FLAG TELECOM GROUP LTD - 10-Q Quarterly Report

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

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FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

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

COMMISSION FILE NO.: 000-29207

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

BERMUDA
(State or Other Jurisdiction of Incorporation or Organization)

CEDAR HOUSE
41 CEDAR AVENUE
HAMILTON HM12, BERMUDA
(Address of registered office)

+1 441 296 0909
(Registrant's Telephone Number, Including Area Code)

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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 and 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes / / No /X/

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 the distribution of securities under a plan
confirmed by a court.

Yes /X/ No / /

134,139,046 common shares (par value $.0006 per share) of FLAG Telecom
Holdings Limited, the predecessor of FLAG Telecom Group Limited, were
outstanding as of September 30, 2002.

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FLAG TELECOM GROUP LIMITED
(SUCCESSOR TO FLAG TELECOM HOLDINGS LIMITED)
FORM 10-Q
INDEX

PART I
FINANCIAL INFORMATION

1.A ITEM 1. FINANCIAL STATEMENTS.

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

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 (together with its subsidiaries, "Successor"). On October 9, 2002
(the "Effective Date"), Predecessor transferred substantially all of its assets,
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. Liabilities subject to compromise of $1.4 billion were
retained by Predecessor and, as a result, Predecessor is now insolvent and being
liquidated. The financial information of Predecessor does not reflect the
effects of the application of fresh start accounting, which is available to
Successor as of the Effective Date and which will be reflected in Successor's
subsequent filings. Readers should therefore review this material with caution.
See Notes 1 and 2 for further information.

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

2

1.B

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

Per share and share information--see Note 9

These consolidated financial statements contain information relating to
Predecessor, and have been prepared by the management of Successor. On the
Effective Date, the Predecessor transferred substantially all of its assets, at
fair value, to Successor, as a result of transactions contemplated by the Plan.
Predecessor is now insolvent and being liquidated. The financial information of
Predecessor does not reflect the effects of the application of fresh start
accounting, which is available to Successor as of the Effective Date and which
will be reflected in Successor's subsequent filings. Readers should therefore
review this material with caution. See Notes 1 and 2 for further information.

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

3

1.C

FLAG TELECOM GROUP LIMITED
(SUCCESSOR TO FLAG TELECOM HOLDINGS LIMITED)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(EXPRESSED IN THOUSANDS OF DOLLARS)

These consolidated financial statements contain information relating to
Predecessor, and have been prepared by the management of Successor. On the
Effective Date, Predecessor transferred substantially all of its assets, at fair
value, to Successor, as a result of transactions contemplated by the Plan. The
Predecessor is now insolvent and being liquidated. The financial information of
Predecessor does not reflect the effects of the application of fresh start
accounting, which is available to Successor as of the Effective Date and which
will be reflected in Successor's subsequent filings. Readers should therefore
review this material with caution. See Notes 1 and 2 for further information.

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

4

1.D

FLAG TELECOM GROUP LIMITED
(SUCCESSOR TO FLAG TELECOM HOLDINGS LIMITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN THOUSANDS OF DOLLARS)

These consolidated financial statements contain information relating to
Predecessor, which have been prepared by the management of Successor. On the
Effective Date, Predecessor transferred substantially all of its assets, at fair
value, to Successor, as a result of transactions contemplated by the Plan.
Predecessor is now insolvent and being liquidated. The financial information of
Predecessor does not reflect the effects of the application of fresh start
accounting, which is available to Successor as of the Effective Date and which
will be reflected in Successor's subsequent filings. Readers should therefore
review this material with caution. See Notes 1 and 2 for further information.

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

6

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

1. RECENT EVENTS; BACKGROUND AND ORGANIZATION

On April 12, 2002, Predecessor and certain of its subsidiaries filed
voluntary petitions for relief under chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court in the Southern District of New York.
Predecessor continued to operate its business and manage its property subject to
the Bankruptcy Court's supervision and orders until the Plan was confirmed on
September 26, 2002 and became effective on October 9, 2002. 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 October 9, 2002.

Upon 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 on
record on all matters submitted to a vote of shareholders. The Shareholders are
entitled to receive ratably such dividends as may be declared by our 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 ("BONY"), 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:

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 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%);

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

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

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1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

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.

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 Bermuda Court.
Pursuant to this order, the appointments 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, were continued. As
a result, Predecessor, FLAG Atlantic Holdings Limited and FLAG Atlantic Limited
are now in liquidation under Bermuda law.

2. BASIS OF PRESENTATION

These consolidated financial statements contain information relating to
Predecessor, and have been prepared by management of Successor. On 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 the Plan. The Predecessor is now insolvent and being liquidated.
The financial information of Predecessor does not reflect the effects of the
application of fresh start accounting, which is available to Successor as of the
Effective Date and which will be reflected in Successor's subsequent filings.
Readers should therefore review this material with caution.

These consolidated financial statements have been prepared on the basis of
the third quarter financial statements of Predecessor when Predecessor was still
involved in chapter 11 proceedings and, accordingly, have been prepared in
accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code". 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. The accompanying unaudited consolidated financial statements are
expressed in U.S. Dollars ("Dollars") and have been prepared in accordance with
accounting principles generally accepted in the United States ("U.S. GAAP") for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation 8-X. Accordingly they do not include all of the
information required by U.S. GAAP for complete financial statements.

8

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all normal, recurring adjustments necessary for a
fair presentation of the results of operations for the three and nine months
ended September 30, 2002 and 2001, the balance sheet as of September 30, 2002,
and the cash flows for the three and nine months ended September 30, 2002 and
2001.

Our comparative financial statements have been restated. 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 a re-audit of our 2000 and 2001
financial statements. Certain other reclassifications and audit adjustments have
been made. These are more fully explained in Note 4.

The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Predecessor's accompanying unaudited consolidated
financial statements should be read in conjunction with Predecessor's audited
consolidated financial statements for the year ended December 31, 2001.

The preparation of financial statements in conformity with U.S. GAAP
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, as well as the reported
amounts of revenue and expenses during the reporting period. Actual amounts and
results could differ from those estimates. The results of operations for any
interim period are not necessarily indicative of results for the full year.

