<Page>

================================================================================

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

                                   ----------

                                    FORM 10-Q

(MARK ONE)
   /X/    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

        FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002

                                       OR

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

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                         COMMISSION FILE NUMBER _0-29207

                                   ----------

                          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
                                    OFFICES)
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: +1 (441) 296 0909

                                   ----------

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, 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 May 10, 2002.

================================================================================

<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)
                                    FORM 10-Q
                                      INDEX

<Table>
<Caption>
                                                                                                                            PAGE
                                                                                                                           NUMBER
                                                                                                                           ------
<S>                                                                                                                        <C>
PART I   FINANCIAL INFORMATION......................................................................................          2

Item 1   Financial Statements.......................................................................................          2
           Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001 (audited).............          2
           Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 (unaudited).....          3
           Consolidated Statements of Comprehensive Income for the three months ended March 31, 2002 and 2001
             (unaudited)............................................................................................          4
           Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 (unaudited).....          5
           Notes to Consolidated Financial Statements (unaudited)...................................................          6

Item 2   Management's Discussion and Analysis of Financial Condition and Results of Operations......................         14

Item 3   Quantitative and Qualitative Disclosures About Market Risk.................................................         22

PART II  OTHER INFORMATION..........................................................................................         25

Item 1   Legal Proceedings..........................................................................................         25

Item 2   Changes in Securities and Use of Proceeds..................................................................         26

Item 3   Defaults Upon Senior Securities............................................................................         26

Item 4   Submission of Matters to a Vote of Security Holders........................................................         26

Item 5   Other Information..........................................................................................         26

Item 6   Exhibits and Reports on Form 8-K...........................................................................         26
</Table>

                                       -1-
<Page>

                          PART I FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)
                           CONSOLIDATED BALANCE SHEETS
                   AS OF MARCH 31, 2002 AND DECEMBER 31, 2001
     (EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

<Table>
<Caption>
                                                                                                  MARCH 31,         DECEMBER 31,
                                                                                                    2002                2001
                                                                                                -------------      -------------
                                                                                                 (UNAUDITED)        (AUDITED)(1)
<S>                                                                                             <C>                <C>
ASSETS:
  Current assets:
    Cash and cash equivalents..............................................................     $     373,811      $     424,174
    Accounts receivable, net of allowance for doubtful accounts of $10,579 (2001--$4,099)..           151,920            154,000
    Prepaid expenses and other assets......................................................            84,118             66,205
    Interest Rate collars..................................................................             2,596                 57
                                                                                                -------------      -------------
  Total current assets.....................................................................           612,445            644,436

  Goodwill.................................................................................               936                  -
  Restricted cash..........................................................................           181,927            321,195
  Capitalized financing costs, net of accumulated amortization of $16,721 (2001--$8,543)...            19,695             27,872
  Deferred Tax Asset.......................................................................             2,940              2,940
  Construction in progress.................................................................           416,947            315,718
  Other long term assets, net..............................................................           159,565            157,427
  Property and equipment, net..............................................................         1,951,499          2,007,078
                                                                                                -------------      --------------
  Total Assets.............................................................................     $   3,345,954      $   3,476,666
                                                                                                -------------      --------------

LIABILITIES:
  Current liabilities:
    Accrued construction costs.............................................................     $      83,992      $      67,084
    Accounts payable.......................................................................           116,689            112,183
    Accrued liabilities....................................................................            90,965            109,684
    Cross currency swaps...................................................................             9,561              7,226
    Deferred revenue.......................................................................           157,167            173,000
    Income taxes payable...................................................................            10,765             13,686
    Short-term debt........................................................................         1,231,233            556,078
                                                                                                -------------      -------------
    Total current liabilities..............................................................         1,700,372          1,038,941

  Long-term debt...........................................................................                 -            767,953
  Deferred revenue and other...............................................................         1,291,908          1,236,951
  Deferred taxes...........................................................................             2,920              2,901
                                                                                                -------------      -------------
  Total Liabilities........................................................................         2,995,200          3,046,746
                                                                                                -------------      -------------

SHAREHOLDERS' EQUITY:
  Common stock, $.0006 par value, 300,000,000 authorized and 134,139,046
    (2001--134,139,046) outstanding........................................................                80                 80
  Additional paid-in capital...............................................................         1,112,668          1,112,668
  Deferred stock compensation..............................................................               (36)               (51)
  Minority interest........................................................................                20                  -
  Accumulated other comprehensive income...................................................                24              5,165
  Accumulated deficit......................................................................          (762,002)          (687,942)
                                                                                                -------------      -------------
  Total shareholders' equity...............................................................           350,754            429,920
                                                                                                -------------      --------------
  Total liabilities and shareholders' equity...............................................     $   3,345,954      $   3,476,666
                                                                                                -------------      -------------
</Table>

(1) Extracted without amendment from the audited financial statements of the
    Company

                                       -2-
<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                           FOR THE THREE MONTHS ENDED
                             MARCH 31, 2002 AND 2001
     (EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

<Table>
<Caption>
                                                                      THREE MONTHS ENDED
                                                                            MARCH 31,
                                                               ----------------------------------
                                                                    2002                 2001
                                                               -------------        -------------
                                                                (UNAUDITED)          (UNAUDITED)
<S>                                                            <C>                  <C>
REVENUES:.............................................                69,538               29,016
EXPENSES:
  Operations and maintenance cost (including non-cash
    stock compensation expense of $1 (2001 -$151))....                19,740                7,592
  Network expenses....................................                23,435                7,710
  Sales and marketing (including non-cash stock
    compensation expense of $1 (2001-$113))...........                 3,755                3,255
  General and administrative (including non-cash
    stock compensation expense of $13 (2001--$393))...                19,343                9,253
  Depreciation and amortization.......................                45,366               20,437
                                                               -------------        -------------
                                                                     111,639               48,247

OPERATING LOSS........................................               (42,101)             (19,231)
INTEREST EXPENSE......................................               (40,087)             (31,042)
FOREIGN CURRENCY GAIN.................................                 2,022               (6,951)
INTEREST INCOME.......................................                 3,909               20,252
LOSS BEFORE INCOME TAXES..............................               (76,257)             (36,972)
PROVISION FOR INCOME TAXES............................                 2,197               (1,259)
NET LOSS BEFORE CUMULATIVE EFFECT OF ADOPTION OF SFAS
  No. 133.............................................               (74,060)             (38,231)
CUMULATIVE EFFECT OF ADOPTION OF SFAS No. 133.........                    --               (1,291)
NET LOSS..............................................         $     (74,060)       $     (39,522)
                                                               -------------        -------------

Basic and diluted net loss per common share before
  cumulative effect of adoption of SFAS No. 133.......         $       (0.55)       $       (0.29)
Cumulative effect of adoption of SFAS No. 133.........         $        (---)       $       (0.01)
Basic and diluted net loss per share..................         $       (0.55)       $       (0.30)
                                                               -------------        -------------

Weighted average common shares outstanding............           134,139,046          134,093,171
                                                               -------------        -------------
</Table>

                                       -3-
<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
               FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
                       (EXPRESSED IN THOUSANDS OF DOLLARS)

<Table>
<Caption>
                                                                      THREE MONTHS ENDED
                                                                            MARCH 31,
                                                               ----------------------------------
                                                                    2002                 2001
                                                               -------------        -------------
                                                                (UNAUDITED)          (UNAUDITED)
<S>                                                                  <C>                  <C>
NET LOSS..............................................               (74,060)             (39,522)
Foreign currency translation..........................                (7,681)              (2,809)
Loss/Gain on derivatives--effect of adoption of SFAS
  No.133..............................................                    --                 (526)
Loss/Gain on derivatives--change in fair value........                 2,540               (1,038)
                                                                 -----------          -----------
COMPREHENSIVE LOSS....................................               (79,201)             (43,895)
                                                                 -----------          -----------
</Table>

                                       -4-
<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
                       (EXPRESSED IN THOUSANDS OF DOLLARS)

