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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|ý                                                 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the Quarterly Period Ended September 30, 2003
|or                                               
|o                                                 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-29207

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

BERMUDA(State or other Jurisdiction of Incorporation or Organization)

CANON'S COURT
22 VICTORIA STREET
HAMILTON HM12, BERMUDA(Address of registered office)

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

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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

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

Yes o    No ý

Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a court.

Yes ý    No o

2,000,000
common shares (par value $1.00 per share) of FLAG Telecom Group Limited were outstanding as of November 14, 2003.

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FLAG TELECOM GROUP LIMITED  FORM 10-Q  INDEX

|           |  |                                                                                                                      |  | Page
|---------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ----
|PART I     |  | FINANCIAL INFORMATION                                                                                                |  | 1   
|ITEM 1:    |  | FINANCIAL STATEMENTS                                                                                                 |  | 1   
|1.A        |  | Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002                                           |  | 1   
|1.B        |  | Consolidated Statements of Operations for the three months and nine months ended September 30, 2003 and 2002         |  | 2   
|1.C        |  | Consolidated Statements of Comprehensive Loss for the three months and nine months ended September 30, 2003 and 2002 |  | 3   
|1.D        |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002                          |  | 4   
|1.E        |  | Notes to Consolidated Financial Statements                                                                           |  | 5   
|ITEM 2:    |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                |  | 19  
|ITEM 3:    |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                           |  | 28  
|ITEM 4:    |  | CONTROLS AND PROCEDURES                                                                                              |  | 28  
|PART II    |  | OTHER INFORMATION                                                                                                    |  | 31  
|ITEM 1:    |  | LEGAL PROCEEDINGS                                                                                                    |  | 31  
|ITEM 2:    |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                                                            |  | 32  
|ITEM 3:    |  | DEFAULTS UPON SENIOR SECURITIES                                                                                      |  | 32  
|ITEM 4:    |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                  |  | 32  
|ITEM 5:    |  | OTHER INFORMATION                                                                                                    |  | 33  
|ITEM 6:    |  | EXHIBITS AND REPORTS FILED ON FORM 8-K                                                                               |  | 34  
|SIGNATURES |  | S-1                                                                                                                 

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PART I  FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

1.A

FLAG TELECOM GROUP LIMITED  CONSOLIDATED BALANCE SHEETS  AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

(Expressed in thousands of U.S. Dollars except share and per share amounts)

|                         |                                                                                                                               | Successor |          
|------------------------ | ----------------------------------------------------------------------------------------------------------------------------- | --------- | ---------
|
|
|ASSETS:                  |                                                                                                                               |           |          
|Current assets:          |                                                                                                                               |           |          
|                         | Cash and cash equivalents                                                                                                     |           | $  52,055
|                         | Accounts receivable, net of allowance for doubtful accounts of $21,481 (2002$10,444)                                         |           | 71,580   
|                         | Prepaid expenses and other assets                                                                                             |           | 59,851   
|                         |                                                                                                                               |           |          
|                         | Total current assets                                                                                                          |           | 183,486  
|Non-current assets:      |                                                                                                                               |           |          
|                         | Restricted cash                                                                                                               |           | 5,164    
|                         | Other long term assets, net                                                                                                   |           | 17,833   
|                         | Property and equipment, net                                                                                                   |           | 312,249  
|                         |                                                                                                                               |           |          
|                         | Total assets                                                                                                                  |           | $518,732 
|                         |                                                                                                                               |           |          
|LIABILITIES:             |                                                                                                                               |           |          
|Current liabilities:     |                                                                                                                               |           |          
|                         | Accounts payable                                                                                                              |           | $  16,586
|                         | Accrued liabilities                                                                                                           |           | 42,772   
|                         | Deferred revenue                                                                                                              |           | 24,879   
|                         | Income taxes payable                                                                                                          |           | 12,114   
|                         | Short term debt                                                                                                               |           | 9,661    
|                         | Performance obligations under long-term contracts                                                                             |           | 14,817   
|                         |                                                                                                                               |           |          
|                         | Total current liabilities                                                                                                     |           | 120,829  
|Non current liabilities: |                                                                                                                               |           |          
|                         | Long-term debt                                                                                                                |           | 18,429   
|                         | Other long-term liabilities                                                                                                   |           | 10,265   
|                         | Deferred revenue                                                                                                              |           | 60,088   
|                         | Performance obligations under long-term contracts                                                                             |           | 107,459  
|                         |                                                                                                                               |           |          
|                         | Total liabilities                                                                                                             |           | 317,070  
|                         |                                                                                                                               |           |          
|                         | Minority interest                                                                                                             |           | 1,969    
|SHAREHOLDERS' EQUITY:    |                                                                                                                               |           |          
|                         | Common stock, $1.00 (2002$1.00) par value, 20,000,000 (20023,000,000) authorized and 2,000,000 (20022,000,000) outstanding |           | 2,000    
|                         | Additional paid-in capital                                                                                                    |           | 266,700  
|                         | Accumulated other comprehensive income                                                                                        |           | 11,109   
|                         | Accumulated deficit                                                                                                           |           | (80,116  
|                         |                                                                                                                               |           |          
|                         | Total shareholders' equity                                                                                                    |           | 199,693  
|                         |                                                                                                                               |           |          
|                         | Total liabilities and shareholders' equity                                                                                    |           | $518,732 
|                         |                                                                                                                               |           |          

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

1

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1.B

FLAG TELECOM GROUP LIMITED  CONSOLIDATED STATEMENTS OF OPERATIONS

(Expressed in thousands of U.S. Dollars except share and per share amounts)

|                                                           |                                                                   | Successor |           | Predecessor |             | Successor |           | Predecessor |            
|---------------------------------------------------------- | ----------------------------------------------------------------- | --------- | --------- | ----------- | ----------- | --------- | --------- | ----------- | -----------
|
|
|
|REVENUES:                                                  |                                                                   |           |           |             |             |           |           |             |            
|                                                           | Capacity revenue, net of discounts                                |           | $2,644    |             | $26,532     |           | $6,395    |             | $83,514    
|                                                           | Operations and maintenance revenue                                |           | 11,425    |             | 13,401      |           | 42,266    |             | 49,870     
|                                                           | Network services revenue                                          |           | 10,440    |             | 16,486      |           | 33,733    |             | 39,644     
|                                                           | Amortization of performance obligations under long-term contracts |           | 3,446     |             |            |           | 10,410    |             |           
|                                                           |                                                                   |           |           |             |             |           |           |             |            
|TOTAL REVENUES                                             |                                                                   | 27,955    |           | 56,419      |             | 92,804    |           | 173,028     |            
|                                                           |                                                                   |           |           |             |             |           |           |             |            
|EXPENSES:                                                  |                                                                   |           |           |             |             |           |           |             |            
|                                                           | Operations and maintenance cost                                   |           | 15,424    |             | 10,444      |           | 51,451    |             | 54,770     
|                                                           | Network expenses                                                  |           | 7,113     |             | 13,161      |           | 19,188    |             | 39,741     
|                                                           | Selling, general and administrative                               |           | 13,560    |             | 17,201      |           | 42,405    |             | 55,291     
|                                                           | Gain from early extinguishments of debt                           |           | (9,900    | )           |            |           | (9,900    | )           |           
|                                                           | Bad debt expense                                                  |           | 792       |             | 7,311       |           | 9,980     |             | 15,565     
|                                                           | Restructuring costs                                               |           |          |             | 1,893       |           |          |             | 1,893      
|                                                           | Asset impairment                                                  |           |          |             |            |           |          |             | 552,900    
|                                                           | Depreciation                                                      |           | 8,328     |             | 39,125      |           | 24,234    |             | 123,407    
|                                                           |                                                                   |           |           |             |             |           |           |             |            
|TOTAL EXPENSES                                             |                                                                   | 35,317    |           | 89,135      |             | 137,358   |           | 843,567     |            
|                                                           |                                                                   |           |           |             |             |           |           |             |            
|OPERATING LOSS BEFORE REORGANIZATION ITEMS                 |                                                                   | (7,362    | )         | (32,716     | )           | (44,554   | )         | (670,539    | )          
|REORGANIZATION ITEMS                                       |                                                                   |           |           |             |             |           |           |             |            
|                                                           | Reorganization costs                                              |           |          |             | (24,286     | )         |          |             | (57,362    
|                                                           | Gain on pre-confirmation contingency                              |           | 6,500     |             |            |           | 6,500     |             |           
|                                                           |                                                                   |           |           |             |             |           |           |             |            
|TOTAL REORGANIZATION ITEMS                                 |                                                                   | 6,500     |           | (24,286     | )           | 6,500     |           | (57,362     | )          
|                                                           |                                                                   |           |           |             |             |           |           |             |            
|OPERATING LOSS                                             |                                                                   | (862      | )         | (57,002     | )           | (38,054   | )         | (727,901    | )          
|INTEREST EXPENSE                                           |                                                                   | (1,100    | )         | (1,359      | )           | (5,570    | )         | (42,279     | )          
|FOREIGN CURRENCY (LOSS)/GAIN                               |                                                                   | (161      | )         | 3,051       |             | 445       |           | (25,036     | )          
|INTEREST INCOME                                            |                                                                   | 119       |           | 241         |             | 565       |           | 4,041       |            
|                                                           |                                                                   |           |           |             |             |           |           |             |            
|LOSS BEFORE INCOME TAXES AND MINORITY INTEREST             |                                                                   | (2,004    | )         | (55,069     | )           | (42,614   | )         | (791,175    | )          
|PROVISION FOR INCOME TAXES                                 |                                                                   | (787      | )         | 3,502       |             | (1,427    | )         | 3,787       |            
|                                                           |                                                                   |           |           |             |             |           |           |             |            
|LOSS BEFORE MINORITY INTEREST                              |                                                                   | (2,791    | )         | (51,567     | )           | (44,041   | )         | (787,388    | )          
|MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARY |                                                                   | 552       |           |            |             | 772       |           |            |            
|                                                           |                                                                   |           |           |             |             |           |           |             |            
|NET LOSS                                                   |                                                                   | $(2,239   | )         | $(51,567    | )           | $(43,269  | )         | $(787,388   | )          
|                                                           |                                                                   |           |           |             |             |           |           |             |            
|                                                           | Basic and diluted net loss per share                              |           | $(1.12    | )           | $(0.38      | )         | $(21.63   | )           | $(5.87     
|                                                           |                                                                   |           |           |             |             |           |           |             |            
|                                                           | Weighted average common shares outstanding                        |           | 2,000,000 |             | 134,139,046 |           | 2,000,000 |             | 134,139,046
|                                                           |                                                                   |           |           |             |             |           |           |             |            

