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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, 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
|--- | ----------------------------------------------------------------------------------

For the quarterly period ended September 30, 2001

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

Commission File No.: 0-29207

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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 principal executive 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 /x/  No / /

134,139,046
common shares were outstanding as of October 31, 2001.
The Exhibit Index, filed as a part of this report, appears on page 31 to 33.

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FLAG TELECOM HOLDINGS LIMITED  FORM 10-Q  INDEX

|           |  |                                                                                                                        |  | Page 
|---------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | -----
|PART I     |  | FINANCIAL INFORMATION                                                                                                  |  | 3    
|ITEM 1:    |  | FINANCIAL STATEMENTS                                                                                                   |  | 3    
|1.A        |  | Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000                                             |  | 3    
|1.B        |  | Consolidated Statements of Operations for the three months and nine months ended September 30, 2001 and 2000           |  | 4    
|1.C        |  | Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2001 and 2000 |  | 5    
|1.D        |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000                            |  | 6    
|1.E        |  | Notes to Consolidated Financial Statements                                                                             |  | 7    
|ITEM 2:    |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                  |  | 15   
|ITEM 3:    |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                             |  | 28   
|PART II    |  | OTHER INFORMATION                                                                                                      |  | 31   
|ITEM 1:    |  | LEGAL PROCEEDINGS                                                                                                      |  | 31   
|ITEM 2:    |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                                                              |  | 31   
|ITEM 3:    |  | DEFAULTS UPON SENIOR SECURITIES                                                                                        |  | 31   
|ITEM 4:    |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                    |  | 31   
|ITEM 5:    |  | OTHER INFORMATION                                                                                                      |  | 31   
|ITEM 6:    |  | EXHIBITS AND REPORTS FILED ON FORM 8-K                                                                                 |  | 31-33
|SIGNATURES |  | 34                                                                                                                    

2

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PART I

ITEM 1.A

FLAG TELECOM HOLDINGS LIMITED        CONSOLIDATED BALANCE SHEETS        AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000        (Expressed in thousands of dollars
except share and per share amounts)

|                      |                                                                                                       | September 30,
2001                                                                  |   | December 31,
2000 |        
|--------------------- | ----------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | - | ----------------- | -------
|
|ASSETS:               |                                                                                                       |                                                                                     |   |                   |        
|                      | Current assets:                                                                                       |                                                                                     |   |                   |        
|                      |                                                                                                       | Cash and cash equivalents                                                           |   | $                 | 498,320
|                      |                                                                                                       | Accounts receivable, net of allowance for doubtful accounts of $5,289 (2000$5,289) |   |                   | 174,319
|                      |                                                                                                       | Prepaid expenses and other assets                                                   |   |                   | 141,712
|                      |                                                                                                       |                                                                                     |   |                   |        
|                      | Total current assets                                                                                  |                                                                                     |   | 814,350           |        
|                      | Goodwill, net of accumulated amortization of $1,652 (2000$139)                                       |                                                                                     |   | 30,310            |        
|                      | Restricted cash                                                                                       |                                                                                     |   | 170,444           |        
|                      | Capitalized financing costs, net of accumulated amortization of $7,859 (2000$5,783)                  |                                                                                     |   | 28,756            |        
|                      | Construction in progress                                                                              |                                                                                     |   | 174,543           |        
|                      | Other long term assets, net                                                                           |                                                                                     |   | 152,432           |        
|                      | Property and equipment, net                                                                           |                                                                                     |   | 2,345,775         |        
|                      |                                                                                                       |                                                                                     |   |                   |        
|                      | Total Assets                                                                                          |                                                                                     | $ | 3,716,611         |        
|                      |                                                                                                       |                                                                                     |   |                   |        
|LIABILITIES:          |                                                                                                       |                                                                                     |   |                   |        
|                      | Current liabilities:                                                                                  |                                                                                     |   |                   |        
|                      |                                                                                                       | Accrued construction costs                                                          |   | $                 | 210,116
|                      |                                                                                                       | Accounts payable                                                                    |   |                   | 135,663
|                      |                                                                                                       | Accrued liabilities                                                                 |   |                   | 94,153 
|                      |                                                                                                       | Cross currency swaps                                                                |   |                   | 408    
|                      |                                                                                                       | Interest rate collars                                                               |   |                   | 1,208  
|                      |                                                                                                       | Deferred revenue                                                                    |   |                   | 125,814
|                      |                                                                                                       | Income taxes payable                                                                |   |                   | 9,052  
|                      |                                                                                                       |                                                                                     |   |                   |        
|                      |                                                                                                       | Total current liabilities                                                           |   |                   | 576,414
|                      | Senior notes, due 2010/2008, net of unamortized discount of $13,651 (2000$14,978)                    |                                                                                     |   | 989,229           |        
|                      | Other long-term debt                                                                                  |                                                                                     |   | 168,500           |        
|                      | Deferred revenue and other                                                                            |                                                                                     |   | 1,123,667         |        
|                      | Deferred taxes                                                                                        |                                                                                     |   | 3,082             |        
|                      |                                                                                                       |                                                                                     |   |                   |        
|                      | Total Liabilities                                                                                     |                                                                                     |   | 2,860,892         |        
|SHAREHOLDERS' EQUITY: |                                                                                                       |                                                                                     |   |                   |        
|                      | Common stock, $.0006 par value, 300,000,000 authorized and 134,139,046 (2000134,061,920) outstanding |                                                                                     |   | 80                |        
|                      | Additional paid-in capital                                                                            |                                                                                     |   | 1,112,668         |        
|                      | Deferred stock compenstion                                                                            |                                                                                     |   | (401              | )      
|                      | Accumulated other comprehensive (loss) / income                                                       |                                                                                     |   | 8,601             |        
|                      | Accumulated deficit                                                                                   |                                                                                     |   | (265,229          | )      
|                      |                                                                                                       |                                                                                     |   |                   |        
|                      | Total shareholders' equity                                                                            |                                                                                     |   | 855,719           |        
|                      |                                                                                                       |                                                                                     |   |                   |        
|                      | Total liabilities and shareholders' equity                                                            |                                                                                     | $ | 3,716,611         |        
|                      |                                                                                                       |                                                                                     |   |                   |        

3

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PART I

ITEM 1.B

FLAG TELECOM HOLDINGS LIMITED        CONSOLIDATED STATEMENTS OF OPERATIONS        FOR THE THREE MONTHS AND NINE MONTHS ENDED        SEPTEMBER 30, 2001 AND 2000
    (Expressed in thousands of dollars except share and per share amounts)

|                                                              |                                                                                                             | Three Months Ended
September 30, |             | Nine Months Ended
September 30, |  
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | -------------------------------- | ----------- | ------------------------------- | -
|
|
|REVENUES:                                                     |                                                                                                             |                                  | 55,599      |                                 |  
|EXPENSES:                                                     |                                                                                                             |                                  |             |                                 |  
|                                                              | Operations and maintenance cost (including non-cash stock compensation expense of $106, $339, $406, $1,506) |                                  |             | 15,946                          |  
|                                                              | Network expenses                                                                                            |                                  |             | 16,006                          |  
|                                                              | Sales and marketing (including non-cash stock compensation expense of $53, $228, $278, $936)                |                                  |             | 4,568                           |  
|                                                              | General and administrative (including non-cash stock compensation expense of $187, $773, $973, $3,448)      |                                  |             | 13,645                          |  
|                                                              | Restructuring and asset impairment                                                                          |                                  |             | 28,169                          |  
|                                                              | Depreciation and amortization                                                                               |                                  |             | 39,254                          |  
|                                                              |                                                                                                             |                                  |             |                                 |  
|                                                              |                                                                                                             |                                  | 117,588     |                                 |  
|OPERATING LOSS                                                |                                                                                                             |                                  | (61,989     | )                               |  
|INCOME FROM INVESTMENT IN FLAG ATLANTIC LIMITED               |                                                                                                             |                                  |            |                                 |  
|INTEREST EXPENSE                                              |                                                                                                             |                                  | (26,576     | )                               |  
|FOREIGN CURRENCY GAIN/(LOSS)                                  |                                                                                                             |                                  | 2,675       |                                 |  
|INTEREST INCOME                                               |                                                                                                             |                                  | 7,570       |                                 |  
|                                                              |                                                                                                             |                                  |             |                                 |  
|LOSS BEFORE INCOME TAXES                                      |                                                                                                             |                                  | (78,320     | )                               |  
|PROVISION FOR INCOME TAXES                                    |                                                                                                             |                                  | 2,575       |                                 |  
|                                                              |                                                                                                             |                                  |             |                                 |  
|NET LOSS BEFORE CUMULATIVE EFFECT OF ADOPTION OF SFAS No. 133 |                                                                                                             |                                  | (80,895     | )                               |  
|CUMULATIVE EFFECT OF ADOPTION OF SFAS No. 133                 |                                                                                                             |                                  |            |                                 |  
|                                                              |                                                                                                             |                                  |             |                                 |  
|NET LOSS                                                      |                                                                                                             | $                                | (80,895     | )                               | $
|                                                              |                                                                                                             |                                  |             |                                 |  
|Basic and diluted net loss per common share                   |                                                                                                             |                                  |             |                                 |  
|before cumulative effect of adoption of SFAS No. 133          |                                                                                                             | $                                | (0.60       | )                               | $
|Cumulative effect of adoption of SFAS No. 133                 |                                                                                                             | $                                |            |                                 | $
|                                                              |                                                                                                             |                                  |             |                                 |  
|Basic and diluted net loss per share                          |                                                                                                             | $                                | (0.60       | )                               | $
|                                                              |                                                                                                             |                                  |             |                                 |  
|Weighted average common shares outstanding                    |                                                                                                             |                                  | 134,132,484 |                                 |  
|                                                              |                                                                                                             |                                  |             |                                 |  