<Table>
<Caption>
                                                                                                   MARCH 31,           MARCH 31,
                                                                                                     2002                2001
                                                                                                 -------------      -------------
                                                                                                  (UNAUDITED)        (UNAUDITED)
<S>                                                                                              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss......................................................................                 $     (74,060)     $     (39,522)
  Adjustments to reconcile net loss to net cash provided by operating activities:
    Cumulative effect of adoption of SFAS No.133................................                            --              1,291
    Amortization of financing costs.............................................                         8,177                707
    Provision for doubtful accounts.............................................                         6,480                 --
    Senior debt discount........................................................                           441                442
    Non-cash stock compensation.................................................                            16                658
    Depreciation and amortization...............................................                        45,366             20,436
    Deferred taxes..............................................................                            19                (51)
    Add/(deduct) net changes in assets and liabilities:
      Accounts receivable.......................................................                        (4,408)            68,185
      Prepaid expenses and other assets.........................................                       (23,411)           (35,939)
      Accounts payable and accrued liabilities..................................                        26,108            (30,016)
      Income taxes payable......................................................                        (2,921)               833
      Deferred revenue and other................................................                        39,124            107,724
                                                                                                 -------------      -------------
       Net cash provided by operating activities................................                        20,931             94,748
                                                                                                 -------------      -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of short-term debt..................................................                       (88,500)           (20,000)
  Capital contributions--Options exercised......................................                            --                396
                                                                                                 -------------      -------------
                Net cash used in financing activities...........................                       (88,500)           (19,604)
                                                                                                 -------------      -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Decrease in restricted cash...................................................                       139,267            195,634
  Cash paid for network assets (including construction).........................                      (115,960)          (355,080)
  Proceeds from disposal of property and equipment..............................                            57                 --
  Investment in property and equipment..........................................                        (3,541)           (19,005)
                                                                                                 -------------      -------------
      Net cash provided by/(used in) investing activities.......................                        19,823           (178,451)
                                                                                                 -------------      -------------
NET DECREASE IN CASH                                                                                   (47,746)          (103,307)
                                                                                                 -------------      -------------
Effect of foreign currency movements............................................                        (2,617)             1,913
CASH, beginning of period.......................................................                       424,174            919,709
                                                                                                 -------------      -------------
CASH, end of period.............................................................                 $     373,811      $     818,315
                                                                                                 =============      =============

SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
  Increase in network assets (including construction)...........................                 $     132,868      $     327,080
  (Increase)/decrease in accrued construction costs.............................                       (16,908)            28,000
                                                                                                 -------------      -------------
  Cash paid for network assets (including construction).........................                 $     115,960      $     355,080
                                                                                                 -------------      -------------

SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW INFORMATION:
  Interest expense for period...................................................                 $      40,087      $      31,042
  Amortization of financing costs and senior debt discount......................                        (8,618)            (1,149)
  Increase in accrued interest payable..........................................                        (6,861)           (26,366)
                                                                                                 -------------      -------------
Interest paid...................................................................                 $      24,608      $       3,527
                                                                                                 -------------      -------------
Interest capitalized............................................................                 $       2,783      $       2,955
                                                                                                 -------------      -------------
Taxes paid......................................................................                 $         541      $         193
                                                                                                 -------------      -------------
</Table>

                                       -5-
<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.   BACKGROUND AND ORGANIZATION

     FLAG Telecom Holdings Limited (in provisional liquidation) ("FLAG
Telecom" or the "Company") is a Bermuda company with its principal executive
offices located at Cedar House, 41 Cedar Avenue, Hamilton HM12, Bermuda. In
addition to the Company, the principal companies which comprise the FLAG
Telecom group of companies are the following wholly-owned subsidiaries of
FLAG Telecom: FLAG Limited (in provisional liquidation), FLAG Atlantic
Limited (in provisional liquidation), FLAG Asia Limited (in provisional
liquidation), FLAG Telecom Group Services Limited (in provisional
liquidation), FLAG Telecom Global Network Limited and FLAG Telecom Ireland
Limited. We refer to these subsidiaries, together with the Company, as the
"Group". In this quarterly report, the terms "we", "us" and "our" refer to
the Group.

     FLAG Telecom was incorporated on February 3, 1999 to serve as the holding
company for the Group. On February 26, 1999, FLAG Telecom acquired approximately
66% of FLAG Limited by exchanging 69,709,935 shares of FLAG Limited common stock
for the same number of shares of FLAG Telecom 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 carry-over basis.

     FLAG Telecom is a "foreign private issuer" within the meaning of Rule 3b-4
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and is voluntarily filing periodic reports under the Exchange Act as if it
were a domestic registrant.

     VOLUNTARY PETITION UNDER CHAPTER 11

     On April 12, 2002, FLAG Telecom and certain of its subsidiaries filed
voluntary petitions for relief under Chapter 11 of the United States Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for the Southern
District of New York (the " Court"). This action was taken following the
acceleration of the bank debt of FLAG Atlantic Limited by the syndicate of banks
which are its lenders, which constituted a cross-default under FLAG Telecom's
indenture for its outstanding senior notes.

     On April 19, 2002, FLAG Telecom and two of its Bermudan subsidiaries
filed a parallel ancillary petition (the "Bermuda Proceedings") pursuant to
Section 161 of the Companies Act 1981 of Bermuda (the "Bermuda Companies
Act") in order to commence proceedings in the Supreme Court of Bermuda for
the winding up of the Company and the two subsidiaries, to create a stay of
proceedings against the Company under Bermuda law, and to request the
appointment of Joint Provisional Liquidators ("JPLs"). The Bermuda Proceedings
are designed to maintain the status quo of the Company and the two
subsidiaries and to allow the proceedings under the Bankruptcy Code to
proceed, subject to the supervision and agreement of the JPLs.

     Pursuant to Bermuda Companies Act 1981 all correspondence or other
business documentation in the name of or bearing the name of any of the
Bermuda companies which are parties to the Bermuda Proceedings must at all
times while the Bermuda Proceedings are pending indicate that the Bermuda
companies are 'in provisional liquidation'.

     On April 23, 2002, five additional subsidiaries of FLAG Telecom, including
FLAG Asia Limited and FLAG Telecom Group Services Limited, filed for relief
under Chapter 11 of the Bankruptcy Code with the Court. On April 29, 2002, FLAG
Asia Limited filed a parallel ancillary petition in Bermuda pursuant to Section
161 of the Bermuda Companies Act.

     Mr. Richard Heis and Ms. Chris Laverty of KPMG in England and Mr. Robert
D Steinhoff of KPMG in Bermuda have been appointed as JPLs of FLAG Telecom,
FLAG Limited, FLAG Atlantic Limited and FLAG Asia Limited, pursuant to
Section 161 of the Bermuda Companies Act. The JPLs have the power to oversee
the continuation of the business of the Company and its subsidiaries under

                                       -6-
<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)

the control of the Company's Board of Directors and to oversee and liaise
with the existing Board of Directors in effecting a reorganization of the
Company.

     NASDAQ DELISTING HEARING

     On April 19, 2002, FLAG Telecom issued a press release announcing that on
April 12, 2002 it received a notice from the NASDAQ Stock Market, Inc. stating
that FLAG Telecom's securities are subject to delisting from the NASDAQ National
Market effective April 22, 2002. Pursuant to the NASDAQ Marketplace Rules, FLAG
Telecom has requested a hearing to appeal that determination. The hearing
request will stay the delisting of the Company's stock pending a decision by a
NASDAQ Listing Qualifications Panel. The hearing is scheduled to take place on
May 16, 2002.

     RESTRUCTURING

     We are in ongoing negotiations with our creditors, including
representatives of the FLAG Atlantic Limited Bank Group, holders of our various
senior notes and significant trade creditors, regarding a comprehensive
financial restructuring.

     As a result of our negotiations with our creditors, all of FLAG Telecom's
debt has been classified as short-term debt.

2.   BASIS OF PREPARATION

     FLAG Telecom is attempting a restructuring but there is doubt over the
Company's ability to continue as a going concern. It is unclear whether
restructuring the Group is likely to lead to a going concern value higher
than the value likely to be achieved through a liquidation of the Group. We
have been advised that, depending in part upon the speed with which we are able
to emerge from Chapter 11, a negotiated restructuring is likely to result in
a greater value than if we liquidate. This issue is being reviewed by us and
our advisors on an on-going basis.

     Notwithstanding the foregoing, as at the date of this report management
continues to believe it appropriate to prepare our unaudited financial
statements included in this report on a going concern basis. Accordingly,
these financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should we not continue as a
going concern.

     The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States ("U.S. GAAP") and are expressed in U.S. Dollars
("Dollars").

     The financial statements consolidate the financial statements of FLAG
Telecom and its subsidiary companies after eliminating inter-company
transactions and balances. Investments in which FLAG Telecom has an investment
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
March 31, 2002, there were no equity method investments remaining (see Note 4).

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenue and expenses during the
reporting period. Actual amounts and results could differ from those estimates.

