuses for
executive officers were determined on the basis of competitive bonus levels,
level of responsibility, ability to influence results on a corporate or business
unit level and, on occasion, subjective factors.

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Predecessor's 1998 Long-Term Incentive Plan, which was terminated pursuant
to the Plan, had been adopted to provide a means by which eligible employees,
directors and consultants of Predecessor may be given an opportunity to benefit
from increases in value of the common shares of Predecessor through the granting
of stock based awards.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS

EMPLOYMENT AGREEMENTS

PATRICK GALLAGHER. On February 19, 2003, we entered into an agreement with
Mr. Patrick Gallagher, pursuant to which he was appointed Chief Executive
Officer, a member of the Board and Office of the Chair Committee of our company.
The minimum term of the agreement is one year and one day from March 1, 2003.
Under the agreement, Mr. Gallagher is paid a base salary of GBP 300,000 per year
plus a bonus targeted at 100% of base salary, although it is possible that this
bonus may exceed the target amount. For 2003, Mr. Gallagher's bonus shall be
calculated as if he were employed for 12 months, with a guaranteed minimum bonus
payment of 50% of one year's base salary. In connection with the agreement,
Mr. Gallagher was granted options under the 2002 Stock Option Plan to acquire
45,000 common shares, which vest in approximately equal installments on the
first, second and third anniversaries of the date of Mr. Gallagher's employment.
In the event of a change in control, as defined in the 2002 Stock Option Plan,
or if we terminate Mr. Gallagher's employment without cause, or if
Mr. Gallagher's terminates his employment for good reason, as defined in the
agreement, all of the foregoing options will automatically vest. Under the
agreement, Mr. Gallagher is also entitled to life insurance with a benefit in
the amount of $675,000, a pension contribution by us of 10% of base salary and
an annual car allowance of GBP 18,000. In addition, Mr. Gallagher is reimbursed
for the reasonable expenses he incurs in the performance of his duties. In the
event that we terminate Mr. Gallagher without cause (as defined in the
agreement) or Mr. Gallagher terminates his employment for good reason (as
defined in the agreement), we are obligated to pay Mr. Gallagher an amount equal
to the sum of one year of base salary plus target bonus of 100% of base salary.

EDWARD MCCORMACK. Mr. McCormack's employment agreement is for a fixed term
of three years commencing January 1, 2002, pursuant to which Mr. McCormack
serves as Chief Operating Officer. Under the agreement, Mr. McCormack is paid a
base salary of $400,000 per year plus a bonus targeted at 100% of base salary,
although it is possible that this bonus may exceed the target amount. On
March 19, 2003 Mr. McCormack voluntarily elected to participate in an option
purchase and exchange program pursuant to which, in exchange for lowering his
contractual annual target bonus from 100% to 70% of base salary, he was granted
the right and option to purchase 9,800 of our common shares with an exercise
price per share equal to the fair market value of one share of our stock on the
grant date. In addition, Mr. McCormack is entitled to $120,000 per year for
benefits to be selected at his discretion, a housing allowance of $120,000 per
year, a car allowance of $26,000 per year, an allowance of $60,000 per year for
his children's education and life insurance with a benefit in the amount of
$675,000. We are obligated to pay Mr. McCormack an amount equal to the sum of
one years of base salary plus target bonus of 100% of one years' base salary in
any of the following events: (i) if we terminate Mr. McCormack's employment (as
defined in the agreement); (ii) Mr. McCormack gives 60 days notice of
resignation with such notice to expire after October 1, 2004; (iii) we terminate
Mr. McCormack's employment because he becomes incapacitated (as defined in the
agreement); or (iv) Mr. McCormack terminates his employment for good reason (as
defined in the agreement). Under an addendum to the agreement, Mr. McCormack was
paid a retention payment amount of $750,000 on April 30, 2002. Under the
agreement, Mr. McCormack was also granted certain stock options, which were
subsequently cancelled as of the Effective Date in connection with the Plan. In
connection with the agreement, Mr. McCormack was granted options under the 2002
Stock Option Plan to acquire 3,500 common shares, which vest in approximately
equal installments on the first, second and third anniversaries of the date of
grant. In the event of a change in control, as defined in the
2002 Stock Option Plan, all of the foregoing options will automatically vest.

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KEES VAN OPHEM. Mr. van Ophem's employment agreement was entered into for
an unspecified term commencing October 1, 2001. Under the agreement, Mr. van
Ophem is paid a base salary of $270,000 per year plus a bonus targeted at 100%
of base salary, although it is possible that this bonus may exceed the target
amount. On March 19, 2003 Mr. van Ophem voluntarily elected to participate in an
option purchase and exchange program pursuant to which, in exchange for lowering
his contractual annual target bonus from 100% to 70% of base salary, he was
granted the right and option to purchase 7,175 of our common shares with an
exercise price per share equal to the fair market value of one share of our
stock on the grant date. In addition, Mr. van Ophem is entitled to a
transportation allowance of GBP 900 per month, reimbursement of certain
relocation costs, an accommodation allowance of $6,000 per month net of tax,
reimbursement of certain education costs for his children (subject to our review
and approval) and reimbursement of certain tax preparation costs and life
insurance with a benefit in the amount of $500,000. The agreement also provides
that if we terminate Mr. van Ophem's employment without good cause (as defined
in the agreement), we are obligated to pay him one year's base salary plus
target bonus of 100% of one year's base salary. Mr. van Ophem was paid a
one-time sign on bonus of $120,000 on October 22, 2001 and, under an addendum to
the agreement, a retention payment amount of $500,000 on April 30, 2002. Under
the agreement, Mr. van Ophem was also granted certain stock options, which were
subsequently cancelled as of the Effective Date in connection with the Plan. In
connection with the agreement, Mr. Van Ophem was granted options under the
2002 Stock Option Plan to acquire 1,500 common shares, which vest in
approximately equal installments on the first, second and third anniversaries of
the date of grant. In the event of a change in control, as defined in the 2002
Stock Option Plan, all of the foregoing options will automatically vest.

ANDREW EVANS. Mr. Evans' employment agreement was entered into for an
unspecified term commencing January 14, 2002, pursuant to which Mr. Evans serves
as Chief Technical Officer. Under the agreement, Mr. Evans is paid a base salary
of GBP 150,000 per year plus a bonus targeted at 100% of base salary, although
it is possible that this bonus may exceed the target amount. On March 19, 2003,
Mr. Evans voluntarily elected to participate in an option purchase and exchange
program pursuant to which, in exchange for lowering his contractual annual
target bonus from 100% to 70% of base salary, he was granted the right and
option to purchase 5,750 of our common shares with an exercise price per share
equal to the fair market value of one share of our stock on the grant date. In
addition, Mr. Evans is entitled to a transportation allowance of GBP 700 per
month, a living allowance of GBP 3,500 per month and life insurance with a
benefit in the amount of $500,000. The agreement also provides that if we
terminate Mr. Evans' employment without good cause (as defined in the
agreement), we are obligated to pay him one year's base salary plus target bonus
of 100% of one year's base salary. In addition, Mr. Evans was paid a one-time
sign on bonus of GBP 75,000 in January 2002 and, under an addendum to the
agreement, a retention payment amount of $375,000 on April 30, 2002. Under the
agreement, Mr. Evans was also granted certain stock options, which were
subsequently cancelled as of the Effective Date in connection with the Plan. In
connection with the agreement, Mr. Evans was granted options under the 2002
Stock Option Plan to acquire 3,500 common shares, which vest in approximately
equal installments on the first, second and third anniversaries of the date of
grant. In the event of a change in control, as defined in the 2002 Stock Option
Plan, all of the foregoing options will automatically vest.

MICHEL CAYOUETTE. Mr. Cayouette's employment agreement is for a fixed term
of two years commencing January 14, 2002, pursuant to which Mr. Cayouette serves
as Chief Financial Officer. Under the agreement, Mr. Cayouette is paid a base
salary of $265,000 per year plus a bonus targeted at 100% of base salary,
although it is possible that this bonus may exceed the target amount. On
March 19, 2003, Mr. Cayouette voluntarily elected to participate in an option
purchase and exchange program pursuant to which, in exchange for lowering his
contractual annual target bonus from 100% to 70% of base salary, he was granted
the right and option to purchase 6,500 of our common shares with an exercise
price per share equal to the fair market value of one share of our stock on the
grant date.

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In addition, Mr. Cayouette is entitled to a transportation allowance of $1,300
per month, an accommodation allowance of $6,000 per month, reimbursement of
certain travel costs up to $18,000 per year, reimbursement of certain relocation
costs, reimbursement of certain tax preparation costs, certain tax equalization
benefits and life insurance with a benefit in the amount of $500,000. The
agreement also provides that if we terminate Mr. Cayouette's employment without
good cause (as defined in the agreement), we are obligated to pay him one year's
base salary plus target bonus of 100% of one year's base salary. In addition,
Mr. Cayouette was paid a one-time sign on bonus of $50,000 on January 31, 2002
and, under an addendum to the agreement, a retention payment amount of $375,000
on April 30, 2002. Under the agreement, Mr. Cayouette was also granted certain
stock options, which were subsequently cancelled as of the Effective Date in
connection with the Plan. In connection with the agreement, Mr. Cayouette was
granted options under the 2002 Stock Option Plan to acquire 1,500 common shares,
which vest in approximately equal installments on the first, second and third
anniversaries of the date of grant. In the event of a change in control, as
defined in the 2002 Stock Option Plan, all of the foregoing options will
automatically vest.

OTHER AGREEMENTS

For the period from October 10, 2002 to February 28, 2003, prior to
Mr. Gallagher was appointed as Chief Executive Officer, Mr. Mark Spagnolo acted
as Interim Chief Executive Officer pursuant to an agreement with Spagnolo Group,
LP. Under this agreement, we paid an aggregate of $339,359 for Mr. Spagnolo's
services.

On October 10, 2002, we entered into a Termination Agreement with
Mr. Andres Bande (former Chairman and Chief Executive Officer), pursuant to
which Mr. Bande ceased to be a director, officer and employee of our company.
Under the agreement, Mr. Bande received a severance payment of $1,000,000 and
served as a consultant to our company from October 10, 2002 to December 31,
2002, reporting exclusively to the Board of Directors. In consideration for his
consulting services, Mr. Bande received a fee of $350,000 on January 2, 2003.

On October 31, 2002, we entered into a Termination Agreement with Mr. Adnan
Omar (former Director of Predecessor and former advisor to the Chairman and
Chief Executive Officer), pursuant to which Mr. Omar ceased to be an employee
and officer of our company. Mr. Omar was paid a severance payment of $610,000
pursuant to this agreement.

RETENTION PAYMENTS

The employment agreements (as per respective Addendums) with Messrs. Bande,
McCormack, van Ophem, Cayouette and Evans provided these officers with retention
payments by Predecessor in consideration for agreeing to continue to work for
Predecessor until the U.S. Bankruptcy Court entered a decision on the Plan. The
retention payments to these officers consist of gross cash payments that were
approved by the Board of Predecessor on April 4, 2002 (the "Retention
Payments").

The Retention Payments paid to each of the above officers or ex-officers of
our company are as follows:

Neither Mr. Gallagher nor Mr. Spagnolo received a retention payment as
neither was employed by the Company during our chapter 11 proceedings.

71

COMPENSATION OF DIRECTORS

Each of our directors who are not employees of our company is paid his
reasonable travel, hotel and incidental expenses in attending and returning from
meetings of the Board or committees or general meetings. In addition, each such
director is paid an annual sum of $40,000, payable in quarterly installments,
and an additional payment of $2,000 for each day on which a director
(i) attends, and/or travels to and from, a meeting of the Board or committee or
general meeting or (ii) performs any other work in connection with the business
of our company as directed by the Board, any Co-Chairman or any other Chairman
of any committee of the Board or their duties as directors generally; provided,
however, no such payment is payable for works performed unless such payment has
been authorized and approved by the Board, a Co-Chairman or a committee of the
Board. For the period from the Effective Date to December 31, 2002, we paid to
the 10 non-employee directors an aggregate of $376,000 (including $200,000
annual fee installments and $176,000 in payment for the services described in
clause (ii) of the previous sentence). On March 19, 2003, each of our
non-employee directors was granted options to acquire 5,600 common shares.

Mr. Mark Spagnolo is a director but also acted as Interim Chief Executive
Officer of our company for the period from the Effective Date to December 31,
2002. He did not receive any of the above-referenced compensation. Mr. Patrick
Gallagher and Mr. Edward McCormack are directors who are employees of our
company. Neither Mr. Gallagher nor Mr. McCormack receive any of the above-
referenced compensation.

STOCK INCENTIVE PLAN

In January 2003, the Board of Directors adopted the FLAG Telecom Group
Limited 2002 Stock Incentive Plan (the"Incentive Plan"). The purpose of the
Incentive Plan is to allow our company to provide a means by which eligible
employees, directors and consultants may be given an opportunity to benefit from
increases in value of our common shares through the granting of the following
awards:

- incentive stock options;

- non-statutory stock options;

- stock bonuses; and

- rights to acquire restricted stock.

The Incentive Plan is administered by the Compensation Committee, whose
members are appointed by our Board of Directors. The Committee is empowered to
determine from time to time which of the persons eligible under the Incentive
Plan shall be granted awards; when and how each award shall be granted; what
type or combination of types of awards shall be granted; the provisions of each
award granted, including the time or times when a person shall be permitted to
receive common shares pursuant to an award; and the number of common shares with
respect to which an award shall be granted to each person; to construe and
interpret the Incentive Plan and awards granted under it, and to establish,
amend and revoke rules and regulations for its administration.

The Board of Directors and the Compensation Committee have absolute
authority on all determinations, interpretations and constructions of the
Incentive Plan which shall not be subject to review by any person and shall be
final, binding and conclusive on all persons. The Board, at anytime, and from
time to time, may amend the Incentive Plan. However, no amendment shall be
effective unless approved by our shareholders to the extent shareholder approval
is necessary to satisfy any applicable law or any Nasdaq National Market or
national securities exchange listing requirements. The number and kind of shares
reserved or deliverable under the Incentive Plan and the number and kind of
shares subject to outstanding awards are subject to adjustment in the event of
stock splits, stock dividends and other extraordinary corporate events.

72

The number of common shares that may be subject to awards under the
Incentive Plan may not exceed 222,222. As of June 15, 2003, options to acquire
198,525 common shares were outstanding under the Incentive Plan.