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
Predecessor after eliminating inter-company transactions and balances and
recording minority interests. Investments in which Predecessor has an
investment of 20%-50% or investments in which Predecessor 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 September 30, 2002, there were no
equity method investments remaining.

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 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.

9

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

3.1 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 for capacity that
would require it to recognize revenues up-front.

Predecessor and Successor (collectively, the "Company", "FLAG Telecom", "we"
or "us") 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 our 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 lease of managed bandwidth
services and Internet Protocol ("IP") services. Revenue associated with leased
capacity is recognized as operating lease revenue unless the criteria under FASB
Interpretation No. 43 for sales-type lease accounting are met. During the
periods presented, we did not record any sales-type leases.

3.2 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.

10

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

RECIPROCAL TRANSACTIONS FOR CAPACITY

Historically, we 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 we anticipated that
they would be brought into service, and were charged as network expenses 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, we 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.

3.3 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.

3.4 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.

3.5 PENSIONS

All eligible employees of FLAG are covered by a non-contributory defined
contribution pension plan.

3.6 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.

11

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

3.7 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.

3.8 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 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 our global network. Construction in
progress is transferred to property and equipment when placed into service.

3.9 PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation.
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

3.10 IMPAIRMENT OF LONG LIVED ASSETS

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

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.

3.11 CASH AND CASH EQUIVALENTS

We consider 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.

12

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

3.12 RESTRICTED CASH

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

3.13 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.

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.

Effective as of January 1, 2001, we adopted Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137 and 138. The
following effects were recorded in the accompanying consolidated financial
statements as a result of the adoption of SFAS No. 133:

- Our interest rate collars were accounted for as effective cash flow hedges
and, accordingly, upon adoption of SFAS No. 133, their fair values were
recorded as liabilities in the balance sheet, with the corresponding
effect of adoption recorded directly to accumulated other comprehensive
income.

- Our 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 our underlying
economically hedged Euro-denominated debt was recorded at current foreign
currency rates. The resulting adjustment of $1,291 was recorded as the
cumulative effect of adoption of SFAS No.133.

3.14 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.

13

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

3.15 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.

3.16 STOCK OPTIONS

As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"), we account for
employee stock options under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and, accordingly,
recognize compensation expense for stock option grants to the extent that the
fair value of the stock exceeds the exercise price of the option at the
measurement date under fixed plan awards. The compensation expense is charged
ratably over the vesting period of the options.

3.17 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. 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.

3.18 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 historical industry experience with potential
uncollectable receivables and our expectations as to payments. This allowance
could require adjustments based on changing circumstances, including changes in
the economy or in the particular circumstances of individual customers.

3.19 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.

3.20 RECLASSIFICATIONS

In addition to the restatements discussed in Note 4, certain prior year
amounts have been reclassified in the consolidated financial statements to
conform to current year presentation.

14

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

4. RESTATEMENTS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

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

CONDENSED CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2001

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR QUARTER ENDED SEPTEMBER 30, 2001

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2001

15

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

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 did
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.

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.

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

16

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

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.

- The impact of the above adjustments has been an increase in revenues of
$2.9 million in the nine months ended 30 September 2001 due to this
restatement.

OTHER ADJUSTMENTS TO 2000 AND 2001

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

- The Company also adjusted the revenues for the year 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 had 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 were therefore reversed.

- Correction of book keeping and accounting errors

The total impact of all adjustments in the three months and nine months to
September 30 2002 is to decrease previously reported net income in the three
months and nine months to September 30, 2001 by $8.1 million and $10.5 million,
respectively.

17

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

5.1 AICPA--SEC REGULATIONS COMMITTEE NOTIFICATION OF SEC POSITION ON IRU
CAPACITY SWAPS

The SEC guidance provides that all reciprocal transactions consisting of the
exchange of leases should be evaluated within paragraph 21 of APB No. 29. That
is, if a reciprocal transaction involves leases that transfer the right to use
similar productive assets, the exchange should be treated as the exchange of
similar productive assets, irrespective of whether the "outbound" lease is
classified as a sales-type lease, direct financing lease or operating lease and
irrespective of whether the "inbound" lease is classified as a capital lease or
an operating lease. This conclusion is based on the thought that the right to
use an asset, i.e., a lease, is in fact an asset and not a service contract,
irrespective of whether such asset is recognized in a company's balance sheet
and requires that capacity swaps involving the exchange of leases be recognized
based on the carrying value of the assets exchanged, rather than at fair value.
Exchanges involving sufficient boot (i.e. cash) should still be treated as part
monetary and part non-monetary as per EITF 01-2 (EITF 86-29).

We have adopted the SEC guidance, have applied it retrospectively and
restated the comparative period financial statements with the sole purpose of
reflecting this change.

5.2 STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 143, ACCOUNTING FOR
ASSET RETIREMENT OBLIGATIONS--SFAS 143

In June 2001, FASB 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) the initial measurement of the liability, (3) the allocation of
asset retirement cost to expense, (4) the 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. The company must
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 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. SFAS 143 is effective for fiscal
years beginning after June 15, 2002, with early application encouraged.

We adopted SFAS 143 on October 9, 2002 in accordance with the principles of
SOP 90-7. The Company recorded an asset retirement obligation of $4.7 million
and a cumulative effect of change in accounting principle of $1.9 million.

5.3 STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS--SFAS 144

In August 2001, FASB issued 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" ("SFAS 121").
While SFAS 144 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

18

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

and Infrequently Occurring Events and Transactions", it retains the discontinued
operations presentation and 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.

In addition, SFAS 144 requires that the estimates of future cash flows used
to test the recoverability of a long-lived asset, shall be based on the existing
service potential of the asset. Those estimates should therefore exclude cash
flows associated with future capital expenditure that would increase the service
potential of the long-lived asset. Our historic accounting policy on impairment
was consistent with SFAS 121, which allowed estimates of future cash flows to
take into account the cash flows arising from planned future capital
expenditures.

We adopted SFAS 144 on January 1, 2002. 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 the FLAG Europe-Asia ("FEA") cable system of $327.9 million
and an impairment of the FLAG North Asian Loop ("FNAL") cable system of
$225.0 million in the second quarter of 2002.