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

2

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1.C

FLAG TELECOM GROUP LIMITED  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Expressed in thousands of U.S. Dollars)

|                                         |  | Successor |   | Predecessor |   | Successor |   | Predecessor |  
|---------------------------------------- |  | --------- | - | ----------- | - | --------- | - | ----------- | -
|
|
|
|NET LOSS                                 |  | $(2,239   | ) | $(51,567    | ) | $(43,269  | ) | $(787,388   | )
|Foreign currency translation             |  | 899       |   | (3,476      | ) | 6,389     |   | 14,338      |  
|Loss on derivativeschange in fair value |  |          |   |            |   |          |   | (57         | )
|                                         |  |           |   |             |   |           |   |             |  
|COMPREHENSIVE LOSS                       |  | $(1,340   | ) | $(55,043    | ) | $(36,880  | ) | $(773,107   | )
|                                         |  |           |   |             |   |           |   |             |  

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

3

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1.D

FLAG TELECOM GROUP LIMITED  CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in thousands of U.S. Dollars)

|                                                              |                                                                        | Successor                                                                       |                                          | Predecessor |          
|------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ---------------------------------------- | ----------- | ---------
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                         |                                                                        |                                                                                 |                                          |             |          
|                                                              | Net loss before reorganization items                                   |                                                                                 | $                                       |             | $(787,388
|                                                              | Reorganization costs                                                   |                                                                                 |                                         |             | (57,362  
|                                                              |                                                                        |                                                                                 |                                          |             |          
|                                                              | Net loss                                                               |                                                                                 | (43,269                                  | )           | (730,026 
|                                                              |                                                                        | Adjustments to reconcile net loss to net cash provided by operating activities: |                                          |             |          
|                                                              | Minority interest                                                      |                                                                                 | (772                                     | )           |         
|                                                              | Amortization of financing costs                                        |                                                                                 |                                         |             | 9,387    
|                                                              | Allowance for doubtful accounts                                        |                                                                                 | 9,980                                    |             | 15,565   
|                                                              | Senior debt discount                                                   |                                                                                 |                                         |             | 1,200    
|                                                              | Depreciation                                                           |                                                                                 | 24,234                                   |             | 123,407  
|                                                              | Non-cash asset impairment charge                                       |                                                                                 |                                         |             | 552,900  
|                                                              | Loss on disposal of property and equipment                             |                                                                                 | 141                                      |             | 51       
|                                                              | Amortization of performance obligations                                |                                                                                 | (10,410                                  | )           |         
|                                                              | Gain on settlement of long-term debt                                   |                                                                                 | (9,900                                   | )           |         
|                                                              | Gain on pre-confirmation contingency                                   |                                                                                 | (6,500                                   | )           |         
|                                                              | Fair value appreciation of long-term debt                              |                                                                                 | 1,160                                    |             |         
|                                                              | Deferred taxes                                                         |                                                                                 | (79                                      | )           | (2,242   
|                                                              |                                                                        | Add/(deduct) net changes in assets and liabilities:                             |                                          |             |          
|                                                              |                                                                        |                                                                                 | Accounts receivable                      |             | 290      
|                                                              |                                                                        |                                                                                 | Prepaid expenses and other assets        |             | (12,920  
|                                                              |                                                                        |                                                                                 | Accounts payable and accrued liabilities |             | (13,634  
|                                                              |                                                                        |                                                                                 | Income taxes payable                     |             | 1,128    
|                                                              |                                                                        |                                                                                 | Deferred revenue and other               |             | 33,388   
|                                                              |                                                                        |                                                                                 |                                          |             |          
|                                                              | Net cash used in operating activities before reorganization activities |                                                                                 | (27,163                                  | )           | (27,625  
|                                                              | Cash received/(paid) for reorganization items                          |                                                                                 | 5,000                                    |             | (8,762   
|                                                              |                                                                        |                                                                                 |                                          |             |          
|                                                              | Net cash used in operating activities                                  |                                                                                 | (22,163                                  | )           | (36,387  
|                                                              |                                                                        |                                                                                 |                                          |             |          
|CASH FLOWS FROM FINANCING ACTIVITIES:                         |                                                                        |                                                                                 |                                          |             |          
|                                                              | Settlement of foreign exchange swaps                                   |                                                                                 |                                         |             | (6,530   
|                                                              | Repayment of long-term debt                                            |                                                                                 | (44,598                                  | )           | (88,501  
|                                                              |                                                                        |                                                                                 |                                          |             |          
|                                                              | Net cash used in financing activities                                  |                                                                                 | (44,598                                  | )           | (95,031  
|                                                              |                                                                        |                                                                                 |                                          |             |          
|CASH FLOWS FROM INVESTING ACTIVITIES:                         |                                                                        |                                                                                 |                                          |             |          
|                                                              | Decrease in restricted cash                                            |                                                                                 | 3,305                                    |             | 108,283  
|                                                              | Proceeds from disposal of property and equipment                       |                                                                                 | 11                                       |             | 94       
|                                                              | Investment in property and equipment                                   |                                                                                 | (11,655                                  | )           | (159,994 
|                                                              |                                                                        |                                                                                 |                                          |             |          
|                                                              | Net cash used in investing activities                                  |                                                                                 | (8,339                                   | )           | (51,617  
|                                                              |                                                                        |                                                                                 |                                          |             |          
|NET DECREASE IN CASH                                          |                                                                        | (75,100                                                                         | )                                        | (183,035    | )        
|                                                              | Effect of foreign currency movements                                   |                                                                                 | 1,378                                    |             | 27,532   
|CASH, beginning of period                                     |                                                                        | 125,777                                                                         |                                          | 417,396     |          
|                                                              |                                                                        |                                                                                 |                                          |             |          
|CASH, end of period                                           |                                                                        | $52,055                                                                         |                                          | $261,893    |          
|                                                              |                                                                        |                                                                                 |                                          |             |          
|SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW INFORMATION: |                                                                        |                                                                                 |                                          |             |          
|                                                              | Interest expense for period                                            |                                                                                 | $5,570                                   |             | $42,279  
|                                                              | Amortization of financing costs                                        |                                                                                 |                                         |             | (10,587  
|                                                              | Interest transferred to liabilities subject to compromise              |                                                                                 |                                         |             | (40,452  
|                                                              | Fair value appreciation of long-term debt                              |                                                                                 | (1,160                                   | )           |         
|                                                              | Decrease in accrued interest payable                                   |                                                                                 | 207                                      |             | 31,579   
|                                                              |                                                                        |                                                                                 |                                          |             |          
|                                                              | Interest paid                                                          |                                                                                 | $4,617                                   |             | $22,819  
|                                                              |                                                                        |                                                                                 |                                          |             |          
|                                                              | Interest capitalized                                                   |                                                                                 | $                                       |             | $2,165   
|                                                              |                                                                        |                                                                                 |                                          |             |          
|                                                              | Taxes paid                                                             |                                                                                 | $63                                      |             | $1,750   
|                                                              |                                                                        |                                                                                 |                                          |             |          

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

4

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1.E

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Expressed in thousands of U.S. Dollars except share and per share amounts)

1.     BASIS OF PRESENTATION

These consolidated financial statements contain information relating to FLAG Telecom Group Limited, a Bermuda corporation (together with its subsidiaries, "FLAG
Telecom", "Successor" or the "Company"), which is the successor entity of FLAG Telecom Holdings Limited ("Predecessor") which, on October 9, 2002 (the "Effective Date"), transferred
substantially all of its assets, at fair value, to the Company, as a result of transactions contemplated by a Plan of Reorganization (the "Plan") of Predecessor and certain of its subsidiaries under
chapter 11 of the United States Bankruptcy Code and related Bermuda Schemes of Arrangement. Predecessor is now in liquidation under Bermuda law.

The
accompanying unaudited consolidated financial statements are expressed in U.S. Dollars ("Dollars") and have been prepared in accordance with accounting principles generally accepted
in the United States ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly they do not include all of the information required by U.S. GAAP for complete financial statements.

