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

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

                                   FORM 10-K
                                ---------------

<TABLE>
<S>              <C>
/X/              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934

                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
                                     OR

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

                         Commission File Number 0-29207

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

                         FLAG TELECOM HOLDINGS LIMITED

             (Exact name of Registrant as specified in its charter)

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

                                    BERMUDA
                        (State or other jurisdiction of
                         incorporation or organization)

                                  CEDAR HOUSE
                                41 CEDAR AVENUE
                             HAMILTON HM12, BERMUDA
                    (Address of principal executive office)
                                   (Zip Code)

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

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

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

    Securities registered pursuant to Section 12(g) of the Act:  Common Stock,
$.0006 par value

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes /X/ No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  / /

    The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 16, 2001, based upon the closing price of the Common Shares
on The Nasdaq Stock Market for such date, was $1,056,229,815.

    The number of outstanding shares of the registrant's Common Shares as of
March 16, 2001 was 134,124,421.

    The Index of Exhibits filed with this Report begins at page 42.

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<PAGE>
                         FLAG TELECOM HOLDINGS LIMITED
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
Part I
Item 1.   Business....................................................     2
Item 2.   Properties..................................................    16
Item 3.   Legal Proceedings...........................................    16
Item 4.   Submission of Matters To a Vote of Security Holders.........    16

Part II
Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters.........................................    16
Item 6.   Selected Financial Data.....................................    18
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................    20
Item 7A.  Quantitative and Qualitative Disclosures About Market
          Risk........................................................    30
Item 8.   Financial Statements and Supplementary Data.................    32
Item 9.   Change in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................    32

Part III
Item 10.  Directors and Executive Officers of the Registrant..........    32
Item 11.  Executive Compensation......................................    35
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................    39
Item 13.  Certain Relationships and Related Transactions..............    40

Part IV
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................    42

FINANCIAL STATEMENTS..................................................   F-1
Signatures
Exhibits
</TABLE>

                                       1
<PAGE>
    FLAG Telecom Holdings Limited ("FLAG Telecom" or the "Company") was
incorporated under the laws of Bermuda in February 1999. Its principal executive
offices are located at Cedar House, 41 Cedar Avenue, Hamilton HM12, Bermuda. In
addition to the Company, the principal companies which comprise the FLAG Telecom
group of companies are FLAG Limited, FLAG Atlantic Limited, FLAG Telecom
Development Limited, FLAG Telecom Group Services Limited, FLAG Asia Limited and
FLAG Pacific Limited. The Company is a "foreign private issuer" within the
meaning of Rule 3b-4 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and is voluntarily filing periodic reports under
the Exchange Act as if it were a domestic registrant.

                                     PART I

ITEM 1. BUSINESS

INTRODUCTION

    FLAG Telecom is a leading global network services provider and independent
carriers' carrier, providing an innovative range of products and services to the
international carrier community, Application Service Providers ("ASPs") and
Internet Service Providers ("ISPs") across a global network platform optimized
to support the next generation of Internet Protocol ("IP") over optical data
networks. Leveraging this unique network, FLAG Telecom's rapidly growing Network
Services business markets a range of managed bandwidth and value-added services
targeted at carriers, ISPs, ASPs and Multinational Corporations ("MNCs")
worldwide.

    During 2000 FLAG Telecom had the following cable systems in operation or
under development: FLAG Europe-Asia ("FEA"), a cable which stretches from the UK
to Japan and which entered commercial service in November 1997; FLAG Atlantic-1
("FA-1"), the world's first dual transoceanic terabit cable system, which is
scheduled to enter service in Q2 2001, and FLAG Pacific-1 ("FP-1"), scheduled to
enter service in the second half of 2002. In January 2001, FLAG Telecom
announced that it had entered into an agreement with Level 3
Communications, Inc. ("Level 3") for a multi-terabit intra-Asia submarine cable
system, to be referred to as FLAG North Asian Loop ("FNAL").

    By 2003, FLAG Telecom aims to have an operational network of over 100,000
route kilometers offering city-to-city connectivity between the world's major
business centers. Currently our own fibre network has operational landing
stations in 13 countries. In addition, there are eight city Points of Presence
("PoPs") located in San Francisco, New York, London, Madrid, Cairo, Hong Kong,
Seoul and Tokyo, with plans to establish a further 26 PoPs in major business
cities worldwide during 2001.