The graph below compares the cumulative total shareholder return on
Predecessor's shares for the period commencing February 11, 2000, the initial
date of trading of Predecessor's shares, to October 8, 2002. Additionally, the
graph also compares the cumulative total shareholder return on our shares from
October 9, 2002 to December 31, 2002 with the cumulative total return of the
Standard & Poor's 500 Stock Index and the Nasdaq Telecom Index over the same
period. The graph assumes $100 invested on February 11, 2000 in Predecessor's
shares and $100 invested on such date in each of the Standard & Poor's 500 Stock
Index and the Nasdaq Telecom Index, with dividends reinvested. We have used the
Nasdaq Telecom Index for this comparison because we believe this index to be
readily accessible to our shareholders and to be representative of the industry
in which we compete. It should be noted that since our shares are currently
traded over-the-counter the prices reflected in this chart are only indicative.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of June 15, 2003, the beneficial ownership
of our common shares by:

- those persons known by us to own beneficially more than 5% of our common
shares;

- each of the Named Executive Officers;

- each of our directors; and

- all directors and executive officers as a group.

73

Unless otherwise specified, the address of each such person is c/o FLAG
Telecom Group Limited, Cedar House, 41 Cedar Avenue, Hamilton HM12, Bermuda. As
of June 15, 2003, there were 2,000,000 common shares outstanding.

* Less than 1%

(1) The amounts and percentages shown are amounts and percentages owned
beneficially as of June 15, 2003, based on information furnished or publicly
disclosed by the persons named. A person is deemed to be the beneficial
owner of common shares if such person, either alone or with others, has the
power to vote or to dispose of such shares.

(2) The beneficial ownership of The Goldman Sachs Group, Inc. is based solely on
the Schedule 13G filed with the Securities and Exchange Commission dated
February 10, 2003 in which The Goldman Sachs Group, Inc. and its affiliate,
Goldman, Sachs & Co. (together "Goldman Sachs"), reported that they have
shared voting and dispositive power over 188,170 common shares. The address
of Goldman Sachs, as stated on its Schedule 13G, is 85 Broad Street, New
York, NY 10004, USA.

(3) The beneficial ownership of HMC Investors, L.L.C., Philip Falcone,
Raymond J. Harbert and Michael D. Luce is based solely on the Form 4 and
Schedule 13D filed with the Securities and Exchange Commission dated
June 13, 2003, and May 29, 2003, respectively, by Harbert Distressed
Investment Master Fund, Ltd. (the "Master Fund"), HMC Distressed Investment
Offshore Manager, L.L.C., ("HMC Management"), the investment manager of the
Master Fund, HMC Investors, L.L.C., its managing member ("HMC Investors"),
Philip Falcone, a member of HMC Management and the portfolio manager of the
Master Fund, Raymond J. Harbert, a member of HMC Investors, and Michael D.
Luce, a member of HMC Investors (each of the Master Fund, HMC Management,
HMC Investors, Philip Falcone, Raymond J. Harbert and Michael D. Luce may be
referred to herein as a "Reporting Person" and collectively may be referred
to as "Reporting Persons"). This amount consists of (i) 404,696 shares held
for the account of Harbert

74

Distressed Investment Master Fund, Ltd., (ii) 16,535 shares held for the
accoutn of PCMG Trading Partners XII LP and (iii) 10,300 shares held for the
account of Alpha U.S. Sub Fund VI, LLC. The Master Fund is a Cayman Islands
corporation with its principal address at c/o International Fund Services
(Ireland) Limited, Third Floor, Bishop's Square, Redmond's Hill, Dublin 2,
Ireland. Each of HMC Management and HMC Investors is a Delaware limited
liability company. Each of Philip Falcone, Raymond J. Harbert and
Michael D. Luce is a United States citizen. The principal business address
for each of HMC Management, HMC Investors, Philip Falcone, Raymond J.
Harbert and Michael D. Luce is 555 Madison Avenue, Suite 2800, New York, New
York 10022. The Shares reported herein are held in the name of the Master
Fund, PCMG Trading Partners XII LP, a Delaware limited partnership or Alpha
US Sub Fund VI, LLC, a Delaware limited liability company. The shares held
by PCMG Trading Partners XII LP and Alpha Sub Fund VI, LLC may be deemed to
be beneficially owned by HMC Investors, LLC, Philip Falcone, who is the
portfolio manager of PCMG Trading Partners XII LP and Alpha Sub Fund VI,
LLC, Raymond J. Harbert and Michael D. Luce.

(4) Options to purchase Common shares of our company were granted to each of the
directors and officers of our company. None of these options granted are
subject to vesting as at June 15, 2003, or within 60 days of June 15, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The following summarizes the transactions entered into by Successor and
Predecessor with all known related parties:

AGREEMENT WITH SPAGNOLO GROUP LP

On October 10, 2002, we entered into an agreement with Spagnolo Group LP,
pursuant to which Mr. Mark Spagnolo acted as our Interim Chief Executive Officer
during the period from October 10, 2002 to February 28, 2003 and received
$80,000 per month for the term of the agreement. The term of the agreement was
for the lesser of six months from the Effective Date or until a new Chief
Executive Officer was retained. Patrick Gallagher was retained as our Chief
Executive Officer as of March 1, 2003 and, accordingly, this agreement was
terminated as of February 28, 2003.

AGREEMENTS WITH VERIZON

Verizon Communications Inc. ("Verizon") is the ultimate parent of a
controlled subsidiary Verizon International Holdings Ltd., which directly owned
18.6% of the common shares of Predecessor prior to the Effective Date. As of the
Effective Date, Verizon did not hold any of our common shares. We entered into
the following four agreements with subsidiaries of Verizon during 2001, three of
which are no longer in force as a result of the liquidation of KPNQ West:

NETWORK ALLIANCE AGREEMENT

On April 3, 2001, FLAG Telecom Ireland Network Limited ("FTINL"), one of our
subsidiaries, entered into a Network Alliance Agreement with Verizon Global
Solutions Holdings II Ltd. ("VGS") under which both parties agreed to create a
network alliance to develop a European network. FTINL and its affiliates will
have the right to acquire from VGS capacity on this European network on an
indefeasible right of use ("IRU") basis. FTINL paid VGS $35.6 million for such
IRU over the European network and agreed to pay annual operating and maintenance
fees. The annual operating and maintenance fees consist of $1.78 million paid in
years one up to and including year five of the IRU, $1.068 million paid in years
six to ten, and $712,000 paid in years eleven to fifteen. This agreement was
terminated in May 2003 and is no longer in force.

75

COLLOCATION AGREEMENT

On April 4, 2001, two of our subsidiaries, FLAG Atlantic UK Limited and FLAG
Atlantic France Sarl (collectively "FLAG Atlantic"), entered into a Collocation
Agreement with Verizon Global Solutions U.K. Ltd. and Verizon Global Solutions
France SAS (collectively "Verizon UK/France") under which FLAG Atlantic agreed
to license to Verizon UK/France co-location space in FA-1 PoPs in both London
and Paris. Verizon UK/France agreed to pay approximately $15.5 million for the
license in the UK and approximately $6.1 million for the license in France. The
space has been used by VGS to create the London and Paris PoPs for its European
network, which will provide capacity to our subsidiaries under the Network
Alliance Agreement referred to above. This agreement is still in force.

RE-SALE AND PURCHASE AGREEMENT

On April 3, 2001, two of our subsidiaries, FTINL and FLAG Telecom Global
Networks Limited ("FTGNL"), entered into a Re-Sale and Purchase Agreement with
VGS under which VGS agreed to purchase for $17.6 million approximately 30% of
the dark fiber pairs and co-location facilities located on the KPNQwest Services
UK Limited ("KPNQwest") EuroRings Network. The fiber pairs and co-location
facilities were originally purchased pursuant to a Dark Fibre IRU and
Collocation Facilities Agreement, dated February 28, 2001, among FTINL, FTGNL
and KPNQwest (the "KPNQwest Agreement"). This agreement was terminated in May
2003 and is no longer in force.

TRI-PARTITE AGREEMENT

On April 3, 2001, FTGNL, KPNQwest and VGS entered into a Tri-Partite
Agreement under which FTGNL assigned all of its rights, title, interest and
obligations under the KPNQwest Agreement to VGS and KPNQwest acknowledged and
consented to such assignment. This agreement was terminated in May 2003 and is
no longer in force.

MARINE MAINTENANCE SERVICE AGREEMENT WITH TGN

TGN Holdings Ltd. ("TGN") directly owned 11.2% of the common shares of
Predecessor prior to the Effective Date. As of the Effective Date, TGN did not
hold any of our common shares. On June 1, 2001, FLAG Atlantic Limited ("FAL"), a
subsidiary of Predecessor, entered into a Marine Maintenance Service Agreement
with TyCom Contracting Limited ("TyCom"), an affiliate of TGN, under which TyCom
agreed to provide certain marine maintenance services to Predecessor for our
FA-1 undersea fiber-optic cable systems. FAL agreed to pay $6.9 million per
annum for such services. Pursuant to a settlement agreement and release between
FLAG Atlantic Limited and Tyco Contracting Limited (formerly TyCom Contracting
Limited) ("TyCo"), dated as of September 13, 2002 when we were in Chapter 11,
the fee we have to pay TyCo is reduced to $4.7 million per annum plus running
charges. The earliest date on which we could withdraw from this contract is also
amended to May 1, 2004.

AGREEMENT WITH ADNAN OMAR

On December 10, 2001, Predecessor entered into an agreement with Mr. Adnan
Omar, a director on Predecessor's board, pursuant to which Mr. Omar was
appointed President of FLAG Telecom Development Services Company LLC, a
subsidiary of the Company in Egypt. The agreement was for a fixed two-year term
under which Mr. Omar was entitled to a monthly payment of $30,000. On
October 31, 2002, the Company entered into a Termination Agreement with
Mr. Adnan Omar. Mr. Omar was paid a severance payment of $610,000 pursuant to
this agreement.

76

ITEM 14. CONTROLS AND PROCEDURES

CHANGES IN INTERNAL CONTROLS

During 2002, management became aware of certain deficiencies and weaknesses
in our Internal Controls. To address the deficiencies and weaknesses identified,
we have implemented and continue to implement changes required to our processes,
procedures, systems and personnel. We have also taken corrective actions with
regard to our Internal controls, which include, among other things:

- Adopting of a Code of Business Conduct and Ethics;

- Establishing an internal audit department;

- Restructuring the finance department with an emphasis on accountability;

- Increasing supervisory and management review procedures during the month
end closing process;

- Establishing new processes and procedures for various activities including
disbursements, revenues assurance and capital projects approvals;

- Centralizing several critical functions including the accounts payable,
billing and credit control.

- Performing accounting reconciliation activities (including bank
reconciliations) on a more regular basis;

- Implementing a centralized purchase order system;

- Revising the approval authority matrix signatories and limits;

During the external audit and re-audit of our financial statements for 2002,
2001 and 2000, our independent auditors, Ernst & Young, LLP, also noted
deficiencies and weaknesses in our Internal Controls. They have advised the
Audit Committee that these Internal Control deficiencies constitute reportable
conditions and collectively, a material weakness as defined in Statement on
Auditing Standards No. 60. The specific reportable conditions noted by our
independent auditors are related to:

1. Bank reconciliations: Reconciliations of bank accounts were either
infrequent, not timely, or both. Reconciling items were not always
investigated and appropriate action was not always taken;

2. Accounts payable: Purchase orders were not routinely matched to invoices
and invoices were not always posted to the accounts payable ledger
despite payment being authorized and made; and

3. Financial statements close process: The closing process was protracted
and difficult, due to the significant resources dedicated towards the
re-audit of 2001 and 2000, and the consequences of the chapter 11 and
restructuring activities.

Our independent auditors also identified a significant number of audit
adjustments, which impacted prior years. All these adjustments have been
approved and posted by management.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Within the 90-day period prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operations of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. As a
result of this review and evaluation, which was concluded in the course of
preparing our financial statements for the year ended December 31, 2002 and in
connection with the audit and re-audit of our financial statements for

77

2002, 2001 and 2000 by our independent auditors, Ernst & Young, LLP, management
determined that, despite the fact that improvements had been made, the
corrective actions and changes being made to the internal controls had not yet
been fully implemented and tested.

Following this review and evaluation, we have also performed additional
substantive procedures, including a review of specific balance sheet and
operating expense accounts as well as a review of the application of our revenue
recognition policy. We believe the corrective actions we have taken and the
additional substantive procedures we have performed, provide us with reasonable
assurance that the deficiencies and weaknesses identified did not result in
material misstatements in our consolidated financial statements contained in
this Annual Report on form 10-K.

Notwithstanding management's conclusions, the effectiveness of a system of
disclosure controls and procedures is subject to certain inherent limitations,
including cost limitations, judgments used in decision making, assumptions
regarding the likelihood of future events, soundness of internal controls and
fraud. Due to such inherent limitations, there can be no assurance that any
system of disclosure controls and procedures will be successful in preventing
all errors or fraud, or in making all material information known in a timely
manner to the appropriate management.

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

Financial Statements

Financial Statements. See index to Financial Statements on
(a)(1) Page F-1.

Financial Statement Schedules. The Financial Statement
Schedule described below is filed as part of this report on
page F-51. All other schedules are omitted because they are
not applicable.
(a)(2)

- Schedule II--Valuation and Qualifying Accounts

(b) Reports on Form 8-K.

We filed the following Form 8-K Current Reports during the period from
October 1 through December 31, 2002:

Announcing that Predecessor emerged from its chapter 11
proceedings on the Effective Date and that Successor became
the successor to Predecessor as of the Effective Date.
Incorporating press releases on these announcements dated
Oct 15, 2002 October 10, 2002.

Announcing that Ernst & Young was appointed as the Company's
independent auditors as at December 4, 2002.
Dec 9, 2002

78

(a)(3) Exhibits

The following Exhibits are filed as part of this Report as required by
Regulation S-K.

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

* Filed herewith.

+ Confidential treatment has been requested with respect to certain portions of
this exhibit. The confidential portion of this exhibit for which
confidential treatment has been requested has been filed separately with the
SEC.