4

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PART I

ITEM 1.C

FLAG TELECOM HOLDINGS LIMITED        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        FOR THE THREE MONTHS AND NINE MONTHS        ENDED SEPTEMBER 30, 2001
AND 2000        (Expressed in thousands of dollars)

|                                       |  | Three Months Ended
September 30, |   | Nine Months Ended
September 30, |  
|-------------------------------------- |  | -------------------------------- | - | ------------------------------- | -
|
|
|NET LOSS                               |  | (80,895                          | ) | (7,146                          | )
|Foreign currency translation           |  | 14,062                           |   | (450                            | )
|Loss of derivativeseffect of adoption |  |                                 |   |                                |  
|Loss on derivatives                    |  | (170                             | ) |                                |  
|                                       |  |                                  |   |                                 |  
|COMPREHENSIVE LOSS                     |  | (67,003                          | ) | (7,596                          | )
|                                       |  |                                  |   |                                 |  

5

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PART I

ITEM 1.D

FLAG TELECOM HOLDINGS LIMITED        CONSOLIDATED STATEMENTS OF CASH FLOWS        FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000        (Expressed in
thousands of dollars)

|                                                              |                                                                                 | September 30,
2001                                         |                                          | September 30,
2000                         |        
|------------------------------------------------------------- | ------------------------------------------------------------------------------- | ---------------------------------------------------------- | ---------------------------------------- | ------------------------------------------ | -------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                         |                                                                                 |                                                            |                                          |                                            |        
|                                                              | Net loss                                                                        |                                                            | $                                        | (160,277                                   | )      
|                                                              | Adjustments to reconcile net loss to net cash provided by operating activities: |                                                            |                                          |                                            |        
|                                                              |                                                                                 | Cumulative effect of adoption of SFAS N0.133               |                                          |                                            | 1,291  
|                                                              |                                                                                 | Amortization of financing costs                            |                                          |                                            | 2,076  
|                                                              |                                                                                 | Provision for doubtful accounts                            |                                          |                                            |       
|                                                              |                                                                                 | Senior debt discount                                       |                                          |                                            | 1,327  
|                                                              |                                                                                 | Non-cash stock compensation                                |                                          |                                            | 1,657  
|                                                              |                                                                                 | Depreciation and amortization (including asset impairment) |                                          |                                            | 114,097
|                                                              |                                                                                 | Loss on disposal of property and equipment                 |                                          |                                            |       
|                                                              |                                                                                 | Deferred taxes                                             |                                          |                                            | (289   
|                                                              |                                                                                 | Add (deduct) net changes in assets and liabilities:        |                                          |                                            |        
|                                                              |                                                                                 |                                                            | Accounts receivable                      |                                            |        
|                                                              |                                                                                 |                                                            | Prepaid expenses and other assets        |                                            |        
|                                                              |                                                                                 |                                                            | Accounts payable and accrued liabilities |                                            |        
|                                                              |                                                                                 |                                                            | Income taxes payable                     |                                            |        
|                                                              |                                                                                 |                                                            | Deferred revenue and other               |                                            |        
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|                                                              |                                                                                 |                                                            |                                          | Net cash provided by operating acitivities |        
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                         |                                                                                 |                                                            |                                          |                                            |        
|                                                              | Financing costs incurred                                                        |                                                            |                                          | (1,883                                     | )      
|                                                              | Net proceeds from issuance of 115/8% senior notes                               |                                                            |                                          |                                           |        
|                                                              | Proceeds from long-term debt                                                    |                                                            |                                          | 38,000                                     |        
|                                                              | Repayment of long-term debt                                                     |                                                            |                                          | (24,500                                    | )      
|                                                              | Capital contributionsInitial Public Offering                                   |                                                            |                                          |                                           |        
|                                                              | Capital contributionsOptions exercised                                         |                                                            |                                          | 495                                        |        
|                                                              | Decrease / (increase) in restricted cash                                        |                                                            |                                          | 202,355                                    |        
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|                                                              |                                                                                 |                                                            |                                          | Net cash provided by financing activities  |        
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                         |                                                                                 |                                                            |                                          |                                            |        
|                                                              | Cash paid for construction                                                      |                                                            |                                          | (700,576                                   | )      
|                                                              | Investment in FLAG Atlantic                                                     |                                                            |                                          |                                           |        
|                                                              | Proceeds from disposal of property and equipment                                |                                                            |                                          |                                           |        
|                                                              | Investment in property and equipment (incl L/T Asset)                           |                                                            |                                          | (410,756                                   | )      
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|                                                              |                                                                                 |                                                            |                                          | Net cash used in investing activities      |        
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|NET (DECREASE) / INCREASE IN CASH                             |                                                                                 |                                                            | (423,234                                 | )                                          |        
|                                                              | Effect of foreign currency movements                                            |                                                            |                                          | 1,845                                      |        
|CASH, beginning of period                                     |                                                                                 |                                                            | 919,709                                  |                                            |        
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|CASH, end of period                                           |                                                                                 | $                                                          | 498,320                                  |                                            | $      
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|SUPPLEMENTAL INFORMATION ON INVESTING ACTIVITIES:             |                                                                                 |                                                            |                                          |                                            |        
|                                                              | Increase in construction in progress                                            |                                                            | $                                        | 838,707                                    |        
|                                                              | (Increase)/Decrease in accrued construction costs                               |                                                            |                                          | (160,978                                   | )      
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|                                                              | Cash paid for construction in progress                                          |                                                            | $                                        | 677,729                                    |        
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW INFORMATION: |                                                                                 |                                                            |                                          |                                            |        
|                                                              | Interest expense for period                                                     |                                                            | $                                        | 80,023                                     |        
|                                                              | Amortization of financing costs                                                 |                                                            |                                          | (3,403                                     | )      
|                                                              | Increase in accrued interest payable                                            |                                                            |                                          | (8,263                                     | )      
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|                                                              | Interest paid                                                                   |                                                            | $                                        | 68,358                                     |        
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|                                                              | Interest capitalized                                                            |                                                            | $                                        | 15,121                                     |        
|                                                              |                                                                                 |                                                            |                                          |                                            |        
|                                                              | Taxes paid                                                                      |                                                            | $                                        | 1,043                                      |        
|                                                              |                                                                                 |                                                            |                                          |                                            |        

6

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PART I

ITEM 1.E

FLAG TELECOM HOLDINGS LIMITED        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        AS OF SEPTEMBER 30, 2001 AND 2000

1.  BACKGROUND AND ORGANIZATION

FLAG Telecom Holdings Limited (the "Company" or "FLAG Telecom") was incorporated on February 3, 1999 to serve as the holding company for the FLAG
Telecom group of companies (the "Group"). On February 26, 1999, FLAG Telecom acquired approximately 66% of FLAG Limited by exchanging 69,709,935 shares of FLAG Telecom common stock for the
equivalent number of shares of FLAG Limited common stock. The minority shareholder of FLAG Limited exchanged its remaining holding in FLAG Limited for 36,256,121 shares in FLAG Telecom on
January 4, 2000 such that on that date FLAG Limited became a wholly owned subsidiary of FLAG Telecom. This acquisition has been accounted for as a recapitalization such that no goodwill arises
and assets and liabilities are reflected at carryover basis.

FLAG
Telecom is a leading global network services provider and independent carriers' carrier providing a range of products and services to the international carrier community,
Application Service Providers ("ASPs") and Internet Service Providers ("ISPs") across a global network platform. Leveraging this network, FLAG Telecom's network services business markets a range of
managed bandwidth and value-added services targeted at carriers, ISPs, ASPs and selected multinational corporations worldwide.

Currently,
we have the following cable systems in operation or under development: FLAG Europe-Asia ("FEA"), a cable which stretches from the UK to Japan and which entered
commercial service in November 1997; FLAG Atlantic-1 ("FA-1"), the world's first transoceanic multi-terabit dual cable system, which is now offering fully protected
services between New York, London and Paris; and FLAG North Asian Loop ("FNAL"), a multi-terabit intra-Asia submarine cable system which will provide fully protected
services between Hong Kong, Tokyo, Seoul and Taipei, the Eastern, Hong Kong to Tokyo, leg of which entered commercial service in June 2001. Additionally, we have entered into an agreement to
collaborate in the development and use of Verizon Communications' recently announced city-to-city European backbone network providing connectivity to major European business
centers, which has enabled us to establish a European network.

As
of September 30, 2001 our own fiber network had operational landing stations in 15 countries. In addition, there are 20 city Points of Presence ("PoPs") located in San
Francisco, New York (3), London (2), Paris, Madrid, Amsterdam, Brussels, Frankfurt, Dusseldorf, Cairo, Hong Kong (2), Seoul, Tokyo (2), Shanghai and Singapore.