In
the opinion of management, the accompanying unaudited consolidated financial statements reflect all normal, recurring adjustments necessary for a fair presentation of the results of
operations for the
three and nine months ended September 30, 2003 and 2002, the balance sheets as of September 30, 2003 and December 31, 2002, and the cash flows for the nine months ended
September 30, 2003 and 2002.

The
balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S.
GAAP for complete financial statements. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended
December 31, 2002. In addition, Predecessor's results of operations for the three months and nine months ended September 30, 2002 are not comparable to the Company's results for the
three months and nine months ended September 30, 2003 due to the adoption of fresh start accounting upon emergence from bankruptcy.

Subsequent
to September 30, 2003, FLAG Telecom entered into an Agreement and Plan of Amalgamation with Reliance Gateway Net Limited ("Reliance Gateway"), a wholly owned subsidiary
of Reliance Infocomm Limited, pursuant to which Reliance Gateway has agreed to acquire 100% of the Company's common shares on a fully diluted basis for an aggregate purchase price of
$207 million, reflecting a per share price of $95.61. The Agreement and Plan of Amalgamation has not yet been approved by the shareholders and Bermuda and United States regulatory authorities.
Refer to Item 12, Part I of this report for more details.

2.     SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies of the Company are summarized as follows:



The financial statements consolidate the financial statements of FLAG Telecom and its subsidiary companies after eliminating intercompany transactions and
balances and recording minority interests. Investments in which FLAG Telecom has an investment of 20%-50% or investments in which FLAG

5

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Telecom
can exert significant influence, but does not control, are accounted for under the equity method. Accordingly, the Company has a 49% interest in Seoul Telenet Inc. which is accounted
for under the principles of consolidation. The Company consolidates Seoul Telenet Inc. as it exercises control over the operations despite having an investment of only 49%.



The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The most critical
estimates include accounts receivable reserves, impairment charges, useful lives of fixed assets, asset retirement obligations and performance obligations under long-term contracts. Actual
amounts and results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of results for the full year.



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

OPERATIONS AND MAINTENANCE

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

NETWORK REVENUES

Network revenues are revenues derived from the lease of managed bandwidth services and Internet Protocol ("IP") services. Revenue associated with leased capacity
is recognized as operating lease revenue unless the criteria under FASB Interpretation No. 43 for sales-type lease accounting are met. During the periods presented, we did not
record any sales-type leases.

PERFORMANCE OBLIGATIONS

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

6

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CAPACITY

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

OPERATIONS AND MAINTENANCE COSTS

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

NETWORK EXPENSES

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

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

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



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



Advertising costs are expensed as incurred. Such costs are included in selling, general and administrative expenses in the accompanying consolidated statements of
operations.



All eligible employees of The Company are covered by a non-contributory defined contribution pension plan. Accordingly, we are not subject to the
disclosure requirements of a defined
benefit pension plan, being the change in benefit obligation, change in plan assets, funded status and reconciliation to amounts recognized in the consolidated balance sheets.



Income taxes are accounted for under the liability method. Deferred taxes are determined based on the difference between the tax basis of an asset or liability
and its reported amount in the financial statements. A deferred tax liability or asset is recorded using the enacted tax rates expected to apply to taxable income in the period in which the deferred
tax liability or asset is expected to be settled or realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period in which the change is
enacted. Future tax benefits attributable to these differences, if any, are recognizable to the extent that realization of such benefits is more likely than not. A valuation allowance is recognized,
based on the weight of available evidence, when it is more likely than not that some portion or all of the deferred tax asset will not be realized.



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.

7

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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 incurred in the development of our global network. Construction in progress is transferred to property and equipment when placed into
service.



Property and equipment are stated at cost, net of accumulated depreciation. In accordance with fresh start accounting, the book value of property and equipment
was adjusted to its fair value and amortized over its remaining estimated useful life. Depreciation is taken on a straight-line basis over the estimated useful lives of the property and
equipment as follows:

Computer equipment

3 yearsFixtures and fittings

5 yearsLeasehold improvements

Remaining lease termMotor vehicles

5 yearsCable systems

15 years or remaining useful lives


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



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

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



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



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



Prior to the commencement of its chapter 11 proceedings, Predecessor had been using derivative financial instruments for the purpose of reducing its exposure to
adverse fluctuations in interest rates,

8

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currencies
and other market risks. Predecessor did not utilize derivative financial instruments for trading or other speculative purposes. The counter-parties to these instruments were major financial
institutions with high credit quality. Predecessor was exposed to credit loss in the event of non-performance by these counter-parties. The Company does not currently use derivative
financial instruments.



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

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



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

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



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



The Company maintains an allowance for doubtful accounts. Payments due from purchasers of capacity are generally payable within 30 days; however, we have
outstanding receivables greater than 30 days. We have established an allowance for doubtful accounts based on our experience with potential uncollectable receivables and our expectations as to
payments. This allowance could require adjustments based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers.



Expenditures for repairs, replacement and maintenance are expensed as incurred. Such costs include routine maintenance and repair work to office buildings and
equipment.



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.

9

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



In accordance with the provisions of FIN 45, at the time the Company issues a guarantee an initial liability is recognized for the fair market value of the
obligations assumed under that guarantee. We periodically review events and changes in circumstances to determine whether the carrying value of the obligations assumed under that guarantee should be
reassessed.



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

3.     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

EMERGING ISSUES TASK FORCE ISSUE NO. 00-21, REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLESEITF 00-21

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

FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERSFIN 45

In
November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a
company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The initial recognition and measurement provisions of FIN 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The
Company has valued and disclosed its guarantees in accordance with the provisions of FIN 45.

FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIESFIN 46

In
January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46,Consolidation of Variable Interest
Entities("FIN 46"). FIN 46 expands upon existing guidance that addresses when a company should include in its financial statements the assets, liabilities, and activities of
another company. A variable interest entity is any legal structure used for business purposes that either (a) does not have equity investors or has equity investors that lack characteristics of
control; or

10

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(b) the
equity investment at risk does not provide sufficient financial resources for the entity to support its activities. Under FIN 46 a variable interest entity must be consolidated by a
company if that company is expected to absorb a majority of the entity's expected losses or to receive a majority of the entity's expected residual returns. The consolidation requirements are
currently applicable to variable interests created after January 31, 2003. FIN 46 also requires certain disclosures about variable interest entities where those entities are not required to be
consolidated. The Company is currently performing a preliminary assessment of the effect that the adoption of the provisions of FIN 46 will have on its financial position, results of operations and
cash flows.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
EQUITYSFAS 150

In
May 2003, the FASB issued FASB Statement No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity(SFAS 150) which establishes standards for classifying and measuring certain financial instruments issued by a company with characteristics of both liabilities
and equity. The statement is effective for all financial instruments created on or modified after May 31, 2003 and otherwise effective at the beginning of our third quarter of fiscal 2004
beginning September 1, 2003. We have not issued any such instruments and therefore the adoption of SFAS 150 does not have a material effect on our financial position, results of
operations and cash flows.

4.     SEGMENT REPORTING

Although our sales and marketing function is structured geographically, we sell the full range of our products and services across the global network. The Company
evaluates the performance of one segment, the global network.

Revenue
analyzed by geographical location of customers, based on the location of the customer's parent company, is as follows:

|                                                                  |  | Successor |  | Predecessor |  | Successor |  | Predecessor
|----------------------------------------------------------------- |  | --------- |  | ----------- |  | --------- |  | -----------
|
|
|
|North America                                                     |  | $3,970    |  | $16,818     |  | $21,738   |  | $73,055    
|Europe                                                            |  | 6,584     |  | 7,275       |  | 17,204    |  | 27,003     
|Middle East                                                       |  | 5,876     |  | 4,709       |  | 18,762    |  | 23,366     
|Asia                                                              |  | 8,079     |  | 27,617      |  | 24,690    |  | 49,604     
|                                                                  |  |           |  |             |  |           |  |            
|Total geographic revenue                                          |  | 24,509    |  | 56,419      |  | 82,394    |  | 173,028    
|Amortization of performance obligations under long-term contracts |  | 3,446     |  |            |  | 10,410    |  |           
|                                                                  |  |           |  |             |  |           |  |            
|Consolidated revenue                                              |  | $27,955   |  | $56,419     |  | $92,804   |  | $173,028   
|                                                                  |  |           |  |             |  |           |  |            

5.     EARNINGS PER SHARE

Basic net loss per common share is computed by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding
during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares and common share equivalents outstanding during the period. For
the three month and nine month periods ended September 30, 2003 and 2002 presented, no potentially dilutive securities

11

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have
been included in the calculation of diluted net loss per share amounts, as the effects would be anti-dilutive.

|                                                     |  | Successor |   | Predecessor |   | Successor |   | Predecessor |  
|---------------------------------------------------- |  | --------- | - | ----------- | - | --------- | - | ----------- | -
|
|
|
|Net Loss                                             |  | $(2,239   | ) | $(51,567    | ) | $(43,269  | ) | $(787,388   | )
|Basic and diluted loss per share                     |  | $(1.12    | ) | $(0.38      | ) | $(21.63   | ) | $(5.87      | )
|Weighted average common shares outstanding           |  | 2,000,000 |   | 134,139,046 |   | 2,000,000 |   | 134,139,046 |  
|                                                     |  |           |   |             |   |           |   |             |  
|Pro forma basic and diluted loss per share*          |  | N/A       |   | $(25.78     | ) | N/A       |   | $(393.69    | )
|Pro forma weighted average common shares outstanding |  | N/A       |   | 2,000,000   |   | N/A       |   | 2,000,000   |  
|                                                     |  |           |   |             |   |           |   |             |  

---

6.     STOCK-BASED COMPENSATION

At September 30, 2003, the Company had one stock-based employee compensation plan (the "2002 Stock Incentive Plan"), which is more fully described in
Note 17 in the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The Company
accounts for this plan under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees,and
related interpretations and adopted the disclosure-only provisions of SFAS No. 123,Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for its stock-based compensation plan under the fair value method as described in SFAS 123. The Company has issued restricted stock at a
price determined by the Compensation Committee of the Board of Directors subject to the Company's right to repurchase such stock in specified circumstances prior to the expiration of a restricted
period within these plans.