81

FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of FLAG Telecom Group Limited:

We have audited the accompanying consolidated balance sheets of FLAG Telecom
Group Limited (formerly FLAG Telecom Holdings Limited), a Bermuda Company ("FLAG
Telecom"), and subsidiaries as of December 31, 2002 (Successor) and
December 31, 2001 (Predecessor) and the related consolidated statements of
operations, comprehensive loss, shareholders' equity and cash flows for the
periods from October 9, 2002 to December 31, 2002 (Successor) and January 1 to
October 8, 2002 (Predecessor) and for the years ended December 31, 2001 and 2000
(Predecessor). Our audits also included the financial statement schedule listed
in the Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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.

As more fully described in Note 2 to the consolidated financial statements,
effective October 9, 2002, Flag Telecom emerged from protection under Chapter 11
of the U.S. Bankruptcy Code pursuant to a Reorganization Plan that was confirmed
by the Bankruptcy Court on September 26, 2002. In accordance with AICPA
Statement of Position 90-7, the Company adopted "fresh start" accounting whereby
its assets, liabilities and new capital structure were adjusted to reflect
estimated fair value at October 9, 2002. As a result, the consolidated financial
statements for the periods subsequent to October 9, 2002 reflect the Successor's
new basis of accounting and are not comparable to the Predecessor's
pre-reorganization consolidated financial statements. As discussed in Note 13 to
the financial statements, on October 9, 2002 Flag Telecom adopted the provisions
of statement of Financial Accounting Standards No. 143, Asset Retirement
Obligations. As discussed in Note 20 to the financial statements, on January 1,
2001, the Predecessor adopted the provisions of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FLAG Telecom
and subsidiaries as of December 31, 2002 (Successor) and December 31, 2001
(Predecessor) and the consolidated results of their operations and their
consolidated cash flows for the periods from October 9, 2002 to December 31,
2002 (Successor) and January 1 to October 8, 2002 (Predecessor) and for the
years ended December 31, 2001 and 2000 (Predecessor) in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

As discussed in Note 4 to the consolidated financial statements, in 2002,
FLAG Telecom restated its 2001 and 2000 financial statements for revenue
recognition and other matters. The effect of the restatement is further
discussed in Note 4.

Ernst & Young LLP
London, United Kingdom
July 3, 2003

F-2

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(EXPRESSED IN THOUSANDS OF DOLLARS)

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

The accompanying notes are an integral part of these consolidated financial
statements.

F-6

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(EXPRESSED IN THOUSANDS OF DOLLARS)

F-7

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS)

The accompanying notes are an integral part of these consolidated financial
statements.

F-8

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

1. BACKGROUND AND ORGANIZATION

The Company (as defined below) is part of a multinational corporate
organization made up of more than 50 corporate entities. The Company operates a
global telecommunications network comprised of advanced fiber-optic cable
systems and interfaces that are owned by, leased to, or otherwise available to
the Company. Over its global network, the Company offers a variety of
telecommunications products and services, IP transit, IP point-to-point, leased
capacity services, managed bandwidth service, co-location services and long-term
rights of use in capacity. The Company is a "carriers' carrier", meaning that
its target customer base is the international wholesale broadband market,
consisting of established carriers or major public telephone operator
incumbents, including Application Service Providers ("ASPs") and Internet
Service Providers ("ISPs"), alternate carriers and other bandwidth intensive
users, rather than individual telecommunications consumers.

These consolidated financial statements contain information relating to FLAG
Telecom Holdings Limited, a Bermuda corporation and its subsidiaries
(collectively, "Predecessor"), and have been prepared by the management of FLAG
Telecom Group Limited, a Bermuda corporation and the successor entity of
Predecessor. References in these consolidated financial statements to "FLAG
Telecom", the "Company", the "Group", "we", "us", the "Company" or "Successor"
refer to FLAG Telecom Group Limited and its subsidiaries. For the purposes of
continuing accounting policies, Predecessor and Successor are collectively
referred to as "FLAG". On October 9, 2002 (the "Effective Date"), Predecessor
transferred substantially all of its assets and certain liabilities, at fair
value, to Successor, as a result of transactions contemplated by a Plan of
Reorganization (the "Plan") of Predecessor and certain of its subsidiaries under
chapter 11 of the United States Bankruptcy Code and related Bermuda Schemes of
Arrangement.

The consolidated financial statements for the period ended October 8, 2002
have been prepared while Predecessor was still involved in chapter 11
proceedings and, accordingly, have been prepared in accordance with Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code"--("SOP 90-7"). These financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that have resulted due
to Predecessor not continuing as a going concern. In addition, Predecessor's
results of operations prior to October 9, 2002 are not comparable to the
Company's results of operations after its emergence from bankruptcy due to the
adoption of fresh start accounting.

STATEMENT OF POSITION 90-7, FINANCIAL REPORTING BY ENTITIES IN
REORGANIZATION UNDER THE BANKRUPTCY CODE

Successor emerged from chapter 11 bankruptcy proceedings on October 9, 2002,
as the successor to Predecessor. Effective as of the Effective Date, Successor
adopted fresh start reporting in accordance with SOP 90-7. Unlike the
consolidated financial statements for Predecessor contained herein, the
consolidated financial statements for Successor reflect reorganization
adjustments for the discharge of debt and the adoption of fresh start reporting.
This resulted in significant changes to the following balance sheet captions:
Construction in progress, Other long-term assets, Property and equipment,
Deferred revenue, Short-term debt, Accounts payable and Accruals.

SOP 90-7 states that if the reorganization value of the assets of the
emerging entity immediately before the date of confirmation is less than the
total of all post-petition liabilities and allowed claims,

F-9

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

1. BACKGROUND AND ORGANIZATION (CONTINUED)
and if holders of existing voting shares immediately before confirmation receive
less than 50 percent of the voting shares of the emerging entity, the entity
must adopt fresh start reporting upon its emergence from chapter 11.

Entities that adopt fresh start reporting apply the following main
principles:

- The reorganization value of the entity should be allocated to the entity's
assets in conformity with the procedures specified by Statement of
Financial Accounting Standards No. 141, "Business Combinations", ("SFAS
No. 141") for transactions reported on the basis of the purchase method.

- Each liability existing at the plan confirmation date, other than deferred
taxes, should be stated at present values of amounts to be paid determined
at appropriate current interest rates.

PLAN OF REORGANIZATION

Following the consummation of the transactions contemplated by the Plan, the
common shares of the Successor became registered under Section 12 (g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as provided by
Rule 12g-3 under the Exchange Act. For purposes of Rule 12g-3, Successor is the
successor issuer to the Predecessor.

Successor's authorized capital stock consists of 3,000,000 common shares and
no preferred shares. As of the Effective Date, there were 2,000,000 common
shares issued and outstanding. Successor has reserved 222,222 common shares to
be issued pursuant to its 2002 Stock Incentive Plan. The holders of common
shares (the "Shareholders") are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. The Shareholders are
entitled to receive ratably such dividends as may be declared by the Company's
Board of Directors (the "Board") out of the funds legally available for payment
of dividends. However, Successor does not presently anticipate that dividends
will be paid on the common shares in the foreseeable future. Furthermore,
payment of dividends is restricted by the terms of an indenture between
Successor and The Bank of New York, as indenture trustee, dated October 9, 2002.
In the event of a liquidation, dissolution or winding up of the Company, the
Shareholders will be entitled to share ratably in all assets remaining after
payment of liabilities. The Shareholders have no preemptive, subscription,
redemption or conversion rights. All of the outstanding common shares are
validly issued, fully paid and non-assessable.

As of the Effective Date, Successor ceased to be a "foreign private issuer"
within the meaning of Rule 3b-4 promulgated under the Exchange Act and is filing
periodic reports under the Exchange Act as a domestic registrant.

Pursuant to the Plan, the following transactions were completed on or about
the Effective Date;

- Holders of Predecessor's 11 5/8% Senior Dollar Notes due 2010 and 11 5/8%
Senior Euro Notes due 2010 received, in the aggregate, (i) $245 million in
cash, less certain fees and expenses, (ii) notes in the original principal
amount of $45 million, bearing simple interest between 6.67% and 8% over a
three year period of maturity, with a call right by Successor during the
first 18 months after the Effective Date at $30 million, and
(iii) 100,000 shares of the issued and outstanding common shares of
Successor, par value $1.00 per share (approximately 5%);

F-10

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

1. BACKGROUND AND ORGANIZATION (CONTINUED)
- Holders of FLAG Limited's 8 1/4% Notes due 2008 received 1,255,800 common
shares of Successor (approximately 63%);

- Bank lenders under a credit facility previously extended to FLAG Atlantic
Limited received 525,000 common shares (approximately 26%) and were
allowed to keep $82 million they seized just prior to the filing of
chapter 11 proceedings on April 12, 2002;

- Certain significant trade creditors amended agreements with Predecessor
and received other consideration, including, among others, promissory
notes, common shares and cash, as further detailed in the Plan;

- Trade creditors of Predecessor and its affiliates, other than trade
creditors of FLAG Atlantic Holdings Limited and its debtor subsidiaries,
received a negotiated amount, reinstatement of their claims or payment in
full in the sum of $6.1 million; and

- Trade creditors of FLAG Atlantic Holdings Limited and those of its
subsidiaries that are debtors in the chapter 11 cases received pro rata
rights to recoveries attributable to avoidance actions belonging to the
entity against which such trade creditors hold their claims.

As set forth in the Plan, equity holders of Predecessor did not receive any
consideration.

As a companion to the Plan, a Scheme of Arrangement was proposed for each of
FLAG Telecom Holdings Limited and FLAG Limited (the "Schemes"). The Schemes were
submitted to the Bermuda Court on August 7, 2002 and became effective on the
Effective Date.

By orders of the Supreme Court of Bermuda on October 11, 2002, the joint
provisional liquidators of FLAG Limited and FLAG Asia Limited were discharged
and leave was granted to withdraw the petitions for the winding up of these two
entities. On the same day, the powers of the joint provisional liquidators of
FLAG Telecom Holdings Limited and FLAG Atlantic Limited were extended thereby
extinguishing any residual power of the board and management of these entities.
In addition, on October 11, 2002, a petition was filed seeking a winding up
order in respect of FLAG Atlantic Holdings Limited, and an order appointing
joint provisional liquidators of that company was granted.

On November 15, 2002, a winding up order was made in respect of Predecessor,
FLAG Atlantic Holdings Limited and FLAG Atlantic Limited by the Supreme Court of
Bermuda. Pursuant to this order, the appointment of Mr. Richard Heis and
Ms. Chris Laverty, both of KPMG LLP in England and Mr. Robert D. Steinhoff of
KPMG in Bermuda, as Joint Provisional Liquidators of these entities, was
continued. As a result, Predecessor, FLAG Atlantic Holdings Limited and FLAG
Atlantic Limited are now in liquidation under Bermuda law.

2. ACCOUNTING FOR BANKRUPTCY ACTIVITIES

The Company's emergence from chapter 11 bankruptcy proceedings resulted in a
new reporting entity and adoption of fresh start reporting in accordance with
SOP 90-7. The consolidated financial statements for the period ended October 8,
2002 reflect organization adjustments for the discharge of debt and adoption of
fresh start reporting.

The reorganization value of $347.7 million was determined by the Company
with the assistance and analysis of its financial advisors.The reorganization
value was primarily determined on a discounted cash flow analysis utilizing both
recent operating results and future projected cash flows over the lives

F-11

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

2. ACCOUNTING FOR BANKRUPTCY ACTIVITIES (Continued)
of the network assets were evaluated. The estimated reorganization value of the
Company is consistent with the basis for the Plan approved by the bankruptcy
court.

The reorganization value was used to determine the equity value allocated to
the assets and liabilities of the Reorganized Company in proportion to their
relative fair value in conformity with SFAS No. 141. In accordance with SOP
90-7, all expenses incurred in connection with Predecessor's reorganization have
been reflected as reorganization items in the accompanying consolidated
statement of operations.

The following table reflects the fresh start reporting and reorganization
adjustments to the Company's Condensed Consolidated Balance Sheet as of
emergence from bankruptcy:

Reorganization adjustments in the December 31, 2002 consolidated financial
statements result primarily from the following:

1. Exchange of Old Notes and accrued interest for $245 million in cash,
$45 million in New Notes and approximately 68% of the New Common Stock of
the Successor.

2. Bank lenders received approximately 26% of the New Common Stock of the
Successor in addition to the $82.8 million they seized just prior to the
filing of chapter 11 proceedings on April 12, 2002.

3. Trade creditors received promissory notes, New Common Stock and cash as
detailed in the Plan of Reorganization.

F-12

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

2. ACCOUNTING FOR BANKRUPTCY ACTIVITIES (Continued)
Fresh start adjustments in the December 31, 2002 consolidated financial
statements result primarily from the following:

(a) Reduction of the property, plant and equipment carrying values to
reflect fair value.

(b) Elimination of the deferred revenue balances of the Predecessor
($1,298.4 million).

(c) Recognition of the performance obligations under long-term contracts
that were entered into by Predecessor ($142.5 million) to reflect fair
value.

(d) Reduction in the carrying values of long-term assets ($17.4 million).

(e) Elimination of deferred tax liability ($0.6 million) and deferred tax
asset ($2.9 million), included in (d) above.

(f) Cancellation of FLAG's common stock and the elimination of accumulated
deficit.

These adjustments were based on the work of outside financial advisors, as
well as internal valuation estimates using discounted cash flow analyses, to
determine the relative fair values of the Company's assets and liabilities.

REORGANIZATION COSTS

In the period from January 1, 2002 to October 8, 2002, we incurred
$64.7 million in reorganization costs. These costs represent items arising from
the application of SOP 90-7. Specifically, these costs relate to professional
fees ($35.0 million), retainers ($2.5 million), write-off of capitalized finance
cost ($18.2 million) and underwriter's discount ($12.3 million) paid, partially
offset by interest income ($3.3 million) earned during the period we commenced
chapter 11 proceedings.

3. SIGNIFICANT ACCOUNTING POLICIES

These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP") and are
expressed in U.S. Dollars ("Dollars"). The significant accounting policies are
summarized as follows:

BASIS OF CONSOLIDATION

The financial statements consolidate the financial statements of FLAG and
its subsidiary companies after eliminating intercompany transactions and
balances and recording minority interests. Investments in which FLAG has an
investment of 20%-50% or investments in which FLAG can assert significant
influence, but does not control, are accounted for under the equity method.
However, the Company has a 49% interest in Seoul Telenet Inc which is accounted
for under the principles of consolidation. The Company consolidates Seoul
Telenet Inc as it exercises control over the operations despite having an
investment of 49%. At December 31, 2002, there were no equity method investments
remaining (see Note 7).