    Our FLAG Network Services ("FNS") business, launched in 1999, develops and
markets a broad range of products and services aimed at both established and
emerging communications companies. FLAG Telecom currently offers traditional
capacity products as well as Managed Bandwidth Services, and IP Transit Services
("IP-T") and IP Point-to-Point Services ("IP-P"). FLAG Telecom intends to
develop a comprehensive range of IP-based products, including Voice-over-IP and
IP Virtual Private Networks ("IPVPN") and to evaluate opportunities in
co-location, caching and web hosting services.

    The Company has an established customer base of over 100 customers, many of
which are the world's leading telecommunications and Internet companies. We
believe we have succeeded in attracting this customer base primarily as the
result of the diversity, flexibility and high quality of our product and service
offerings.

    FLAG Telecom was incorporated in Bermuda in 1999 and has management offices
in London. There are regional offices and/or subsidiaries located in San
Francisco, the Washington, D.C. area, New York, Dublin, Madrid, Paris,
Frankfurt, Rome, Cairo, Dubai, New Delhi, Bangkok, Singapore, Hong Kong,
Beijing, Seoul and Tokyo. There are two FLAG Network Operations Centers (FNOCs)
located at Fujairah, in the United Arab Emirates, and at Heathrow, in the UK.

                                       2
<PAGE>
BUSINESS STRATEGY

    Our goal is to establish FLAG Telecom as the leading independent global
network services provider, offering an innovative range of products and services
to the international carrier community, ASPs, ISPs and MNCs across a global
network platform optimized to support the next generation of IP over optical
data networks.

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

    PURSUING A FLEXIBLE APPROACH TO DEVELOPING OUR NETWORK.  We have adopted a
flexible approach to the development and expansion of the FLAG Telecom network.
The FEA cable was developed independently, but to construct the FA-1 cable
system we initially joined with Global TeleSystems Inc. ("GTS"). We subsequently
bought GTS's 50% equity interest in the project on December 6, 2000 and now have
100% ownership of the system. While we are currently developing the FP-1 cable
system independently, we may consider partnering, joint ventures, co-build or
other co-operative arrangements to complete this project. Additionally, we are
developing FNAL in conjunction with Level 3. We have also established alliances
with other facilities-based bandwidth capacity providers that provide us with
intra-European connectivity to many of the largest cities in Europe. We believe
that this flexible approach allows us to benefit from the strengths of our
partners, while also reducing the capital expenditure required to develop the
network. It also increases the speed with which we can add new destinations to
our network.

    - BUILDING-OUT OUR OWN INFRASTRUCTURE WHEN ECONOMICALLY ATTRACTIVE. As part
      of our network expansion strategy, we intend to leverage our experience in
      constructing the FEA cable system and FA-1 to build-out our network
      infrastructure to reach as many of the world's major business centers as
      possible when economically advantageous opportunities exist to do so. We
      believe owning network infrastructure offers significant competitive
      advantages in the global network services market because it secures
      end-to-end control of capacity and cost structure, providing access to low
      unit costs.

    - OFFERING CITY-TO-CITY CONNECTIVITY. We intend to pursue multiple
      approaches to obtaining intracontinental city-to-city connectivity to
      increase the attractiveness of the FLAG Telecom network and to meet
      increasing customer demand for connectivity into the major international
      business centers. To this end, we expect to acquire and package
      terrestrial capacity obtained from third parties and to acquire dark fiber
      capacity on cables laid by third parties. We also intend to develop our
      own terrestrial networks in key markets as they deregulate and when
      cost-effective opportunities exist. Through this combined approach, we
      expect to be able to provide our customers with international city-to-city
      connectivity through the FLAG Telecom network at prices significantly
      lower than if such customers had attempted to gain connectivity by
      separately purchasing required terrestrial capacity.