     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 ended March 31,
2002 and 2001, the balance sheet as of March 31, 2002, and the cash flows for
the three months ended March 31, 2002 and 2001. Our accompanying unaudited
condensed consolidated financial statements should be read in conjunction with

                                       -7-
<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)

our audited consolidated financial statements for the year ended December 31,
2001. The results of operations for any interim period are not necessarily
indicative of results for the full year.

3.   SIGNIFICANT ACCOUNTING POLICIES

     Our significant accounting policies are summarized as follows:

     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, we 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.

     RECIPROCAL TRANSACTIONS

     In accordance with U.S. accounting principles, amounts invoiced as part of
reciprocal transactions are recorded at fair value as deferred revenue. We
amortize deferred revenue on a straight-line basis as earned over the term of
the relevant agreement. We have not entered into any reciprocal transactions
that would require us to recognize GAAP revenues up-front. Further details are
provided in note 3.2.

     OPERATIONS AND MAINTENANCE

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

     NETWORK REVENUES

     Network revenues are revenues derived from the sale of managed bandwidth
leases and 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.

     3.2 RECIPROCAL TRANSACTIONS

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

                                       -8-
<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)

     We treat reciprocal transactions as if they were non-monetary transactions
in accordance with APB No. 29. In order to conclude that the reciprocal
transactions should appropriately be accounted for as revenue and a capital
expenditure at fair value, in accordance with APB No. 29, we assess whether:

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

2.   the fair values of the assets exchanged are determinable within reasonable
     limits.

     Our reciprocal transactions fall into three categories: services for
services, operating leases for operating leases and operating leases for capital
leases. Under the terms of both service contracts and operating leases we do not
exchange an interest in a productive asset but provide a service to, and receive
a service from, our customers. Consequently such transactions are recorded at
fair value. We also consider that operating leases and capital leases are
dissimilar in nature and consequently are not exchanges of similar productive
assets within the definition of APB No. 29.

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

     3.3 DIRECT COSTS RELATED TO REVENUE

     CAPACITY

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

     RECIPROCAL TRANSACTIONS

     Capacity or facilities that we acquire as part of reciprocal transactions
are recorded either as property and equipment, prepaid expenses and other assets
or other long term assets, depending upon when it is anticipated that they will
be brought into service, and are charged as network expense or depreciated on a
straight-line basis over the shorter of 15 years or the term of the purchase
agreement.

     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.

     3.4  COMMISSIONS

     Commissions are capitalized and amortized over the period of the
recognition of the related capacity revenue.

                                       -9-
<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)

     3.5  ADVERTISING COSTS

     Advertising costs are expensed as incurred. Such costs are included in
sales and marketing expenses in the accompanying consolidated statements of
operations.

     3.6  INCOME TAXES

     Deferred taxes are determined based on the difference between the tax
basis of an asset or liability and its reported amount in the financial
statements. A deferred tax liability or asset is recorded using the enacted
tax rates expected to apply to taxable income in the period in which the
deferred tax liability or asset is expected to be settled or realized. Future
tax benefits attributable to these differences, if any, are recognizable to
the extent that realization of such benefits is more likely than not.

     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 months period
ended March 31, 2002 and 2001 presented, no potentially dilutive securities have
been included in the calculation of diluted net loss per share amounts as they
would be anti-dilutive in periods in which a loss has been reported.

     3.8  CONSTRUCTION IN PROGRESS

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

     3.9  PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is taken on a straight-line basis over the estimated useful lives
of the assets as follows:

<Table>
    <S>                                                                             <C>
    Computer equipment..........................................................    3 years
    Fixtures and fittings.......................................................    5 years
    Leasehold improvements......................................................    Remaining lease term
    Motor vehicles..............................................................    5 years
    Network assets:
      Cable systems.............................................................    15 years
      PoPs......................................................................    7 years
      Transmission and other assets.............................................    5 years
</Table>

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

     3.10 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.

     3.11  GOODWILL

     With effect from January 1, 2002, the Company has adopted Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets". This has resulted in a change to our accounting policy
for goodwill and, consequently, goodwill is no longer amortized.

     Goodwill, representing the excess of purchase price over the fair value
of assets acquired and the liabilities assumed, is subject to a test for
impairment on an annual basis and whenever indicators of impairment arise.

     Under the testing for impairment, the fair value of a reporting unit is
estimated and compared with its carrying amount including goodwill. Reporting
units are determined on the basis of the organizational structure of the
Group. If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not considered impaired. However, if the
carrying amount of the reporting unit exceeds its fair value, the implied fair
value of the goodwill is compared to the carrying amount of the goodwill. If
the carrying amount of the goodwill exceeds the implied fair value, an
impairment loss is recognized as an adjustment to net income equal to that
excess.

     3.12  CASH AND CASH EQUIVALENTS

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

                                      -10-
<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)

     3.13 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.

     3.14 DERIVATIVE FINANCIAL INSTRUMENTS

     The Group uses derivative financial instruments for the purpose of reducing
its exposure to adverse fluctuations in interest rates, currencies and other
market risks. The Group does not utilize derivative financial instruments for
trading or other speculative purposes. The counter-parties to these instruments
are major financial institutions with high credit quality. The Group is exposed
to credit loss in the event of non-performance by these counter-parties.

     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
established 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 consolidated
financial statements as a result of the adoption of SFAS No. 133:

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

     -    The Group's cross currency swap held at January 1, 2001 was not
          designated as an accounting hedge; consequently, upon the adoption of
          SFAS No. 133, the swap was recorded in the balance sheet at fair
          value, and the Group's underlying economically hedged Euro-denominated
          debt was recorded at current foreign currency rates. The resulting
          adjustment of $1,291 was recorded as the cumulative effect of adoption
          of SFAS No.133.

     3.15  CAPITALIZED INTEREST AND FINANCING COSTS

     Interest costs on qualifying assets are capitalized and amortized over
the useful life.

     Costs incurred to obtain financing are capitalized and amortized over
the term of the related borrowings.

     3.16 TRANSLATION OF FOREIGN CURRENCIES

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

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


                                      -11-
<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)

         3.17  STOCK OPTIONS

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

4.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, and
Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and
Other Intangible Assets. SFAS 141 requires the use of the purchase method of
accounting for all business combinations initiated after June 30, 2001.
Additionally, it is likely that more intangible assets will be recognized under
SFAS 141 than its predecessor, APB Opinion (APB) No. 16, although in some
instances previously recognized intangibles will be included as part of
goodwill. SFAS 141 requires that, upon adoption of SFAS 142, companies
reclassify the carrying amounts of certain intangible assets and goodwill based
on the criteria of SFAS 141.

     Under SFAS 142, goodwill will no longer be amortized, but will be tested
for impairment on an annual basis and whenever indicators of impairment arise.
Additionally, goodwill on equity method investments will no longer be amortized;
however, it will continue to be tested for impairment in accordance with APB No.
18, The Equity Method of Accounting for Investments in Common Stock. Under SFAS
142, intangible assets with indefinite lives will not be amortized. Instead they
will be carried at the lower cost or market value and tested for impairment at
least annually. All other recognized intangible assets will continue to be
amortized over their estimated useful lives.

     SFAS 142 is effective for fiscal years beginning after December 15, 2001,
although goodwill on business combinations consummated after July 1, 2001 is not
amortized. Upon adoption, all goodwill and indefinite lived intangible assets
must be tested for impairment and a cumulative effect adjustment to net income
recognized at that time. The Company adopted SFAS 142 on January 1, 2002 and
this did not have a material impact on its results of operations, financial
position or cash flows.

<Table>
<Caption>
                                                                    MARCH 31,      MARCH 31,
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)          2002           2001
------------------------------------------------------------      -----------     -----------
<S>                                                               <C>             <C>
Reported net loss...........................................      $  (74,060)     $  (39,522)
Add back: Goodwill amortization.............................                -             500
                                                                  -----------     -----------
Adjusted net loss...........................................      $  (74,060)     $  (39,022)
                                                                  -----------     -----------
Basic and diluted earnings per share
Reported net income.........................................       $   (0.55)      $   (0.29)
Goodwill amortization.......................................                -               -
                                                                  -----------     -----------
Adjusted net loss...........................................       $   (0.55)      $   (0.29)
                                                                  -----------     -----------
</Table>

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). SFAS 143 establishes accounting requirements for
retirement obligations associated with tangible long-lived assets, including (1)
the timing of the liability recognition, (2) initial measurement of the
liability, (3) allocation of asset retirement cost to expense, (4) subsequent
measurement of the liability and (5) financial statement disclosures.