The
Company may issue options to acquire up to 222,222 common shares pursuant to the 2002 Stock Incentive Plan.

The
stock-based employee compensation plan of Predecessor was cancelled on October 9, 2002 upon the Company's emergence from chapter 11 activities.

In
accordance with SFAS No. 148,Accounting for Stock-Based CompensationTransition and Disclosure,the following table
illustrates the assumptions used and the effect on net loss and loss per share on a pro forma basis if the Company had applied the fair value recognition provisions of SFAS

12

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No. 123
for all employee stock options granted using the Black-Scholes option pricing model prescribed by SFAS No. 123.

|                                                                                                     |  | Successor |   | Predecessor |   | Successor |   | Predecessor |  
|---------------------------------------------------------------------------------------------------- |  | --------- | - | ----------- | - | --------- | - | ----------- | -
|
|
|
|Net loss as reported                                                                                 |  | $(2,239   | ) | $(51,567    | ) | $(43,269  | ) | $(787,388   | )
|Less: Total stock-based compensation expense determined under fair value based method for all awards |  | (98       | ) |            |   | (193      | ) | (2,374      | )
|Pro forma net loss                                                                                   |  | $(2,337   | ) | $(51,567    | ) | $(43,462  | ) | $(789,762   | )
|                                                                                                     |  |           |   |             |   |           |   |             |  
|Basic and diluted loss per share as reported                                                         |  | $(1.12    | ) | $(0.38      | ) | $(21.63   | ) | $(5.87      | )
|                                                                                                     |  |           |   |             |   |           |   |             |  
|Pro forma basic and diluted loss per share                                                           |  | $(1.17    | ) | $(0.38      | ) | $(21.73   | ) | $(5.89      | )
|                                                                                                     |  |           |   |             |   |           |   |             |  

7.     IMPAIRMENT OF LONG-LIVED ASSETS

Following the adoption of SFAS 144, we prepared discounted cashflow models for each of the cable systems, including a review of the estimation of the cost
of capital. Given the high level of competition in terms of alternative supply, we have reviewed the revenue opportunities on the FEA system and
have recognized an impairment charge of $327.9 million in respect of the FEA system in the second quarter of 2002.

Given
the high level of competition in terms of alternative supply and higher than expected price erosion on various routes connecting Hong Kong, we have reviewed the revenue
opportunities on the FNAL system and have recognized an impairment charge of $225.0 million in respect of the FNAL system in the second quarter of 2002. See Note 2.12 to the Financial
Statements contained in this Report.

8.     REORGANIZATION ITEMS

During the three months ended September 30, 2003 the Company entered into an agreement with a third party to settle various unasserted disputes relating to
certain IRUs entered into prior to the commencement of chapter 11 proceedings. The Company has accounted for this in accordance with AICPA Practice Bulletin
11Accounting for Preconfirmation Contingencies in Fresh Start Reporting("AICPA PB 11"), and the resulting gain on this settlement of
$6.5 million is included within Reorganization Items.

9.     RESTRUCTURING COSTS

Upon emergence from bankruptcy, the Company initiated a plan for a number of office closures, employee relocations and further employment terminations, the
details of which were finalized during 2002 and the first three months of 2003. The employees affected were in Sales (4), Operations (17) and Finance and Administration (14).

The
last planned office closure occurred in April 2003 and the last related employee termination occurred in August 2003. The Company had incurred $4.1 million in
costs as part of the plan by September 30, 2003 and does not expect any further material costs to be incurred. The remaining balance of the restructuring provision is included within accrued
liabilities.

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The
following summarizes the activity for the restructuring costs incurred by the Company during the nine month period ended September 30, 2003:

|                                   |  | One-time
termination
costs |  
|---------------------------------- |  | -------------------------- | -
|
|Beginning balance January 1, 2003  |  | $2,604                     |  
|Amounts paid                       |  | (2,027                     | )
|                                   |  |                            |  
|Closing balance September 30, 2003 |  | $577                       |  
|                                   |  |                            |  

10.   LEGAL PROCEEDINGS



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

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

A
Motion to Dismiss was filed by the defendants, including FLAG Telecom, on July 7, 2003.

As
the Company, per the Plan, has no liability for any claims relating to the period prior to the Effective Date, we believe there is no potential liability for us and therefore no
reserves have been established. There is a contingent liability, on the part of the Company, of $3.25 million for a defense fund in case coverage under the Directors' & Officers'
Liability policy ("D&O policy") is invalidated or attempted to be invalidated by the insurance company. Predecessor and the insurers under the D&O policy have executed an interim funding agreement by
which the insurers are willing to advance reasonable and necessary costs and expenses in connection with the above matters. Based on the likelihood of this event occurring, no provision for these
liabilities has been made in our financial statements.



On August 7, 2003, the Company and certain of its subsidiaries commenced an action for injunctive and declaratory relief (the "Action") in the United
States Bankruptcy Court for the Southern District of New York naming Kensington International Ltd. ("Kensington"), Springfield Associates, LLC ("Springfield" and collectively, with Kensington,
the "Defendants"), Wilmington Trust Company,

14

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and
The Bank of New York, as defendants. The Defendants alleged to be the holders of the FNAL Note (defined below) issued by FLAG Asia Limited, a subsidiary of the Company. The Company is a guarantor
of the FNAL Note. By a letter dated August 4, 2003 and addressed to FLAG Asia Limited, the Defendants alleged that a default occurred arising from an alleged failure of a subsidiary of the
Company to further perfect the interests in the collateral that secures the FNAL Note in Taiwan. Further, the letter declared that the alleged default caused an acceleration of the indebtedness
underlying the FNAL Note. In the Action, the Company and certain of its subsidiaries sought a prompt entry of an order declaring that FLAG Asia Limited had not defaulted on the FNAL Note. The Action
further sought to enjoin the defendants from accelerating the amounts owed on the FNAL Note, as well as certain other senior secured notes issued under that certain Indenture, dated as of
October 9, 2002 among the Company, certain subsidiaries of the Company that are guarantors thereto, and The Bank of New York, as trustee (the "Indenture"). On August 25, 2003, the
Company redeemed the notes issued under the Indenture.

A
hearing on the Action took place in New York on August 22, 2003. The court ruled in the Company's favor and enjoined the defendants under the Action from taking any further
action to accelerate or collect upon the FNAL Note. Furthermore, the Bank of New York was directed to proceed with the
redemption of three series of Notes issued under the Indenture at a discount as previously noticed in the company's Notices of Redemption dated July 25, 2003. However, despite the redemption of
the Indenture, it was ruled that the Security Agreement (as defined below) underlying the Indenture must remain in place for the benefit of the defendants' claim of $3.1 million until a final
judgment on this matter is issued.

Management
believes that the alleged default under the FNAL Note is without merit and the likelihood of the allegation being upheld is remote. Consequently, no provision has been made.
In arriving at its opinion, management has consulted external counsel.



On August 20, 2003, FLAG Telecom Limited, a UK subsidiary of the Company received a Notice from the UK Office of Fair Trading ("OFT") requiring the
production of certain documents and the provision of information under Section 26 of the Competition Act 1998. The OFT stated that it has reasonable grounds that an infringement of the
Competition Act had occurred by way of an agreement or concerted practice that had the effect of a collective boycott and/or by way of price fixing agreements or exchanging information on prices in
the context of the UK Cable Protection Committee ("UKCPC") with the object of restricting competition within the market for UK submarine cable landings and capacity. As the Company had already decided
upon its cable landings before the cable landing provider, who allegedly has been boycotted, presented itself as an alternative provider and as the Company has participated in UKCPC meetings strictly
with respect to non-commercial, technical, matters only, the Company believes that the allegations contained in the Notice from the OFT are without merit. Accordingly, the Company has not
made any provisions in this context.



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

15

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11.   INDEBTEDNESS

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



On the Effective Date, we issued Series A Notes in the original principal amount of $45 million, which were due and payable on October 1,
2005, and bore simple interest on this amount, less any principal repayments made, at the following rates: 6.67% per annum for the first 12 months after the Effective Date; 7.33% per annum for
months 13 through 24 after the Effective Date; and 8% per annum for months 25 through 36 after the Effective Date. The Company redeemed all of the Series A Notes on August 25, 2003 by
paying the sum of $30 million, plus accrued but unpaid interest.