    PROVIDING A DIVERSE SET OF PRODUCTS AND SERVICES TO MEET THE NEEDS OF OUR
CUSTOMERS.  We intend to capitalize on the expanding customer base for
telecommunications services resulting from deregulation and technological
advances. We have developed and intend to expand a range of carrier services and
IP services designed to meet the varying needs of a wide range of established
and emerging telecommunications carriers, ISPs, ASPs and MNCs. Our traditional
carrier service offerings include "lifetime of system" right-of-use products and
services designed to assist carriers in managing their network capacity needs in
a flexible way. Through our FNS business, we offer customers Managed Bandwidth
Services which permit them to lease international connectivity for one, three or
five year terms on a fully redundant, point-to-point basis. This connectivity
can be offered either city-to-city, between our existing PoPs, or from customer
site-to-customer site. We also offer IP Point-to-Point services using high-speed
routers and IP Transit services to provide a connection to the Internet. As part
of our FNS service offerings, we expect to bundle capacity between our systems.
Where we have city PoPs on our network we will offer co-location space for
customers to house their own equipment.

                                       3
<PAGE>
We also intend to continue to evaluate opportunities to develop additional value
added IP-based services including IPVPN, caching, web hosting, content
distribution and media streaming.

    FOCUSING ON THE NEEDS OF THE INTERNET COMMUNITY.  We have capitalised and
intend to continue to capitalize on the significant growth in the use of the
Internet in recent years by focusing on the specialized needs of Internet
service providers, the fastest growing segment of the telecommunications
industry. ISPs, which are subject to demands by their customers to move data
from one part of the world to another extremely quickly, often do not have the
resources necessary to manage the purchase of pure "raw" bandwidth. As a result,
they typically seek telecommunications service providers which are capable of
providing end-to-end services and guaranteed performance levels. We have
developed and plan to continue to develop a broad range of managed, city-to-city
services, including a range of IP services, designed to meet the needs of these
customers. We intend to deliver these services over our own IP-based network
infrastructure.

    EMPLOYING A FLEXIBLE AND COMPREHENSIVE FINANCING PLAN.  We intend to
continue to follow the flexible and successful approach to financing the
extension of our infrastructure that we have employed in connection with all our
cable systems. We anticipate that other extensions of our infrastructure will be
financed partly out of our own resources and partly on a project finance basis
including presales and we may partner with others in connection with some of
these projects.

PRODUCTS AND SERVICES

    We are developing an extensive range of innovative products and services
which will use a state-of-the-art IP-based network infrastructure and are
designed to meet the needs of a wide range of licensed international carriers,
ISPs, ASPs and MNCs. Our current product and service offerings are as follows:

    - TRADITIONAL CARRIER SERVICES. Our traditional carrier service offerings
      include "lifetime of system" right-of-use products and shorter term leased
      capacity products. These services are offered with the option of
      restoration on alternative cable systems. FLAG Telecom undertakes the
      responsibility of operating and maintaining the network and the services
      on the network. An annual operations and maintenance fee is charged to
      customers buying "lifetime of system" right-of-use capacity. For shorter
      term leases, this fee is typically included in the annual lease charge.
      Currently, our customers can purchase the right to connect between any of
      our landing points in China, India, Korea, Hong Kong, Thailand, Malaysia,
      Japan, Egypt, Saudi Arabia, Jordan, the United Arab Emirates, Italy, Spain
      and the United Kingdom. Once FA-1 begins commercial operations, our
      customers will also be able to connect to the PoPs which FA-1 will
      maintain in New York, London and Paris. Additionally, traditional carrier
      services will be offered on FNAL. We have already begun selling capacity
      on FA-1 and FNAL cable systems, with service scheduled to commence on both
      systems in the second quarter of 2001. If a customer requires connectivity
      between any of our landing points (or PoPs) and locations not currently
      served by a FLAG Telecom cable system, we can arrange connectivity by
      bundling our network capacity with that provided by other bandwidth
      capacity providers.

      We believe our customers are finding it increasingly difficult to predict
      their future needs for bandwidth capacity and we have responded by
      offering our customers products that help them manage their network
      capacity in a flexible way. Our global portability program allows
      customers to purchase bandwidth capacity on one segment of the FLAG
      Telecom network and then move the purchased capacity to another segment of
      the FLAG Telecom network on an as needed basis. We offer capacity leases
      with terms ranging from a few months to five years. We also offer lease to
      buy options which allow customers to convert a capacity lease into a
      lifetime right-of-use at any time during the term of the lease on payment
      of a conversion charge. Our "drop & insert" product offers additional
      flexibility to customers allowing them to take a single STM-1 circuit and
      drop traffic off at multiple locations along the FLAG Telecom network.