5.4 STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT 13 AND
TECHNICAL CORRECTIONS--SFAS 145

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.

SFAS 145 is effective for fiscal years beginning after May 15, 2002, with
early adoption encouraged. We adopted SFAS 145 on October 9, 2002 as required
under SOP 90-7. This adoption did not have a material impact on our results of
operations, financial position or cash flows.

5.5 STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 146, ACCOUNTING FOR
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES--SFAS 146

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

19

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

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 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.

We adopted the provisions of SFAS 146 as required under SOP 90-7 upon
emergence from bankruptcy. The impact is that costs of restructuring plans will
be recognized when incurred.

6. LIABILITIES SUBJECT TO COMPROMISE

Liabilities subject to compromise consist of the following:

Accrued construction costs.................................. $ 43,547
Accounts payable............................................ 61,053
Accrued liabilities......................................... 40,453
Short-term debt............................................. 1,193,832
----------
Total....................................................... $1,338,885
==========

7. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF ENTITIES IN
REORGANIZATION AND ENTITIES NOT IN REORGANIZATION

The following condensed consolidated financial statements of the Company as
of September 30, 2002 and December 31, 2001 and for the three and nine months
ended September 30, 2002 have been provided pursuant to SOP 90-7. Predecessor,
FLAG Limited, FLAG Pacific USA Limited, FLAG Telecom Group Services Limited,
FLAG Telecom Limited, FLAG Telecom USA Limited, FLAG Asia Limited, FLAG Atlantic
Holdings Limited, FLAG Atlantic Limited and FLAG Atlantic USA Limited are
included in "Entities in Reorganization". All other wholly owned direct and
indirect subsidiaries of Predecessor are included in "Entities Not in
Reorganization".

20

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

BALANCE SHEET AS AT SEPTEMBER 30, 2002

21

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

BALANCE SHEET AS AT DECEMBER 31, 2001

22

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

23

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS TO SEPTEMBER 30, 2001

24

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS TO SEPTEMBER 30, 2002

25

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS TO SEPTEMBER 30, 2001

26

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

27

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001

8. 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 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.

28

1.E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

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

Revenue analyzed by geographical 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.

9. 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 three month and nine
month periods ended September 30, 2002 and 2001 presented, no potentially
dilutive securities 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.

29

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

We have made forward-looking statements, within the meaning of Section 27A
of the Securities Act of 1933 ("Securities Act") and Section 21E of the Exchange
Act, in this report 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 report.

You should understand that many important factors could cause our results to
differ materially from those expressed in these forward-looking statements.
Factors that could cause our future results to differ from those reflected in
forward-looking statements include, but are not limited, to:

- the uncertainty caused by significant oversupply in the industry;

- certain companies refusing to pay certain operations and management
charges;

- operating under a reduced budget after emergence from bankruptcy;

- the significant problems being experienced by the telecom industry;

- the financial difficulties being experienced by customers and suppliers;
and

- tax and regulatory changes and conditions.

For a detailed explanation of these risk factors and others, see
Exhibit 99.1 attached hereto. Please read those risk factors carefully. We
cannot predict which, if any, of these or other factors might have a significant
impact on the telecommunications industry in the future, nor can we predict what
impact, if any, the occurrence of these or other events might have on our
operations.

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, internet protocol ("IP") transit,
IP point-to-point, leased capacity services, managed bandwidth services,
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, including application service providers ("ASPs")
and internet service providers ("ISPs"), alternate carriers and other bandwidth
intensive users (such as broadcasters), rather than individual
telecommunications consumers. On the Effective Date, Predecessor transferred
substantially all of the assets at fair value, to Successor, as a result of
transactions contemplated by the Plan of Predecessor and certain of its
subsidiaries under chapter 11 of the United States Bankruptcy Code and related
Bermuda Schemes of Arrangement.

30

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. On 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 will reflect reorganization adjustments for the
discharge of debt and the adoption of fresh start reporting. This will result in
significant changes to the following balance sheet captions: Cash, 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, 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 should adopt
fresh start reporting upon its emergence from chapter 11 bankruptcy proceedings.

Entities that adopt fresh start reporting should 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 APB Opinion 16,
"Business Combinations," superceded by SFAS 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.

CRITICAL ACCOUNTING POLICIES

Please refer to the Annual Report of Predecessor for our critical accounting
policies. We have made the following material changes to the critical accounting
estimates described in our Annual Report:

- Accounting for reciprocal transactions. See Note 4.

We adopted the SEC guidance, applied it retrospectively and restated the
comparative period financial statements. The adoption of the SEC guidance
resulted in a change to our accounting policy for reciprocal transactions.

- The adoption of SFAS 144 on impairment of long-lived assets. See
Note 5.3.

Following the adoption of SFAS 144, we prepared Discounted Cash Flow ("DCF")
models for each of our cable systems. Our fiber-optic telecommunication FEA and
FNAL systems are impaired and a charge was recorded in the second quarter of
2002. Refer to Impairment of Long-Lived Assets (SFAS 144) below.

RESULTS OF OPERATIONS

31

Total revenue for the quarter ended September 30, 2002 increased 14.5% to
$56.4 million as compared to $49.3 million for the quarter ended September 30,
2001. Total revenue for the nine months ended September 30, 2002 increased 50.9%
to $173.0 million as compared to $114.7 million for the nine months ended
September 30, 2001. This increase was due to an increase in our network services
activities and the growth in capacity sales and activations on our network,
particularly the FLAG Atlantic ("FA-1") and FNAL cable systems. We only
recognize revenues from the date that a system is ready for commercial service
and revenues are recognized in the income statement on a pro rata basis evenly
over the life of the contract, which generally tends to be over the life of the
cable system, with a maximum of 15 years.

In 2001, additional sections of our global network entered into commercial
service, thereby permitting the recognition of revenue from presales into U.S.
GAAP revenues recognized in the statement of operations, which had previously
been deferred. The southern leg of the FA-1 system entered into commercial
service in May 2001 and the full loop was completed when the northern leg of the
system entered into commercial service in June 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 cable system
started to be recognized. The eastern leg of the FNAL system also entered into
commercial service in June 2001.