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at the date of the financial statements, as well as
the

F-13

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenue and expenses during the reporting period. The most
critical estimates include accounts receivable reserves, impairment charges,
useful lives of fixed assets, asset retirement obligations and performance
obligations under long term contracts. Actual amounts and results could differ
from those estimates.

REVENUE RECOGNITION

CAPACITY

Capacity contracts are accounted for as leases. Capacity contracts that do
not qualify for sales-type lease accounting are accounted for as operating
leases and revenue is recognized over the term of the lease. Predecessor has
recorded only operating leases for capacity transactions for the periods
presented.

Payments received from customers before the relevant criteria for revenue
recognition are satisfied are included in deferred revenue.

In exchange for construction costs incurred, Predecessor granted credits to
suppliers toward future capacity. In addition, certain customers have committed
to purchase capacity from Successor at a future date under signed capacity
credit agreements. Amounts received under these agreements and the capacity
credits granted to suppliers are recorded at fair value as deferred revenue
until the date the credits are utilized, at which time the deferred revenue is
recognized as earned. Amounts receivable under these capacity agreements are
reflected within accounts receivable in the accompanying balance sheets.

RECIPROCAL TRANSACTIONS FOR CAPACITY

Historically, in accordance with U.S. GAAP, amounts invoiced as part of
reciprocal transactions for capacity were recorded at fair value as deferred
revenue. Predecessor amortized deferred revenue on a straight-line basis as
earned over the term of the relevant agreement. During the periods presented,
Predecessor was not a party to any reciprocal transaction that would require it
to recognize revenues up front.

Predecessor adopted the guidance issued by the AICPA--SEC Regulations
Committee on August 2, 2002 (the "AICPA Guidance"), applied this retrospectively
and restated the comparative period financial statements. The adoption of the
AICPA Guidance resulted in a change to Predecessor's accounting policy for
reciprocal transactions for capacity and, consequently, they are no longer
capitalized. See Note 4.

OPERATIONS AND MAINTENANCE

Standby maintenance charges are invoiced separately from capacity sales.
Revenues relating to standby maintenance are recognized over the period in which
the service is provided. Deferred revenue also includes amounts invoiced for
standby maintenance applicable to future periods.

NETWORK REVENUES

Network revenues are revenues derived from the sale of managed bandwidth
leases and Internet Protocol ("IP") services. Revenue associated with leased
capacity is recognized as operating lease

F-14

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
revenue unless the criteria under FASB Interpretation No. 43 for sales-type
lease accounting are met. During the periods presented, FLAG did not record any
sales-type leases.

PERFORMANCE OBLIGATIONS

As part of fresh start accounting, deferred revenue balances were written
off and a performance obligations reserve was created to cover future expenses
resulting from sale activity recognized prior to restatement, and for which
benefit was also received prior to restatement. This reserve will be amortized
in line with the relevant cost incursion associated with performance of
contracts.

DIRECT COSTS RELATED TO REVENUE

CAPACITY

Costs of the system relating to capacity contracts accounted for as
operating leases are recorded in property and equipment and are depreciated over
the remaining economic life of the network.

RECIPROCAL TRANSACTIONS FOR CAPACITY

Historically, Predecessor recorded capacity acquired as part of reciprocal
transactions for capacity either as property and equipment, prepaid expenses and
other assets or other long-term assets, depending upon when Predecessor
anticipated that they would be brought into service, and were charged as network
expense or depreciated on a straight-line basis over the shorter of 15 years or
the term of the purchase agreement.

As discussed in Note 4, Predecessor adopted the AICPA Guidance issued on
August 2, 2002, applied this retrospectively and restated the comparative period
financial statements.

OPERATIONS AND MAINTENANCE COSTS

Operations and maintenance costs are expensed over the period to which the
expenditure relates.

NETWORK EXPENSES

Costs relating to the short-term lease of capacity are recognized over the
period of the contract.

The costs of network service products are expensed over the period of the
recognition of the corresponding revenue.

Where network service rebates are received, costs are reduced by the amount
of the rebate received.

COMMISSIONS

Third party commissions are capitalized and amortized over the period of the
recognition of the related capacity revenue. Internal sales commissions are
expensed as incurred.

ADVERTISING COSTS

Advertising costs are expensed as incurred. Such costs are included in
sales, general and administrative expenses in the accompanying consolidated
statements of operations. Advertising costs charged to the income statement were
$68, $784, $2,087 and $1,570 for the period October 9, 2002 to December 31,
2002, the period January 1, 2002 to October 8, 2002, and the years ended
December 31, 2001 and 2000, respectively.

F-15

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PENSIONS

All eligible employees of FLAG are covered by a non-contributory defined
contribution pension plan. Pension costs charged to the income statement were
$837, $1,611, $2,419 and $706 for the period October 9, 2002 to December 31,
2002, the period January 1, 2002 to October 8, 2002, and the years ended
December 31, 2001 and 2000, respectively.

INCOME TAXES

Income taxes are accounted for under the liability method. Deferred taxes
are determined based on the difference between the tax basis of an asset or
liability and its reported amount in the financial statements. A deferred tax
liability or asset is recorded using the enacted tax rates expected to apply to
taxable income in the period in which the deferred tax liability or asset is
expected to be settled or realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period in
which the change is enacted. Future tax benefits attributable to these
differences, if any, are recognizable to the extent that realization of such
benefits is more likely than not. Valuation allowance is applied to deferred tax
assets in order to recognize them at fair value at the balance sheet date.

NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing net loss applicable
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share is computed by
dividing net loss by the weighted average number of common shares and common
share equivalents outstanding during the period.

CONSTRUCTION IN PROGRESS

Construction in progress is stated at cost. Capitalized costs include costs
incurred under the construction contract, engineering and consulting fees, legal
fees related to obtaining landing right licenses, interest costs, program
management costs, costs for the route surveys, indirect costs associated with
cable systems and points of presence ("PoPs"), long-term capacity lease
purchases, and other costs incurred in the development of FLAG's global network.
Construction in progress is transferred to property and equipment when placed
into service.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation.
In accordance with fresh start accounting, the book value of property and
equipment was adjusted to its fair value and

F-16

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortized over its remaining estimated useful life. Depreciation is taken on a
straight-line basis over the estimated useful lives of the property and
equipment as follows:

Computer equipment........................... 3 years
Fixtures and fittings........................ 5 years
Leasehold improvements....................... Remaining lease term
Motor vehicles............................... 5 years
Network assets............................... 15 years or remaining useful lives

The estimated useful lives of cable systems are determined based on the
estimated period over which they will generate revenue, ranging from 10 to
14 years.

IMPAIRMENT OF LONG-LIVED ASSETS

Effective as of January 1, 2002, Predecessor adopted Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets". FLAG periodically reviews events and changes in
circumstances to determine whether the recoverability of the carrying value of
long-lived assets should be reassessed. Should events or circumstances indicate
that the carrying value may not be recoverable based on undiscounted future cash
flows, an impairment loss measured by the difference between the fair value and
the carrying value of long-lived assets would be recognized by FLAG.

Under the testing for impairment, estimates of future cash flows are used to
test the recoverability of a long-lived asset, and are based on the existing
service potential of the asset. These estimates exclude cash flows associated
with future capital expenditures that would increase the service potential of
the long-lived asset.

CASH AND CASH EQUIVALENTS

FLAG considers all short-term investments with original maturities of
90 days or less to be cash equivalents. The carrying amounts reported in the
accompanying consolidated balance sheets are approximate to fair value.

RESTRICTED CASH

FLAG designates funds held by collateral trustees, in escrow on deposit or
legally designated for specific projects or commitments by bank agreements, as
restricted cash.

DERIVATIVE FINANCIAL INSTRUMENTS

Prior to the commencement of its chapter 11 proceedings, Predecessor had
been using derivative financial instruments for the purpose of reducing its
exposure to adverse fluctuations in interest rates, currencies and other market
risks. Predecessor did not utilize derivative financial instruments for trading
or other speculative purposes. The counter-parties to these instruments are
major financial institutions with high credit quality. Predecessor was exposed
to credit loss in the event of non-performance by these counter-parties.

F-17

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FLAG records all derivative instruments on the balance sheet at fair value.
Changes in a derivative's fair value are recognized in earnings unless specific
hedge criteria are met. If the derivative is designated as a fair value hedge,
the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized as a charge or credit to
earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in other
comprehensive income (loss) and are recognized in the consolidated statement of
earnings when the hedged item affects earnings and the cash flows are classified
consistent with the underlying hedged item. For purchased foreign currency
options the entire change in fair value is included in the measurement of hedge
effectiveness for cash flow hedges. Ineffective portions of changes in the fair
value of cash flow hedges are recognized as a charge or credit to earnings.

FLAG designates and assigns derivatives as hedges of forecasted
transactions, specific assets or specific liabilities. When hedged assets or
liabilities are sold or extinguished or the forecasted transactions being hedged
are no longer expected to occur, the Company recognizes the gain or loss on the
designated hedging financial instruments.

CAPITALIZED INTEREST AND FINANCING COSTS

Interest costs on qualifying assets are capitalized and amortized over the
asset's useful life. Costs incurred to obtain financing are capitalized and
amortized over the term of the related borrowings. Capitalized finance costs
were written off and included in the reorganization costs in connection with the
bankruptcy proceedings.

TRANSLATION OF FOREIGN CURRENCIES

Transactions in foreign currencies are translated into Dollars at the rate
of exchange at the date of each transaction. Monetary assets and liabilities
denominated in foreign currencies at period-end are translated into Dollars at
the rate of exchange at that date. Foreign exchange gains or losses are
reflected in the accompanying statements of operations.

The statements of operations of overseas subsidiaries are translated into
Dollars at average exchange rates and the period-end net investments in these
companies are translated at period-end exchange rates. Exchange differences
arising from retranslation at period-end exchange rates of the opening net
investments and results for the period are charged or credited directly to the
cumulative translation adjustment in shareholders' equity.

STOCK OPTIONS

Prior to the emergence from chapter 11, as permitted by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"), Predecessor accounted for employee stock options
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"), and, accordingly, recognized compensation expense for
stock option grants to the extent that the fair value of the stock exceeded the
exercise price of the option at the measurement date under fixed plan awards.
The compensation expense was charged ratably over the vesting period of the
options. Upon emergence from bankruptcy and as of December 31, 2002, Successor
did not have any stock options outstanding.

F-18

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Group to a concentration
of credit risk are accounts receivable. The Group performs ongoing credit
evaluations of its larger customers' financial condition. Geographical risk is
mitigated by the fact that revenues are not concentrated in one part of the
world. See Note 23, "Segment Reporting", for concentrations by geographic areas.

FLAG is exposed to credit-related losses in the event of non-performance by
counter parties to financial instruments but does not expect any counter parties
to fail to meet their obligations. FLAG deals only with highly rated counter
parties.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

FLAG maintains an allowance for doubtful accounts. Payments due from
purchasers of capacity are generally payable within 30 days; however, we have
outstanding receivables greater than 30 days. We have established an allowance
for doubtful accounts based on our experience with potential uncollectable
receivables and our expectations as to payments. As of December 31, 2002, we had
an allowance of $10.4 million (2001 $5.1 million). This allowance could require
adjustments based on changing circumstances, including changes in the economy or
in the particular circumstances of individual customers.

REPAIRS AND MAINTENANCE COSTS

Expenditures for repairs, replacement and maintenance are expensed as
incurred. Such costs include routine maintenance and repair work to office
buildings and equipment. Repairs and maintenance costs charged to the income
statement were $31, $113, $83 and $99 for the period October 9, 2002 to
December 31, 2002, the period January 1, 2002 to October 8, 2002, and the years
ended December 31, 2001 and 2000, respectively.

ASSET RETIREMENT OBLIGATIONS

As a result of fresh start accounting, the Company adopted Statement of
Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset
Retirement Obligations". This adoption resulted in the calculation of a
liability of $4.7 million, which will be accreted over the remaining life of the
assets. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset and
depreciated over the life of the associated fixed asset.

The Company measures changes in the liability for an asset retirement
obligation due to passage of time by applying an interest method of allocation
to the amount of the liability at the beginning of the period. The interest rate
used to measure that change is the credit-adjusted risk-free rate that existed
when the liability was initially measured. That amount is recognized as an
increase in the carrying amount of the liability and as an expense classified as
an operating item in the statement of income.

F-19

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES

The Company adopted Statement of Financial Accounting Standards No. 146
("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities"
upon emergence from bankruptcy in accordance with the provisions of SOP 90-7.
There was no impact on the Company's results upon adoption of this standard.

Prior to this date, Predecessor accounted for such costs under Emerging
Issues Task Force (EITF) Issue No. 94-3, ("EITF 94-3") "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)".

SFAS 146, which nullifies EITF 94-3, requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified in the consolidated
financial statements to conform to current year presentation.

RECENT ACCOUNTING STANDARDS

GOODWILL AND OTHER INTANGIBLE ASSETS

Effective as of January 1, 2002, Predecessor adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". This resulted in a change to Predecessor's accounting policy for
goodwill and, consequently, goodwill is no longer amortized. This adoption did
not impact Predecessor's results of operations, financial position or cash flows
since its goodwill balance was impaired during 2001 and the Company no longer
has goodwill recorded on its books.

ASSET RETIREMENT OBLIGATIONS

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires companies to record the fair
value of a liability for asset retirement obligations in the period in which the
legal or contractual removal obligation is incurred. The Company adopted this
statement as of October 9, 2002 as part of implementing fresh start accounting
as required by SOP 90-7.

AMENDMENT AND RESCISSION OF PREVIOUS ACCOUNTING STANDARDS

In April 2002, FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No.4, 44 and 64, Amendment
of FASB Statement 13 and Technical Corrections". This statement rescinds FASB
Statement No.4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that statement, FASB Statement No.64, "Extinguishments of Debt Made
to Satisfy Sinking-fund Requirements". This statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers". This
statement amends

F-20

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FASB Statement No.13, "Accounting for Leases", to eliminate inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
Company adopted SFAS 145 as part of the implementation of fresh start accounting
as required by SOP 90-7. This adoption did not have a material impact on the
Company's results of operations, financial position or cash flows.