                                       4
<PAGE>
      With our latest generation terabit cable systems, FA-1, FNAL and FP-1, we
      are offering:

    - optical 10 gigabits per second wavelength services, which are designed to
      support the next generation of IP networks by eliminating the need to
      route traffic through slower intermediate protocol layers and switches,
      and

    - fiber pair services, which are designed to meet the needs of major global
      carriers that require substantial amounts of bandwidth at low unit costs.

      Because these new cable systems are still under construction, we are
      selling these services on a future delivery basis.

    Our FNS business offers a growing range of value-added services including:

    - MANAGED BANDWIDTH SERVICES ("MBS"). MBS offer customers fully protected
      international city-to-city circuits backed by service delivery and
      availability guarantees. The service is available in a range of speeds
      from 1.5 megabits per second to 155 megabits per second. Contract terms
      are available for one, three or five years.

    - IP POINT TO POINT SERVICES ("IP-P"). Our IP-P service is developed for
      carriers, ISPs and IP operators requiring connectivity to a specific
      Internet Exchange or peering partner. Customers using this service arrange
      their own presence and peering. Access to the service can be via local,
      national or international leased lines providing a dedicated connection
      between the customer router and an access router in the FLAG Telecom
      gateway. The service, which runs on IP and includes latency guarantees, is
      designed for customers offering services such as Intranet backbones,
      IPVPNs and Voice-over-IP services.

    - IP TRANSIT SERVICES ("IP-T"). We provide a global-carrier class,
      high-speed connection to the Internet via transit arrangements with Tier 1
      ISPs. Access to the transit service can be via local, national or
      international leased lines providing a dedicated connection between the
      customer router and an access router in the FLAG Telecom gateway.

    We aim to maximize the combined benefits of all our cable systems by
offering FNS services that combine our own cable systems and also package our
network capacity with that of other providers in order to extend our network
reach. Using two or more systems to provide a seamless end-to-end service
enables us to offer products such as "Middle East Direct", which provides direct
connectivity from Middle Eastern markets to the United States.

    We have recently extended our IP Network to Cairo with the introduction of a
city centre PoP, allowing us to uniquely offer managed network services to the
Middle East. This brings to eight the total number of metropolitan city centre
locations offered on the FLAG Telecom IP Network, the other locations being San
Francisco, New York, London, Madrid, Hong Kong, Seoul and Tokyo.

    Additional information on the breakdown of revenues between products and
services is contained by reference to Note 15 "Segment Reporting" of Notes to
Consolidated Financial Statements of the Company attached hereto.

MARKETING AND SALES

    We currently market our network capacity and telecommunications products and
services globally through a sales force of 75 people in the following locations:

    - regional sales offices in North America (New York & Washington, D.C.
      area), Europe (London), the Middle East and Africa (Dubai) and Asia
      Pacific (Hong Kong);

    - local sales offices or other sales presences in Spain (Madrid), France
      (Paris), Netherlands (Amsterdam), Germany (Frankfurt), United States (San
      Francisco), Korea (Seoul), Italy (Rome), India (New Delhi), Singapore,
      China (Beijing), Japan (Tokyo), Greece (Athens), Egypt (Cairo), and Turkey
      (Istanbul); and

                                       5
<PAGE>
    - representatives in Belgium, Switzerland and Hungary.

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

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

THE FLAG TELECOM NETWORK

    FLAG Telecom is developing a global fiberoptic cable system through
own-builds and collaboration with third parties. Our first cable, FEA, deploys
optical amplified bit interleaved technology. All of our subsea cables announced
subsequently will be equipped with state-of-the-art Dense Wavelength Division
Multiplexing ("DWDM") technology, which greatly increases the transmission
capacity of a cable.

FLAG EUROPE-ASIA (FEA)

    The FEA cable system links the telecommunications markets of Western Europe
and Japan through the Middle East, India, Southeast Asia and China along a route
which adjoins countries with approximately 75% of the world's population. The
FEA cable system consists of approximately 28,000 kilometers of undersea digital
fiberoptic cable with a 580 kilometer dual land crossing in Egypt and a 450
kilometer dual land crossing in Thailand. The cable comes ashore at 16
operational landings in the following 13 countries: United Kingdom, Spain,
Italy, Egypt, Jordan, Saudi Arabia, the United Arab Emirates, India, Malaysia,
Thailand, China (including Hong Kong), Korea and Japan. It has an aggregate
capacity of 10 gigabits per second transmitting on two fiber pairs. The system
incorporates synchronous digital hierarchy ("SDH"), which is the current
international standard for digital transmission and management. The transmission
capacity of the segments of the FEA cable system is upgradeable to between 20
and 40 gigabits per second depending on the location of the segment. The FEA
cable system cost approximately $1.6 billion to complete and was placed into
commercial service on November 22, 1997.