                                      -12-
<Page>

                          FLAG TELECOM HOLDINGS LIMITED
                          (in provisional liquidation)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)

     SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset and
depreciated over the life of the associated fixed asset. An entity shall measure
changes in the liability for an asset retirement obligation due to passage of
time by applying an interest method of allocation to the amount of the liability
at the beginning of the period. The interest rate used to measure that change
shall be the credit-adjusted risk-free rate that existed when the liability was
initially measured. That amount shall be recognized as an increase in the
carrying amount of the liability and as an expense classified as an operating
item in the statement of income. SFAS 143 is effective for fiscal years
beginning after June 15, 2002, with early application encouraged.

     The Company adopted SFAS 143 on January 1, 2002 and this did not have a
material impact on its results of operations, financial position or cash flows.

     In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144). SFAS 144 establishes a single
accounting model for long-lived assets to be disposed of by sale consistent with
the fundamental provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. While it
supersedes portions of APB Opinion 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, it
retains the discontinued operations presentation, yet it broadens that
presentation to include a component of an entity (rather than a segment of a
business). However, discontinued operations are no longer recorded at net
realizable value and future operating losses are no longer recognized before
they occur. SFAS 144 also establishes criteria for determining when an
asset should be treated as held for sale.

     SFAS 144 is effective for fiscal years beginning after December 15, 2001.
The provisions of SFAS 144 are generally to be applied prospectively. The
Company adopted SFAS 144 on January 1, 2002 and this did not have a material
impact on its results of operations, financial position or cash flows.

5.   SEGMENT REPORTING

     On a segmental basis, FLAG Telecom has historically reported its results
in its two primary operational areas: Capacity and Operations and Network
Services. The decision to report under these two segments was made on the
basis that each segment possessed different economic characteristics
requiring different marketing strategies and they were managed and evaluated
separately. The rationale for this historical basis has been subject to
review and consequently from January 1, 2002, the Group will now report as
just one segment. We made this determination on the basis that our sales and
marketing functions are structured geographically, selling a full range of
the products and services on our global network.  The presentation of one
segment is consistent with the financial information reported to the
Group's executive officers for management purposes.

     Revenue analyzed by geographical location of customers is as follows:

<Table>
<Caption>
                                                              MARCH 31,     MARCH 31,
     (EXPRESSED IN THOUSANDS OF DOLLARS)                        2002          2001
     -----------------------------------                      ---------     ---------
     <S>                                                         <C>           <C>
     Americas.......................................             22,018         5,704
     Europe.........................................             16,468        10,653
     Middle East....................................              8,582         4,745
     Asia...........................................             22,470         7,914
                                                              ---------     ---------
     Consolidated Revenue...........................             69,538        29,016
                                                              ---------     ---------
</Table>

                                      -13-
<Page>

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

A NOTE ABOUT FORWARD LOOKING STATEMENTS

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

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

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

          -    our ability to file with the Court a plan of reorganization for
               the Group and obtain subsequent court approval which allows us
               to emerge from Chapter 11 with a deleveraged balance sheet and
               a strong operational base;
          -    involuntary bankruptcy filings of certain other FLAG entities
               that do not have sufficient nexus in the US or the filings under
               Chapter 11 being challenged in foreign jurisdictions;
          -    our ability to operate successfully under a reduced budget while
               we are in Chapter 11;
          -    our ability to successfully implement the approved reorganization
               plan;
          -    our ability to defend class action law suits brought against
               us and certain of our officers and directors;
          -    an inability to arrange alternate financing for FNAL;
          -    lack of liquidity;
          -    dependence on key personnel;
          -    problems being experienced by the telecom industry;
          -    the insolvency and financial difficulties on the part of
               customers and suppliers;
          -    excess fiber capacity;
          -    pricing pressures requiring the recognition of an asset
               impairment;
          -    governmental investigations with respect to other industry
               participants;
          -    changes arising from the recent focus on financial reporting
               principles;
          -    substantial over-capacity;
          -    customers demanding shorter-term arrangements;
          -    customers canceling existing agreements and prospective customers
               determining not to enter into business arrangements currently
               forecast;
          -    dependence on third parties for the critical last mile connection
               to customers;
          -    inability to complete projects underway;
          -    the refusal of third parties to honor existing contracts or to
               enter into critical new "supply" agreements;
          -    failure to realize sufficient value from our systems;
          -    infrastructural investments and technologies becoming obsolete;
          -    maintenance of cooperative relationships with landing partners
               and local operators;
          -    foreign regulation;
          -    possible international economic and political instability;
          -    exposure to foreign exchange rate risk;
          -    volatility of FLAG Telecom's common shares;
          -    the delisting of common shares from the Nasdaq National Market;
          -    changes in tax regulation; and
          -    limitations imposed by FLAG Telecom's Bye-laws.

                                      -14-
<Page>

     Many of these risks are discussed in greater detail in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2001 (the "Annual
Report") under the heading "Risk Factors". Please read those risk factors
carefully. We cannot predict which, if any, of these or other factors might
have a significant impact on the telecommunications industry in the future,
nor can we predict what impact, if any, the occurrence of these or other
events might have on our operations.

CRITICAL ACCOUNTING ESTIMATES

     We have not made any material changes to the critical accounting
estimates described in our Annual Report.

RESULTS OF OPERATIONS

     QUARTER ENDED MARCH 31, 2002 COMPARED WITH THE QUARTER ENDED MARCH 31, 2001

     REVENUES

<Table>
<Caption>
                                                                       MARCH 31,     MARCH 31,
        (EXPRESSED IN THOUSANDS OF DOLLARS)                              2002          2001
        -----------------------------------                            ---------     ---------
        <S>                                                               <C>           <C>
        Capacity....................................                      28,732         8,112
        Operations and maintenance..................                      16,115        12,303
        Network services............................                      24,691         8,601
                                                                       ---------     ---------
        Total.......................................                      69,538        29,016
                                                                       ---------     ---------
</Table>

     Total revenue for the quarter ended March 31, 2002 increased 140% to $69.5
million as compared to $29.0 million for the quarter ended March 31, 2001. 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,
particularly the FLAG Atlantic ("FA-1") and FLAG North Asian Loop ("FNAL")
systems. Revenues are only recognized from the date that 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
15 years.

     Subsequent to March 31, 2001, we achieved a number of significant
milestones in the construction of our global network bringing parts of our
network into commercial service and thereby permitting the recognition of
revenue from presales in the statement of operations which had previously been
deferred. The southern leg of the FA-1 system entered into commercial service in
May 2001 and the full loop was completed when the northern leg of the system
entered into commercial service in June 2001. With both the full loop of the
FA-1 system in commercial service, the full amount of the presale payments began
to be recognized over the lifetime of the system from June 2001. In addition,
revenues in relation to the agreed maintenance charges on the FA-1 cable system
started to be recognized. The eastern leg of the FNAL system also entered into
commercial service in June 2001. If we are able to arrange adequate financing,
as the construction of the FNAL system progresses and more segments enter into
commercial service, the amount of revenue that can be recognized in the income
statement will increase. Prior to the quarter ended March 31, 2001, only the FEA
cable system was in commercial service.

     Revenue recognized from the sale of capacity increased by 254% to $28.7
million for the quarter ended March 31, 2002, as compared to $8.1 million for
the quarter ended March 31, 2001. The increase is due to the construction
milestones achieved on our global network in 2001 which enabled us to start
amortizing deferred revenue through the income statement over the life time of
the system or over the life of the lease and services agreements. In the quarter
ended March 31, 2001 there were only capacity sales relating to the FEA cable
system.

     Revenue recognized from operations and maintenance increased by 30.9% to
$16.1 million for the quarter ended March 31, 2002, as compared to $12.3 million
for the quarter ended March 31, 2001. This increase resulted from construction
milestones achieved on our global network which enabled us to start billing the
agreed maintenance charges on the systems brought into commercial service.

                                      -15-
<Page>

     Revenue recognized from our network services business increased by 187%
to $24.7 million for the quarter ended March 31, 2002, as compared to $8.6
million for the quarter ended March 31, 2001. The network services business
consists of Managed Bandwidth Services, IP Services and co-location services.
The increase reflects the growth in customers for the expanding range of
products and services offered.