Our
network services business, launched in 1999, develops and markets a broad range of products and services aimed at both established and emerging communications companies. We
currently offer traditional capacity products as well as Managed Bandwidth Services ("MBS"), IP Transit Services ("IP-T") and IP Point-to-Point Services
("IP-P").

2.  BASIS OF PREPARATION

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles ("US
GAAP") and include the accounts and balances of FLAG Telecom and its wholly-owned subsidiaries. All significant inter-company transactions

7

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have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of
the results of operations for the three months and nine months ended September 30, 2001 and 2000, the balance sheet as of September 30, 2001, and the cash flows for the nine months ended
September 30, 2001 and 2000. Our accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year
ended December 31, 2000. The results of operations for any interim period are not necessarily indicative of results for the full year. Investments in which FLAG Telecom has an interest of
20%-50% or investments in which FLAG Telecom can assert significant influence, but does not control, are accounted for under the equity method.

At
September 30, 2001 and December 31, 2000, there were no equity method investments held by FLAG Telecom. There was an equity method investment accounted for during the
nine months ended September 30, 2000.

3.  SIGNIFICANT ACCOUNTING POLICIES

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. In compliance with FASB Interpretation No. 43, "Real Estate Sales, an Interpretation of FASB Statement No. 66,"
capacity contracts are deemed not to be sales of real estate and, therefore, are not accounted for as sales-type leases. The Group 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, FLAG Telecom granted credits to suppliers toward future capacity. In addition, certain customers have committed to purchase capacity 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.

Operations and Maintenance

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

Network Revenues

Network revenues are revenues derived from the sale of managed bandwidth leases and 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, there were no
sales-type leases recorded.

8

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Revenue from project management services is recognized on a percentage completion basis as costs are incurred on the project.

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.

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 RESTRUCTURING AND RELATED ASSET IMPAIRMENT

Restructuring charges and asset impairment charges of $28,169 were recorded in the third quarter of 2001. On August 7, 2001 FLAG Telecom announced that
it had decided not to proceed with the FLAG
Pacific-1 ("FP-1") project in association with TyCom that had been announced in the second quarter. The agreement in principle with TyCom was conditional upon FLAG Telecom obtaining
financing on satisfactory terms. However, despite substantial efforts on FLAG Telecom's part and given the capital market conditions prevailing at the time, the financing proposal received fell short
of expectations. Following this decision certain employment agreements were terminated and amounts already paid or due in connection with preliminary build evaluation were written off.

The
restructuring and asset impairment charges are as follows:

($000's except per share data)

September 30,
2000
(unaudited)Staff reduction costs

$
1,571Asset impairment

$
26,598Total costs

$
28,169


The
restructuring charge of $1.6 million related to staff reduction costs. FLAG Telecom has paid an aggregate of $0.5 million in restructuring charges as at 30
September 2001. The remaining cash expenditures relating to the workforce reduction are expected to be substantially paid by the end of 2001.

FLAG
Telecom had commissioned a survey/feasibility study for the construction of the FP-1 project and entered into other project related expenditure commitments. Following the
decision not to proceed

9

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with the project the residual value of the costs incurred was $nil and the consequent asset impairment charge was $26.6 million comprising $24.0 million in abandoned survey and
preliminary build costs and $2.6 million of other project related costs. $23.6 million of the asset impairment related cash costs were paid as at September 30, 2001 and the
remaining cash costs were expected to be paid by the end of 2001.

3.4 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 rights, interest costs, costs for the route surveys, indirect costs associated with cable systems and PoPs, long-term capacity lease purchases, and other
costs related to the construction of the network. Construction in progress is transferred to property and equipment when placed into service.

3.5 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 assets as follows:

Computer equipment

3 yearsFixtures and fittings

5 yearsLeasehold improvements

remaining lease termMotor vehicles

5 yearsNetworkCable systems

15 yearsPoPs

7 yearsTransmission and other assets

5 years


The
estimated useful lives of network assets are determined based on the estimated period over which they will generate revenue.

3.6 IMPAIRMENT OF LONG LIVED ASSETS

The Group periodically reviews events and changes in circumstances to determine whether the recoverability of the carrying value of long lived assets should be
reassessed. Should events or circumstances indicate that the carrying value may not be recoverable based on undiscounted future cash flows, an impairment loss measured by the difference between the
fair value and the carrying value of long lived assets would be recognized by the Group.

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. For
the three month and nine month periods ended September 30, 2001 and 2000 presented, no potentially dilutive securities have been included in the calculation of diluted net loss per share
amounts as they would be antidilutive in periods in which a loss has been reported. The average aggregate number of potential common share equivalents that have been excluded from the diluted net loss
per share calculation was

10

---

7,565,770 and 7,056,656 for the three month and nine month periods ended September 30, 2001, respectively, and related entirely to stock options.

3.8 RESTRICTED CASH

The Group designates funds held by collateral trustees, in escrow or legally designated for specific projects or commitments by bank agreements, as long term
restricted cash.

4.  BUSINESS ACQUISITIONS

On December 6, 2000, FLAG Telecom acquired the remaining 50% equity interest in FLAG Atlantic Limited ("FLAG Atlantic") it did not already own from
Global TeleSystems Group, Inc. ("GTS") for a cash consideration of $135 million. Until that time, FLAG Atlantic was a 50-50 joint venture established
for the construction of the FA-1 cable system. The acquisition was accounted for using the purchase method of accounting and, accordingly, the assets and liabilities assumed were recorded
at fair value as of the date of acquisition. The excess of purchase price over the fair value of the assets acquired and the liabilities assumed was recorded as goodwill. The initial purchase price
allocation was based on current estimates. The Group will make final purchase price allocations based upon final values for certain assets and liabilities. As a result, the final purchase price
allocation may differ from the presented estimate.

The
following unaudited pro forma condensed combined financial information of the Group demonstrates the results of operations had the acquisition been completed at the beginning of
the prior period presented.

($000's except per share data)

September 30,
2000
(unaudited)Revenue

$
67,773Net loss

$
(55,985
)Basic and diluted loss per share

$
(0.431
)


5.  SEGMENT INFORMATION

On a segmental basis, FLAG Telecom reports its results in its two primary business segments: (1) Capacity and Operations, and (2) Network
Services. These two segments are managed and evaluated
separately because each segment possesses different economic characteristics requiring different marketing strategies.

The
accounting policies adopted for each segment are the same as those described in the summary of significant accounting policies. Management evaluates performance based on operating
contribution, where segment revenues are reduced by those costs that are directly attributable to that segment.

11

---

Details of the financial results of the two business segments for the three months ended September 30, 2001 and 2000 are summarized below and reconciled to the totals for the
Group as a whole.

|($ 000's)
Selected items |  | Capacity and
operations |           | September 30,
2001
(unaudited)
Network
services |   | Consolidated
total |   | Capacity and
operations |           | September 30,
2000
(unaudited)
Network
services |   | Consolidated
total |  
|------------------------ |  | ----------------------- | --------- | ----------------------------------------------- | - | ------------------ | - | ----------------------- | --------- | ----------------------------------------------- | - | ------------------ | -
|Revenue                  |  | $                       | 43,855    |                                                 | $ | 11,744             |   | $                       | 55,599    |                                                 | $ | 21,591             |  
|Operating expenses       |  |                         | 95,080    |                                                 |   | 22,508             |   |                         | 117,588   |                                                 |   | 37,506             |  
|                         |  |                         |           |                                                 |   |                    |   |                         |           |                                                 |   |                    |  
|Operating loss           |  |                         | (51,225   | )                                               |   | (10,764            | ) |                         | (61,989   | )                                               |   | (15,915            | )
|                         |  |                         |           |                                                 |   |                    |   |                         |           |                                                 |   |                    |  
|Segmental assets         |  |                         | 2,318,993 |                                                 |   | 271,325            |   |                         | 2,590,318 |                                                 |   | 1,040,969          |  
|                         |  |                         |           |                                                 |   |                    |   |                         |           |                                                 |   |                    |  
|Common assets            |  |                         |           |                                                 |   |                    |   |                         | 1,126,293 |                                                 |   |                    |  
|                         |  |                         |           |                                                 |   |                    |   |                         |           |                                                 |   |                    |  
|Total assets             |  |                         |           |                                                 |   |                    |   |                         | 3,716,611 |                                                 |   |                    |  
|                         |  |                         |           |                                                 |   |                    |   |                         |           |                                                 |   |                    |  
|Cash revenues            |  |                         | 206,453   |                                                 |   | 39,134             |   |                         | 245,587   |                                                 |   | 66,565             |  
|                         |  |                         |           |                                                 |   |                    |   |                         |           |                                                 |   |                    |  
|Adjusted EBITDA          |  |                         | 175,259   |                                                 |   | 18,938             |   |                         | 194,197   |                                                 |   | 49,630             |  
|                         |  |                         |           |                                                 |   |                    |   |                         |           |                                                 |   |                    |  

Details
of the financial results of the two business segments for the nine months ended September 30, 2001 and 2000 are summarized below and reconciled to the totals for the
Group as a whole.