Revenue recognized from the sale of capacity increased by 13.8% to
$26.5 million for the quarter ended September 30, 2002, as compared to
$23.3 million for the quarter ended September 30, 2001. Revenue recognized from
the sale of capacity increased by 89.0% to $83.5 million for the nine months
ended September 30, 2002, as compared to $44.2 million for the nine months ended
September 30, 2001. This increase was due to the additional sections of our
global network entering commercial service in 2001, which enabled us to start
amortizing deferred revenue over the life of the FA-1 and FNAL systems or over
the life of the lease and services agreements.

Included in the revenue recognized from the sale of capacity above, we
received $12.5 million as a result of the transfer of capacity ownership to a
third party. The deal encompassed deferred revenue relating to a European
point-to-point agreement resulting in additional income.

Revenue recognized from operations and maintenance decreased by 19.6% to
$13.4 million for the quarter ended September 30, 2002, as compared to
$16.7 million for the quarter ended September 30, 2001, reflecting the reduction
in the deferred revenue balance from the write off of certain receivables on the
FA-1 system totaling $3.2 million. Revenue recognized from operations and
maintenance increased by 15.4% to $49.9million for the nine months ended
September 30, 2002, as compared to $43.2 million for the nine months ended
September 30, 2001. This increase resulted from additional sections of our
global network entering commercial service, which enabled us to start billing
the agreed maintenance charges on those systems.

Revenue recognized from our network services activities increased by 77.1%
to $16.5 million for the quarter ended September 30, 2002, as compared to
$9.3 million for the quarter ended September 30, 2001. Revenue recognized from
network services activities increased by 45.3% to $39.6 million for the nine
months ended September 30, 2002, as compared to $27.3 million for the nine
months ended September 30, 2001. This increase reflects the continuing impact of
the new customers in both 2001 and the first half of 2002 for the expanding
range of products and services offered. The network services activities consist
of IP Transit, managed bandwidth services, vPoP and co-location services.

32

OPERATING EXPENSES

During the quarter ended September 30, 2002, network expenses decreased by
16.9% to $13.1 million, as compared to $15.8 million for the quarter ended
September 30, 2001. During the nine months ended September 30, 2002, network
expenses increased by 40.7% to $39.7 million, as compared to $28.2 million for
the nine months ended September 30, 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
increase for the nine months ended September 30, 2002, was primarily due to
costs incurred to support the growth in Network Services' products and services
and the growth of our network. The decrease for the quarter ended September 30,
2002, reflects the impact of a cost reduction program.

During the quarter ended September 30, 2002, operations and maintenance
costs decreased by 36.4% to $10.4 million, as compared to $16.4 million for the
quarter ended September 30, 2001. During the nine months ended September 30,
2002, operations and maintenance costs increased by 55.2% to $54.8 million, as
compared to $35.3 million for the nine months ended September 30, 2001.
Operations and maintenance costs relate primarily to the provision of standby
maintenance under maintenance zone agreements as well as salaries and overheads
directly associated with operations and maintenance activities. The increase
reflects the additional sections of our global network entering commercial
service. As legs of our FA-1 and FNAL systems were entered into commercial
service in 2001 and 2002 respectively, 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. The decrease reflects the reallocation of
certain O&M costs to prior periods as a result of the audit adjustments
described in Note 4.

Costs for the nine months ended September 30, 2001 include charges for
non-cash stock compensation expense of $1.0 million in respect of certain awards
under our long-term incentive plan. There were no costs for non-cash stock
compensation expense incurred after the second quarter of 2001. These charges
are required under U.S. GAAP and have no effect on our cash flows.

During the quarter ended September 30, 2002, sales, general and
administrative expenses decreased by 11.0% to $17.2 million, as compared to
$19.4 million for the quarter ended September 30, 2001. During the nine months
ended September 30, 2002, general and administrative expenses increased by 11.3%
to $55.3 million, as compared to $49.7 million for the nine months ended
September 30, 2001. This increase reflects higher personnel and related costs,
together with retention payments to management in the first six months of the
year. In the quarter ended September 30, 2002, the increase relates to the
increased general overhead required to support the growth of our global network
across Europe, the U.S. and the Far East offset by certain audit adjustments
described in Note 4.

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Included in sales, general and administrative expenses for the quarter ended
September 30, 2002 are bad debt expenses of $7.3 million and for the nine months
ended September 30, 2002, $15.6 million. There were no bad debt expenses for the
period ended September 30, 2001. All such costs were incurred in the final
quarter of 2001.

For the quarter ended September 30, 2002, we recorded $39.1 million in
respect of depreciation compared to $39.1 million for the quarter ended
September 30, 2001. For the nine months ended September 30, 2002, we recorded
$123.4 million in respect of depreciation compared to $87.1 million for the nine
months ended September 30, 2001. The depreciation charge increased in the nine
month period 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 respectively, amounts
held within construction in progress relating to these systems were transferred
to property and equipment and subsequently depreciated. In the third quarter of
2002, the $552.9 million FEA and FNAL cable impairments resulted in lower
carrying values, hence lower depreciation charges. This decrease was offset by
an increase resulting from the additional sections of the network entering
service.

The Company no longer incurs amortization costs because goodwill balances
were impaired as of December 31, 2001.

IMPAIRMENT OF LONG-LIVED ASSETS (SFAS 144)

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, linking Western Europe and Japan
through the Middle East, India, Southeast Asia and China.

The FNAL system is a 12,500 kilometer city-to-city service between the high
traffic centers of Hong Kong, Seoul, Tokyo and Taipei, over infrastructure
co-built and co-owned with Reach.

Following the adoption of SFAS 144, we prepared DCF models for each of the
cable systems, including a review of the estimation of the cost of capital.
Given the high level of competition in terms of alternative supply, lower than
generally expected demand for this route, significant over-supply for the
trans-Atlantic route, we have reviewed the revenue opportunities on this route
and have recognized an impairment charge of $327.9 million in respect of the FEA
system in the second quarter of 2002.

Given the high level of competition in terms of alternative supply and
higher than expected price erosion on various routes connecting Hong Kong, we
have reviewed the revenue opportunities on this route and have recognized an
impairment charge of $225.0 million in respect of the FNAL system in the second
quarter of 2002. See Note 3.10.