We issued the Series B Note on the Effective Date. The Series B Note had an original principal amount of $4 million, due and payable on
October 1, 2004 and bore simple interest on this amount, less any principal repayments made, at the following rates: 10% per annum until October 1, 2003; and 11% thereafter. The Company
redeemed the Series B Note on August 25, 2003 by paying the sum of $4 million, plus accrued but unpaid interest.



We issued the Series C Note on the Effective Date. The Series C Note had an original principal amount of $1.25 million, due and payable on
October 1, 2004 and had the same material terms and conditions as the Series B Note. The Company redeemed the Series C Note on August 25, 2003 by paying the sum of
$1.25 million, plus accrued but unpaid interest.



The redemption of the Series A, B and C Notes, which had a combined face value of $50.25 million, for a discounted redemption value of
$35.25 million plus all accrued but unpaid interest, on August 25, 2003, resulting in an accounting gain of $9.9 million.



The Series A Notes, the Series B Note and the Series C Note were each governed by the Indenture. Under the terms of the Indenture we were
prohibited from retiring any debt prior to its scheduled maturity, other than the Series A, B and C Notes, non-recourse debt, and intercompany debt. Therefore, we were not permitted
to retire the FNAL Note (see below) without the consent of the Series A, B and C Noteholders. However, the FNAL Note and other indebtedness does not prevent us from repurchasing or redeeming
the Series A, B and C Notes.

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

As
permitted under Sections 3.05, 4.03 and 5.03 of the Indenture, on August 25, 2003, we redeemed the Series A, B and C Notes, which had a combined face value of
$50.25 million, for a discounted redemption value of $35.25 million, plus accrued but unpaid interest. Following these redemptions, the Indenture was terminated and the Company was
discharged from its obligations thereunder.

16

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In
connection with the Indenture, we also entered into a Security and Pledge Agreement (the "Security Agreement"), dated as of October 9, 2002, with The Bank of New York, as
collateral trustee, under which we pledged and granted a security interest in substantially all of our current and future assets to secure the payment of all the Series A Notes, the
Series B Note and the Series C Note. Notwithstanding the termination of the Indenture, the Security Agreement is still in full force and effect, subject to the final resolution of the
action related to the FNAL Note described in Note 10.



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

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

On
August 22, 2003, the US Bankruptcy Court ruled in the Company's favor on an action brought by the Company and certain of its subsidiaries for injunctive and declaratory relief
after the noteholders asserted, among other things, that the Company defaulted on its obligations under the Note. Refer to Item 8 of this Report for further details.

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

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

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



As of September 30, 2003, the Company issued a guarantee in the form of a one year, annually renewable $1 million irrevocable letter of credit. The
present value of the maximum potential future payments under the guarantee is $0.9 million. The guarantee is collateralized by cash.

12.   POST BALANCE SHEET EVENT

On October 16, 2003, the Company entered into an Agreement and Plan of Amalgamation (the "Amalgamation Agreement") with Reliance Gateway Net Limited
("Reliance Gateway"), a company organized under the laws of India, pursuant to which Reliance Gateway has agreed to acquire 100% of

17

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the
Company's Common Shares on a fully diluted basis for an aggregate consideration of $207 million reflecting a per share price of $95.61, by way of an amalgamation of Gateway Net Bermuda
Limited (the "Amalgamation Sub"), a direct, wholly-owned subsidiary of Reliance Gateway, with the Company. The amalgamation would result in the elimination of the separate existence of the Company and
the Amalgamation Sub, and the new amalgamated company would continue operating under the name of "FLAG Telecom Group Limited," as a Bermuda company and a direct, wholly-owned subsidiary of Reliance
Gateway.

The
Amalgamation Agreement has been unanimously approved by the boards of directors of the Company and Reliance Gateway.

Closing
of the transaction is subject to the receipt of certain regulatory approvals and the approval of the Company's shareholders. The transaction requires the approval of three
quarters (75%) of the votes cast at a meeting of the Company's shareholders. If more than 30% of the holders of shares entitled to vote at the meeting do not vote in favor of the approval and adoption
of the Amalgamation Agreement and exercise their dissenters' rights, the Amalgamation Agreement may be terminated by Reliance Gateway. The transaction does not require the approval of Reliance
shareholders.

18

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



We have made forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 ("Securities Act") and Section 21E of the
Exchange Act, in this report that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information
concerning our possible or assumed results of operations, liquidity and capital resources, cash flows, business strategies, financing plans, competitive position and potential growth opportunities.
Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believes", "expects", "anticipates",
"intends", "plans", "estimates" and similar expressions.

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

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



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



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

19

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Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 for our critical accounting policies. We have
made no material changes to the critical accounting policies described in our Annual Report other than as set forth in Note 2.22 to the Consolidated Financial Statements contained in this
Report.



The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the
year ended December 31, 2002 contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. In addition, Predecessor's results of
operations for the three months and nine months ended September 30, 2002 are not comparable to the Company's results for the three months and nine months ended September 30, 2003 due to
the adoption of fresh start accounting upon emergence from bankruptcy.



|                                                                  |  | Successor |  | Predecessor |  | Successor |  | Predecessor
|----------------------------------------------------------------- |  | --------- |  | ----------- |  | --------- |  | -----------
|
|
|
|
|Capacity revenue, net of discounts                                |  | $2,644    |  | $26,532     |  | $6,395    |  | $83,514    
|Operations and maintenance                                        |  | 11,425    |  | 13,401      |  | 42,266    |  | 49,870     
|Network Services                                                  |  | 10,440    |  | 16,486      |  | 33,733    |  | 39,644     
|Amortization of performance obligations under long term contracts |  | 3,446     |  |            |  | 10,410    |  |           
|                                                                  |  |           |  |             |  |           |  |            
|Total revenues                                                    |  | $27,955   |  | $56,419     |  | $92,804   |  | $173,028   
|                                                                  |  |           |  |             |  |           |  |            



Total revenue for the three months ended September 30, 2003 decreased 50.4% to $28.0 million as compared to $56.4 million for the three
months ended September 30, 2002. Total revenue for the nine months ended September 30, 2003 decreased 46.4% to $92.8 million as compared to $173.0 million for the nine
months ended September 30, 2002. These decreases are primarily due to the write off of all deferred revenue as part of fresh start accounting and the issuing of one off credit notes totaling
$3.4 million in the quarter. Consequently, revenues as of September 30, 2003 reflect only services performed or products sold and ready for service related to contracts entered into
subsequent to October 9, 2002, along with the amortization of performance obligations under long-term contracts. Revenues are also affected by the mix of contracts signed between
leases and right of use agreements ("ROUs") due to the different revenue recognition policies.

We
only recognize revenues from the date capacity is activated, or services rendered, with revenues being recognized in the income statement on a pro rata basis evenly over the period of
the contract or the lifetime of the cable system, with a maximum of 15 years.

Included
within total revenue for the three months and nine months ended September 30, 2003 is $20.8 million and $68.8 million, respectively, related to contracts
entered into prior to December 31, 2002. Additionally, we have signed new contracts with a projected value of $34.3 million and $113.2 million in the three months and nine months
ended September 30, 2003, respectively.

20

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The
total right of use, or ROU, capacity acquired by affiliates of Reliance Gateway is $35.0 million or approximately 30.9% of the Company's 2003 new contract values through the
nine month period ended September 30, 2003. The total revenue, as recorded, derived from these arrangements for the nine months ended September 30, 2003 was $1.0 million or 1.1%
of the Company's total revenue for the period then ended.



Revenue recognized from the sale of capacity decreased by 90.0% to $2.6 million for the three months ended September 30, 2003, as compared to
$26.5 million for the three months ended September 30, 2002. Revenue recognized from the sale of capacity decreased by 92.3% to $6.4 million for the nine months ended
September 30, 2003, as compared to $83.5 million for the nine months ended September 30, 2002. These decreases are primarily due to the write off of all deferred revenue as part
of fresh start accounting. Capacity revenues in the three months and nine months ended September 30, 2003 only includes revenues from contracts entered into subsequent to October 9,
2002. Capacity revenues consist of leases and ROU contracts.



Revenue recognized from operations and maintenance decreased by 14.7% to $11.4 million for the three months ended September 30, 2003, as compared to
$13.4 million for the three months ended September 30, 2002. Revenue recognized from operations and maintenance decreased by 15.2% to $42.3 million for the nine months ended
September 30, 2003, as compared to $49.9 million for the nine months ended September 30, 2002. These decreases are primarily due to the write off of deferred revenue on prepaid
operations and maintenance ("O&M") contracts as part of fresh start accounting, along with price reductions reflecting general market conditions.



Revenue recognized from our network services activities decreased by 36.7% to $10.4 million for the three months ended September 30, 2003, as
compared to $16.5 million for the three months ended September 30, 2002. Revenue recognized from our network services activities decreased by 14.9% to $33.7 million for the nine
months ended September 30, 2003, as compared to $39.6 million for the nine months ended September 30, 2002. The network services activities consist of IP Transit, managed
bandwidth services, vPoP and co-location services. The decreases are due to price erosion and certain annual contracts not being renewed.