ACCOUNTING FOR STOCK-BASED COMPENSATION

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure" (SFAS 148) that amends SFAS 123 to
provide alternative methods of transition for a voluntary change to SFAS 123's
fair value method of accounting for stock-based employee compensation. SFAS 148
also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28,
"Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. The Company
adopted this standard in accordance with the provisions of SOP 90-7. We do not
expect the adoption of SFAS 148 to have a material effect on our financial
position, results of operations, or cash flows. Successor has elected to
continue to follow the intrinsic value method of accounting as prescribed by APB
Opinion No. 25 to account for employee stock options.

AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. The Company does
not expect the adoption of this statement to have a material impact on its
operating results of financial position.

GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and measurement provisions of FIN 45 apply on a prospective
basis to guarantees issued or modified after December 31, 2002. FLAG Telecom
adopted this standard in accordance with SOP 90-7. We do not expect the adoption
of FIN 45 to have a material effect on our financial position, results of
operations, or cash flows.

F-21

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONSOLIDATION OF VARIABLE INTEREST ENTITIES

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses the financial
reporting by enterprises involved with variable interest entities. FIN 46
addresses both unconsolidated variable interest entities and any new variable
interest entities that are created subsequent to the issuance of the
interpretation. As of December 31, 2002, we did not have any unconsolidated
variable interest entities. Any future variable interest entities will be
accounted for in accordance with FIN 46.

REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES

In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. FLAG Telecom is currently evaluating the
effect that the adoption of EITF Issue No. 00-21 will have on its results of
operations and financial condition.

4. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The Company has recorded certain restatement adjustments to its previously
issued 2001 and 2000 financials. The effects of the adjustments are as follows:

F-22

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

4. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (CONTINUED)

STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 2001
Revenues.......................... $ 188,323 $ 824 $ (25,538) $ 163,609

F-23

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

4. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (CONTINUED)

(A) RECIPROCAL TRANSACTIONS REVERSALS

We have entered into transactions in which we provide capacity, services or
facilities, by way of leases, ROUs or service agreements to other
telecommunications companies and service providers at approximately the same
time that we lease or purchase capacity from the same companies or their
affiliates. We call these transactions "reciprocal transactions".

Historically, we treated reciprocal transactions as if they were
non-monetary transactions in accordance with Accounting Principles Board Opinion
No. 29 "Accounting for Non-monetary Transactions" ("APB No. 29"). In order to
determine whether our reciprocal transactions should be accounted for as revenue
and a capital expenditure at fair value as deferred revenue and deferred costs,
in accordance with APB No. 29, we assessed whether:

- the reciprocal transaction was an "exchange of similar productive assets"
as defined in APB No. 29. We do not hold products or property for sale in
the ordinary course of business so an "exchange" would be the exchange of
a productive asset not held for sale in the ordinary course of business
for a similar productive asset or an equivalent interest in the same or
similar productive asset; and

- the fair values of the assets exchanged were determinable within
reasonable limits.

Our reciprocal transactions fall into three categories: services for
services, operating leases for operating leases and operating leases for capital
leases. Under the terms of both service contracts and operating leases, we do
not exchange an interest in a productive asset but provide a service to, and
receive a service from, our customers. Consequently, these transactions were
recorded at fair value as deferred revenue on a straight-line basis over the
term of the relevant agreement. We also considered that operating leases and
capital leases were dissimilar in nature and consequently were not exchanges of
similar productive assets within the definition of APB No. 29.

F-24

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

4. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (CONTINUED)

We determined fair value by reference to recent cash transactions or quotes
from third parties for equivalent capacity or services.

In August 2002, the staff of the Securities and Exchange Commission (the
"SEC") indicated that the SEC staff had concluded that all non-monetary exchange
transactions for telecommunications capacity should be accounted for as an
exchange of assets, irrespective of whether the transaction involved the lease
of assets. The conclusion was based on the SEC staff's view that the right to
use an asset (that is, a lease), is in fact an asset and not a service contract,
irrespective of whether such asset is characterized as an asset on the balance
sheet. This conclusion requires that non-monetary exchange transactions for
telecommunications capacity involving the exchange of one or more operating
leases be recognized based on the carrying value of the assets exchanged, rather
than at fair value, resulting in no recognition of revenue for the transactions.
Prior to the SEC's communication on this issue, Predecessor's accounting for
these transactions, which resulted in Predecessor recognizing revenue, had been
consistent with guidance for these types of transactions. The SEC indicated that
it expects affected companies to retroactively apply this guidance to historical
non-monetary exchange capacity transactions that occurred in prior years and, if
appropriate, restate their financial statements.

(B) AUDIT ADJUSTMENTS

ADJUSTMENTS TO OPENING RETAINED EARNINGS

The accounting for sales of capacity has evolved over the last few years as
the interpretation and application of certain pronouncements by the SEC and
accounting standard setting bodies have been clarified. To take account of these
developments and to be consistent with current industry practice, the accounting
for certain sales transactions has been re-stated as follows:

- A contract signed in September 1998 but related to a customer commitment
in an earlier period was treated as a sales type lease because the
customer had a fixed period to commit to draw down the capacity and to
start paying maintenance charges for certain specifically identified
capacity on our network, otherwise the customer would lose the capacity
with no refund. On re-evaluation of the contract the Company has accounted
for these capacity sales as operating leases as and when drawn down.

- A contract, which was signed in September 1999, was treated as a sales
type lease contract because the customer had committed to the purchase in
an earlier period and some capacity had been activated prior to June 1999.
On re-evaluation of the contract and taking account of the criteria stated
in FIN 43 and SFAS 66 for the "transfer of title" for capacity contracts
entered into after June 1999, the Company has accounted for the contract
as an operating lease.

- The Company had entered into a contract in August 1998, which involved the
sale of capacity and the customer having a "rent free" period from paying
standby operations and maintenance charges. The entire contract was
treated as a sales type lease contract and the Company set up a provision
for costs to be incurred during the free maintenance period. Subsequently
the Company also recognised capacity credits as revenues in 2001. On
re-evaluation of the terms and components of the contract, adjustments
have been made to revenues in 1998, 1999, 2000 and 2001.

F-25

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

4. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (CONTINUED)
- The impact of these adjustments has been a decrease to 2000 opening
retained earnings of $58.8 million.

ADJUSTMENTS TO 2000 AND 2001

- The items listed above also impacted the revenues for the years 2000 and
2001.

- The Company also adjusted the revenues for the years 2000 and 2001, upon
further analysis of the deliveries of capacity to customers, in compliance
with the current revenue recognition policy.

- In December 2001, the Company accrued for an upgrade on the FA-1 system,
which was committed to be purchased. Upon further analysis by management,
the accruals and related assets have been reversed to reflect the fact
that the work had not been undertaken by the supplier in 2001.

- The Company identified additional fixed assets for which depreciation had
to be charged in 2001.

- Adjustments to cash and expense accounts to reflect payments made to
suppliers but not recorded posted to the accounts payable ledger in 2001.
Upon further analysis, the Company identified certain accruals at December
2001, which were not required and therefore reversed.

- Correction of book keeping and accounting errors.

The total impact of all adjustments in 2001 and 2000 is to reduce previously
reported net income in 2001 and 2000 is $20.4 million and $6.2 million,
respectively.

5. RESTRUCTURING

During the third quarter of 2002, the Predecessor implemented a
restructuring plan to reduce the employee base and close certain offices in
order to reduce the level of fixed costs. The employees affected were in Sales
(51), Operations (47) and Finance and Administration (15). The following
summarizes the costs incurred by Predecessor.

The costs have been recorded as restructuring costs on the income statement.

Upon emergence from Bankruptcy, the Successor initiated a further plan for a
number of office closures, employee relocations and further employment
terminations, the details of which were finalized during 2002 and early 2003.
The employees affected were in Sales (4), Operations (17) and Finance and
Administration (14). The Successor expects to incur $4.9 million in costs, as
part of the plan. The Successor has incurred $4.1 million in one-time
termination costs in December 31, 2002. There are a

F-26

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

5. RESTRUCTURING (CONTINUED)
further $0.6 million of one-time termination and $0.2 million of other
associated costs expected to be incurred and paid in 2003.

The last office closure occurred in April 2003 and the final employee
termination is expected in August 2003.

The following summarizes the activity for the restructuring costs incurred
by the Successor

(1) Represents employee termination benefits of Predecessor paid by Successor.

6. ASSET IMPAIRMENT

In accordance with SOP 90-7 and SFAS 141, the Company constructed a
valuation model to determine the values of its long-term assets, telecoms and
non-telecoms plant and equipment assets upon Emergence from bankruptcy as part
of fresh start accounting. The forecast period was assessed to be 15 years and
the assumptions used reflect lighting dark fiber expenditures, taxation and
working capital requirements. The value of the property and equipment was
calculated to be $322.0 million, resulting in an impairment write-down of
$1,447.8 million. This was recorded as part of the fresh start adjustments in
the income statement.

In 2002, the Company accounted for impairment of long-lived assets in
accordance with SFAS 144. Upon filing for chapter 11, the Company concluded that
impairment indictors existed and performed a test for recoverability based on
management's estimate of undiscounted future cash flows attributable to the
assets as compared to the carrying value of the assets, calculated as net book
value less deferred revenues. For the purpose of the impairment exercise, the
financial forecasts were projected up to the useful lives of the fiber-optic
systems in question with no further terminal value assumed beyond their useful
lives. Valuation metrics were referenced and benchmarked against comparable
company and market data.

The undiscounted cash flows were less than the carrying value of the FEA and
FNAL systems. We discounted the cash flow model and determined that
Predecessor's fiber-optic telecommunication FEA and FNAL systems were impaired
as at June 30, 2002. In determining the appropriate cost of capital, the capital
asset pricing model was used.

FLAG EUROPE ASIA SYSTEM: The FEA system was put into place in 1997 and
links the telecommunications markets of Western Europe and Japan through the
Middle East, India, Southeast Asia and China. The FEA system consists of
approximately 28,000 kilometers of undersea fiber-optic cable with a 580
kilometer dual land crossing in Egypt and a 450 kilometer dual land crossing in
Thailand. There is increasingly high level of competition in terms of
alternative supply, lower than

F-27

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

6. ASSET IMPAIRMENT (CONTINUED)
generally expected demand and significant over-supply for this route. As at
June 30, 2002 we have reassessed future revenue opportunities for the life of
this route when preparing our future cash flows of the asset. Predecessor has
recognized an impairment charge of $327.9 million in respect of the FEA system
based upon our estimates of future cash flows at the time.

FLAG NORTH ASIAN LOOP: FNAL is connected to FEA in Hong Kong and Japan, and
to two trans-Pacific cable systems on which we own facilities, the PC-1 and
Japan-U.S. networks. FNAL was put in place in 2002 to offer intra-regional,
city-to-city connectivity between the high traffic centers of Hong Kong, Seoul,
Tokyo and Taipei. There is increasingly high level of competition in terms of
alternative supply, lower than generally expected demand and significant
over-supply for this route. As at June 30, 2002 we have reassessed future
revenue opportunities for the life of this route when preparing our future cash
flows of the asset. Predecessor has recognized an impairment charge of
$225.0 million in respect of the FNAL system based upon our estimates of future
cash flows at the time.

Prior to 2002, Predecessor determined impairment in accordance with
SFAS 121 by comparing the carrying values of each of the fiber-optic systems to
their fair values.

FLAG ATLANTIC-1 SYSTEM: In 2001, Predecessor determined that our FA-1
system was impaired. Given the high level of competition in terms of alternative
supply, price erosion and continued lack of demand on the trans-Atlantic route,
Predecessor reviewed the prospects for demand on that route and concluded that,
in accordance with its accounting policy, the FA-1 system was impaired. It was
determined that the carrying amount of the FA-1 system exceeded its fair value,
and Predecessor therefore recognized an impairment charge of $359 million in the
year. It was determined the fair value of the FA-1 system based on the present
value of future cash flows expected to be generated by the FA-1 system according
to management's latest demand forecasts. The impairment charge, which is
included in operating loss, reduced the carrying values of Goodwill and Property
and equipment in the balance sheet by $30 million and $329 million respectively.

FLAG PACIFIC-1 SYSTEM: Asset impairment charges of $26.6 million were
recorded in the third quarter of 2001. On August 7, 2001 Predecessor announced
that it had decided not to proceed with the FLAG Pacific-1 ("FP-1") project in
association with TyCo Telecommunications that had been announced in the second
quarter. The agreement in principle with TyCo Telecommunications was conditional
upon Predecessor obtaining financing on satisfactory terms. However, despite
substantial efforts on Predecessor's part and given the capital market
conditions prevailing at the time, the financing proposal received fell short of
expectations. Following this decision three employment agreements were
terminated and amounts already paid or due in connection with preliminary build
evaluation were written off. Predecessor had commissioned a marine survey for
the construction of the FP-1 project and entered into other project related
expenditure commitments. Following the decision not to proceed, the residual
value of the costs incurred was $nil and the consequent asset impairment charge
was $26.6 million, comprising $24.0 million in abandoned survey and preliminary
build costs and $2.6 million of other project related costs.

F-28

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

6. ASSET IMPAIRMENT (CONTINUED)
The asset impairment charges are as follows:

7. BUSINESS ACQUISITIONS

On December 6, 2000, Predecessor acquired the remaining 50% equity interest
in FLAG Atlantic Limited from Global TeleSystems Group, Inc. ("GTS") for a cash
consideration of $135 million. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the assets and liabilities
assumed have been recorded at fair value as of the date of acquisition. The
excess of purchase price over the fair value of the assets acquired and the
liabilities assumed had been recorded as goodwill. Following the impairment of
the FLAG Atlantic-1 asset (see Note 6 above) the goodwill was written off in
full in the year ended December 31, 2001.

8. ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

F-29

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

9. PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets consist of the following:

10. RESTRICTED CASH

The Group designates funds held by collateral trustees, in escrow or legally
designated for specific projects or commitments by bank agreements, as
restricted cash. Restricted cash as at December 31, 2002 totals $8.4 million and
represents amounts held in escrow accounts. Restricted cash as at December 31,
2001 consisted of funds held by collateral trustees totaling $326.1 million. As
at December 31, 2001 there was $122.4 million restricted for use in relation to
FLAG Atlantic Limited, $137.8 million in relation to FLAG Asia Limited and
$65.9 million in relation to Predecessor. As part of the Plan, all amounts
previously restricted became unrestricted at the Effective Date.