REORGANIZATION ITEMS

During the quarter ended and the nine months ended September 30, 2002 we
incurred reorganization costs of $24.3 million and $57.4 million, respectively,
arising from the application of SOP 90-7, as referred to in Basis of Preparation
and Forward-Looking Statements above. Specifically, these costs relate to
professional fees ($24.0 million) and retainers ($0.3 million) paid during the
quarter ended September 30, 2002 and professional fees ($27.6 million),
retainers ($2.5 million), capitalized finance cost ($18.2 million) and
underwriter's discount ($12.3 million) paid during the nine months ended
September 30, 2002, net of interest received of $3.2 million.

RESTRUCTURING ITEMS

During the quarter ended September 30, 2002 we incurred restructuring costs
of $1.9 million arising from the application of EITF 94-3, primarily relating to
headcount reductions and employee related costs paid during chapter 11
proceedings on April 12, 2002. The employees affected were in

34

Sales (51), Operations (47) and Finance and Administration (15). The following
summarizes the costs incurred.

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

INTEREST EXPENSE AND INTEREST INCOME

Interest expense on borrowings for the quarter ended September 30, 2002 was
$1.4 million, compared to $26.6 million during the quarter ended September 30,
2001. Interest expense on borrowings for the nine months ended September 30,
2002 was $42.3 million, compared to $80.0 million during the nine months ended
September 30, 2001. The decrease in interest expense for these periods was
attributable to the capitalization of interest directly related to construction
projects in 2001. This capitalization of interest has ceased in the quarter
ended June 30, 2002. In accordance with the requirements of SOP 90-7, we ceased
recording interest expense on our debt.

Foreign exchange gain for the quarter ended September 30, 2002 was
$3.1 million. The gain resulted from the translation of Euro and
sterling-denominated cash balances giving rise to a charge of $0.2 million and
the retranslation of Euro-denominated debt giving rise to a gain of
$3.3 million. For the nine months ended September 30, 2002, the foreign exchange
loss was $25.0 million. The loss resulted from the retranslation of the
Euro-denominated debt which resulted in a foreign exchange loss of $28 million,
although this was partially offset by a gain of $1.6 million on the translation
of Euro and sterling-denominated cash balance, a gain on foreign exchange
contracts of $0.7 million, and a gain on operating activities of $0.7 million.

We terminated FLAG Asia Limited's interest rate collar on April 8, 2002,
resulting in a gain of $0.2 million. As a result of the chapter 11 proceedings,
the FLAG Atlantic Limited swap was terminated by Barclays Bank plc resulting in
a gain of $0.5 million. These funds were to be applied to the repayment of loans
to Barclays Bank plc.

Interest income of $0.2 million was earned during the quarter ended
September 30, 2002, compared to $7.5 million earned during the quarter ended
September 30, 2001. Interest income of $4.0 million was earned during the nine
months ended September 30, 2002, compared to $38.7 million earned during the
nine months ended September 30, 2001 reflecting the reduced cash balances and
the recording of any such income in reorganization items in accordance with SOP
90-7. The interest income was earned on:

- cash balances, short-term investments and restricted cash 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 our initial public offering and high
yield funds held by FLAG Telecom.

PROVISION FOR TAXES

The provision for taxes was a credit of $3.5 million for the quarter ended
September 30, 2002, compared to a charge of $2.6 million for the quarter ended
September 30, 2001. The provision for

35

taxes was a credit of $3.8 million for the nine months ended September 30, 2002,
compared to a charge of $5.6 million for the nine months ended September 30,
2001.

The provision for income tax charges / (credits) consists of taxes payable /
(receivable) relating to the income earned / (losses) incurred or activities
performed by us and our subsidiaries in certain jurisdictions, where they are
deemed to have a taxable presence or are otherwise subject to tax.

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, this belief is based 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. The extent to which certain taxing
jurisdictions may require us to pay tax or to make payments in lieu of tax
cannot be determined in advance. 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 the current tax regime.

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 us 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.

NET LOSS AND LOSS PER COMMON SHARE

For the quarter ended September 30, 2002, we recorded a net loss of
$51.6 million, compared to a net loss of $89.0 million for the quarter ended
September 30, 2001.

Basic and diluted loss per common share was $0.38 for the quarter ended
September 30, 2002, compared to basic and diluted loss per common share of $0.66
for the quarter ended September 30, 2001.

For the nine months ended September 30, 2002, we recorded a net loss of
$787.4 million, compared to a net loss of $170.8 million for the nine months
ended September 30, 2001. The primary reason for this loss is the Impairment of
Long-Lived Assets of $552.9 million referred to above being recognized in the
period.

Basic and diluted loss per common share was $5.87 for the nine months ended
September 30, 2002, compared to a basic and diluted loss of $1.27 per common
share for the nine months ended September 30, 2001.

LIQUIDITY AND CAPITAL RESOURCES

For a description of our restructuring, see Note 1 to the financial
statements included in Item 1.

At September 30, 2002, our available sources of liquidity consisted of
$261.9 million of unrestricted cash and cash equivalents.

During the remainder of 2002 and 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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RESTRICTED CASH

Orders entered by the Bankruptcy Court during chapter 11 proceedings (the
"Orders") imposed restrictions on our ability to transfer cash from Predecessor
to the operating companies. All such transfers of cash were made pursuant to a
monthly budget approved by Predecessor's creditors. In certain circumstances,
and upon application, the Bankruptcy Court could approve specific non-budgeted
and extraordinary uses of cash for payment of obligations of the operating
companies, or otherwise. Predecessor's use of cash was restricted by Orders
until the Plan was confirmed.

As of September 30, 2002, we had $217.8 million of restricted cash. This
amount is inclusive of $82.0 million of cash seized by FLAG Atlantic Limited's
lending banks. Barclays Bank plc, in their capacity as administrative agent for
the banks, seized $82.0 million of cash in accounts of FLAG Atlantic Limited on
April 11, 2002, at the same time that it accelerated FLAG Atlantic Limited's
bank debt. In connection with the Plan, and as of the Effective Date, the banks
have retained the $82.0 million and received approximately 26% of our common
stock.