     OPERATING EXPENSES

<Table>
<Caption>
                                                                       MARCH 31,     MARCH 31,
        (EXPRESSED IN THOUSANDS OF DOLLARS)                              2002          2001
        -----------------------------------                            ---------     ---------
        <S>                                                              <C>            <C>
        Network expenses............................                      23,435         7,710
        Operations and maintenance..................                      19,740         7,592
        Sales and marketing.........................                       3,755         3,255
        General and administrative..................                      19,343         9,253
        Depreciation and amortization...............                      45,366        20,437
                                                                       ---------     ---------
        Total.......................................                     111,639        48,247
                                                                       ---------     ---------
</Table>

     During the quarter ended March 31, 2002, network expenses increased by 204%
to $23.4 million, as compared to $7.7 million for the quarter ended March 31,
2001. These costs primarily relate to the utilization of third party capacity,
including local backhaul costs, connection and access fees, restoration charges
and other network procurement costs. This increase is primarily due to costs
incurred to support the growth in network services' products and services and
the growth of our network. Where possible, and as our global network is
completed, we intend to migrate third party capacity onto our global network,
thereby removing the need to incur costs purchasing capacity from third parties.

     During the quarter ended March 31, 2002, operations and maintenance costs
increased by 159% to $19.7 million, as compared to $7.6 million for the quarter
ended March 31, 2001. Operations and maintenance costs relate primarily to the
provision of standby maintenance under maintenance zone agreements as well as
salaries and overhead expenses directly associated with operations and
maintenance activities. The increase in the quarter ended March 31, 2002
reflects the construction milestones achieved on our global network. Subsequent
to March 31, 2001, as legs of the FA-1 and FNAL systems were entered into
commercial service, we became liable for the contractual commitments under
maintenance zone agreements and started to recognize the salaries and overhead
expenses relating to the operations and maintenance of these systems in the
income statement.

     During the quarter ended March 31, 2002, sales and marketing costs
increased by 15% to $3.8 million, as compared to $3.3 million for the quarter
ended March 31, 2001. Sales and marketing costs are comprised of all sales and
marketing activities that are directly undertaken by the Group. This increase in
costs is principally due to the higher personnel costs arising from the
sales activity to support the Group's growing range of products.

     During the quarter ended March 31, 2002, general and administrative
expenses increased by 108% to $19.3 million, as compared to $9.3 million for the
quarter ended March 31, 2001. This is comprised principally of increased
personnel and related costs and increased general overheads required to support
the growth of our global network across Europe, the US and the Far East. In
addition, in the quarter ended March 31, 2002, general and administrative
expenses includes a charge of $6.5 million relating to an increase in the
allowance for doubtful accounts receivable.

     For the quarter ended March 31, 2002, we recorded $45.4 million in
respect of depreciation compared to $20.4 million for the quarter ended March
31, 2001. The depreciation and amortization charge for the quarter ended
March 31, 2002 has increased as a result of the achievement of construction
milestones on our global network during 2001. In 2001, as legs of the FA-1
and FNAL systems entered into commercial service, amounts held within
construction in progress relating to these systems were transferred to
property and equipment and subsequently depreciated. We depreciate property
and equipment on a straight line basis over the estimated useful life of the
asset, generally no more than 15 years.

                                      -16-
<Page>

     INTEREST EXPENSE, FOREIGN CURRENCY LOSS AND INTEREST INCOME

<Table>
<Caption>
                                                                       MARCH 31,     MARCH 31,
        (EXPRESSED IN THOUSANDS OF DOLLARS)                              2002          2001
        -----------------------------------                            ---------     ---------
        <S>                                                              <C>           <C>
        Interest expense............................                     (40,087)      (31,042)
        Foreign currency gain / (loss)..............                       2,022        (6,951)
        Interest income.............................                       3,909        20,252
</Table>

     Interest expense on borrowings for the quarter ended March 31, 2002 was
$40.1 million compared to $31.0 million during the quarter ended March 31, 2001.
The increase in interest and related expenses of $9.0 million is primarily due
to the accelerated amortization of $8.2 million of capitalized financing fees
following the repayment of debt relating to FEA and the termination of the FLAG
Asia Limited credit facility.

     The foreign exchange gain of $2.0 million is comprised of a net loss of
$0.4 million arising from the translation of Euro-denominated cash balances into
U.S. dollars at the balance sheet exchange rate and a net gain of $2.4 million
arising on foreign currency swaps.

     During the quarter ended March 31, 2002, we capitalized $2.8 million of
interest as a component of construction in progress.

     Interest income of $3.9 million was earned during the quarter ended March
31, 2002, compared to $20.3 million earned during the quarter ended March 31,
2001. The interest income was earned on:

  -  cash balances, short-term investments and restricted cash held by the
     collateral trustee for FLAG Limited's credit facility;
  -  the restricted cash balances in FLAG Atlantic Limited; and
  -  the balance of the proceeds from the Company's initial public offering and
     high yield funds held by FLAG Telecom.

     PROVISION FOR TAXES

<Table>
<Caption>
                                                                       MARCH 31,     MARCH 31,
        (EXPRESSED IN THOUSANDS OF DOLLARS)                              2002          2001
        -----------------------------------                            ---------     ---------
        <S>                                                                <C>          <C>
        Provision for income taxes..................                       2,197        (1,259)
</Table>

     The provision for tax credits was $2.2 million for the quarter ended March
31, 2002 compared to a provision for tax charges of $1.3 million for the quarter
ended March 31, 2001. The provision for income tax charges / credits consists of
taxes payable / receivable relating to the income earned / losses incurred or
activities performed by Group companies in certain jurisdictions, where they are
deemed to have a taxable presence or are otherwise subject to tax.

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

     We have obtained from the Minister of Finance of Bermuda, under the
Exempted Undertakings Tax Protection Act 1966, an undertaking that, in the event
that Bermuda enacts any legislation imposing tax computed on profits or income
or computed on any capital asset, gain or appreciation, or any tax in the nature

                                      -17-
<Page>

of estate duty or inheritance tax, then the imposition of such tax will not be
applicable to us or to any of our operations, or to the shares, capital or
common stock of FLAG Telecom, until March 28, 2016. This undertaking does not,
however, prevent the imposition of property taxes on any real property or
leasehold interests in Bermuda.

     NET LOSS AND LOSS PER COMMON SHARE

     For the quarter ended March 31, 2002, we recorded a net loss of
$74.1 million compared to a net loss of $39.5 million for the quarter ended
March 31, 2001.

     Basic and diluted loss per common share was $0.55 for the quarter ended
March 31, 2002 compared to basic and diluted loss per common share of $0.30 for
the quarter ended March 31, 2001.

     FINANCIAL IMPACT OF RECIPROCAL TRANSACTIONS

     During the first quarter of 2002 and in prior financial years, we have
entered into a number of transactions in which we provided capacity, services or
facilities, by way of leases, ROUs or services agreements, to other
telecommunications companies and service providers at approximately the same
time that we leased or purchased capacity, services or facilities from these
same companies or their affiliates.

     Sales made as part of reciprocal transactions totaled $1.0 million in the
quarter ended March 31, 2002, and were recorded as deferred revenue in those
amounts. GAAP revenues resulting from amortization of this deferred revenue
totaled $22.0 million in the quarter ended March 31, 2002, representing 31.6% of
total GAAP revenues for that period.

     Purchases made as part of reciprocal transactions entered into by us
totaled $1.0 million in the quarter ended March 31, 2002, and were recorded as
prepaid expenses and other assets. Amounts recognized as expense or depreciation
from reciprocal transactions were $9.3 million in the quarter ended March 31,
2002.

<Table>
<Caption>
                                                                                                  EXCLUDING
                                                                                 RECIPROCAL      RECIPROCAL
                                                                      TOTAL     TRANSACTIONS    TRANSACTIONS
                                                                     --------   -------------   ------------
                                                                           (NUMBERS IN $ MILLIONS)
     <S>                                                              <C>                <C>         <C>
     Changes in deferred revenue:
       Opening Balance as at January 1, 2002....................      1,410.0            261.2       1,148.8
       Additions in the period..................................        110.1              1.0         109.1
       Amounts amortized into GAAP revenues in 2002.............        (69.5)           (22.0)        (47.5)
       Other movements..........................................         (1.5)               -          (1.5)
                                                                     --------        ---------  ------------
     Closing balance as at March 31, 2002.......................      1,449.1            240.2       1,208.9
                                                                     --------        ---------  ------------

     Changes in other long term assets:
       Opening balance as at January 1, 2002....................        157.4            153.2           4.2
       Additions in the period..................................            -                -             -
       Other movements..........................................          2.2                -           2.2
                                                                     --------        ---------  ------------
     Closing balance as at March 31, 2002.......................        159.6            153.2           6.4
                                                                     --------        ---------  ------------
</Table>

     In the period ended March 31, 2002, we have signed a sales contract and
a purchase contract in respect of a reciprocal transaction. The transaction
did not meet our accounting policy for the recognition of a reciprocal
transaction and it has been accounted for on a carry-over basis.