11. CAPITALIZED INTEREST COSTS

Interest costs on qualifying assets are capitalized and amortized over their
useful lives. There was no interest capitalized in the period ended
December 31, 2002. Total interest capitalized to construction in progress during
the period from January 1, 2002 to October 8, 2002 and the years ended
December 31, 2001 and 2000, was $2,165, $16,150 and $6,683, respectively.

12. PROPERTY AND EQUIPMENT

Property and equipment, including assets held under capital leases, consist
of the following:

Pursuant to the adoption of fresh start reporting, the Company wrote down
the gross value of its property and equipment by $2,445 million, and the balance
of accumulated depreciation by $997 million. The total fresh start value of
network assets was allocated to each cable system based

F-30

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

12. PROPERTY AND EQUIPMENT (CONTINUED)
upon expected future cash flows. The new values are being amortized over the
remaining estimated useful lives of the assets, ranging from 10 to 14 years.

The Company leases office equipment under various capital lease
arrangements. Assets recorded under capital lease agreements included in
property and equipment consisted of equipment with a gross value of $867 with an
associated balance of accumulated depreciation of $405 as of December 31, 2002.
As of December 31, 2001, the comparative balances were $867 and $231,
respectively.

13. ASSET RETIREMENT OBLIGATIONS

The Company implemented SFAS No. 143 relating to asset retirement
obligations as part of implementing fresh start accounting and recorded a
cumulative effect of change in accounting principle of $1.9 million to
October 8, 2002. The cumulative effect of change in accounting principle
represents accretion and depreciation expenses the company would have recorded
had the provisions of SFAS No. 143 been in effect on the dates the obligations
were incurred. The Company's asset retirement obligations relate to the cable
systems. The estimation of the fair value of asset retirement obligations
requires the significant use of estimates regarding the amounts and timing of
expected cash flows. The fair value of the asset retirement obligations was
calculated using the Company's weighted average cost of capital and assuming an
expected time to retirement of 20 years for each section of the cable.

Upon adoption of SFAS No. 143 as of October 9, 2002, the company recorded an
asset retirement obligation of $4.7 million. For the period to December 31,
2002, the Company recognized $0.1 million of expense in depreciation to accrete
the liability to $4.8 million as of December 31, 2002.

If the Company had adopted SFAS No. 143 on January 1, 2001, it would have
recorded a liability of $3.8 million. Accretion expense for the year ended
December 31, 2001 and the period to October 8, 2002 would have been
$0.5 million and $0.4 million, respectively. The liability as of December 31,
2001 would have been $4.3 million.

14. ACCRUED LIABILITIES

Accrued liabilities as of December 31 consisted of the following:

F-31

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

15. LONG-TERM DEBT

The Group's long-term debt comprises the following:

On March 17, 2000, Predecessor completed a sale of 11 5/8% Senior Notes due
2010 in the United States and Europe, raising net proceeds of $576.6 million. As
of the Effective Date, these notes were cancelled and the holders of these notes
received $245 million in cash, a $45 million promissory note (callable by the
Company at $30 million for 18 months) and 5% of the common stock of the Company.

FLAG Limited had $430.0 million 8 1/4% senior notes repayable at par in
2008. As of the Effective Date, these notes were redeemed and the holders of
these notes received approximately 63% of the common stock of the Company.

FLAG Atlantic Limited had a term loan of $253.0 million prior to emergence
from chapter 11. As of the Effective Date, FLAG Atlantic Limited's creditors
received approximately 26% of the common stock of the Company and the loan was
thereby discharged. FLAG Atlantic Limited has since then been in liquidation
under Bermudan law, pursuant to the Plan.

Prior to the Effective Date, Predecessor had outstanding 11 5/8% Senior
Dollar Notes due 2010 in the aggregate principal amount of $300 million and
11 5/8% Senior Euro Notes due 2010 in the aggregate principal amount of
E300 million. In addition, prior to the Effective Date, FLAG Limited had
outstanding 8 1/4% Notes due 2008 in the aggregate principal amount of
$430 million. On the Effective Date and pursuant to the Plan, these notes were
exchanged in favor of new notes, cash and

F-32

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

15. LONG-TERM DEBT (CONTINUED)
common shares, and subsequently discharged. See "Legal Proceedings" for a more
detailed discussion of the Plan and these transactions

Upon our emergence from chapter 11 proceedings our company and our
subsidiaries entered into various financing agreements. Our debt instruments are
described below:

THE SERIES A NOTES

We issued Series A Notes to the bondholders of Predecessor in the original
principal amount of $45 million, which are due and payable on October 1, 2005,
and bear simple interest on this amount, less any principal repayments made, at
the following rates: 6.67% per annum for the first 12 months after the Effective
Date; 7.33% per annum for months 13 through 24 after the Effective Date; and 8%
per annum for months 25 through 36 after the Effective Date.

At any time up until April 2004, we have the right, in our sole and absolute
discretion, provided that no default or event of default has occurred or is
continuing, to redeem all of the Series A Notes by paying the sum of
$30 million, plus accrued but unpaid interest. Such discount redemption must be
done via Board resolution with 30 days prior notice to the trustee and can only
be done in a situation where there is no default. Each subsequent month, the
repayment sum increases by $0.833 million until October 1, 2005 whereby the
total sum would be $45 million.

In the event of a liquidation event or Change of Control (defined below),
the original principal amount of $45 million will be payable in full plus
accrued but unpaid interest, less any principal repayments made. "Change of
Control" is defined to mean, in summary: (i) when any person or group becomes
the beneficial holder of more than 50% of our voting stock; or (ii) when we
consolidate or merge with or into any other person or sell all or substantially
all of our assets.

To secure payment of the Series A Notes liens were granted on substantially
all of the assets of our company and certain of our subsidiaries in favor of The
Bank of New York, as Trustee to the Indenture (the "Indenture"). Such lien ranks
PARI PASSU in priority and right of payment with the Series B Note and the
Series C Note.

THE SERIES B NOTE

We issued the Series B Note to The Blackstone Group, which acted as our
financial advisor during our chapter 11 proceedings, on the Effective Date. The
Series B Note has an original principal amount of $4 million, is due and payable
on October 1, 2004 and bears simple interest on this amount, less any principal
repayments made, at the following rates: 10% per annum until October 1, 2003;
and 11% thereafter. Unlike the Series A Notes, the Series B Note is not
redeemable at a discount.

We may issue senior secured debt obligations equal and ratable to the
Series B Note upon payment by us of $15 million of the original principal amount
of the Series A Notes.

In the event of a liquidation or Change of Control, the original principal
amount of $4 million plus a $2 million premium is payable in full plus accrued
but unpaid interest, less any principal repayments made.

The Series B Note is cross-defaulted with both the Series A Notes and the
Series C Note. The Series B Note is secured by liens on the same assets as the
Series A Notes and ranks PARI PASSU in priority and right of payment with the
Series A Notes and the Series C Note. Upon the payment by us

F-33

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

15. LONG-TERM DEBT (CONTINUED)
of $5 million of the original principal amount of the Series A Notes, the liens
securing the Series B Note will be cancelled and released.

SERIES C NOTE

We issued the Series C Note to Houlihan Lokey Howard & Zukin Capital
("Houlihan"), which acted as the financial advisor to the Unsecured Creditors'
Committee during our chapter 11 proceedings, on the Effective Date. The
Series C Note has an original principal amount of $1.25 million, is due and
payable on October 1, 2004 and has the same material terms and conditions as the
Series B Note.

In the event of a liquidation or Change of Control, the original principal
amount of $1.25 million is payable in full plus accrued but unpaid interest,
less any principal repayments made. The Series C Note is cross-defaulted with
both the Series A Notes and the Series B Note. The Series C Note is secured by
liens on the same assets as the Series A Notes and ranks PARI PASSU in priority
and right of payment with the Series A Notes and the Series B Note. Upon the
payment by us of $5 million of the original principal amount of the Series A
Notes, the liens securing the Series C Note will be cancelled and released.

We may issue senior secured debt obligations equal and ratable to the
Series C Note upon the payment by us of $15 million of the original principal
amount of the Series A Notes.

INDENTURE FOR SERIES A, B AND C NOTES

The Series A Notes, the Series B Note and the Series C Note are each
governed by an Indenture, dated as of October 9, 2002, between FLAG Telecom and
The Bank of New York, as indenture trustee. We are prohibited from retiring any
debt prior to its scheduled maturity, other than the Series A, B and C Notes,
non-recourse debt, and intercompany debt. Therefore, we cannot retire the FNAL
Note (see below) without the consent of the Series A, B and C Noteholders.
However, the FNAL Note and other indebtedness does not prevent us from
repurchasing the Series A, B and C Notes.

Furthermore, any payment of dividends would be restricted by the terms of
the Indenture between FLAG Telecom and the Bank of New York, as Indenture
Trustee, dated October 9, 2002. The Indenture provides that any dividend or
distribution paid pursuant to the provisions of the Security and Pledge
Agreement, also with the Bank of New York, as Collateral Trustee, dated
October 9, 2002, shall be paid to the Bank of New York and such dividend or
distribution paid will be used to redeem the Series A, B & C Notes on a pro rata
basis. Any and all dividends and interest paid or payable in case in respect of
any Security Collateral (i.e. Pledged Stock, Pledged Notes, additional shares of
Capital Stock and additional indebtedness from time to time) in connection with
a partial or total liquidation or dissolution or in connection with a reduction
of capital surplus or paid-in-surplus, and cash paid, payable or otherwise
distributed in respect of principal of, or redemption of, or in exchange for,
any Security Collateral, shall be forthwith delivered to the Collateral Trustee
to be held as Security Collateral.

Pursuant to the terms of the Indenture, each of our subsidiaries other than
FLAG Telecom Korea Limited, Seoul Telenet, Inc. and FLAG Telecom Switzerland
Network AG has granted a guarantee of the full and punctual payment of
principal, premium and interest of each of the Series A, B and C Notes and all
other obligations of the Company under the Notes.

F-34

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

15. LONG-TERM DEBT (CONTINUED)
We also entered into a Security and Pledge Agreement, dated as of
October 9, 2002, with The Bank of New York, as collateral trustee, under which
we have pledged and granted a security interest in substantially all of our
current and future assets to secure the payment of all the Series A Notes, the
Series B Note and the Series C Note.

OTHER INDEBTEDNESS

In addition to the notes described above, we, and/or certain of our
subsidiaries, issued several promissory notes to trade creditors in connection
with the Plan. In particular, on May 16, 2002, FLAG Asia Limited issued a
promissory note (the "FNAL Note") to a trade creditor in the principal amount of
$27.4 million. The FNAL Note is secured by certain assets of FLAG Asia Limited,
including one fiber pair and related equipment and rights on FNAL, and
guaranteed by FLAG Telecom. The guarantee issued by FLAG Telecom to the holder
and the collateral agent of the FNAL Note provides that, for the term of the
FNAL Note, FLAG Telecom will guarantee the payment and performance of the FNAL
Note until the date on which the note is paid in full. As a result, FLAG Telecom
is obligated fully and to the same extent as FLAG Asia Limited for the full
amount of the FNAL Note until it is paid in full. The FNAL Note bears an
interest rate of 7% per annum payable quarterly in arrears commencing on the
Effective Date. Of the principal amount, $6 million is due and payable on
September 30, 2003, $6.9 million is due and payable on September 30, 2004 and
the remaining principal is due and payable on September 30, 2005.

In the event of a liquidation event or Change of Control (defined below),
the original principal amount of $27.4 million will be payable in full plus
accrued but unpaid interest, less any principal repayments made. "Change of
Control" is defined to mean, in summary: (i) when any person becomes the
beneficial holder of 100% of FLAG Asia Limited's issued capital stock; or
(ii) when FLAG Asia Limited consolidates or merges with or into any other person
or sell all or substantially all of our assets.

On the Effective Date, we also issued a promissory note to another trade
creditor in the principal amount of $2.4 million with an 18-month term and 7%
interest.

Also on the Effective Date, FLAG Asia Limited issued an unsecured promissory
note to another trade creditor, in the principal amount of $1 million with an
18 month term and 7% interest payable monthly, maturing on 25 March, 2004.

On the Effective Date, we also issued an unsecured note to another trade
creditor of $3.42 million, repayable in 12 equal monthly installments. This note
is not interest bearing.

F-35

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

15. LONG-TERM DEBT (CONTINUED)
As at December 31, 2002, contractual maturities of the Group's indebtedness,
excluding interest, were as follows:

DEBT COVENANTS

We review the covenants of our debt instruments on a monthly basis to ensure
compliance, and to enable the Chief Financial Officer to make the certifications
regarding these covenants that are required by certain of these instruments.

The major covenants can be categorized as follows:

Operational Covenants

- No incurrence of additional Indebtedness

- Conduct of business

- Restrictions on payments and investments

- Restrictions on transactions with affiliates

- Record keeping required

- Compliance with laws and payment of taxes

Perfection and dealings with creditors and creditors' agents

- Payment of principal and interest

- Perfection of security interests

- Reporting to trustees and bondholders

Structural Covenants

- Corporate existence

- Maintenance, retention and insurance of assets

- No creation of additional liens

Currently, we are of the opinion that we are in compliance with the covenants
contained in all of our debt instruments.

F-36

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

16. SHAREHOLDER'S EQUITY

PREDECESSOR

On February 26, 1999, FLAG Limited's shareholders other than Bell Atlantic
Network Systems exchanged all their common shares in FLAG Limited for common
shares in Predecessor. Bell Atlantic Network Systems, however, exchanged only a
limited portion of its common shares in FLAG Limited for 3,666,155 common shares
in Predecessor. At the same time, Bell Atlantic Network Systems and Predecessor
entered into an Exchange Agreement and Plan of Reorganization providing that
Bell Atlantic Network System's remaining common shares in FLAG Limited would be
exchanged for common shares in Predecessor in the event that, prior to
February 26, 2002, Bell Atlantic received certain regulatory approvals from the
Federal Communications Commission allowing Bell Atlantic to offer long distance
service. Such regulatory approvals were obtained and Bell Atlantic exchanged its
remaining common shares in FLAG Limited for 36,256,121 common shares in the
Predecessor on January 4, 2000.

On February 16, 2000 the Predecessor completed an initial public offering
(IPO) of 27,964,000 common shares at $24 per share. The Predecessor received
$634,499 in net proceeds from that offering.