|($ 000's)
Selected items |  | Capacity and
Operations |         | September 30,
2001
(unaudited)
Network
services |   | Consolidated
total |   | Capacity and
operations |          | September 30,
2000
(unaudited)
Network
services |   | Consolidated
Total |  
|------------------------ |  | ----------------------- | ------- | ----------------------------------------------- | - | ------------------ | - | ----------------------- | -------- | ----------------------------------------------- | - | ------------------ | -
|Revenue                  |  | $                       | 90,088  |                                                 | $ | 30,646             |   | $                       | 120,734  |                                                 | $ | 59,343             |  
|Operating expenses       |  |                         | 175,361 |                                                 |   | 50,021             |   |                         | 225,382  |                                                 |   | 114,192            |  
|                         |  |                         |         |                                                 |   |                    |   |                         |          |                                                 |   |                    |  
|Operating loss           |  |                         | (85,273 | )                                               |   | (19,375            | ) |                         | (104,648 | )                                               |   | (54,849            | )
|                         |  |                         |         |                                                 |   |                    |   |                         |          |                                                 |   |                    |  
|Cash revenues            |  |                         | 625,891 |                                                 |   | 97,967             |   |                         | 723,858  |                                                 |   | 181,348            |  
|                         |  |                         |         |                                                 |   |                    |   |                         |          |                                                 |   |                    |  
|Adjusted EBITDA          |  |                         | 560,209 |                                                 |   | 52,455             |   |                         | 612,660  |                                                 |   | 131,753            |  
|                         |  |                         |         |                                                 |   |                    |   |                         |          |                                                 |   |                    |  

Cash
revenues and adjusted EBITDA are additional measures reported to and used by the Group's chief operating decision makers for purposes of making decisions about allocating
resources to the segments and assessing their performance. Cash revenues are accounting revenues plus changes in deferred revenues. Adjusted EBITDA is defined as earnings before interest, taxes,
depreciation and amortization, one-off asset impairment charge, plus non-cash stock compensation charges, and changes in deferred revenues.

No
individual customer accounted for greater than 10% of revenue.

12

---

Revenue analyzed by geographic location of customers is as follows:

($ 000's)

September 30,
2001
(unaudited)

September 30,
2000
(unaudited)Revenue:Americas

29,555

12,125Europe

37,716

24,681Middle East

18,892

12,914Asia

34,571

21,480Consolidated Revenue

120,734

71,200


6.  ACCOUNTING FOR DERIVATIVES

Effective January 1, 2001, the Group 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, which establishes accounting and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value. The statement also requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying hedges allows gains and losses on a derivative to offset related results on the hedged item in the income statement, and
requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.

The
following effects were recorded in the accompanying condensed consolidated financial statements as a result of the adoption of SFAS No. 133:



Subsequent
to adoption of SFAS No. 133 during the first quarter of 2001, the Group entered into additional cross currency swaps, which were not designated as accounting hedges.
These swaps are recorded at their fair values, with a gain of $1,334 recorded in current period earnings.

The
Group will enter into derivative financial instruments as appropriate to minimize its exposure to currency, interest rate or other market risks. We do not utilize derivative
financial instruments for trading or other speculative purposes.

13

---

7.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets," which will be effective for the Group as of January 1,
2002. SFAS No. 142 requires that goodwill and other intangible assets with indefinite lives acquired in a business combination before July 1, 2001 not be amortized. The statement further
requires that the fair value of goodwill and other intangible assets with indefinite lives be tested for impairment upon adoption of this statement, annually and upon the occurrence of certain events.
FLAG Telecom's management estimates that the adoption of SFAS No. 142 will result in the elimination of annual amortization expense related to goodwill in the amount of $2.04 million;
however, the impact of related impairment, if any, on the Group's financial position or results of operations has not been determined.

In
June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires the fair value of
a liability for asset retirement obligations be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the related long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after
June 15, 2002. FLAG Telecom's management has not yet assessed the potential impact of the adoption of SFAS No. 143.

In
August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale consistent with the fundamental
provisions of SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Whilst it supersedes APB Opinion 30 "Reporting
the Results of operationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" it retains the
presentation of discontinued operations but 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. Under SFAS
No. 144 there is no longer a requirement to allocate goodwill to long-lived assets to be tested for impairment. It also establishes a probability weighted cash flow estimation
approach to deal with situations in which there are a range of cash flows that may be generated by the asset being tested for impairment. SFAS No. 144 also establishes criteria for determining
when an asset should be treated as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, with early
application encouraged. The provisions of the Statement are generally to be applied prospectively. FLAG Telecom's management currently has no plans to dispose of any operations and accordingly, does
not anticipate that adoption of SFAS No. 144 will have a material impact on its results of operations or its financial position.

14

---



PART I

ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF        FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "should," "estimates," "predicts," "potential,"
"continue," "strategy," "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements.
Forward-looking statements made in this report on Form 10-Q are as of the date of filing with the Securities and Exchange Commission (the "SEC") and should not be relied upon as of
any subsequent date. We expressly disclaim any obligation to update information presented herein, except as may otherwise be required by law. Our actual results and the timing of certain events may
differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed
elsewhere in this report and in other documents we file from time to time with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2000.

QUARTER ENDED SEPTEMBER 30, 2001 COMPARED WITH THE QUARTER ENDED SEPTEMBER 30, 2000

RESULTS OF OPERATIONS

REVENUES

(Expressed in thousands of dollars)

September 30,
2001

September 30,
2000Capacity

27,620

11,374Operations and maintenance

16,235

10,217Network services

11,744

5,736Total

55,599

27,327


Total
revenue for the quarter ended September 30, 2001 increased 104% to $55.6 million as compared to $27.3 million for the quarter ended September 30,
2000. This increase is due to an increase in our network services business and the continued growth in capacity sales and activations on the FLAG Telecom network. Revenues are only recognized from the
date a system is ready for commercial service and are recognized in the income statement on a pro rata basis evenly over the life of the contract which generally tends to be for fifteen years. The
Northern leg of the FA-1 cable system and the Eastern leg of the FNAL cable system both entered commercial service in June 2001 and revenues from both sale of capacity and
operations and maintenance were recognized for a full quarter as a result. In the quarter ended September 30, 2000 only the FEA system was in commercial service. As at September 30,
2001, with both the Southern and the Northern legs having entered into commercial service, the full amount of the payments received in advance for FA-1 capacity ("presales") had begun to
be recognized as revenues over the life of the contract. In the final quarter of 2001 we

15

---

would expect revenues to increase as a result of the full FA-1 system having been in commercial service for the full quarter. As the construction of the FNAL cable system progresses and
more segments enter
into commercial service this will increase the amount of revenue that can be recognized in the income statement.

Revenue
recognized from the sale of capacity increased by 142% to $27.6 million for the quarter ended September 30, 2001, as compared to $11.4 million for the
quarter ended September 30, 2000.

Revenue
recognized from operations and maintenance increased by 59% to $16.2 million for the quarter ended September 30, 2001, as compared to $10.2 million for
the quarter ended September 30, 2000.

Revenue
recognized from our network services business increased by 105% to $11.7 million for the quarter ended September 30, 2001, as compared to $5.7 million for
the quarter ended September 30, 2000, reflecting the continued growth in customers for the growing range of products and services offered by this business segment.

OPERATING EXPENSES

(Expressed in thousands of dollars)

September 30,
2001

September 30,
2000Network expenses

16,006

4,686Operations and maintenance

15,946

7,603Sales and marketing

4,568

3,552General and administrative

13,645

9,877Restructuring and asset impairment

28169

Depreciation and amortization

39,254

19,598Total

117,588

45,316


During
the quarter ended September 30, 2001, network expenses increased to $16.0 million, as compared to $4.7 million for the quarter ended September 30,
2000. These costs relate primarily to the utilization of third party capacity, backhaul expenses, connection and access charges, and other network procurement costs. This increase is primarily due to
increased third party costs incurred to support the growth in network services products and services and the growth of the network.

During
the quarter ended September 30, 2001, operations and maintenance costs increased by 109% to $15.9 million, as compared to $7.6 million for the quarter
ended September 30, 2000. Operations and maintenance costs relate primarily to the provision of standby maintenance under maintenance agreements as well as salaries and overheads directly
associated with operations and maintenance
activities. This increase primarily reflects the Northern leg of the FA-1 cable system entering into commercial service during June 2001, thus incurring one full quarters costs and
usage of the FNAL cable system during this period.

During
the quarter ended September 30, 2001, sales and marketing costs increased by 28% to $4.6 million, as compared to $3.6 million for the quarter ended
September 30, 2000. Sales and marketing costs are comprised of all sales and marketing activities that are directly undertaken by the Group. This increase is comprised principally of higher
personnel costs arising from the increased sales activity to support the Group's growing range of products.

16

---

During the quarter ended September 30, 2001, general and administrative expenses increased by 37% to $13.6 million, as compared to $9.9 million for the quarter
ended September 30, 2000. This increase is comprised principally of higher personnel and related costs and increased general overheads required to support the growth across our business
segments.

For
the quarter ended September 30, 2001, we recorded $39.3 million in respect of depreciation and amortization compared to $19.6 million for the quarter ended
September 30, 2000. The depreciation and amortization charge for the quarter includes a full quarter's depreciation charge for the FA-1 and FNAL cable systems, portions of which
entered commercial service in June 2001. Amounts within construction in progress relating to these systems were transferred to property and equipment when these systems were placed into
commercial service.

Costs
for the quarter ended September 30, 2001 include charges for non-cash stock compensation expense of $0.3 million in respect of certain awards under our
long-term incentive plan. These charges are required under US GAAP and have no effect on our cash flows.