An additional $25.0 million of restricted cash was created as a result of
Barclays Bank plc freezing $25.0 million of Predecessor's cash deposited in a
Barclays Bank plc account in New York. The deposited cash was frozen in
conjunction with the acceleration of FLAG Atlantic Limited's bank debt. In
connection with the Plan, and as of the Effective Date, the funds plus interest
were returned to us for distribution pursuant to the terms of the Plan.

As at September 30, 2002, Westdeutsche Landesbank Girozentrale ("WestLB"),
the lending banks' agent for our project financing for FNAL, was holding
$100.0 million of cash that was originally intended to support the credit
facility for FLAG Asia Limited. We believe that WestLB was improperly holding
these funds and adversary proceedings in the Bankruptcy Court were filed to seek
recovery of such funds. In connection with the Plan, and as of the Effective
Date, the funds plus interest were returned to us for distribution pursuant to
the terms of the Plan.

As at September 30, 2002, Predecessor had cash and cash equivalents of
$261.9 million. This balance is expected to reduce in the first half of 2003 as
we make payments due under a number of deferred payment plans currently in
place.

We believe that, based on current market conditions, current financial
conditions and our latest financial projections, this cash balance is sufficient
to enable us to continue to meet in full our financial obligations as they fall
due in the foreseeable future.

FURTHER DETAILS ON OUR INDEBTEDNESS

PREDECESSOR

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. In
connection with the Plan, and 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 us at $30 million for 18 months) and 5%
of the common stock of Successor.

Pursuant to the Plan and related Bermudan Schemes of Arrangement,
Predecessor is now insolvent and will be liquidated.

FLAG LIMITED

FLAG Limited had $430.0 million 8 1/4% Senior Notes repayable at par in
2008. Pursuant to the Plan, and as of the Effective Date, these notes were
redeemed and the holders of these notes received approximately 63% of the common
stock of Successor.

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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 is
comprised of a LIBOR cap at 8% and a floor of 5.85%. FLAG Limited recognizes the
net cash amount received or paid on interest rate hedging instruments as an
adjustment to interest cost on the related debt.

FLAG ATLANTIC LIMITED

FLAG Atlantic Limited had a term loan of $253.0 million as at September 30,
2002. Pursuant to the Plan and as of the Effective Date, the loan was discharged
and FLAG Atlantic Limited's creditors received approximately 26% of the common
stock of Successor. Pursuant to the Plan and related Bermudan Schemes of
Arrangement, Predecessor is now insolvent and will be liquidated.

FLAG ASIA LIMITED

The bank lenders who were parties to a credit agreement with FLAG Asia
Limited cancelled their commitments for the project financing of FNAL and
terminated the lending facility. At the date of the termination, FLAG Asia
Limited had not utilized the WestLB facility. As at September 30, 2002, WestLB
was holding $100.0 million in cash that was originally intended to support the
credit facility for FLAG Asia Limited. As of the Effective Date, the funds plus
interest were returned to us for distribution pursuant to the terms of the Plan.
Additionally, an agreement was reached and approved by the Bankruptcy Court with
certain of the FNAL suppliers.

CASH FLOWS

Cash used in operating activities was $34.5 million, cash used in financing
activities was $95.0 million and cash used in investing activities was
$53.5 million during the nine months ended September 30, 2002. At September 30,
2002, total cash, excluding restricted cash, had decreased to $261.9 million
from $417.4 million at December 31, 2001, primarily as a result of debt payments
in restricted cash.

ASSETS

Our primary asset is the net book value of the FLAG Telecom global network,
including construction in progress recorded in property and equipment totaling
$1,770.2 million at September 30, 2002, compared to $2,274.1 million at
December 31, 2001. The decrease of $380.5 million (excluding depreciation
charged in the nine months ended September 30, 2002 of $123.4 million) reflects
the impairment charges of $327.9 million and $225.0 million to FEA and FNAL,
respectively, arising from the adoption of SFAS 144 (refer to Note 5.3), offset
by ongoing construction of the FNAL cable system. The capitalized costs incurred
in the construction of FLAG Telecom's cable systems that are under construction
were included in Construction in Progress.

Our other property and equipment consist primarily of office furniture,
leasehold improvements, computer equipment and motor vehicles that had net book
values of $13.7 million and $16.4 million as of September 30, 2002 and
December 31, 2001, respectively.

Goodwill of $0.9 million had been recognized in the three months ended
March 31, 2002. The goodwill arose on the acquisition of Seoul Telenet, Inc. The
value of goodwill was based on a provisional estimate of the fair value of our
assets and liabilities at the date of acquisition. As a result of the impairment
review of the FNAL cable system, this asset has been written off as part of the
$225.0 million impairment.

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As of September 30, 2002, we had net current liabilities of
$1,066.1 million, compared to net current liabilities of $352.7 million, at
December 31, 2001.

ACCOUNTS RECEIVABLE

The accounts receivable balance at September 30, 2002 was $74.8 million
compared to $148.9 million at December 31, 2001. The balance at September 30,
2002 includes $0.02 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 in comparison to $11.6 million at December 31, 2001.

Balances totaling $43.8 million were offset against amounts held under
deferred revenues for these companies during the nine months ended
September 30, 2002.

Due to the adverse market conditions experienced during this period, the net
allowance for doubtful accounts at September 30, 2002 was $9.5 million, compared
to $5.1 million at December 31, 2001.

We are aware that one of our customers, Global Crossing, has 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. For the nine months ended September 30, 2002, $1.5 million in
deferred revenues was in respect of 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
September 30, 2002, Global Crossing and its affiliates owed us $0.2 million
($nil at September 30, 2001). Global Crossing has $25 million of credits to be
used on our system, subject to certain provisions under a governing agreement,
which cannot be offset against any monies owed to us.

Other customers have credits totaling $22.5 million to be used on our
fiber-optic system, subject to certain provisions under our agreements with
these customers.

INFLATION

In management's view, inflation in operating, maintenance and general and
administrative costs will not have a material effect on our financial position
in the short-term.

SUBSEQUENT EVENT

Pursuant to the Plan, the indebtedness discussed above in "Further Details
on our Indebtedness" was terminated and Successor issued notes and related
security documents on the Effective Date.

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

39

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 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.