SUCCESSOR

The Successor's authorized capital stock consists of 3,000,000 common shares
and no preferred shares. As of the Effective Date, there were 2,000,000 common
shares issued and outstanding. Successor has reserved 222,222 common shares to
be issued pursuant to its 2002 Stock Incentive Plan. The holders of common
shares (the "Shareholders") are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. The Shareholders are
entitled to receive ratably such dividends as may be declared by the Company's
Board of Directors (the "Board") out of the funds legally available for payment
of dividends. Payment of dividends is restricted by the terms of an indenture
between Successor and The Bank of New York, as indenture trustee, dated
October 9, 2002. In the event of a liquidation, dissolution or winding up of the
Company, the Shareholders will be entitled to share ratably in all assets
remaining after payment of liabilities. The Shareholders have no preemptive,
subscription, redemption or conversion rights. All of the outstanding common
shares are validly issued, fully paid and non-assessable.

17. STOCK OPTIONS

As at December 31, 2001, Predecessor had 11,224,210 options outstanding.
Pursuant to the Plan, all outstanding Predecessor common stock and stock options
were cancelled on the Effective Date. The historical stock option disclosures
have therefore been excluded from the financial statements due to the
immateriality of the number of options and pro forma compensation expense.

In connection with the Plan, the Company established the 2002 Stock
Incentive Plan and reserved 222,222 common shares to be issued to employees. No
shares were issued in 2002 pursuant to the Incentive Plan. As at June 15, 2003,
options to acquire 198,525 common shares were outstanding under the Incentive
Plan.

F-37

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

18. ACCUMULATED OTHER COMPREHENSIVE INCOME

The Group's components of accumulated other comprehensive income is
presented below:

19. EARNINGS PER SHARE

Basic net loss per common share is computed by dividing net loss applicable
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share is computed by
dividing net loss by the weighted average number of common shares and common
share equivalents outstanding during the period. For the period from October 9,
2002 to December 31, 2002, the period from January 1 to October 8, 2002, and the
years ended December 31, 2001 and 2000 presented, no outstanding stock options
have been included in the calculation of diluted net loss per share amounts as
the effect would be anti-dilutive.

* The pro forma information has been provided to disclose the impact of the
share structure of the Successor assuming the shares had been outstanding in
the entire period.

F-38

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

20. FINANCIAL INSTRUMENTS

The notional amounts of interest rate derivatives do not represent amounts
exchanged by the parties and, thus, are not a measure of the Group's exposure
through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the derivatives.

Predecessor's interest rate collars were accounted for as effective cash
flow hedges and, accordingly, upon adoption of SFAS No. 133 on January 1, 2001,
their fair values were recorded as liabilities in the balance sheet, with the
corresponding effect of adoption recorded directly to accumulated other
comprehensive income. The interest rate collars were terminated by the counter-
party on April 30, 2002, resulting in a gain of $194, which was included in the
other comprehensive income balance in the shareholder's equity of the
Predecessor.

Predecessor's cross currency swap held at January 1, 2001 was not designated
as an accounting hedge; consequently, upon the adoption of SFAS No. 133, the
swap was recorded in the balance sheet at fair value, and Predecessor's
underlying economically hedged Euro-denominated debt was recorded at current
foreign currency rates. The resulting adjustment of $1.3 million was recorded as
the cumulative effect of adoption of SFAS No.133. This swap agreement was
terminated by the counter-party on April 15, 2002, resulting in a loss of
$6.5 million, which was included in the foreign currency loss in the income
statement of Predecessor.

The following summarizes the Company's financial instruments:

Senior Secured Notes Series A............. The carrying amount of the Senior Secured Notes Series A
is based on the fair value of the Notes.

Senior Secured Notes Series B............. The carrying amount of the Senior Secured Notes Series B
is based on the repayment value of the Notes. The
carrying value approximates the fair value of these
notes.

Senior Secured Notes Series C............. The carrying amount of the Senior Secured Notes Series C
is based on the repayment value of the Notes. The
carrying value approximates the fair value of these
notes.

7% Secured Note (FNAL Note)............... The carrying amount of the Secured Note is the repayment
value of the Note. The carrying value approximates the
fair value of these notes.

Other Notes............................... The carrying amount of the Other Notes is the repayment
value of the Notes. The carrying value approximates the
fair value of these notes.

8 1/4% Senior Notes....................... The carrying amount of the 8 1/4% Senior Notes is the
net proceeds of the Senior Notes issue. The fair value
is based on the market price of the Senior Notes at
December 31, 2001.

11 5/8% Senior Notes...................... The carrying amount of the 11 5/8% Senior Notes is the
net proceeds of the Senior Notes issue. The fair value
is based on the market price of the Senior Notes at
December 31, 2001.

F-39

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

20. FINANCIAL INSTRUMENTS (CONTINUED)

Long-term debt............................ The carrying amount of the long-term debt is the
proceeds drawn under the available credit facilities.
The debt is subject to variable interest rates, and
therefore, in management's opinion, the carrying amount
approximates the fair value of the long-term debt.

Interest rate collars and swaps........... The interest rate collar and swap agreements are "zero
cost" meaning that the cost of acquiring the contract is
embedded in the interest rate spread. As such, the
agreements have not previously had a carrying value. The
fair values are estimated using an option pricing model
and values the changes in interest rates since
inception, and the potential for future changes over the
remaining term. Since the adoption of SFAS No. 133
"Accounting for Derivative Instruments and Hedging
Activities" on January 1, 2001, the calculated fair
value is accounted for in the financial statements and
reflected as the carrying value.

Cross currency swaps...................... The cross currency swap agreement, by its nature, has
not previously had a carrying value. The fair value is
estimated using an option pricing model and values the
changes in interest rates and foreign exchange rates
since inception, and the potential for future changes
over the remaining term. Since the adoption of SFAS No.
133 "Accounting for Derivative Instruments and Hedging
Activities" on January 1, 2001, the calculated fair
value is accounted for in the financial statements and
reflected as the carrying value.

Cash and restricted cash.................. Due to the nature of this asset, carrying value
approximates fair value.

A fair value exercise on the Group's financial instruments was performed in
2001. Swaps and collars were marked to market based on valuations obtained from
respective counter-parties.

In 2002, the carrying value of the financial instruments, which is the
Company's debt, approximated fair value.

F-40

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

20. FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents the carrying amounts and fair values of the
Group's financial instruments as of December 31, 2002 and 2001:

21. TAXES

At the present time, no income, profit, capital or capital gains taxes are
levied in Bermuda. In the event that such taxes are levied in the future, FLAG
Telecom and all its subsidiaries registered in Bermuda have received an
undertaking from the Bermuda Government exempting them from all such taxes until
March 28, 2016.

The provision for income taxes reflected in the accompanying statement of
operations consists of taxes incurred on the income earned or activities
performed by Group companies in certain jurisdictions, where they are deemed to
have a taxable presence or are otherwise subject to tax.

The provision for income taxes, which consists entirely of taxes payable to
foreign governments outside Bermuda, is comprised of the following:

The tax charge has increased from $1.1 million for 2000 to $7.4 million for
2001 primarily as a result of provisions being made during 2001 for potential
tax liabilities in a number of jurisdictions. The tax credit for the period from
January 1, 2002 to October 9, 2002 was $3.8 million. The tax charge for the
period from October 10, 2002 to December 31, 2002 was $0.7 million. The movement
from a tax charge for 2001 of $7.4 million to an overall tax credit, on a
combined basis, for 2002 of $3.1 million arises because certain provisions made
in 2001 were not required in 2002, and from the release of certain of the 2001
provisions as certain liabilities are now not expected to crystallize.

F-41

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

21. TAXES (CONTINUED)
The increase in the balance sheet current tax liability from $4.5 million at
December 31, 2000 to $13.7 million at December 31, 2001 arose primarily as a
result of provisions referred to above being made. The balance sheet current tax
liability decreased from $13.7 million at December 31, 2001 to $10.9 million at
December 31, 2002 primarily as a result of the provision release referred to
above.

Deferred tax liabilities arise principally because revenues from certain
capacity sales entered into prior to July 1, 1999 were recognized in accordance
with FLAG's accounting policies applicable at that time (up front revenue
recognition on sale type leases), in advance of when they are recognized for tax
purposes in certain jurisdictions.

SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Management
has determined that a $122.6 million valuation allowance as at December 31, 2002
is necessary to reduce the deferred tax assets to the amount that will more
likely than not be realized.

The comparative numbers disclosure for 2001 has been restated to reflect the
effect of deferred tax in relation to the impairment of the FA-1 cable system at
31 December 2001. The figure for operating losses for 2001 was $2.9 million but
has been restated to $8.1 million as the tax position for certain entities has
been determined with additional information since the filing of the 10-K for
2001. Since in management's opinion the deferred tax asset arising from the
impairment and the losses should be fully offset by a valuation allowance, there
is no impact on the net deferred tax liability for the year ended 31
December 2001.

As Bermuda does not impose an income tax, the statutory amount of tax is
zero. The provision for income taxes for the years ended December 31, 2002 and
2001, results in an effective tax charge/ (credit) that differs from the Bermuda
tax charge as follows:

F-42

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

21. TAXES (CONTINUED)
The reorganization that took place as part of the chapter 11 process is not
expected to have a material adverse impact on the tax position of the Company by
increasing tax liabilities or by reducing or extinguishing tax assets.

The discharge of the debt in accordance with the Plan is not expected to
have a material impact on the taxation of the Group, as the debt was held by
group entities located in Bermuda.

Certain losses arising in foreign jurisdictions are expected to continue to
be available to the Group after the reorganization, though their use may be
subject to some restrictions in the US and elsewhere.

22. RELATED PARTY TRANSACTIONS

The following summarizes the transactions entered into by Successor and
Predecessor with all known related parties:

AGREEMENT WITH SPAGNOLO GROUP LP

On October 10, 2002, we entered into an agreement with Spagnolo Group LP,
pursuant to which Mr. Mark Spagnolo acted as our Interim Chief Executive Officer
during the period from October 10, 2002 to February 28, 2003 and received $80
per month for the term of the agreement. The term of the agreement was for the
lesser of six months from the Effective Date or until a new Chief Executive
Officer was retained. Patrick Gallagher was retained as our Chief Executive
Officer as of March 1, 2003 and, accordingly, this agreement was terminated as
of February 28, 2003.

AGREEMENTS WITH VERIZON

Verizon Communications Inc. ("Verizon") is the ultimate parent of a
controlled subsidiary Verizon International Holdings Ltd., which directly owned
18.6% of the common shares of Predecessor prior to the Effective Date. As of the
Effective Date, Verizon did not hold any of our common shares. We entered into
the following four agreements with subsidiaries of Verizon throughout 2001, all
of which have been renegotiated as a result of the liquidation of KPNQwest:

NETWORK ALLIANCE AGREEMENT

On April 3, 2001, FLAG Telecom Ireland Network Limited ("FTINL"), a
subsidiary of the Company, entered into a Network Alliance Agreement with
Verizon Global Solutions Holdings II Ltd. ("VGS") under which both parties
agreed to create a network alliance to develop a European network. FTINL and its
affiliates will have the right to acquire from VGS capacity on this European
network on an indefeasible right of use ("IRU") basis. FTINL paid VGS
$35.6 million for such IRU over the European network and agreed to pay annual
operating and maintenance fees. The annual operating and maintenance fees
consist of $1.78 million paid in years one up to and including year five of the
IRU, $1.068 million paid in years six to ten, and $712 paid in years eleven to
fifteen. This agreement was terminated in May 2003 and is no longer in force.

COLLOCATION AGREEMENT

On April 4, 2001, FLAG Atlantic UK Limited and FLAG Atlantic France Sarl,
both subsidiaries of the Company (collectively "FLAG Atlantic"), entered into a
Collocation Agreement with Verizon

F-43

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

22. RELATED PARTY TRANSACTIONS (CONTINUED)
Global Solutions U.K. Ltd. and Verizon Global Solutions France SAS (collectively
"Verizon UK/ France") under which FLAG Atlantic agreed to license to Verizon
UK/France co-location space in FA-1 PoPs in both London and Paris. Verizon
UK/France agreed to pay approximately $15.5 million for the license in the UK
and approximately $6.1 million for the license in France. The space has been
used by VGS to create the London and Paris PoPs for its European network, which
will provide capacity to subsidiaries of the Company under the Network Alliance
Agreement referred to above. This agreement is still in force.

RE-SALE AND PURCHASE AGREEMENT

On April 3, 2001, FTINL and FLAG Telecom Global Networks Limited ("FTGNL"),
both subsidiaries of the Company, entered into a Re-Sale and Purchase Agreement
with VGS under which VGS agreed to purchase for $17.6 million approximately 30%
of the dark fiber pairs and co-location facilities located on the KPNQwest
Services UK Limited ("KPNQwest") EuroRings Network. The fiber pairs and
co-location facilities were originally purchased pursuant to a Dark Fiber IRU
and Collocation Facilities Agreement, dated February 28, 2001, among FTINL,
FTGNL and KPNQwest (the "KPNQwest Agreement"). This agreement was terminated in
May 2003 and is no longer in force.

TRI-PARTITE AGREEMENT

On April 3, 2001, FTGNL, KPNQwest and VGS entered into a Tri-Partite
Agreement under which FTGNL assigned all of its rights, title, interest and
obligations under the KPNQwest Agreement to VGS and KPNQwest acknowledged and
consented to such assignment. This agreement was terminated in May 2003 and is
no longer in force.

MARINE MAINTENANCE SERVICE AGREEMENT WITH TGN

TGN Holdings Ltd. ("TGN") directly owned 11.2% of the common shares of
Predecessor prior to the Effective Date. As of the Effective Date, TGN did not
hold any common shares of the Company. On June 1, 2001, FLAG Atlantic Limited
("FAL"), a subsidiary of Predecessor, entered into a Marine Maintenance Service
Agreement with TyCom Contracting Limited ("TyCom"), an affiliate of TGN, under
which TyCom agreed to provide certain marine maintenance services to Predecessor
for our FA-1 undersea fiber-optic cable systems. FAL agreed to pay $6.9 million
per annum for such services. Pursuant to a settlement agreement and release
between FLAG Atlantic Limited and TyCo Contracting Limited (formerly TyCom
Contracting Limited) ("TyCo") dated as of September 13, 2002 when we were in
chapter 11, the fee we have to pay TyCo is reduced to $4.7 million per annum
plus running charges. The earliest date on which we could withdraw from this
contract is also amended to May 1, 2004.