Upon emergence from chapter 11, and in accordance with fresh start accounting, we began to amortize performance obligations under long-term contracts
within revenues. In the three months and nine months ended September 30, 2003, we have amortized $3.4 million and $10.4 million to the income statement, respectively. These
performance obligations under long-term contracts arose upon the adoption of fresh start accounting. As part of fresh start accounting, deferred revenue balances were written off and a
performance obligations reserve was created to cover future expenses resulting from sale activity recognized prior to restatement, and for which the benefit, except for ongoing O&M payments, was also
received prior to restatement. This reserve will be amortized in line with the relevant cost incursion associated with performance of contracts.

21

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|                                        |  | Successor |   | Predecessor |  | Successor |   | Predecessor
|--------------------------------------- |  | --------- | - | ----------- |  | --------- | - | -----------
|
|
|
|
|Operations and maintenance              |  | $15,424   |   | $10,444     |  | $51,451   |   | $54,770    
|Network expenses                        |  | 7,113     |   | 13,161      |  | 19,188    |   | 39,741     
|Selling, general and administrative     |  | 13,560    |   | 17,201      |  | 42,405    |   | 55,291     
|Gain from early extinguishments of debt |  | (9,900    | ) |            |  | (9,900    | ) |           
|Bad debt expense                        |  | 792       |   | 7,311       |  | 9,980     |   | 15,565     
|Restructuring costs                     |  |          |   | 1,893       |  |          |   | 1,893      
|Asset impairment                        |  |          |   |            |  |          |   | 552,900    
|Depreciation                            |  | 8,328     |   | 39,125      |  | 24,234    |   | 123,407    
|                                        |  |           |   |             |  |           |   |            
|Total expenses                          |  | $35,317   |   | $89,135     |  | $137,358  |   | $843,567   
|                                        |  |           |   |             |  |           |   |            

Included
within our operating expenses for the three months and nine months ended September 30, 2003 are recurring fixed costs of $16.5 million and $49.5 million,
respectively.



During the three months ended September 30, 2003, operations and maintenance costs increased by 47.7% to $15.4 million, as compared to
$10.4 million for the three months ended September 30, 2002. During the three months ended September 30, 2003, we incurred further costs of $0.4 million as a direct result
of repairs to the FEA cable after the earthquake in Algeria during May 2003, $0.7 million as a direct result of the FA-1 cable break in the North Atlantic and a P3 Spur cable
cut in China. Additionally, we have reclassified certain costs from network expenses in 2003. During the nine months ended September 30, 2003, operations and maintenance costs decreased by 6.1%
to $51.5 million, as compared to $54.8 million for the nine months ended September 30, 2002. Operations and maintenance costs relate primarily to the provision of standby
maintenance under maintenance zone agreements as well as salaries and overheads directly associated with operations and maintenance activities. The decrease for the nine month period reflects the
renegotiation of contracts and rationalization in our marine cable operations, landing stations, terrestrial cable operations, PoPs and vendor maintenance and support, along with reductions in certain
fixed costs related primarily to marine costs on fixed contracts partially offset by the reclassification of certain backhaul costs from network expenses.



During the three months ended September 30, 2003, network expenses decreased by 46.0% to $7.1 million, as compared to $13.2 million for the
three months ended September 30, 2002. During the nine months ended September 30, 2003, network expenses decreased by 51.7% to $19.2 million, as compared to $39.7 million
for the nine months ended September 30, 2002. These costs relate primarily to the utilization of third party capacity, including local backhaul costs, connection and access fees, restoration
charges and other network procurement costs. These decreases reflect the migration from temporary Atlantic facilities onto our own network which took place during the third quarter of 2002 and other
measures taken to improve the efficiency of network utilization together with the reclassification of certain backhaul costs to operations and maintenance costs.

22

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During the three months ended September 30, 2003, selling, general and administrative expenses decreased by 21.2% to $13.6 million, as compared to
$17.2 million for the three months ended September 30, 2002. During the nine months ended September 30, 2003, selling, general and administrative expenses decreased by 23.3% to
$42.4 million, as compared to $55.3 million for the nine
months ended September 30, 2002. These decreases reflect lower personnel and related costs due to the downsizing of personnel and office closures during the latter half of 2002 and first
quarter of 2003. Subsequent to the restructuring, our total headcount has increased from 260 at September 30, 2002 to 265 at September 30, 2003. Included within selling, general and
administrative expenses are certain fixed costs which primarily relate to salaries, office rent and insurance costs. Selling, general and administrative expenses decreased in the three months ended
September 30, 2003 primarily as a result of the release of certain provisions made relating to emergence date payments which were settled in the quarter.



The Company redeemed its Series A, B and C Notes, which had a combined face value of $50.25 million, for a discounted redemption value of
$35.25 million plus all accrued but unpaid interest, on August 25, 2003, resulting in an accounting gain of $9.9 million.



For the three months ended September 30, 2003, we recorded $0.8 million in respect of bad debt expense compared to $7.3 million for the three
months ended September 30, 2002. For the nine months ended September 30, 2003, we recorded $10.0 million in respect of bad debt expense compared to $15.6 million for the
nine months ended September 30, 2002. The bad debt expense for the nine months ended September 30, 2003 was primarily a result of provisions taken against specific credit concerns as
well as certain customer disputes.



For the three months ended September 30, 2003, we recorded $8.3 million in respect of depreciation compared to $39.1 million for the three
months ended September 30, 2002. For the nine months ended September 30, 2003, we recorded $24.2 million in respect of depreciation compared to $123.4 million for the nine
months ended September 30, 2002. The depreciation charge for the nine month period decreased as a result of asset impairments totaling $0.5 billion in the second quarter of 2002 and
$1.4 billion as part of fresh start accounting. We depreciate property and equipment on a straight-line basis over the estimated useful life of the asset, generally no more than
15 years.



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

The
FEA system consists of approximately 28,000 kilometers of undersea fiber-optic cable with a 580 kilometer dual land crossing in Egypt and a 450 kilometer dual land crossing in
Thailand, linking Western Europe and Japan via the Middle East, India, Southeast Asia and China.

23

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The
FNAL system provides a 12,500 kilometer city-to-city service between the high traffic centers of Hong Kong, Seoul, Tokyo and Taipei, over infrastructure
co-built and co-owned with Reach Cable Networks Limited and Reach Networks KK (collectively "Reach").

Following
the adoption of SFAS 144, we prepared discounted cashflow models for each of the cable systems, including a review of the estimation of the cost of capital. Given the
high level of competition in terms of alternative supply, we have reviewed the revenue opportunities on the FEA system and have recognized an impairment charge of $327.9 million in respect of
the FEA system in the second quarter of 2002.

Given
the high level of competition in terms of alternative supply and higher than expected price erosion on various routes connecting Hong Kong, we have reviewed the revenue
opportunities on the FNAL system and have recognized an impairment charge of $225.0 million in respect of the FNAL system in the second quarter of 2002. See Note 2.12 to the Financial
Statements contained in this Report.



During the three months ended September 30, 2003 the Company entered into an agreement with a third party to settle various unasserted disputes relating to
certain IRUs entered into prior to the
commencement of chapter 11 proceedings. The Company has accounted for this in accordance with AICPA Practice Bulletin 11Accounting for Preconfirmation Contingencies in Fresh Start
Reporting ("AICPA PB 11"), and the resulting gain on this settlement of $6.5 million is included within Reorganization Items.

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



Upon emergence from bankruptcy, the Company initiated a plan for a number of office closures, employee relocations and further employment terminations, the
details of which were finalized during 2002 and the first quarter of 2003. The employees affected were in Sales (4), Operations (17) and Finance and Administration (14).

The
last planned office closure occurred in April 2003 and the last related employee termination occurred in August 2003. The Company incurred $4.1 million in costs
as part of the plan by September 30, 2003 and does not expect any further costs to be incurred.

The
following summarizes the activity for the restructuring costs incurred by the Company during the nine month period ended September 30, 2003:

|                                   |  | One-time
termination
costs |  
|---------------------------------- |  | -------------------------- | -
|
|Beginning balance January 1, 2003  |  | $2,604                     |  
|Amounts paid                       |  | (2,027                     | )
|                                   |  |                            |  
|Closing balance September 30, 2003 |  | $577                       |  
|                                   |  |                            |  

24

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Interest expense on borrowings for the three months ended September 30, 2003 was $1.1 million, compared to $1.4 million during the three
months ended September 30, 2002. Interest expense on borrowings for the nine months ended September 30, 2003 was $5.6 million, compared to $42.3 million during the nine
months ended September 30, 2002. The decrease in interest expense for these periods was primarily attributable to reduction and restructuring of our debt as a result of chapter 11 proceedings.



The foreign exchange loss for the three months ended September 30, 2003 was $0.2 million and resulted from unfavorable exchange rate movements on
the settlement of transactions during the quarter. The foreign exchange gain of $3.1 million for the three months ended September 30, 2002 arose predominantly from the translation of
Euro denominated debt. The foreign exchange gain for the nine months ended September 30, 2003 was $0.5 million and resulted predominantly from the weakening of the US dollar against
operating expenses in foreign currencies. The foreign exchange loss of $25.0 million for the nine months ended September 30, 2002, arose predominantly from the translation of Euro
denominated debt.



Interest income of $0.1 million and $0.6 million was earned during the three months and nine months ended September 30, 2003, respectively,
compared to $0.2 million and $4.0 million earned during the three months and nine months ended September 30, 2002, respectively, reflecting the reduced cash balances and the
recording of any such income as reorganization costs in accordance with SOP 90-7. The interest income was earned on cash balances, short-term investments and restricted cash.