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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
Notes (see below) without the consent of the Series A, B and C Noteholders.
However, the FNAL Notes 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 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

41

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 a 7% interest rate payable monthly, maturing on 25
March, 2004.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CURRENCY RISK

On December 18, 2000, we entered into a cross currency swap agreement to
manage foreign exchange exposure arising from our E300 million 11 5/8% Senior
Notes due 2010 ("the 11 5/8% Senior Notes"). However this swap agreement was
terminated by the counter-party on April 15, 2002, resulting in a loss of
$6.5 million. Pursuant to the Plan, and as of the Effective Date, the 11 5/8%
Senior Notes were redeemed and all of our debt is now denominated in Dollars.

We do not believe that our operations are exposed to significant risk from
movements in foreign currency exchange rates other than relating to our Euro and
sterling-denominated cash balances and Euro-denominated debt. The foreign
exchange gain resulted from the translation of Euro and sterling-denominated
cash balances and the retranslation of Euro-denominated debt. Our
Euro-denominated debt was eliminated upon emergence from chapter 11.

We terminated FLAG Asia Limited's interest rate collar on April 8, 2002,
resulting in a gain. As a result of the chapter 11 proceedings, the FLAG
Atlantic Limited swap was terminated by Barclays Bank plc resulting in a gain.

All capacity and operations and maintenance revenues are payable in Dollars.
All contracts for the provision by third parties of restoration are invoiced to
us in Dollars. We invoice some network services business products in local
currencies. Some contracts with suppliers of services to our network services
business are payable in currencies other than Dollars. Some vendor contracts for
the provision to the FEA cable system of operations and maintenance services and
local operating expenses of our subsidiary companies are payable in currencies
other than Dollars. When deemed necessary, we enter into forward foreign
currency contracts to hedge exposures that are considered material to our
financial position.

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 swaps
transactions were entered into manage this risk.

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FLAG Limited's bank debt was repaid in full in March 2002, and FLAG Atlantic
Limited's debt was redeemed pursuant to the Plan.

As a result of the default on our 11 5/8% Senior Notes, all of our debt was
classified as short-term debt as at September 30, 2002.

Commodity price risk is not material to our company.

ITEM 4. 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 and
credit control;

- Performing accounting reconciliation activities (including bank
reconciliations) on a 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.

43

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 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 Quarterly Report on form 10-Q.

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.

44

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

BANKRUPTCY PROCEEDING

On April 12, 2002, Predecessor and certain of its subsidiaries filed
voluntary petitions for relief under chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court in the Southern District of New York.
Predecessor continued to operate its business and manage its property subject to
the Bankruptcy Court's supervision and orders until the Plan was confirmed on
September 26, 2002 and became effective on October 9, 2002. As a companion to
the Plan, Bermuda Schemes of Arrangement were proposed for Predecessor and FLAG
Limited (the "Schemes"). The Schemes were submitted to the Bermuda Court on
August 7, 2002 and became effective on October 9, 2002. The provisions of the
Plan and the Schemes are further described in Notes 1 and 2 of Item 1, Financial
Statements, of this Report and in a Current Report on Form 8-K filed on
October 15, 2002 with the Securities and Exchange Commission by Successor.

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 Successor. 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 Successor, 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 Successor, of $3.25 million for a defense fund in case
the Directors' & Officers' Liability policy ("D&O policy") is invalidated or
attempted to be invalidated 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.

45

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 11 U.S.C. sections 547, 550 of 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 E6.7 million. 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 E2.1 million.

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. FLAG Telecom paid $1.7 million into an escrow
account in Bermuda in October 2000. In 1999, Reda and Jalil received the sum of
$0.9 million which was paid into Court. In October 2000, a further sum of
$0.5 million was paid to them out of the escrow account. After the Privy Council
decision another $0.6 million 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 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

46

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Predecessor had $300 million 11 5/8% Senior Notes and E300 million 11 5/8%
Senior Notes outstanding. We defaulted on these notes when Predecessor failed to
make the required interest payments, due March 30, 2002.

FLAG Limited had $430.0 million 8 1/4% Senior Notes outstanding. We
defaulted on these notes when we filed for chapter 11 protection with the U.S.
Bankruptcy Court in April 2002.

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

During the quarter ended September 30, 2002, certain security holders and
creditors of Predecessor and nine of its direct and indirect subsidiaries
(collectively, the "Debtors") holding allowable claims against the Debtors or
shares of equity securities of any of the Debtors (collectively, the
"Creditors"), were solicited to vote on the Plan. Pursuant to the provisions of
the United States Bankruptcy Code, only classes of holders of claims and
interests entitled to vote on the Plan are:

- classes treated as "impaired" by the Plan; and

- classes entitled to receive a distribution.

The Third Amended and Restated Disclosure Statement dated as of August 8,
2002, as modified, together with ballots and ballot/proxies were sent to the
Creditors entitled to vote on or about August 12, 2002. The record date for the
vote was August 1, 2002. The voting deadline was 3:00 p.m. Eastern Time on
September 20, 2002.

The Plan was accepted by Creditors holding in excess of two-thirds in amount
and one-half in number of allowed claims against the Debtor in each of the
classes of Creditors voting. On September 26, 2002, the United States District
Bankruptcy Court for the Southern District of New York, finding that the Plan
was feasible and in the best interest of the Creditors, confirmed the Plan. The
effective date of the Plan was October 9, 2002.

The initial board of directors (the "Board") of Successor was subsequently
formed pursuant to Section 7.7.4 of the Plan. The Board is comprised of thirteen
(13) members, two (2) of whom are officers of Successor as required by Bermuda
law, seven (7) of whom were nominated by the Subcommittee of FLAG Limited
Bondholders (as defined in the Plan), three (3) of whom were nominated by
Barclays Bank plc, acting on behalf of the FLAG Atlantic banks (as defined in
the Plan), and one (1) of whom was nominated by the Creditors' Committee (as
defined in the Plan).

The officers of Successor appointed to serve on the Board were Andres Bande
(Mr. Bande resigned on October 10, 2002; he was replaced by Mr. Patrick
Gallagher on March 1, 2003) and Edward McCormack. The Subcommittee of FLAG
Limited Bondholders nominated Messrs. Bradley E. Scher, Charles Macaluso, Eugene
Davis, Robert Aquilina, Harry Hobbs, Anthony Cassara and Mark Spagnolo. Barclays
Bank plc nominated Messrs. David Wilson, Ian Akhurst and Jack Dorfman. The
Creditors' Committee nominated Mr. Anthony Pacchia.