     We are aware that one of our customers, Global Crossing, recently
announced that it has filed for bankruptcy protection under Chapter 11. In
the year ended December 31, 2001, we entered into three transactions with
Global Crossing and its affiliates. For the quarter ended March 31, 2002,
$12.2 million in GAAP revenues was in respect of transactions with Global
Crossing and its affiliates. Cash was received in connection with these
transactions in the year ended December 31, 2001 and the last receipt was in
October 2001. As at March 31, 2002, Global Crossing and its affiliates did
not owe any amounts to us. As at the same date, $20.5 million, included
within "Prepaid expenses and other assets" represented the unamortized
balance for payments for circuits activated on the networks of Global
Crossing and its affiliates. These assets have already been paid for and are
being accounted for as an expense over the 12 month term of the agreement. It
is expected that this balance will be expensed in

                                      -18-
<Page>

full during the year ending December 31, 2002. In addition, as at March 31,
2002, $32.5 million included within "Other long-term assets" represented
capacity credits that have been purchased on the systems of Global Crossing
and its affiliates. In light of the bankruptcy filing by Global Crossing,
there is no guarantee that we will be able to realize the value of these
assets and an impairment charge may be required.

     SUPPLEMENTAL INFORMATION

     In previous filings with the Securities and Exchange Commission (the
"SEC"), we have reported certain "pro forma" information that we identified as
EBITDA, Adjusted EBITDA, and cash revenues. We have reassessed the supplemental
information that we have historically disclosed and determined that in this
current filing and future SEC filings supplemental information will be limited
to EBITDA.

     We compute EBITDA for each period by adding depreciation and amortization
to operating income/(loss) and any impairment charge. We add any impairment
charge to EBITDA for each period on the basis that impairment represents an
acceleration of the depreciation charge. EBITDA is not computed in the same
manner as operating loss, which is computed in accordance with U.S. GAAP. EBITDA
for the quarter ended March 31, 2002 was $3.3 million, compared to $1.2 million
for the quarter ended March 31, 2001.

     The following table reconciles U.S. GAAP operating loss to EBITDA for the
quarters ended March 31, 2002 and 2001, respectively

<Table>
<Caption>
                                                                       MARCH 31,     MARCH 31,
        (EXPRESSED IN THOUSANDS OF DOLLARS)                              2002          2001
        -----------------------------------                            ---------     ---------
        <S>                                                              <C>           <C>
        Operating loss..........................................         (42,101)      (19,231)
        Depreciation and amortization...........................          45,366        20,437
        Asset impairment charge.................................              --            --
                                                                       ---------     ---------
        EBITDA..................................................           3,265         1,206
                                                                       ---------     ---------
</Table>

LIQUIDITY AND CAPITAL RESOURCES

     On April 11, 2002, Barclays Bank PLC ("Barclays"), as agent for FLAG
Atlantic Limited's lending banks, accelerated FLAG Atlantic Limited's bank debt,
which constituted a cross-default under FLAG Telecom's indenture for its
outstanding senior notes. As a result of this acceleration and cross default, on
April 12, 2002, FLAG Telecom and certain of its subsidiaries filed voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code with the Court.

     On April 19, 2002, FLAG Telecom and two of its Bermudan subsidiaries
filed a parallel ancillary petition pursuant to Section 161 of the Bermuda
Companies Act in order to commence proceedings in the Supreme Court of Bermuda
for the winding up of the Company and the two subsidiaries, to create a stay of
proceedings against the Company under Bermuda law, and to request the
appointment of JPLs. The proceedings in Bermuda are designed to maintain the
status quo of the Company and the two subsidiaries and to allow the proceedings
under the Bankruptcy Code to proceed, subject to the supervision and agreement
of the JPLs.

     On April 23, 2002, five additional subsidiaries of FLAG Telecom,
including FLAG Asia Limited and FLAG Telecom Group Services Limited, filed for
relief under Chapter 11 of the Bankruptcy Code with the Court. On April 29,
2002, FLAG Asia Limited filed a parallel ancillary petition in Bermuda pursuant
to Section 161 of the Bermuda Companies Act.

     RESTRICTED CASH

     Orders entered by the Chapter 11 Court (the "Orders") impose
restrictions on our ability to transfer cash from FLAG Telecom to the operating
companies. All such transfers of cash are made pursuant to a monthly budget
approved by the Company's creditors. In certain circumstances, and upon
application, the Court may approve specific non-budgeted and extraordinary uses
of cash for payment of obligations of the operating companies, or otherwise.

                                    -19-
<Page>

     As of March 31, 2002, we had $182 million of restricted cash. This
amount is comprised of $82 million cash seized by FLAG Atlantic Limited's
lending banks and $100 million cash held by FLAG Asia Limited's project finance
banks. Barclays seized $82 million of cash in accounts of FLAG Atlantic Limited
on April 11, 2002 at the same time that it accelerated FLAG Atlantic Limited's
bank debt. Westdeutsche Landesbank Girozentrale ("WestLB"), the agent for our
project financing for FNAL, is holding $100 million of cash that was originally
intended to support the credit facility for FLAG Asia Limited. We believe that
WestLB is improperly holding these funds and we are considering, among other
actions, initiating proceedings against WestLB to have the funds released.

     In addition, since March 31, 2002, an additional $25 million of restricted
cash has been created as a result of Barclays freezing $25 million of FLAG
Telecom's cash deposited in a Barclays account in New York. The deposited cash
was frozen in conjunction with the acceleration of FLAG Atlantic Limited's bank
debt. We believe that Barclays is improperly holding these funds and we are
considering, among other actions, initiating proceedings against Barclays to
have the $25 million released.

     FURTHER DETAILS ON THE GROUP'S INDEBTEDNESS

     FLAG TELECOM

     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 11 5/8% Senior Notes due
2010 in the US and Europe, raising net proceeds of $576.6 million. We did not
make the required interest payments, due March 30, 2002, on these outstanding
senior notes. We do not have sufficient liquidity to pay these two series in
full at this time. We elected not to make this interest payment in order to
conserve our cash and to permit us to enter into discussions with the holders of
our outstanding indebtedness to seek a consensual arrangement under which we
would restructure our outstanding indebtedness. FLAG Telecom's Board of
Directors has authorized the Company's management and advisors to negotiate with
holders of these senior notes regarding a comprehensive financial restructuring.
As a result of our decision not to pay interest on FLAG Telecom's senior notes,
we have classified the senior notes as short-term debt.

     In connection with the acceleration of FLAG Atlantic Limited's bank
debt, Barclays, as agent for FLAG Atlantic Limited's lending banks, froze $25
million of FLAG Telecom's cash deposited in a Barclays account in New York. We
believe that Barclays is improperly holding these funds and we are considering,
among other actions, initiating proceedings against Barclays to have the $25
million released.

     On December 20, 2000, we entered into a cross currency swap to manage
the foreign exchange exposure of our Euro300 million 11 5/8% Senior Notes due
2010. Under the swap agreement we exchanged Euro300 million for $269.0 million
and we would exchange back the $269.0 million for Euro300 million on June 20,
2002. However, on April 15, 2002, the cross currency swap was terminated by the
counter-party.

     FLAG LIMITED

     As of March 28, 2002, we had paid all amounts owed to Barclays, the
agent for FLAG Limited's lending banks, under FLAG Limited's credit agreement.

     FLAG Limited also has $430.0 million 8 1/4% Senior Notes outstanding at
that date, repayable at par in 2008. We defaulted on these notes when we filed
for Chapter 11 protection with the Court. We do not have sufficient liquidity to
pay these notes in full at this time. FLAG Telecom's Board of Directors has
authorized the Company's management and advisors to negotiate with holders of
these senior notes regarding a comprehensive financial restructuring. As a
result of our default on these senior notes, we have reclassified the senior
notes from long-term debt to short-term debt.

                                    -20-
<Page>

      We have reviewed FLAG Limited's business in the light of deteriorating
market conditions, the degree to which it is economic to upgrade the FEA
system and the likelihood that FEA will generate sufficient cash to repay the
Senior Notes. We have received third party supplier analysis that indicates
that, with current technology, it is possible to extend the capacity of the
FEA system beyond what we had previously believed to be possible. Based on
current assumptions, the FEA system would be impaired if we do not invest in
the upgrade necessary to achieve the additional potential capacity. We are
continuing to assess the option to upgrade the FEA system and, at this stage,
we do not consider it necessary to recognize an impairment charge on the FEA
system. However, we will need to decide whether to upgrade the FEA system
prior to December 31, 2002 and an impairment charge may be required at that
time.