The provision for taxes was a charge of $0.8 million for the three months ended September 30, 2003, compared to a credit of $3.5 million for
the three months ended September 30, 2002. The provision for taxes was a charge of $1.4 million for the nine months ended September 30, 2003, compared to a credit of
$3.8 million for the nine months ended September 30, 2002.

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

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

We
have obtained from the Minister of Finance of Bermuda, under the Exempted Undertakings Tax Protection Act 1966, an undertaking that, in the event that Bermuda enacts any legislation

25

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



For the three months ended September 30, 2003, we recorded a net loss of $2.2 million, compared to a net loss of $51.6 million for the three
months ended September 30, 2002.

Basic
and diluted loss per common share was $1.12 for the three months ended September 30, 2003, compared to a basic and diluted loss per common share of $0.38 for the three
months ended September 30, 2002.

For
the nine months ended September 30, 2003, we recorded a net loss of $43.3 million, compared to a net loss of $787.4 million for the nine months ended
September 30, 2002.

Basic
and diluted loss per common share was $21.63 for the nine months ended September 30, 2003, compared to a basic and diluted loss per common share of $5.87 for the nine months
ended September 30, 2002.



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

|                          |  | Successor
|------------------------- |  | ---------
|
|
|Cash and cash equivalents |  | $52,055  
|Restricted cash           |  | 5,164    
|Working capital           |  | 62,657   
|                          |  |          



As at September 30, 2003, the Company had cash and cash equivalents of $52.1 million. We believe that, based on current market conditions, current
financial conditions and our latest financial projections, this cash balance is sufficient to enable us to continue to meet in full our financial obligations as they fall due in the foreseeable
future. Our cash balance decreased during the nine months ended September 30, 2003 primarily due to the repayment of $35.25 million plus accrued but unpaid interest against our
indebtedness under the Indenture, net cash used in operating activities of $22.2 million and $9.35 million repaid against other promissory notes issued on the Effective Date.



The Company designates funds held by banks or other third parties as collateral for guarantees and performance bonds as restricted cash.



At September 30, 2003, working capital, defined by the Company as net current assets, had decreased to $62.7 million from $103.3 million at
December 31, 2002 primarily as a result of the repayment of our indebtedness under the Indenture, a reduction in the total cash balance and an increase in the allowance for doubtful accounts.
Total cash, excluding restricted cash, had decreased by

26

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$73.7 million
from $125.8 million at December 31, 2002 to $52.1 million at September 30, 2003. This decrease was primarily due to net cash used in operating
activities of $22.2 million, net cash used in financing activities of $44.6 million, net cash used in investing activities of $8.3 million, partially offset by the effect of
foreign currency movements of $1.4 million during the nine months ended September 30, 2003.

Net
cash used in operating activities for the nine months ended September 30, 2003 of $22.2 million was primarily due to a net loss of $43.3 million, payments made
to reduce our trade creditors balance by $13.6 million, amortization of performance obligations of $10.4 million and a gain on the repayment of
long-term debt under the Indenture of $9.9 million, partially offset by an increase in our deferred revenue balance of $33.4 million and a depreciation charge of
$24.2 million.

Net
cash used in financing activities for the nine months ended September 30, 2003 of $44.6 million was due to the repayment of $35.25 million plus accrued but
unpaid interest against long-term debt under the Indenture and $9.35 million against other promissory notes issued on the Effective Date.

Net
cash provided by investing activities for the nine months ended September 30, 2003 of $8.3 million was primarily due to payments made for construction costs and
investment in plant and equipment of $11.6 million, partially offset by a decrease in our restricted cash balance of $3.3 million.



Our primary asset is the net book value of the FLAG Telecom global network, including construction in progress recorded in property and equipment totaling
$303.9 million at September 30, 2003, compared to $302.5 million at December 31, 2002. The increase of $21.0 million (excluding depreciation charged in the nine
months ended September 30, 2003 of $19.6 million) is mainly attributed to an overall increase in network capacity and construction in progress.

Our
other property and equipment consists primarily of office furniture, leasehold improvements and computer equipment that had net book values of $8.3 million and
$12.6 million as of September 30, 2003 and December 31, 2002, respectively.



The accounts receivable balance at September 30, 2003 was $71.6 million compared to $81.9 million at December 31, 2002. The allowance
for doubtful accounts at September 30, 2003 was $21.5 million, compared to $10.4 million at December 31, 2002. This increase is attributable to additional provisions
against specific credit concerns as well as certain customer disputes.

We
are aware that one of our customers, Global Crossing, has announced that it has filed for bankruptcy protection under chapter 11. As at September 30, 2003, Global Crossing and
its affiliates owed us $0.2 million ($0.2 million at December 31, 2002). This has been provided for in full. Global Crossing has $24.7 million of credits to be used on our
system, subject to certain provisions under a
governing agreement, which cannot be offset against any monies owing to us. These credits expire on December 31, 2009.

Other
customers have credits totaling $25.5 million to be used on our fiber-optic system, subject to certain provisions under our agreements with these customers. These credits
generally expire over the lifetime of the cable.



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

27

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



Accounts receivable potentially subject FLAG Telecom to a concentration of credit risk. FLAG Telecom performs ongoing credit evaluations of the financial
condition of its larger customers. Geographical risk is mitigated by the fact that revenues are not concentrated in one part of the world. See Note 4, "Segment Reporting", to the Consolidated
Financial Statements contained in this Report for concentrations by geographic areas.

Where
the Company enters into contractual arrangements with customers that are in bankruptcy proceedings, the risk of non-performance is mitigated by the fact that the
customer's liquidator will approve any financial commitment with the bankruptcy court in advance of acceptance of the commitment.

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



Historically we have been exposed to interest rate risk on bank debt incurred by FLAG Limited and FLAG Atlantic Limited, and interest rate swaps transactions were
entered to manage this risk. FLAG Limited's bank debt was repaid in full in March 2002, and FLAG Atlantic Limited's debt was redeemed pursuant to the Plan.

Commodity
price risk is not material to our company.

ITEM 4.    CONTROLS AND PROCEDURES

The Company's disclosure controls and procedures ("Disclosure Controls") are controls and other procedures that are designed with the objective of ensuring that
information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is
accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal
control over financial reporting ("Internal Controls") is a process designed by, or under the supervision of, the Company's Chief Executive Officer and the Chief Financial
Officer, and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for

28

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external
purposes in accordance with U.S. GAAP. Internal Controls include policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the
Company's financial statements.



As discussed in our Annual Report on Form 10-K for the year ended December 31, 2002, which was filed with the Securities and Exchange
Commission on July 3, 2003, certain reportable Internal Controls deficiencies were identified within the 90-day period prior to the date of that report. Our independent auditors,
Ernst & Young, LLP, advised the Audit Committee that deficiencies in the following Internal Controls constituted reportable conditions and, collectively, a "material weakness" as defined in the
Statement on Auditing Standards No. 60:

To
date, a number of corrective actions and changes to the Internal Controls have been taken to address these weaknesses, as follows. However, they have not yet been fully implemented.

Bank
Reconciliations:

Reconciliations
are now performed on a monthly basis for all active accounts and on a quarterly basis for all accounts. A control checklist is maintained and the reconciliations are
reviewed and approved by the Company's Group Financial Controller. The list of reconciling items has been significantly cleared and reconciling items are now investigated and cleared on a regular
basis.

Accounts
Payable:

Monthly
reconciliations are performed between the accounts payable listing and the general ledger and reviewed by the Company's Group Financial Controller.

Supplier
statement reconciliations are being performed as part of an accounts payable clean up exercise. Reconciling items are being addressed and corrected on a timely basis.

Financial
Statement Close Process:

Monthly
management accounts are produced on a timely basis as close as possible to the end of the month. Management has revised the timetable for monthly reporting and included the
development of variance analysis, flash reporting and the responsibilities and ownership for achieving these deadlines.

The
month end close process deliverables require the reconciliation and review of all significant balances, which is evidenced and reviewed by the Company's Group Financial Controller.

Greater
emphasis is being placed on ensuring that appropriate documentary evidence is maintained for accounting transactions, especially that required to support journal entries and
accounting estimates.

As
discussed in our Quarterly Report on Form 10-Q for the period ended June 30, 2003, which was filed with the Securities and Exchange Commission on
August 14, 2003, to further address the deficiencies and weaknesses identified, we are implementing additional changes appropriate to our

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processes,
procedures, systems and personnel. Furthermore, management has also developed a Finance Improvement Plan, the key elements of which were included in the aforementioned Quarterly Report and
which address comments our independent auditors raised in their management letter.



As of September 30, 2003, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange
Act of 1934. In addition, we evaluated whether there was any change in our Internal Controls that occurred during the past fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. As a result of this review and evaluation, which was concluded in the course of preparing our financial statements for the three
months and nine months ended September 30, 2003 and in connection with the audit and re-audit of our financial statements for 2002, 2001 and 2000 by our independent auditors,
Ernst & Young, LLP, management determined that, despite the fact that significant progress had been made, all our planned corrective actions and changes to the Internal Controls had not yet
been fully implemented and tested.

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

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

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PART II  OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS



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

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

A
Motion to Dismiss was filed by the defendants, including FLAG Telecom, on July 7, 2003.