FLAG ATLANTIC-1 (FA-1)

    FA-1 is a 14,500 kilometer trans-Atlantic fiberoptic dual cable system with
a six fiber pair configuration with 10 gigabit per second technology and up to a
maximum of 40 wavelengths of light per fiber pair. The FA-1 cable system will
have an initial installed fully redundant capacity of 280 gigabits per second,
with potential for upgrade to 2.4 terabits of fully redundant capacity. FA-1
will deploy state-of-the-art DWDM technology. One cable spans from Porthcurno in
the United Kingdom to the north shore of Long Island, New York, and the other
cable is routed from Brittany in northern France to the south shore of Long
Island. The system's European landing points are connected to city centers in
London and Paris. The European city centers are connected to one another via a
fiber ring including two English Channel crossings. The landing points in Long
Island connect to two telecommunication centers in New York City, which also
connect to each other via a fiber ring. The system's design is intended to
permit seamless interconnection with the FEA cable system and with a

                                       6
<PAGE>
range of existing European city-to-city networks in London and Paris. The FA-1
cable system uses company owned landing stations and city-center connection
points. The first loop is scheduled to be in operational service by the second
quarter of 2001 and the full loop system is due to be completed by early in the
second half of 2001. FA-1 will have cost approximately $1.1 billion to complete.
FLAG Telecom had initially been constructing FA-1 under a 50/50 joint venture
between FLAG Atlantic Holdings Limited, our subsidiary, and GTS TransAtlantic
Holdings, Limited, a subsidiary of GTS. On December 6, 2000, we purchased GTS's
50% equity interest in FLAG Atlantic from GTS.

FLAG PACIFIC-1 (FP-1)

    FP-1 is the first announced transoceanic cable with eight fiber pairs, with
64 wavelengths per fiber pair and 10 gigabits per second per wavelength. Using
DWDM technology, the system is expected to offer fully-protected voice,
high-speed data, Internet, broadcast and other communications traffic at speeds
up to 5.12 terabits per second per cable link. The high-capacity fiberoptic link
between Asia and the United States is scheduled to be operational by the second
half of 2002. The system is expected to connect city nodes in Tokyo to the
cities on the West Coast of North America. The FP-1 design includes integrated
backhaul networks for city-to-city connectivity, and employs state-of-the-art
technology to maximize the capacity of the system. FP-1 will have an overall
system length of approximately 22,000 km. We now expect the entire FP-1 cable
system to cost approximately $1.9 billion, down from an initial project cost of
$2.1 billion.

FLAG NORTH ASIAN LOOP (FNAL)

    FNAL is a six-fiber pair system designed to offer intra-regional,
city-to-city connectivity between the high traffic centers of Hong Kong, Seoul,
Tokyo, and Taipei and is being developed in conjunction with Level 3. Level 3's
North Asian cable system, which is currently under development, will form the
Eastern leg of the new system connecting Hong Kong, Taiwan and Japan. FLAG
Telecom will develop the Western leg, connecting Hong Kong, Korea and Japan. We
will be responsible for the integration of the Eastern and Western links of the
system. The whole system will be over 10,000 kilometers in length and will be
owned, managed and operated by FLAG Telecom. Level 3 will have three fibre pairs
on the system. Total cost of the entire system is estimated to be approximately
$750 million. FNAL is planned to connect to the FP-1 cable system in Japan,
providing seamless multi-terabit connectivity to the United States, and to the
FEA cable in Hong Kong, Korea and Japan. The Eastern leg of the system
(excluding Taiwan) is expected to be ready for service in the second quarter of
2001. The cable will land in Korea and Taiwan later in 2001 with full loop
closure expected by the third quarter of 2002. The cable system utilizes
state-of-the-art DWDM technology operating at 10 gigabits per second and is
expected to offer an initial fully redundant capacity of 80 gigabits per second,
upgradeable to 2.5-3.8 terabits per second.