AGREEMENT WITH ADNAN OMAR

On December 10, 2001, Predecessor entered into an agreement with Mr. Adnan
Omar, a director on Predecessor's board, pursuant to which Mr. Omar was
appointed President of FLAG Telecom Development Services Company LLC, a
subsidiary of the Company in Egypt. The agreement was for a fixed two-year term
under which Mr. Omar was entitled to a monthly payment of $30. On October 31,
2002, the Company entered into a Termination Agreement with Mr. Adnan Omar.
Mr. Omar was paid a severance payment of $610 pursuant to this agreement.

F-44

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

22. RELATED PARTY TRANSACTIONS (CONTINUED)
AGREEMENTS WITH TRADE CREDITORS

We have three trade creditors who also hold certain portions of our debt and
share capital as at December 31, 2002. Those debt balances are $33.4 million.
Interest in the amount of $0.5 million has been paid in the period from
October 9, 2002 to December 31, 2002.

23. LEGAL PROCEEDINGS

LOFTIN ACTION--CLASS ACTION LAWSUIT

Five class action complaints against Predecessor and some of its past and
present officers, brought by certain of Predecessor's shareholders on behalf of
a proposed class of those who purchased Predecessor's stock between
February 16, 2000 and February 13, 2002 (the "Class Period"), were filed in the
United States District Court for the Southern District of New York, beginning in
April 2002. A sixth action was filed in the same court against certain past and
present officers and directors of Predecessor, Salomon Smith Barney, Inc. and
Verizon Communications, Inc. All these actions have now been consolidated by
order of the Court (the "Loftin action").

The consolidated amended complaint (the "Complaint") was filed by the
plaintiffs on March 20, 2003 and asserts claims under sections 11, 12(a)(2) and
15 of the Securities Act and sections 10(b) and 20(a) of the Exchange Act, as
well as Rule 10b-5. More specifically, the Complaint alleges, among other
things, that the defendants: knew but failed to tell the market about the glut
of capacity and falling bandwidth prices that allegedly existed at the time of
the initial public offering and throughout the Class Period; engaged in, or
caused Predecessor to engage in, transactions with competitors whereby they
would sell each other cable that neither needed, for the sole purpose of
increasing revenue; and accounted for, or caused Predecessor to account for,
these transactions improperly and to overstate revenue. The Complaint does not
name Predecessor as a defendant, but it does name FLAG Telecom. The Plan
provides that we shall have no liability for any claims relating to the period
prior to the Plan's Effective Date. The claims asserted in the Complaint relate
solely to that period. The amount of damages sought from the defendants is not
specified.

As we, per the Plan, have no liability for any claims relating to the period
prior to the Effective Date, we believe there is no potential liability for us
and therefore no reserves have been established. There is a contingent
liability, on the part of the Company, of $3.25 million for a defense fund in
case the Directors' & Officers' Liability policy ("D&O policy") is invalidated
or attempted to be by the insurance company. No provision for these liabilities
has been made in our financial statements.

Predecessor and the insurers under the D&O policy have executed an interim
funding agreement by which the insurers are willing to advance reasonable and
necessary costs and expenses in connection with the above matters. In the
meantime, the insurers have confirmed the existence of the D&O policies.

RESOLUTION OF PSINET ACTION

FLAG Atlantic Limited and FLAG Atlantic USA Limited were defendants in
litigation filed by PSINet, Inc. and its related affiliates and subsidiaries
("PSINet"). On May 31, 2001, PSINet initiated chapter 11 bankruptcy proceedings
in the United States Bankruptcy Court in the Southern District of New York.
Pursuant to those proceedings, PSINet commenced litigation against FLAG Atlantic
Limited

F-45

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

23. LEGAL PROCEEDINGS (CONTINUED)
and FLAG Atlantic USA Limited to recover an alleged preference payment under the
Bankruptcy Code. Prior to PSINet filing for bankruptcy, FLAG Atlantic Limited
and FLAG Atlantic USA Limited entered into a Capacity Right of Use Agreement
with three affiliated PSINet entities. After PSINet defaulted on payments due on
that agreement, on or about March 20, 2001, the parties entered into a Restated
Capacity Right of Use Agreement, amended the capacity, amended the term and
PSINet paid FLAG Atlantic Limited and FLAG Atlantic USA Limited $23.8 million.
PSINet claimed that this payment could be avoided as a preference because it was
made within 90 days of PSINet's bankruptcy, was on account of a prior debt and
allowed FLAG Telecom, as a creditor of PSINet, to recover more than it would
have if the payment had not occurred and it instead filed a claim in PSINet's
bankruptcy. PSINet alleged that it was entitled to recover the amount of the
payment, together with interest. FLAG Telecom filed an answer to the complaint
in which it denied the allegations of the complaint and asserted several
affirmative defenses. Because of Predecessor's own bankruptcy proceedings,
PSINet's action was stayed. The PSINet action was settled in connection with the
Plan and no further payments were made.

RESOLUTION OF SOGETREL ACTION

On July 15, 2002, Sogetrel, a company domiciled and doing business in
France, commenced litigation against the French subsidiary of FLAG Atlantic
Limited and FLAG Atlantic France SARL, for alleged unpaid invoices. The amount
of the claim was approximately E6,689,374. The claim was the subject of a motion
for summary judgment, which was dismissed on March 27, 2002. In December 2002,
the Sogetrel action was settled in an amount of E2,096,647.

RESOLUTION OF EMPLOYMENT DISPUTE

FLAG Limited was involved in a dispute with two former employees,
Messrs. Reda and Jalil, which centered on the lawfulness of the termination of
their employment contracts and the sums payable in that termination. The Court
of Appeal of Bermuda ruled on this issue in our favor. Messrs. Reda and Jalil
subsequently appealed to the Privy Council in the United Kingdom and the hearing
took place on April 16-18, 2002. The Privy Council ruled on this issue in FLAG
Telecom's favor on July 11, 2002. The only issue remaining in the case is that
of the amounts payable to Messrs. Reda and Jalil in respect of their lawful
termination. FLAG Telecom paid L1,691 into an escrow account in Bermuda in
October 2000. In 1999, Reda and Jalil received the sum of $855 which was paid
into Court. In October 2000, a further sum of $501 was paid to them out of the
escrow account. After the Privy Council decision another $558 was paid out of
the escrow. The remaining money in the escrow account was distributed to FLAG
Telecom, part of which was used to pay the costs incurred in the Court of Appeal
and the Privy Council.

OTHER

We have received third party subpoenas from the SEC seeking documents in
connection with the SEC's investigations of both Global Crossing and KPNQwest.
We intend to cooperate fully with the SEC's request for such documents.

F-46

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

23. LEGAL PROCEEDINGS (CONTINUED)

We are also involved in litigation from time to time in the ordinary course
of business. In management's opinion, with the exception of the disputes
described above, the litigation in which we are currently involved, individually
and in the aggregate, is not material to our company.

24. NON-MONETARY TRANSACTIONS

During 2001, we entered into three transactions wherein we provided capacity
in exchange for facilities and construction of landing station at approximately
the same time. In accordance with Accounting Principle Board's Opinion 29,
since, these are not reciprocal transfers of similar productive assets, we
recorded the transactions as prepaid assets or construction work in progress and
deferred revenues at fair values totaling $8.2 million. Since the capacity
exchanged was not activated, no revenues were recorded.

25. COMMITMENTS AND CONTINGENCIES

As part of the settlement, the Company agreed with one of its trade
creditors to pay $8 million if it recovered E16 million from the French
authorities in respect of its VAT claim. This amount of $8 million was to be
discharged in cash of $4 million and an unsecured promissory note of
$4 million. This note is to have an 18-month term and 7% interest. If the
Company does not recover the entire amount, it has the right to pay 57 per cent
of the amount recovered equally in cash and in a note payable. The Company
believes it will recover the full VAT reclaim and has recorded an accrued
liability of $8 million in respect of the commitment.

During 1997, Predecessor entered into an operations contract for the FLAG
Network Operations Center (the "FNOC") with one of the landing parties on the
FLAG Europe-Asia cable system. The terms of the contract require the landing
party to provide a permanent facility in which to locate the FNOC along with
qualified personnel and additional support as required to assist in the
operations of the FNOC. This is an ongoing commitment. In exchange for the
services provided under the contract, the Company is currently committed to
compensate the landing party with $243 as an annual fixed charge for rent of the
premises where the FNOC is located, subject to review in future years. Costs
incurred by the landing party to provide qualified personnel and additional
support is to be reimbursed by FLAG Limited on a "cost plus" basis.

The Group has entered into lease agreements for the rental of office space.
Rent expense of $1,325, $5,563, $6,107 and $1,959 was recorded for the period
from October 9, 2002 to December 31, 2002, for the period from January 1, 2002
to October 8, 2002 and for the years ended December 31, 2001 and 2000,
respectively. The Group is also committed to make payments under various standby

F-47

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

25. COMMITMENTS AND CONTINGENCIES (CONTINUED)
maintenance agreements for the cable systems currently in use. Estimated future
minimum payments under the leases and standby maintenance agreements are as
follows:

The estimated future payments under the standby maintenance agreements are
based on a number of assumptions, including, among other things, the proportion
of the total cable system capacity sold at any point in time and the number of
other cable systems serviced under the agreement.

The Company has capitalized the future minimum lease payments of property
and equipment under leases that qualify as capital leases. At December 31, 2002,
future minimum payments under these capital leases are as follows (in thousands)
and are included in other current liabilities and other deferred liabilities in
the accompanying consolidated balance sheet:

Capital expenditure contracted but not provided for as at December 31, 2002
amounted to approximately $5,174 in relation to the construction of our global
network.

26. SEGMENT REPORTING

Predecessor has historically reported its segmental disclosures in its two
primary operational areas: Capacity and Operations and Network Services. The
Company has changed the way it has managed its

F-48

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

26. SEGMENT REPORTING (CONTINUED)
business. Although our sales and marketing function is structured
geographically, we sell the full range of our products and services across the
global network. The Successor evaluates the performance of one segment, the
global network. The prior period segment disclosures have been restated.

As described in Note 2--Basis of Presentation and Fresh Start Accounting,
the Company adopted fresh start accounting at the Effective Date. Accordingly,
the segment information of the Successor and Predecessor is not comparable.

No individual customer accounted for greater than 10% of revenues.

The revenue generated by geographic location of customers is as follows:

No assets are located in the Company's country of domicile. All network
assets are located across geographic borders, therefore it is impractical to
disclose assets by geographic location.

27. UNAUDITED SUPPLEMENTARY DATA

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Due to the adoption of fresh start accounting as of October 9, 2002,
Successor's post-fresh start balance sheet; statement of operations; statement
of comprehensive income; statement of shareholders' equity and statement of cash
flows have not been prepared on a consistent basis with, and are generally not
comparable to, those of Predecessor. Prior to the application of fresh start
accounting, in accordance with SOP 90-7, Successor's balance sheet; statement of
operations; statement of comprehensive income; statement of shareholders' equity
and statement of cash flows have been presented separately from those of
Predecessor.

F-49

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

27. UNAUDITED SUPPLEMENTARY DATA (CONTINUED)
The following table presents selected unaudited operating results of
Predecessor for 2001, three quarters ended September 30, 2002, and the period
from October 1 through October 8, 2002, and selected unaudited operating results
of Successor for the period from October 9, through December 31, 2002.

F-50

FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

27. UNAUDITED SUPPLEMENTARY DATA (CONTINUED)

QUARTERLY EFFECTS OF RECIPROCALS & AUDIT ADJUSTMENTS

As discussed in Note 4, Predecessor has restated its prior period financial
statements. The following summarizes the impact of the adjustments:

For the first quarter of 2001 the net loss was reduced by $3.5 million
primarily as a result of additional revenue of $2.9 million recognized on
contracts entered into prior to 2000 and $0.3 million due to reciprocal
restatements.

For the second quarter of 2001, the net loss was increased by $5.7 million.
Reciprocal restatements increased the net loss by $1.9 million and other audit
adjustments resulted in increased sales, general and administrative expenses of
$3.0 million, depreciation $0.3 million and interest expense $0.3 million.

For the third quarter of 2001, net losses were increased by $8.1 million.
Reciprocal restatements increased the net loss by $6.5 million and the audit
adjustments have resulted in increased O&M costs of $0.5 million and additional
sales, general and administrative expenses of $1.1 million.

For the fourth quarter of 2001, net losses were increased by $10.3 million.
Reciprocal restatements increased the net loss by $8.4 million and the audit
adjustments have resulted revenue reductions of $2.3 million and a decrease in
sales, general and admin expenses of $0.8 million.

For the first quarter of 2002, net losses were increased by $6.3 million.
Reciprocal restatements decreased profit by $10.9 million, which was offset by
revenue increases of $4.3 million, an increase in network expenses of
$1.5 million. Additionally there was a decrease in sales, general &
administration expenses of $2.1 milion.

F-51

FLAG TELECOM GROUP LIMITED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(EXPRESSED IN THOUSANDS OF DOLLARS)

As described in Note 2 to the financial statements--Basis of Presentation
and Fresh Start Accounting, the Company adopted fresh start accounting on
October 9, 2002. Accordingly, the valuation and qualifying accounts of the
Successor and Predecessor are not comparable.

F-52

SIGNATURES

Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act 1934, FLAG Telecom Group Limited has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, the State of New York, on the 3rd day of July, 2003.

FLAG TELECOM GROUP LIMITED

By: /s/ KEES VAN OPHEM
-----------------------------------------
Kees van Ophem
GENERAL COUNSEL AND ASSISTANT SECRETARY

Know All Men By These Presents, that each person whose signature appears
below constitutes and appoints Kees van Ophem, his attorney-in-fact, each with
the power of substitution for him in any and all capacities, to sign any
amendments to this Report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may 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 dates indicated:

S-1

S-2

CERTIFICATIONS

I, Patrick Gallagher, certify that:

1. I have reviewed this Annual Report on Form 10-K of FLAG Telecom Group
Limited;

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 officers 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 officers 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 officers 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.

Date: July 3, 2003

/s/ PATRICK GALLAGHER
------------------------------------------------
Name: Patrick Gallagher
Title: CHIEF EXECUTIVE OFFICER

C-1

I, Michel Cayouette, certify that:

1. I have reviewed this annual report on Form 10-K of FLAG Telecom Group
Limited;

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 officers 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 officers 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 officers 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.

Date: July 3, 2003

/s/ MICHEL CAYOUETTE
------------------------------------------------
Name: Michel Cayouette
Title: CHIEF FINANCIAL OFFICER

C-2