Restructuring
charges and asset impairment charges of $28.2 million were recorded in the third quarter of 2001. On August 7, 2001 FLAG Telecom announced that it had
decided not to proceed with the FP-1 project in association with TyCom that had been announced in the second quarter. The agreement in
principle with TyCom was conditional upon FLAG Telecom obtaining financing on satisfactory terms. However, despite substantial efforts on FLAG Telecom's part and given the capital market conditions
prevailing at the time, the financing proposal received fell short of expectations. Following this decision certain employment agreements were terminated and amounts already paid or due in connection
with preliminary build evaluation were written off. The restructuring charge of $1.6 million related to staff reduction costs. In total FLAG Telecom had paid $0.5 million as at
September 30, 2001. The remaining cash expenditures relating to the workforce reduction are expected to be substantially paid by the end of 2001. FLAG Telecom had commissioned a marine survey
for the construction of the FP-1 project and entered into other project related expenditure commitments. Following the decision not to proceed the residual value of the costs incurred was
$nil and the consequent asset impairment charge was $26.6 million, comprising $24.0 million in abandoned survey and preliminary build costs and $2.6 million of other project
related costs. $22.8 million of the asset impairment related costs were paid as at September 30, 2001 and the remaining cash costs were expected to be paid by the end of 2001.

INTEREST EXPENSE AND INTEREST INCOME

(Expressed in thousands of dollars)

September 30,
2001

September 30,
2000Interest expense

(26,576
)
(28,287
)Foreign currency gain

2,674

16,502Interest income

7,570

21,654


Interest
expense on borrowings for the quarter ended September 30, 2001 were $26.6 million compared to $28.3 million during the quarter ended September 30,
2000. The decrease in interest expense of $1.7 million is attributable to the capitalization of interest directly related to construction projects. See also "Liquidity and Capital Resources."

The
foreign exchange gain of $2.7 million arises from the translation of the euro denominated cash balances giving rise to a gain of $2.0 million and the gains and
losses on foreign exchange contracts giving rise to a gain of $0.7 million.

17

---

Interest income of $7.6 million was earned during the quarter ended September 30, 2001, compared to $21.7 million earned during the quarter ended
September 30, 2000. The interest income was earned on cash balances, short-term investments and restricted cash held by a collateral trustee or in escrow arising from ongoing
business operations. These amounts were created from cash generated from operations, the proceeds received from our initial public offering in February 2000 and further borrowings, including
the issuance of our senior notes, which are currently held on deposit and are now being applied to various construction projects within the Group.

PROVISION FOR TAXES

(Expressed in thousands of dollars)

September 30,
2001

September 30,
2000Provision for income taxes

2,575

164


The
provision for taxes was $2.6 million for the quarter ended September 30, 2001 compared to $0.2 million for the quarter ended September 30, 2000. The
provision for income taxes reflected in the accompanying statement of operations consists of taxes incurred on the income earned or activities performed by Group companies in certain jurisdictions,
where they are deemed to have a taxable presence or are otherwise subject to tax. At the present time, no income, profit, capital or capital gains taxes are levied in Bermuda. In the event that such
taxes are levied in the future, we have received an undertaking from the Bermuda Government exempting us from all such taxes until March 28, 2016.

NET LOSS AND LOSS PER COMMON SHARE

For the quarter ended September 30, 2001, we recorded a net loss of $80.9 million compared to a net loss of $7.1 million for the quarter
ended September 30, 2000. This includes a restructuring and asset impairment charge following the decision not to progress with the construction of the FP-1 cable system totaling
$28.2 million.

Basic
and diluted loss per common share was $0.60 for the quarter ended September 30, 2001 compared to basic and diluted loss per common share of $0.05 for the quarter ended
September 30, 2000.

OTHER FINANCIAL MEASURES

Management considers the following to be key performance indicators of the business and monitors these on an ongoing basis:

(Expressed in thousands of dollars)

September 30,
2001

September 30,
2000EBITDA(1)

3,863

1,609Adjusted EBITDA(2)

194,197

47,922Cash Revenues(3)

245,587

72,300


---

18

---

EBITDA

We achieved EBITDA of $3.9 million for the quarter ended September 30, 2001, as compared to $1.6 million for the quarter ended September
30, 2000. This increase in EBITDA is principally driven by the significant increase of our revenues during the quarter.

ADJUSTED EBITDA

During the quarter ended September 30, 2001 our adjusted EBITDA increased to $194.2 million, as compared to $47.9 million for the quarter ended
September 30, 2000. This increase includes the impact of $143.5 million of presale revenues billed in relation to the FA-1 and FNAL cable systems.

CASH REVENUES

Our cash revenues for the quarter ended September 30, 2001 increased to $245.6 million, as compared to $72.3 million for the quarter ended
September 30, 2000. This increase is principally due to sales of capacity (including presales) on our FA-1, FNAL, and FEA cable systems in addition to the increased revenues
achieved by our network services business. As we complete our global network build we expect cash revenues to fall as the level of presales diminishes.

NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2000

RESULTS OF OPERATIONS

REVENUES

(Expressed in thousands of dollars)

September 30,
2001

September 30,
2000Capacity

48,964

29,410Operations and maintenance

41,124

29,933Network services

30,646

11,857Total

120,734

71,200


Total
revenue for the nine months ended September 30, 2001 increased 70% to $120.7 million as compared to $71.2 million for the nine months ended September 30,
2000. This increase is due to a significant increase in our FNS business and the continued growth in capacity sales and activations on the FLAG Telecom network. Revenues are only recognized from the
date a system is ready for commercial service and are recognized in the income statement on a pro rata basis evenly over the life of the contract which generally tends to be for fifteen years. The
Northern leg of the FA-1 cable system and the Eastern leg of the FNAL cable system both entered commercial service in June 2001 and revenues from both sale of capacity and
operations and maintenance were recognized for a full quarter

19

---

as a result. In the nine month period ended September 30, 2000 only the FEA system was in commercial service. As at September 30, 2001, with both the Southern and the Northern legs
having entered into commercial service, the full amount of the payments received in advance for FA-1 capacity ("presales") had begun to be recognized as revenues over the lives of the
respective contracts. In the final quarter of 2001 we would expect revenues to increase as a result of the full FA-1 system having been in commercial service for the full quarter. As the
construction of the FNAL cable system progresses and more segments enter into commercial service this will increase the amount of revenue that can be recognized in the income statement.

Revenue
recognized from the sale of capacity increased by 67% to $49.0 million for the nine months ended September 30, 2001, as compared to $29.4 million for the
nine months ended September 30, 2000.

Revenue
recognized from operations and maintenance increased by 37% to $41.1 million for nine months ended September 30, 2001, as compared to $29.9 million for
the nine months ended September 30, 2000.

Revenue
recognized from network services increased by 157% to $30.6 million for the nine months ended September 30, 2001, as compared to $11.9 million for the
nine months ended September 30, 2000, reflecting the continued growth in customers for the growing range of products and services offered by this business segment.

OPERATING EXPENSES

(Expressed in thousands of dollars)

September 30,
2001

September 30,
2000Network expenses

33,939

8,288Operations and maintenance

33,720

24,574Sales and marketing

11,454

9,942General and administrative

32,172

27,564Restructuring and asset impairment

28,169

Depreciation and amortization

85,928

59,596Total

225,382

129,964


During
the nine months ended September 30, 2001, network expenses increased to $33.9 million, as compared to $8.3 million for the nine months ended
September 30, 2000. These costs relate primarily to the utilization of third party capacity, backhaul expenses, connection and access charges, and other
network procurement costs. This increase is primarily due to increased third party costs incurred to support the growth in network services products and services and the growth of the network.

During
the nine months ended September 30, 2001, operations and maintenance costs increased by 37% to $33.7 million, as compared to $24.6 million for the nine
months ended September 30, 2000. Operations and maintenance costs relate primarily to the provision of standby maintenance under maintenance agreements as well as salaries and overheads directly
associated with operations and maintenance activities. This increase primarily reflects the Northern leg of the FA-1 cable system entering into commercial service during June 2001,
thus incurring one full quarters costs and usage of the FNAL cable system during this period.

20

---

During the nine months ended September 30, 2001, sales and marketing costs increased by 16% to $11.5 million, as compared to $9.9 million for the nine months
ended September 30, 2000. Sales and marketing costs are comprised of all sales and marketing activities that are directly undertaken by the Group. This increase is comprised principally of
higher personnel costs arising from the increased sales activity to support the Group's growing range of products.

During
the nine months ended September 30, 2001, general and administrative expenses increased by 17% to $32.2 million, as compared to $27.6 million for the nine
months ended September 30, 2000. This increase is comprised principally of higher personnel and related costs and increased general overheads required to support the growth across our business
segments.

For
the nine months ended September 30, 2001, we recorded $85.9 million in respect of depreciation and amortization compared to $59.6 million for the nine months ended
September 30, 2000. The depreciation and amortization charge for the nine months includes a full quarters depreciation charge for the FA-1 and FNAL cable systems, portions of which
entered commercial service during June 2001. Amounts within construction in progress relating to these systems were transferred to property and equipment when these systems were placed into
commercial service.

Costs
for the nine months ended September 30, 2001 include charges for non-cash stock compensation expense of $1.7 million in respect of certain awards under
our long-term incentive plan. These charges are required under US GAAP and have no effect on our cash flows.