Pursuant to the Bye-Laws of Successor, the Board is divided into three
classes, namely Class 1, Class 2 and Class 3, each class to have approximately
the same number of directors as determined by the Board or any Nominating
Committee of the Board. The initial term of the Class 1 Directors shall expire
at the second annual general meeting. The initial term of the Class 2 Directors
shall expire at the third annual general meeting and the initial term of the
Class 3 Directors shall expire at the fourth annual general meeting. Following
their initial terms, all classes of directors shall be elected to three-year
terms. Each director shall serve until the expiration of such director's term or
until such director's successor has been duly elected or appointed or until such
director's office is otherwise vacated.

47

The Class 1 Directors are Messrs. Anthony Pacchia, Ian Akhurst, Anthony
Cassara and Patrick Gallagher. The Class 2 Directors are Messrs. Jack Dorfman,
Bradley E. Scher, Mark Spagnolo and Edward McCormack. The Class 3 Directors are
Messrs. David Wilson, Robert Aquilina, Harry Hobbs, Eugene Davis and Charles
Macaluso.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

2.1 Third Amended and Restated Disclosure Statement and Third
Amended and Restated Joint Plan of Reorganization of the
Company (incorporated by reference to Exhibit 2.1 filed with
the Company's Current Report on Form 8-K dated August 8,
2002 and filed with the Commission on August 13, 2002).

3.1 Memorandum of Association of FLAG Telecom Group Limited
(incorporated by reference to Exhibit 4.1 filed with the
Company's Current Report on Form 8-K dated October 9, 2002
and filed with the Commission on October 15, 2002).

3.2 Bye-Laws of FLAG Telecom Group Limited (incorporated by
reference to Exhibit 4.2 filed with the Company's Current
Report on Form 8-K dated October 9, 2002 and filed with the
Commission on October 15, 2002).

4.1 Indenture between the Registrant and The Bank of New York,
as indenture trustee, dated October 9, 2002 (incorporated
herein by reference to the Registrant's Post Effective
Amendment No. 1 to its Application for Qualification of
Indenture under the Trust Indenture Act of 1939 on
Form T-3/A, filed on October 11, 2002).

4.2 Form FNAL Note, dated as of May 16, 2002, between FLAG Asia
Limited and a trade creditor (incorporated herein by
reference to Exhibit 10.28 filed with the Company's Annual
Report of Form 10-K for the period ended December 31, 2002
and filed with the Commission on July 3, 2003.)

4.3 Form FNAL Guaranty, dated as of May 16, 2003, between the
Company and a trade creditor (incorporated herein by
reference to Exhibit 10.29 filed with the Company's Annual
Report of Form 10-K for the period ended December 31, 2002
and filed with the Commission on July 3, 2003.)

4.4 Form FNAL Security Agreement, dated as of May 16, 2002,
among FLAG Asia Limited, FLAG Telecom Asia Limited, FLAG
Telecom Taiwan Limited, FLAG Telecom Japan Limited,
Wilmington Trust Company and a trade creditor (incorporated
herein by reference to Exhibit 10.30 filed with the
Company's Annual Report of Form 10-K for the period ended
December 31, 2002 and filed with the Commission on July 3,
2003.)

99.1* Risk Factors Affecting Future Financial Performance.

99.2* Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

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

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

* Filed herewith.

48

(b) Reports on Form 8-K.

The Company filed the following Form 8-K Current Reports during the period
from April 1, 2002 through September 30, 2002:

April 10, 2002 Incorporating press release announcing the Board of
Directors of Predecessor approved a proposal to restructure
the obligations of Predecessor and its subsidiaries.

April 25, 2002 Reporting the filing of Predecessor and certain of its
subsidiaries under chapter 11 on April 12 and 23,
respectively, and the parallel ancillary petition filed by
Predecessor and certain of its subsidiaries in Bermuda.
Incorporating press releases on these announcements dated
April 12 and 19, 2002.

June 18, 2002 Incorporating press release announcing that Predecessor has
been notified by the Nasdaq Qualifications Hearing Panel of
its decision to delist Predecessor's common stock from the
Nasdaq National Market, effective June 13, 2002.

July 5, 2002 Incorporating press release announcing that Predecessor has
filed a Plan of Reorganization and related Disclosure
Statement in the U.S. Bankruptcy Court for the Southern
District of New York.

Aug. 7, 2002 Reporting the resignation of Arthur Andersen as auditor of
Predecessor, effective July 31, 2002.

Aug. 13, 2002 Announcing that Predecessor will delay the filing of its
interim financial statements on Form 10-Q for the quarter
ended June 30, 2002 until it has a new auditor in place to
review its interim financial statements. The report
incorporates a press release dated August 13, 2002 on the
delay of the filing and the Third Amended and Restated
Disclosure Statement attaching the Third Amended and
Restated Joint Plan of Reorganization of Predecessor under
chapter 11 of the Bankruptcy Code, dated August 8, 2002.

Sept 30, 2002 Announcing that the Plan was confirmed by the U.S.
Bankruptcy Court at a hearing on September 26, 2002.
Incorporating press releases on these announcements dated
September 26, 2002.

49

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized this 3rd day of July 2003.

FLAG TELECOM GROUP LIMITED

By: /s/ MICHEL CAYOUETTE
----------------------------------------
Michel Cayouette
CHIEF FINANCIAL OFFICER

By: /s/ KEES VAN OPHEM
----------------------------------------
Kees van Ophem
GENERAL COUNSEL AND ASSISTANT SECRETARY

S-1

CERTIFICATIONS

I, Patrick Gallagher, certify that:

1. I have reviewed this quarterly report on Form 10-Q of FLAG Telecom Group
Limited;

2. Based on my knowledge, this quarterly 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 quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly 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
quarterly 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 quarterly report on Form 10-Q of FLAG Telecom Group
Limited;

2. Based on my knowledge, this quarterly 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 quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly 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
quarterly 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