     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

     FLAG Atlantic Limited had a $575.0 million construction/term loan facility.
On December 6, 2001, the construction loan converted to a term loan of $286.0
million and the remaining commitments were cancelled. The loan has a term of 7.5
years and bears interest at LIBOR plus 300 basis points. As at March 31, 2002,
the outstanding term loan was $253.0 million.

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

     Notwithstanding an agreement reached with FLAG Atlantic Limited's lending
banks, under which the banks agreed to forbear from exercising certain rights
they may have through to April 30, 2002, FLAG Atlantic Limited's bank debt was
accelerated by the lending banks on April 11, 2002 and those banks seized $82
million of cash in accounts of FLAG Atlantic Limited and applied that cash to
repayment of their loans.  As a result of these events, we have reclassified
the FLAG Atlantic Limited term loan from long-term debt to short-term debt.

     In October 2001, FLAG Atlantic Limited 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. Under the swap agreement, FLAG
Atlantic Limited paid a fixed rate of 3.94% and the swap counter-party paid the
floating rate based on LIBOR. The transaction commenced on December 31, 2001 and
was due to terminate on March 31, 2005. However, on April 15, 2002, the interest
rate swap was terminated by the counter-party.

     FLAG ASIA LIMITED

     WestLB cancelled its commitments for the project financing of FNAL and
terminated the lending facility. At the date of the termination, FLAG Asia
Limited had not utilized the WestLB facility. WestLB is holding $100 million
of cash that was originally intended to support the credit facility for FLAG
Asia Limited. We believe that WestLB is improperly holding these funds and we
are considering, among other actions, initiating proceedings against WestLB
to have the funds released.

     We are currently in negotiations with suppliers to obtain alternative
financing for the FNAL cable system. On the basis that the FNAL cable system is
not fully completed, we cannot determine at this stage if there is any
impairment of the asset and, consequently, as at March 31, 2002 we have not
recognized any impairment charge.

     CASH FLOWS

     Cash provided by operating activities was $20.9 million and that used in
investing activities was $19.8 million, during the three months ended March 31,
2002.

     At March 31, 2002, total cash, excluding restricted cash, had decreased
to $373.8 million from $424.2 million at December 31, 2001, primarily as a
result of further payments on the construction of the FNAL cable system and
repayment, of $88.5 million, of short-term debt.

                                    -21-
<Page>

     ASSETS

     Our primary asset is the current net book value of the FLAG Telecom
network including construction in progress recorded in property and equipment
totaling $2,353.2 million at March 31, 2002, compared to $2,306.4 million at
December 31, 2001. The increase of $90.6 million (excluding depreciation and
amortization charged in the quarter ended March 31, 2002 of $43.8 million) is
primarily due to the ongoing construction of the FNAL cable system. The
capitalized costs incurred in the construction of FLAG Telecom's cable systems
that are 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 $15.2
million and $16.4 million as of March 31, 2002 and December 31, 2001,
respectively.

     Goodwill of $0.9 million has been recognized in the quarter ended March 31,
2002. The goodwill arose on the acquisition of Seoul Telenet, Inc. The value of
goodwill is based on a provisional estimate of the fair value of the assets and
liabilities of the company at the date of acquisition.

     As of March 31, 2002, the Group had net current liabilities of $1,087.9
million compared to net current liabilities of $394.5 million, at December 31,
2001.

     ACCOUNTS RECEIVABLE

     The accounts receivable balance at March 31, 2002 of $151.9 million in
comparison to $154.0 million at December 31, 2001. The balance at March 31, 2002
includes $8.6 million relating to sales contracts payable in accordance with
agreed payment schedules over periods between 30 days and one year from the
balance sheet date in comparison to $20.6 million at December 31, 2001.

     The net allowance for doubtful accounts at March 31, 2002 was $10.6 million
in comparison to $4.1 million at December 31, 2001.

     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.

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 Euro 300 million of 11 5/8% 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.

                                      -22-
<Page>

     We originally entered into a cross currency swap agreement to manage
foreign exchange exposure arising from the Euro 300 million Senior Notes, which
subsequent to March 31, 2002, was terminated by the counter-party.

     Other than our foreign exchange exposure arising from the
Euro-denominated notes, 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.

     On January 1, 1999, 12 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and a new currency called the "Euro". These countries adopted the Euro as their
common legal currency on that date. The Euro trades on currency exchanges and is
now also available for cash transactions. Until January 1, 2002, the existing
sovereign currencies remained legal tender in these countries. On January 1,
2002, the Euro replaced the sovereign legal currencies of these countries. We
have operations within the European Union including many of the countries that
have adopted the Euro. We continue to evaluate the impact the Euro will have on
our continuing business operations within the overall scope of managing currency
risk. However, we do not expect the introduction of the Euro to have a material
effect on our financial position or competitive position.

     DERIVATIVE FINANCIAL INSTRUMENTS AS OF MARCH 31, 2002

<Table>
<Caption>
                                                                                                  NOTIONAL
  TYPE OF                    PAYMENTS            MATURITY           RATE          RATE             AMOUNT           FAIR VALUE
  INSTRUMENT                    DUE                DATE           PAYABLE       RECEIVABLE       ($ MILLION)        ($ MILLION)
  ----------              -------------        -------------      --------      ----------       -----------        -----------
  <S>                     <C>                  <C>                  <C>              <C>          <C>                   <C>
  Cross Currency
    Swap (1)............. Semi-annually        June 20, 2002        1.265%           Nil          $  268.98             (9.6)
                                                                                                  Euro300.0
</Table>

(1) Terminated by the counter-party on April 15, 2002

INTEREST RATE RISK

      We are exposed to interest rate risk in our financing instruments. Our
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. However, subsequent to March 31,
2002 our derivative financial instruments have been terminated.  We do not
utilize derivative financial instruments for trading or other speculative
purposes.

                                      -23-
<Page>

     SENIOR NOTES AS OF MARCH 31, 2002

<Table>
<Caption>
                                                                                CURRENCY      CURRENCY
                                                                              AND PRINCIPAL   AND FAIR
TYPE OF                       PRINCIPAL       ORIGINAL                           AMOUNT         VALUE
INSTRUMENT                  PAYMENTS DUE  MATURITY DATE(1)    INTEREST RATE     (MILLION)     (MILLION)     FLAG OPTION TO REDEEM
----------                  ------------  ----------------    -------------   -------------   ---------     ---------------------
<S>                         <C>            <C>               <C>              <C>             <C>         <C>
FLAG Telecom Holdings
  Limited 11 5/8% Senior
  Notes...................  Semi-annually  March 2010        Fixed 11 5/8%    $     300.0  $       48  Any time after March 2005
FLAG Telecom Holdings
  Limited 11 5/8% Senior
  Notes...................  Semi-annually  March 2010        Fixed 11 5/8%    Euro  300.0  Euro    48  Any time after March 2005
FLAG Limited 8 1/4% Senior
  Notes...................  Semi-annually  January 2008       Fixed 8 1/4%    $     430.0  $     90.3  Any time after January 2003
</Table>

     DEBT AS OF MARCH 31, 2002

<Table>
<Caption>
                                                                                       PRINCIPAL                 FLAG
TYPE OF                       PRINCIPAL      ORIGINAL                                    AMOUNT     FAIR VALUE   OPTION
INSTRUMENT                   PAYMENTS DUE  MATURITY DATE(1)  INTEREST RATE           ($ MILLION)   ($ MILLION)   TO REDEEM
----------                   ------------  ----------------  -------------           -----------   -----------   ---------
<S>                         <C>            <C>             <C>                            <C>           <C>     <C>
FLAG Atlantic Limited                                      Floating LIBOR + 125 to
  credit facility.........  Quarterly      April 2007      300 basis points               253.0         253.0   At any time
</Table>

(1) As of March 31, 2002 the Senior Notes and bank debt have been classified
as short-term debt.

     INTEREST RATE DERIVATIVE FINANCIAL INSTRUMENTS AS OF MARCH 31, 2002

<Table>
<Caption>
                                            ORIGINAL                                     NOTIONAL
TYPE OF                       PAYMENTS      MATURITY         RATE            RATE         AMOUNT        FAIR VALUE
INSTRUMENT                      DUE           DATE         PAYABLE        RECEIVABLE    ($ MILLION)    ($ MILLION)
----------                    --------      --------       -------        ----------    -----------    -----------
<S>                           <C>          <C>           <C>                <C>               <C>             <C>
FLAG Atlantic Limited
     LIBOR Swap (1).......    Quarterly    March 2005             3.94%          Nil          260.0           (1.9)
FLAG Limited
     LIBOR Collar.........    Quarterly    April 2002    Floor at 5.85%     Cap at 8%          20.0            0.2
FLAG Asia Limited
     LIBOR Swap (2).......    Quarterly    Sept 2005               3.9%          Nil           89.2           (0.9)
</Table>

(1) Terminated by the counter-party on April 10, 2002
(2) Terminated by FLAG Asia Limited on April 4, 2002

     The three-month LIBOR rate at March 31, 2002 was 2.03%.