Restructuring
charges and asset impairment charges of $28.2 million were recorded in the third quarter of 2001. On August 7, 2001 FLAG Telecom announced that it had
decided not to proceed with the FP-1 project in association with TyCom that had been announced in the second quarter. The agreement in principle with TyCom was conditional upon FLAG
Telecom obtaining financing on satisfactory terms. However, despite substantial efforts on FLAG Telecom's part and given the capital market conditions prevailing at the time, the financing proposal
received fell short of expectations. Following this decision certain employment agreements were terminated and amounts already paid or due in connection with preliminary build evaluation were written
off. The restructuring charge of $1.6 million related to staff reduction costs. In total FLAG Telecom had paid $0.5 million as at September 30, 2001. The remaining cash
expenditures relating to the workforce reduction are expected to be substantially paid by the end of 2001. FLAG Telecom had commissioned a marine survey for the construction of the FP-1
project and entered into other project related expenditure commitments. Following the decision not to proceed the residual value of the costs incurred was $nil and the consequent asset impairment
charge was $26.6 million, comprising $24.0 million in abandoned survey and preliminary build costs and $2.6 million of other project related costs. $22.8 million of the
asset impairment related costs were paid as at September 30, 2001 and the remaining cash costs were expected to be paid by the end of 2001.

INTEREST EXPENSE AND INTEREST INCOME

(Expressed in thousands of dollars)

September 30,
2001

September 30,
2000Interest expense

(80,023
)
(74,417
)Foreign currency (loss) / gain

(7,511
)
18,870Interest income

38,771

48,925


Interest
expense on borrowings for the nine months ended September 30, 2001 was $80.0 million compared to $74.4 million during the nine months ended
September 30, 2000. The increase in interest

21

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expense of $5.6 million is attributable to the impact of additional borrowings taken on towards the end of quarter one 2001 which has been partly offset by the capitalization of interest
directly related to construction projects. See also "Liquidity and Capital Resources."

The
foreign exchange loss of $7.5 million arises from the translation of the euro denominated cash balances giving rise to a gain of $3.2 million and the gains and
losses on foreign exchange contracts giving rise to a loss of $10.7 million.

Interest
income of $38.8 million was earned during the nine months ended September 30, 2001, compared to $48.9 million earned during the nine months ended
September 30, 2000. The interest income was earned on cash balances, short-term investments and restricted cash held by a collateral
trustee or in escrow arising from ongoing business operations. These amounts were created from cash generated from operations, the proceeds received from our initial public offering in
February 2000 and further borrowings, including the issuance of our senior notes during March 2000, which are currently being applied to various construction projects within the Group.

PROVISION FOR TAXES

(Expressed in thousands of dollars)

September 30,
2001

September 30,
2000Provision for income taxes

5,575

935


The
provision for taxes was $5.6 million for the nine months ended September 30, 2001 compared to $0.9 million for the nine months ended September 30,
2000. The provision for income taxes reflected in the accompanying statement of operations consists of taxes incurred on the income earned or activities performed by Group companies in certain
jurisdictions, where they are deemed to have a taxable presence or are otherwise subject to tax. At the present time, no income, profit, capital or capital gains taxes are levied in Bermuda. In the
event that such taxes are levied in the future, we have received an undertaking from the Bermuda Government exempting us from all such taxes until March 28, 2016.

CUMULATIVE EFFECT OF ADOPTION OF SFAS No. 133

For the quarter ended March 31, 2001, we recorded $1.3 million as the cumulative effect of adoption of SFAS No. 133. See also
Note 6 of Notes to Consolidated Financial Statements.

NET LOSS AND LOSS PER COMMON SHARE

For the nine months ended September 30, 2001, we recorded a net loss of $160.3 million compared to a net loss of $63.0 million for the
nine months ended September 30, 2000.

Basic
and diluted loss per common share was $1.19 for the nine months ended September 30, 2001 compared to basic and diluted loss per common share of $0.49 for the nine months
ended September 30, 2000.

22

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OTHER FINANCIAL MEASURES

Management considers the following to be key performance indicators of the business and monitors these on an ongoing basis:

(Expressed in thousands of Dollars)

September 30,
2001

September 30,
2000EBITDA

7,878

832Adjusted EBITDA

612,660

128,726Cash Revenues

723,859

193,204


EBITDA

We achieved EBITDA of $7.9 million for the nine months ended September 30, 2001, as compared to $0.8 million for the nine months ended
September 30, 2000. This increase in EBITDA is principally driven by the 70% increase in our revenues.

ADJUSTED EBITDA

During the nine months ended September 30, 2001 our adjusted EBITDA increased to $612.7 million, as compared to $128.7 million for the
nine months ended September 30, 2000. This increase includes the impact of $418.2 million of presale revenues billed in relation to the FA-1 and FNAL cable systems.

CASH REVENUES

Our cash revenues for the nine months ended September 30, 2001 increased to $723.9 million, as compared to $193.2 million for the nine
months ended September 30, 2000. This increase is principally due to sales of capacity (including presales) on our FA-1, FNAL, and FEA cable systems in addition to the increased
revenues achieved by our network services business. As we complete our global network build we expect cash revenues to fall as the level of presales diminishes.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The Group's operations and ability to grow may be affected by risks and uncertainties which could cause actual results to differ materially from those
currently anticipated including, without limitation:



23

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Without
limiting the generality of the foregoing, we note in particular the following factors that may affect future results. Although the FNAL project remains on schedule for
completion in mid-2002, any
delay in the completion of this or any other part of the FLAG Telecom network which has not yet entered into commercial service would have the effect of delaying the recognition of revenues.
Additionally, any delays in the completion of the network would slow our ability to migrate customer traffic onto our own network from third party suppliers who are currently providing capacity to us
(at a higher cost than our own network) on a temporary basis. Until such migration is completed we continue to be reliant upon the performance of our third party suppliers and any failure in their
performance would have the effect of delaying the receipt of revenue from our customers and increasing costs. Also, failure to complete the FNAL project on target could result in a default under the
credit facility entered into to provide financing for the FNAL system and an acceleration of the indebtedness thereunder. In addition, FNAL is being built as a development project between a subsidiary
of FLAG Telecom and an unrelated third party. We cannot assure you that such third party will continue to fulfill its obligations under the development agreement, which could be negatively affected by
an adverse change in such third party's financial condition, among other things.

We
also note that the global economic conditions are increasingly difficult and the general conditions prevalent in the global telecommunications market and capital market constraints
continue to affect our customers' capital spending plans significantly. Any worsening or prolongment of these circumstances may affect our future results. Furthermore, we may continue to be faced with
competition that focuses on low prices as opposed to quality and stable supply. We believe, however, that such competition may lessen as a result of the current conditions in the telecom market.

We
have substantial indebtedness, including $430 million of 81/4% Senior Notes issued by FLAG Limited, Euro300 million of 115/8% Senior
Notes issued by FLAG Telecom, Euro300 million of 115/8% Senior Notes issued by FLAG Telecom, $100 million outstanding under FLAG Atlantic's credit facility and
$68.5 million outstanding under FLAG Limited's credit facility, in each case as of September 30, 2001. In addition, FLAG Asia Limited entered into a $300 million credit facility
in August 2001 to provide financing for construction of the FNAL system. As of September 30, 2001, no amounts had been drawn down under the FNAL credit facility. The Group's indebtedness
could impair our ability to raise or generate additional capital, limit our operating flexibility and make us more vulnerable to adverse changes in our markets or the economy generally.

We
derive revenues from services and products provided to a variety of customers primarily in the telecommunications industry. Although none of these exceeds 10% of our revenues, we
have some concentration of credit risk among our customer base. We regularly perform ongoing credit evaluations of our larger customers' financial condition. Any defaults in payment or a reduction in
purchases by our customers could have a negative impact on our financial condition, results of operations and liquidity. We are also exposed to credit-related losses in the event of
non-performance by counterparties
to financial instruments, however, we transact only with highly-rated counterparties and do not currently have reason to expect any such counterparties to fail to meet their obligations to us.

24

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LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations to date through a combination of cash generated from operations, presale proceeds, equity contributions, bank debt, the
proceeds of debt offerings, and the proceeds of our initial public offering.

FLAG Telecom Holdings Limited

On February 16, 2000 we sold 27,964,000 common shares at $24 per share in our initial public offering. We received $633.7 million in net proceeds
from that offering. On March 17, 2000 we completed our sale of 115/8% Senior Notes due 2010 in the US and Europe, raising net proceeds of $576.6 million.

On
December 20, 2000, we entered into a cross currency swap to manage the foreign exchange exposure of our Euro300 million 115/8% Senior Notes due 2010.
Under the swap agreement we exchanged Euro300 million for $269.0 million. On June 20, 2002, we will exchange back the $269.0 million for Euro300 million.

On
January 1, 2001, the Group adopted SFAS No. 133 in its entirety, applying the necessary accounting treatment for all derivative financial instruments held within the
Group. See Note 6 of Notes to Consolidated Financial Statements.

On
April 5, 2001, FLAG Telecom entered into an agreement to collaborate in the development and use of Verizon Communications' recently announced
city-to-city European backbone network. We expect to fund our commitments under this agreement from our existing resources.