As
we, per the Plan, have no liability for any claims relating to the period prior to the Effective Date, we believe there is no potential liability for us and therefore no reserves have
been established. There is a contingent liability, on the part of the Company, of $3.25 million for a defense fund in case coverage under the Directors' & Officers' Liability policy
("D&O policy") is invalidated or attempted to be invalidated by the insurance company. Predecessor and the insurers under the D&O policy have executed an interim funding agreement by which the
insurers are willing to advance reasonable and necessary costs and expenses in connection with the above matters. Based on the likelihood of this event occurring, no provision for these liabilities
has been made in our financial statements.



On August 7, 2003, the Company and certain of its subsidiaries commenced an action for injunctive and declaratory relief (the "Action") in the United
States Bankruptcy Court for the Southern District of New York naming Kensington International Ltd. ("Kensington"), Springfield Associates, LLC ("Springfield" and collectively, with Kensington,
the "Defendants"), Wilmington Trust Company, and The Bank of New York as defendants. The Defendants alleged to be the holders of the FNAL Note (defined below) issued by FLAG Asia Limited, a subsidiary
of the Company. The Company is a guarantor of the FNAL Note. By a letter dated August 4, 2003 and addressed to FLAG Asia Limited, the Defendants alleged that a default occurred arising from an
alleged failure of a subsidiary of the Company to further perfect the interests in the collateral that secures the FNAL Note in Taiwan. Further, the letter declared that the alleged default caused an
acceleration of the indebtedness underlying the FNAL Note. In the Action, the Company and certain of its subsidiaries seek a prompt entry of an order declaring that FLAG Asia Limited has not defaulted
on the FNAL Note. The Action further seeks to enjoin the defendants from accelerating the amounts owed on the FNAL Note, as well

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as
certain other senior secured notes issued under that certain Indenture, dated as of October 9, 2002 among the Company, certain subsidiaries of the Company that are guarantors thereto, and
The Bank of New York, as trustee (the "Indenture"). On August 25, 2003, the Company redeemed the notes issued under the Indenture.

A
hearing on the Action took place in New York on August 22, 2003. The court ruled in the Company's favor and enjoined the defendants under the Action from taking any further
action to accelerate or collect upon the FNAL Note. Furthermore, the Bank of New York was directed to proceed with the redemption of three series of Notes issued under the Indenture at a discount as
previously noticed in the company's Notices of Redemption dated July 25, 2003. However, despite the redemption of the Indenture, it was ruled that the Security Agreement (as defined below)
underlying the Indenture must
remain in place for the benefit of the defendants' claim of $3.1 million until a final judgment on this matter is issued.

Management
believes that the alleged default under the FNAL Note is without merit and the likelihood of the allegation being upheld is remote. Consequently, no provision has been made.
In arriving at its opinion, management has consulted external counsel.



On August 20, 2003, FLAG Telecom Limited, a UK subsidiary of the Company received a Notice from the UK Office of Fair Trading ("OFT") requiring the
production of certain documents and the provision of information under Section 26 of the Competition Act 1998. The OFT stated that it has reasonable grounds that an infringement of the
Competition Act had occurred by way of an agreement or concerted practice that had the effect of a collective boycott and/or by way of price fixing agreements or exchanging information on prices in
the context of the UK Cable Protection Committee ("UKCPC") with the object of restricting competition within the market for UK submarine cable landings and capacity. As the Company had already decided
upon its cable landings before the cable landing provider, who allegedly has been boycotted, presented itself as an alternative provider and as FLAG has participated in UKCPC meetings strictly with
respect to non-commercial, technical, matters only, the Company believes that the allegations contained in the Notice from the OFT are without merit. Accordingly, the Company has not made
any provisions in this context.



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

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

On September 25, 2003, the Company held its 2003 Annual General Meeting at which the shareholders of the Company voted to modify certain provisions of the
Company's Bye-laws. See Item 4 of this Report for further details on the modifications and the general effect of such modifications upon the rights of holders of the Company's Common
Shares.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

On September 25, 2003, FLAG Telecom held its 2003 Annual General Meeting in London, United Kingdom. As there were two or more shareholders present in
person or by proxy representing

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1,350,245
Common Shares in person or by proxy at the meeting representing 67.51% of the 2,000,000 issued and outstanding Common Shares of the Company, a quorum for the meeting was present.

The
following proposals were adopted by the shareholders:

Proposal
1an amendment to the Company's Bye-laws to permit the Board of Directors from time to time to effect a sub-division of all or any of the
Company's share capital into shares of a lesser par value than the Company's existing shares.

Proposal
3an amendment to the Company's Bye-laws to increase the Company's authorized capital by the creation of an additional 17 million common shares,
par value $1.00 per share, to an aggregate of 20 million authorized Common Shares.

Proposal
6an amendment to the Company's Bye-laws to remove the limitations on the Board of Director's or its committees' ability to conduct their respective
meetings in the United States or execute unanimous written resolutions in the United States.

Proposal
7an amendment to the Company's Bye-laws to remove the limitations on the Company's and its Shareholders' ability to conduct shareholders meetings in the
United States or execute unanimous written resolutions of the shareholders in the United States.

Proposal
8the appointment of Ernst & Young LLP to serve as the independent auditors of the Company for the 2003 fiscal year.

The
following proposals were not approved by the shareholders:

Proposal
2an amendment to the Company's Bye-laws to permit the Board of Directors to designate any undesignated shares in the authorized capital of the Company
into any one or more series of common or preferred shares, and determine the rights, privileges and preferences to be attached to such shares.

Proposal
4an amendment to the Company's Bye-laws to increase the Company's authorized capital by the creation of 10 million preferred shares, par value
$1.00 per share.

Proposal
5an amendment to the Company's Bye-laws to clarify the Board of Directors' staggered terms currently set forth in the Bye-laws by
restricting the shareholders' ability to remove directors without cause.

The
shareholder votes on each of the foregoing proposals were as follows:

|           |  | For       |  | Against |  | Abstention |  | Adopted/Defeated
|---------- |  | --------- |  | ------- |  | ---------- |  | ----------------
|Proposal 1 |  | 1,434,633 |  | 3,212   |  | 0          |  | Adopted         
|Proposal 2 |  | 251,744   |  | 746,809 |  | 22,465     |  | Defeated        
|Proposal 3 |  | 1,248,908 |  | 166,472 |  | 22,465     |  | Adopted         
|Proposal 4 |  | 251,744   |  | 746,809 |  | 22,645     |  | Defeated        
|Proposal 5 |  | 235,663   |  | 785,282 |  | 73         |  | Defeated        
|Proposal 6 |  | 1,020,726 |  | 0       |  | 292        |  | Adopted         
|Proposal 7 |  | 1,015,178 |  | 5,840   |  | 0          |  | Adopted         
|Proposal 8 |  | 1,437,845 |  | 0       |  | 0          |  | Adopted         

ITEM 5.    OTHER INFORMATION

Not applicable.

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ITEM 6.    EXHIBITS AND REPORTS FILED ON FORM 8-K

|3.11* |  | Amended and Restated Bye-laws of the Company.                                                                                                                                                                                                                                                       
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1   |  | Agreement and Plan of Amalgamation, dated as of October 16, 2003, between the Company and Reliance Gateway Net Limited (incorporated by reference as Exhibit 2.1 on a Form 8-K filed with the Commission on October 16, 2003).                                                                      
|2.2   |  | Amendment to the Agreement and Plan of Amalgamation, dated as of October 28, 2003, but effective as of October 16, 2003, between the Company and Reliance Gateway Net Limited (incorporated by reference as Annex A to a preliminary proxy
statement filed with the Commission on November 3, 2003).
|31.1* |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                             
|31.2* |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                             
|32.1+ |  | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                             
|32.2+ |  | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                             
|99.1* |  | Risk Factors Affecting Future Financial Performance.                                                                                                                                                                                                                                                

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The
Company filed the following Current Reports on Form 8-K during the period from July 1, 2003 through September 30, 2003:

July
7, 2003Announcing that the Company has filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2002, along with its Quarterly Reports on Form 10-Q
for the periods ended September 30, 2002 and March 31, 2003 respectively.

July
25, 2003Announcing that the Company has notified The Bank of New York, the trustee under the Company's Indenture dated October 9, 2002, of its election to redeem all
series of notes issued by the Company under the Indenture, on August 25, 2003.

August
1, 2003Incorporating as an exhibit a press clipping on the Company published in Total Telecom on July 31, 2003.

August
7, 2003Announcing that the Company and certain of its subsidiaries commenced an action for injunctive and declaratory relief in the United States Bankruptcy Court for
the Southern District of New York naming Kensington International Ltd, Springfield Associates, LLC, Wilmington Trust Company, and The Bank of New York as defendants.

August
18, 2003Announcing that the Company has filed with the Securities and Exchange Commission its Quarterly Report on Form 10-Q for the period ended June 30, 2003.

August
26, 2003Announcing that the Company has completed the redemption of its Series A, Series B and Series C Notes at a discounted value.

September
25, 2003Announcing the results of the Company's 2003 Annual General Meeting of Shareholders.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized this 14th day of November 2003.

| |  | FLAG TELECOM GROUP LIMITED
| |  | --------------------------
| |  | By:                       
| |  | By:                       

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