                                      -24-
<Page>

                                     PART II

ITEM 1. LEGAL PROCEEDINGS

     On or about April 2, 2002, a purported class-action complaint was filed
by Gildardo Michel-Garcia against the Company, three of its current senior
officers, and one of its former senior officers, in the United States
District Court for the Southern District of New York (the "Michel-Garcia
action"). The complaint, which asks that the plaintiff be appointed to
represent a proposed class of all persons who purchased shares of the
Company's stock between March 23, 2001 and February 13, 2002, alleges (a)
that the Company engaged in reciprocal transactions with other industry
participants which were not reported or disclosed in accordance with
Generally Accepted Accounting Principles and which had the effect of
materially inflating the Company's reported results; (b) that as a result of
this alleged improper accounting treatment, it was not possible for the
Company's foreseeable future earnings to be as strong as allegedly
represented; and (c) that alleged assertions that the Company was still
experiencing growth despite the downturn in the telecommunications market
were false and misleading. The complaint purports to assert claims against
the Company and the individual defendants under section 10(b) of the
Securities Exchange Act of 1934, and against the individual defendants under
section 20(a) of the same statute. The complaint does not specify the amount
of damages sought. Since the filing of the Michel-Garcia action, four
additional complaints have been filed, all of which are virtually identical to
the complaint in the Michel-Garcia action. The filing of Chapter 11, however,
operates as an automatic stay of all litigation against the Company.

     On or about May 1, 2002, another plaintiff, Peter T. Loftin, filed a
complaint against certain past and present officers and directors of the
Company, Salomon Smith Barney, Inc. and Verizon Communications, Inc., in the
United States District Court for the Southern District of New York (the
"Loftin action"). The Company is not named as a defendant in this action. The
Loftin action is brought as a purported class action suit, and asks that
plaintiff be appointed to represent a proposed class of persons who purchased
shares of the Company's stock between February 16, 2000 and February 13, 2002.
The allegations of the Loftin action include allegations identical to those of
the Michel-Garcia action described above and the Loftin action also asserts
that the prospectus issued in connection with the Company's February 16, 2000
initial public offering was false and misleading because it failed to
disclose, among other things, that it was unlikely that the Company could
attract enough customers to enable it to recover the cost of financing the
FA-1 cable system and that existing trans-Atlantic cable lines had a glut of
unused capacity. The complaint asserts claims against the defendants under
various sections of both the Securities Act of 1933 and the Securities Exchange
Act of 1934. The complaint does not specify the amount of damages sought.

     FLAG Atlantic Limited and FLAG Atlantic USA Limited are currently
defendants in litigation filed by PSINet, Inc. and its related affiliates and
subsidiaries ("PSINet"). In December 2001, PSINet initiated Chapter 11
bankruptcy proceedings in the United States Bankruptcy Court in the Southern
District of New York. Pursuant to those proceedings, on December 31, 2001,
PSINet commenced litigation against FLAG Atlantic Limited and FLAG Atlantic USA
Limited to recover an alleged preference payment under 11 U.S.C. Sections 547,
550 of the United States Bankruptcy Code. Prior to PSINet filing for bankruptcy,
FLAG Atlantic Limited and FLAG Atlantic USA Limited entered into a Capacity
Right of Use Agreement with three affiliated PSINet entities. After PSINet
defaulted on payments due on that agreement, on March 20, 2001, the parties
entered into an Amended Capacity Right of Use Agreement, amended the capacity,
amended the term and PSINet paid FLAG Atlantic Limited and FLAG Atlantic USA
Limited $23.8 million. PSINet claims that this payment may be avoided as a
preference because it was made within 90 days of PSINet's bankruptcy, was on
account of a prior debt and allowed us, as a creditor of PSINet, to recover more

                                      -25-
<Page>
than we would if the payment had not occurred and we instead filed a claim in
PSINet's bankruptcy. PSINet alleges that it is entitled to recover the amount of
the payment, together with interest. We have filed an answer to the complaint in
which we denied the allegations of the complaint and asserted several
affirmative defenses. Because of our own bankruptcy proceedings, PSINet's action
is now stayed. To the extent PSINet pursues a claim in our bankruptcy, we intend
to vigorously defend and assert various defenses to the preference claim.

     We are involved in a dispute with two former employees, Messrs. Reda and
Jalil, which centers on the lawfulness of the termination of their employment
contracts and the sums payable in that termination. The most significant dispute
between the parties is as to the ex-employees' entitlement to stock options or
damages in lieu. Although Messrs. Reda and Jalil have not made clear what
damages they are claiming, we believe that the amount that they would claim for
wrongful termination would between them approximate to $3,000,000 and
$4,000,000, plus interest. We are unable to estimate the amount they would claim
with respect to their allegation that they were entitled to stock options. The
Court of Appeal of Bermuda ruled on this issue in our favor. Messrs. Reda and
Jalil have subsequently appealed to the Privy Council in the United Kingdom and
the hearing took place on April 16-18, 2002. Judgement has not yet been
received. We remain of the opinion that we have good grounds for believing that
the ruling of the Court of Appeal of Bermuda is unlikely to be varied by the
Privy Council.

     We have received a third-party subpoena from the SEC seeking documents in
connection with the SEC's investigation of Global Crossing. To date, we have
cooperated fully with the SEC's request for such documents and we intend to
continue to cooperate in the future. In addition, the SEC has indicated that it
wishes to take deposition testimony from certain Company officers and employees
in connection with the same investigation, but to date no subpoenas have been
received for such testimony.

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     FLAG Telecom has $300 million 11 5/8% Senior Notes and Euro 300 million
11 5/8% Senior Notes outstanding. We defaulted on these notes when we failed to
make the required interest payments, due March 30, 2002.

     FLAG Limited has $430.0 million 8 1/4% Senior Notes outstanding. We
defaulted on these notes when we filed for Chapter 11 protection with the Court.

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

     (a)  EXHIBITS

     The following Exhibits are filed as part of this Report on Form 10-Q as
required by Regulation S-K.

 EXHIBIT                                  DESCRIPTION
 NUMBER

  10.1     Addendum to the Contract of Employment, dated April 9, 2002, among
           Andres Bande, FLAG Telecom Holdings Limited and FLAG Limited

  10.2     Addendum to the Contract of Employment, dated April 10, 2002, between
           Edward McCormack and FLAG Telecom Holdings Limited

  10.3     Addendum to the Contract of Employment, dated April 10, 2002, between
           C.J. van Ophem and FLAG Telecom Limited

  10.4     Addendum to the Contract of Employment, dated April 10, 2002, between
           Michel Cayouette and FLAG Telecom Limited

  10.5     Addendum to the Contract of Employment, dated April 10, 2002, between
           Adnan Othman Omar and FLAG Telecom Holdings Limited

                                      -26-
<Page>

(b)  REPORTS ON FORM 8-K.

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

<Table>
    <S>                              <C>
    January 15, 2002                 Incorporating press release announcing the appointment of Andy Evans as the Company's
                                     Chief Technology Officer.
    January 25, 2002                 Incorporating press releases announcing the appointment of Adnan Omar as President of
                                     FLAG Telecom Development Services Company LLC; and the appointment of Osama Jamjoom to
                                     the Company's Board of Directors.
    January 31, 2002                 Incorporation press release announcing that the Company's Q4 and full year 2001
                                     financial results to be announced on 13 February 2002.
    February 14, 2002                Incorporating press release announcing the Company's Q4 and full year 2001 financial
                                     results.
    March 11, 2002                   Incorporating press release announcing the retention of Company's strategic and
                                     financial advisors.
</Table>

                                      -27-
<Page>

                                   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 15th day of May 2002.

                                 FLAG TELECOM HOLDINGS LIMITED
                                 By:
                                                       /s/ MICHEL CAYOUETTE
                                                       --------------------
                                                         Michel Cayouette
                                                     CHIEF FINANCIAL OFFICER
                                 By:
                                                        /s/ KEES VAN OPHEM
                                                        ------------------
                                                          Kees van Ophem
                                                   GENERAL COUNSEL AND SECRETARY

                                      -28-