FLAG Limited

On February 16, 2000, FLAG Limited amended its existing credit facilities to consist of a $150 million six-year term loan facility
($68.5 million of which remained outstanding at September 30, 2001 and $93 million of which was outstanding at December 31, 2000) and a $10 million revolving credit
facility (none of which was outstanding at June 30, 2001 or December 31, 2000). Dresdner Kleinwort Benson
and Barclays Capital acted as joint lead arrangers. These facilities bore interest at a rate of 225 basis points over LIBOR for the first six months and thereafter at a rate of between 150 and 250
basis points over LIBOR, depending on the credit rating of the 81/4% Senior Notes due 2008 of FLAG Limited. The current interest rate is 200 basis points over LIBOR. The facilities are
secured by a pledge by us of all of the capital stock of FLAG Limited and by assignment of FLAG Limited's contracts and a security interest in its bank accounts and intangible property. In connection
with this amendment, FLAG Limited paid fees and expenses to the joint lead arrangers totaling approximately $3.3 million.

At
the end of March 1998, FLAG Limited entered into two interest rate swap agreements to manage its exposure to interest rate fluctuations on its credit facilities. Under the
swap agreements, FLAG Limited paid a fixed rate of 5.6% on a notional amount of $60.0 million and a fixed rate of 5.79% on a notional amount of $100.0 million and the swap counterparty
paid the floating rate based on LIBOR. One swap agreement terminated in January 2000 and the other swap agreement terminated in July 2000. 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 terminates on
April 30, 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

In October 1999, FLAG Atlantic entered into an interest rate collar transaction for an initial notional amount of $31.0 million, increasing in
increments to $106.0 million in the final quarter of

25

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2001. The transaction terminates on November 30, 2001. The collar is comprised of a LIBOR cap at 7% and a floor of 6.27%. FLAG Atlantic recognizes the net cash amount received or paid on
interest rate hedging instruments as an adjustment to interest cost on the related debt.

In
October 2001, FLAG Atlantic entered into an interest rate swap for an initial notional amount of $260.0 million, reducing in increments to $99.0 million in the
first quarter of 2005. The transaction commences on December 31, 2001 and terminates on March 31, 2005. Under the swap agreement, FLAG Atlantic pays a fixed rate of 3.94% and the swap
counterparty pays the floating rate based on LIBOR.

FLAG
Atlantic has a $575.0 million construction/term loan facility (of which $100.0 million and $62.0 million was outstanding at September 30, 2001 and
December 31, 2000, respectively) and a $25.0 million revolving credit facility (none of which was outstanding at September 30, 2001 or December 31, 2000). These facilities
have a term of 7.5 years and bear interest at LIBOR plus 125 basis points for that portion of the loans (not to exceed 50% of the outstanding loans) which are backed by
investment grade receivables and LIBOR plus 300 basis points for the balance of the loans. FLAG Atlantic has elected, over the course of the construction contract for FA-1, to cancel
$134.2 million of the undrawn construction loan facility as a result of capacity pre-sales over and above the anticipated pre-sale targets. Commitment fees accrue on the
undrawn balance of the loans at between 37.5 basis points and 75 basis points.

FLAG
Atlantic's bank facility is secured by an assignment of all of FLAG Atlantic's contracts, a security interest in its bank accounts and property and a pledge of all of the stock
in FLAG Atlantic.

On
December 6, 2000 we completed the purchase from GTS of its interest in FLAG Atlantic. FLAG Atlantic is now a wholly-owned subsidiary of FLAG Telecom. Under the terms of the
agreement, GTS receives $135.0 million in cash from FLAG Telecom, and FLAG Telecom assumed FLAG Atlantic's cash of $265.8 million at December 31, 2000, which was restricted to use
for FA-1 purposes only, along with all other remaining assets and liabilities of FLAG Atlantic. The transaction was accounted for under the purchase method of accounting and, accordingly,
the excess of the assets acquired and liabilities assumed has been recorded as goodwill. The initial purchase price allocation was based on current estimates. We will make final purchase price
allocations based upon the final values for certain assets and liabilities. As a result, the final purchase price allocation may differ from the presented estimate. Funding arrangements for the
project, including all presale commitments are unaffected.

FLAG Asia Limited

On January 9, 2001, FLAG Telecom entered into an agreement with Level 3 Communications, Inc. for the development of FNAL, a multi-terabit
intra-Asian submarine cable system. In August, 2001, to finance its share of the construction costs, FLAG Asia Limited ("FLAG Asia") entered into a $300 million construction/term loan facility
(of which none was outstanding at September 30, 2001). This facility has a term of 61/2 years and bears interest at LIBOR plus 125 basis points for that portion of the loans (not
to exceed 50% of the outstanding loans) which are backed by investment grade receivables and LIBOR plus 325 basis points for the balance of the loans.

FLAG
Asia's bank facility is secured by an assignment of all of FLAG Asia's contracts, a security interest in its bank accounts and property and a pledge of all of the capital stock
in FLAG Asia.

In
October 2001, FLAG Asia entered into an interest rate swap for an initial notional amount of $89.2 million, rising to $113.0 million in the second quarter of
2002 and then reducing in increments to $2.2 million in the third quarter of 2005. The transaction commences on December 31, 2001 and terminates on September 30, 2005. Under the
swap agreement, we pay a fixed rate of 3.90% and the swap counterparty pays the floating rate based on LIBOR.

26

---

CASH FLOWS

Total cash provided by operating activities was $473.6 million and that used in investing activities was $(1,111.3) million, during the nine months
ended September 30, 2001. At September 30, 2001, total cash had decreased to $668.8 million from $1,292.5 million at December 31, 2000, primarily as a result of
further payments on the construction of the FLAG Telecom network.

Total
cash provided by operating activities and used in investing activities during the nine months ended September 30, 2000 were $144.6 million and $(52.8) million,
respectively.

ASSETS

One of our primary assets is the current net book value of the FLAG Telecom network including construction in progress recorded in property and equipment
totaling $2,498.5 million at September 30, 2001, compared to $1,538.0 million at December 31, 2000. The increase of $993.3 million is primarily due to the ongoing
construction of the various cable systems, particularly the FA-1 system, the Northern leg of which became operational in June 2001, with the remaining portion becoming operational
in September 2001. The capitalised costs incurred in the construction of the various FLAG Telecom cable systems under construction have been included in Construction in Progress.

Our
other property and equipment consist primarily of office furniture, leasehold improvements, computer equipment and motor vehicles totaling $22.9 million and
$10.7 million as of September 30, 2001 and December 31, 2000, respectively.

As
of September 30, 2001, the Group had net current assets of $305.7 million compared to net current assets of $750.5 million, at December 31, 2000.

ACCOUNTS RECEIVABLE

The accounts receivable balance at September 30, 2001 of $174.3 million includes $19.8 million relating to sales contracts payable in
accordance with agreed payment schedules over periods between 30 days and one year from the balance sheet date. The comparable figure at December 31, 2000 was $50.6 million.

IMPACT OF THE INTRODUCTION AND ADOPTION OF THE EURO

On January 1, 1999, eleven of the 15 member countries of the European Union established fixed conversion rates between their existing sovereign
currencies and a new currency called the "Euro". These countries adopted the Euro as their common legal currency on that date. The Euro trades on currency exchanges and is available for
non-cash transactions. Until January 1, 2002, the existing sovereign currencies will remain legal tender in these countries. On January 1, 2002, the Euro is scheduled to
replace the sovereign legal currencies of these countries.

FLAG
Telecom has operations within the European Union including many of the countries that have adopted the Euro. The Group continues to evaluate the impact the Euro will have on its
continuing business operations within the overall scope of managing currency risk. However, the Group does not expect the introduction of the Euro to have a material effect on the group's financial
position or competitive position.

INFLATION

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

27

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PART I

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency Risk.

We are exposed to a degree of foreign currency risk in our international operations. The value of the liability of the E300 million of
115/8% Senior Notes due 2010, as expressed in U.S. dollars on our Balance Sheet, is dependent on the U.S. dollar/euro exchange rate at each balance sheet date. The change in this
liability over a period is reflected in our Income Statement in accordance with US GAAP.

We
have entered into a cross currency swap agreement to manage this aspect of our foreign exchange exposure arising from the E300 million Senior Notes. The
agreement is for a period of 18 months, after which time we will review the exposure again and may enter into further transactions if considered appropriate.

Other
than this, we do not believe that we are exposed to significant risk from movements in foreign currency exchange rates. All capacity and operations and maintenance revenues are
payable in U.S. dollars. All contracts for the provision by third parties of restoration are invoiced to us in U.S. dollars. We invoice some network services products in local currencies. Some
contracts with suppliers of services to our network services business are payable in currencies other than U.S. dollars. Some vendor contracts for the provision to the FEA cable system of operations
and maintenance services and local operating expenses of our subsidiary companies are payable in currencies other than U.S. dollars. We enter into forward foreign currency contracts to hedge exposures
that are considered material to our financial position.

The
impact of the introduction of the euro is discussed in Part I, Item 2 in the "Liquidity and Capital Resources" section.

Interest Rate Risk.

We are exposed to interest rate risk in our financing instruments. Our long-term financing is provided by fixed rate senior notes and floating rate
bank debt. We use derivative financial instruments for the purpose of reducing our exposure to fluctuations in interest rates. We do not utilize derivative financial instruments for trading or other
speculative purposes. The counterparties to these instruments are major financial institutions with high credit quality. We are exposed to credit loss in the event of non-performance by
these counterparties.

28

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SENIOR NOTES AS OF SEPTEMBER 30, 2001

|Type of
Instrument            |  | Principal
Payments Due |  | Maturity Date |  | Interest Rate |   | Currency
and Principal
Amount
(million) |  | Currency
and Fair
Value
(million) |  | FLAG Option to Redeem      
|----------------------------- |  | ---------------------- |  | ------------- |  | ------------- | - | --------------------------------------- |  | --------------------------------- |  | ---------------------------
|FLAG Telecom Holdings Limited |  |                        |  |               |  |               |   |                                         |  |                                   |  |                            
|115/8% Senior Notes           |  | Semi-annually          |  | March 2010    |  | Fixed 115/8   | % | $300.0                                  |  | $120                              |  | Any time after March 2005  
|FLAG Telecom Holdings Limited |  |                        |  |               |  |               |   |                                         |  |                                   |  |                            
|115/8% Senior Notes           |  | Semi-annually          |  | March 2010    |  | Fixed 115/8   | % | Euro300.0                               |  | Euro105                           |  | Any time after March 2005  
|FLAG Limited                  |  |                        |  |               |  |               |   |                                         |  |                                   |  |                            
|81/4% Senior Notes            |  | Semi-annually          |  | January 2008  |  | Fixed 81/4    | % | $430.0                                  |  | $283.8                            |  | Any time after January 2003

DERIVATIVE FINANCIAL INSTRUMENTS AS OF SEPTEMBER 30, 2001

|Type of
Instrument  |  | Payments
Due  |  | Maturity
Date |  | Rate
Payable |   | Rate
Receivable |  | Notional
Amount
($ million) |  | Fair Value
($ million) |  
|------------------- |  | ------------- |  | ------------- |  | ------------ | - | --------------- |  | --------------------------- |  | ---------------------- | -
|Cross Currency Swap |  | Semi-annually |  | June 20, 2002 |  | 1.265        | % | Nil             |  | $268.98                     |  | (0.4                   | )
|                    |  |               |  |               |  |              |   |                 |  | Euro300.0                   |  |                        |  

LONG-TERM DEBT AS OF SEPTEMBER 30, 2001

|Type of
Instrument                    |  | Principal
Payments Due |  | Maturity Date |  | Interest Rate                            |  | Principal
Amount
($ million) |  | Fair Value
($ million) |  | FLAG
Option
to Redeem
|------------------------------------- |  | ---------------------- |  | ------------- |  | ---------------------------------------- |  | ---------------------------- |  | ---------------------- |  | ---------------------
|FLAG Limited credit facility          |  | Quarterly              |  | January 2006  |  | Floating LIBOR + 150 to 250 basis points |  | 68.5                         |  | 68.5                   |  | At any time          
|FLAG Atlantic Limited credit facility |  | Quarterly              |  | April 2007    |  | Floating LIBOR + 125 to 300 basis points |  | 100                          |  | 100                    |  | At any time          
|FLAG Asia Limited credit facility     |  | Quarterly              |  | February 2008 |  | Floating LIBOR + 125 to 325 basis points |  | 0                            |  | 0                      |  | At any time          

FOREIGN CURRENCY DERIVATIVE FINANCIAL INSTRUMENTS AS OF SEPTEMBER 30, 2001

Type of
Instrument

Payments
Due

Maturity
Date

Fair Value
($ million)Forward Contracts

Various

Various

(0.05
)


29

---

INTEREST RATE DERIVATIVE FINANCIAL INSTRUMENTS AS OF SEPTEMBER 30, 2001

|Type of
Instrument    |  | Payments
Due |  | Maturity
Date |  | Rate
Payable   |  | Rate
Receivable |  | Notional
Amount
($ million) |  | Fair Value
($ million) |  
|--------------------- |  | ------------ |  | ------------- |  | -------------- |  | --------------- |  | --------------------------- |  | ---------------------- | -
|FLAG Atlantic Limited |  |              |  |               |  |                |  |                 |  |                             |  |                        |  
|LIBOR Collar          |  | Quarterly    |  | November 2001 |  | Floor at 6.27% |  | Cap at 7%       |  | 106.0                       |  | (0.7                   | )
|FLAG Limited          |  |              |  |               |  |                |  |                 |  |                             |  |                        |  
|LIBOR Collar          |  | Quarterly    |  | April 2002    |  | Floor at 5.85% |  | Cap at 8%       |  | 25.0                        |  | (0.5                   | )

The
three-month LIBOR rate at September 30, 2001 was 2.59000%.

30

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PART II

ITEM 1. LEGAL PROCEEDINGS

We are involved in litigation from time to time in the ordinary course of business. In management's opinion, the litigation in which we are currently involved,
individually and in the aggregate, is not material to us.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



The
following Exhibits are filed as part of this Report on Form 10-Q as required by Regulation S-K. The Exhibits designated by an asterisk (*)
are management contracts and compensation plans and arrangements required to be filed as Exhibits to this report. The following documents are filed as part of or incorporated by reference in this
registration statement.

|Exhibit |  | Description               |  |                                                                                                                                                                  
|------- |  | ------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1     |  | Memorandum of Association |  | Incorporated by Reference to exhibit 3.1 to the Company's Registration Statement on Form F-1, Registration No. 333-94899, filed with the SEC on January 18, 2000.

31

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|4.2  |  | Bye-Laws of the Company                                                                                                                                                         |  | Incorporated by Reference to exhibit 4.2 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2001.                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|4.3  |  | Form of share certificate                                                                                                                                                       |  | Incorporated by Reference to the Company's Registration Statement on Form F-1, Registration No. 333-94899, filed with the SEC on January 18, 2000.      
|4.4  |  | Form of Registration Rights Agreement                                                                                                                                           |  | Incorporated by Reference to the Company's Registration Statement on Form F-1, Registration No. 333-94899, filed with the SEC on January 18, 2000.      
|4.5  |  | Indenture, dated March 17, 2000 between the Company and The Bank of New York, as Trustee, relating to 115/8% Senior Euro Notes Due 2010                                         |  | Incorporated by Reference to the Company's Current Report on Form 8-K, Registration No. 333-94899, filed with the SEC on March 23, 2000.                
|4.6  |  | Indenture, dated March 17, 2000 between the Company and The Bank of New York, as Trustee, relating to 115/8% Senior Dollar Notes Due 2010                                       |  | Incorporated by Reference to the Company's Current Report on Form 8-K, Registration No. 333-94899, filed with the SEC on March 23, 2000.                
|4.7  |  | The Company's Amended and Restated Long-Term Incentive Plan                                                                                                                     |  | Incorporated by reference to exhibit 10.1 to the Company's Annual Report on Form 10-K, Registration No. 000-29207, filed with the SEC on March 30, 2001.
|4.8  |  | Registration Rights Agreement, dated as of June 19, 2001, between FLAG Telecom Holdings Limited, Verizon International Holdings Ltd. and TyCom Ltd.                             |  | Incorporated by Reference to exhibit 4.8 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2001.                         
|99.1 |  | Collocation Agreement between FLAG Atlantic UK Limited, FLAG Atlantic France Sarl, Verizon Global Solutions UK Ltd. and Verizon Global Solutions France dated February 19, 2001 |  | Incorporated by Reference to exhibit 99.1 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2001.                        
|99.2 |  | Network Alliance Agreement between FLAG Telecom Ireland Network Limited and Verizon Global Solutions Holdings II Ltd. dated April 3, 2001                                       |  | Incorporated by Reference to exhibit 99.2 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2001.                        
|99.3 |  | Re-Sale and Purchase Agreement between FLAG Telecom Global Networks Limited, FLAG Telecom Ireland Network Limited and Verizon Global Solutions Holdings II Ltd.                 |  | Incorporated by Reference to exhibit 99.3 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2001.                        
|99.4 |  | Marine Maintenance Service Agreement between TyCom Contracting Limited and FLAG Atlantic Ltd. dated June 1, 2001                                                                |  | Incorporated by Reference to exhibit 99.4 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2001.                        

32

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|99.5 |   | Credit Agreement, dated as of August 16, 2001, among FLAG Asia Limited, Westdeutsche Landesbank Girozentrale, New York Branch, as lead arranger, administrative agent and syndication agent, the Royal Bank of Scotland PLC, as documentation agent, and
the lenders thereunder from time to time |  | **
|---- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|99.6 | * | Letter Agreement, dated as of July 13, 2001, between FLAG Telecom Holdings Limited and Samih Kawar.                                                                                                                                                                                               |  | **
|99.7 | * | Letter Agreement, dated as of July 13, 2001, between FLAG Telecom Holdings Limited and Stuart Rubin.                                                                                                                                                                                              |  | **
|99.8 | * | Letter Agreement, dated as of July 13, 2001, between FLAG Telecom Holdings Limited and Larry Bautista.                                                                                                                                                                                            |  | **

---



July 16, 2001

re: change of Directors and Chief Financial OfficerAugust 7, 2001

re: June 30, 2001 resultsAugust 23,2001

re: FNAL financing.October 12, 2001

re: release of September 30, 2001 resultsNovember 8, 2001

re: September 30, 2001 results


33

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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 14th day of November 2001.

| |  | FLAG TELECOM HOLDINGS LIMITED
| |  | -----------------------------
| |  | By:                          
| |  | By:                          

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