EXTENSION AND DEVELOPMENT OF THE NETWORK

    We intend to extend the reach of the FLAG Telecom network in Europe and the
US, and to upgrade our systems based on customer demand. Where economically
feasible, we expect to extend our network to additional countries by developing
new cable systems, building extensions from our existing cable systems or by
building additional terrestrial capacity. Where rapid access to a market is
required or where it is not economically feasible to expand our network on our
own, we may enter into arrangements with third parties to develop network
extensions or to acquire rights to use their existing networks. We may also
consider acquiring companies with networks or products and services that
complement our own.

    We have adopted a flexible approach to the development and expansion of the
FLAG Telecom network. We developed the FEA cable system independently and had
joined with GTS to construct the FA-1 cable system. In December of 2000, we
acquired GTS's equity interest and it is now a fully owned FLAG Telecom venture.
We have also established alliances with other facilities-based bandwidth

                                       7
<PAGE>
capacity providers that provide us with intra-European connectivity to many of
the largest cities in Europe. We believe that our approach allows us to benefit
from the strengths of our partners, while also reducing the capital expenditures
required to develop the leading global carriers' carrier network. In the future,
we intend to remain flexible as we seek additional opportunities to expand our
network. Our present plans call for the establishment of additional PoPs in
major metropolitan areas, as well as the addition of IP network capabilities
that will allow us to offer high value-added services. We have developed a PoP
deployment plan, which anticipates a further 26 PoPs added in 2001 to the
existing 8. We will consider further opportunities for the development of
infrastructure ourselves, for the lease or acquisition of existing
infrastructure from third parties and for the provision of additional services.
We believe that our flexible approach will significantly facilitate our efforts
to expand our existing network into the leading global private carriers' carrier
network. In contrast to some of our competitors who are attempting to develop
their global networks exclusively on an independent basis, we believe that our
approach will enable us to expand our network more rapidly and to focus on
increasing the types and quality of services we offer.

    We currently maintain the FLAG Telecom network through our network
operations centers ("NOCs") in Fujairah, U.A.E. and a location near Heathrow,
United Kingdom. These operations centers provide for system-wide surveillance,
maintenance and circuit activation 24 hours a day, 365 days per year. As the
network develops new NOCs may have to be established in appropriate regions.

CUSTOMERS

    The Company has an established customer base of over 100 customers, many of
which are the world's leading telecommunications and Internet companies. Our
principal customers are international licensed telecommunications companies,
emerging telecommunications companies and ISPs. As we expand our range of
services our customer base will increasingly cover emerging carriers, ISPs,
ASPs, web centric companies and MNCs.

COMPETITION

    As a global network services provider, we compete in a wide variety of
different geographic markets, in each of which we face and expect in the future
to face specific regional competitors. We also compete against a small number of
other players that are aiming to build global networks. We compete or expect to
compete in seven key markets:

    - global network services;

    - trans-Atlantic services;

    - intra-European services;

    - Middle Eastern services;

    - intra-Asian services;

    - Europe-Asia long haul services; and

    - trans-Pacific services.

    A number of companies are presently engaged in building global networks. We
believe that because of the high cost of building truly global networks this is
a market in which there will always be a limited number of players. Our main
competitors in terms of global network operators are Global Crossing Ltd.
("Global Crossing"), 360networks inc. ("360 Networks") and Level 3. In addition,
TyCom Ltd. ("TyCom") has announced that its undersea fiberoptics business will
design, build, operate and maintain its own global undersea fiberoptics
communications network.

                                       8
<PAGE>
    We believe our key competitors in the trans-Atlantic services market are
TAT-14 consortium system, Level 3, Global Crossing, 360 Networks and TyCom.

    The intra-European market has become very competitive as a result of the
large number of proposed pan-European operators. At least 20 pan-European
networks have been announced or commenced operations, including: GTS, British
Telecom, WorldCom, Global Crossing, Viatel and KPNQwest.

    We believe our key competitors in the Middle Eastern market are Sea Me We 3
("SMW3") and Satellite-based transmission services.

    We believe our key competitors in the intra-Asian services market are SMW3
and Asia Pacific Cable Network ("APCN"). We expect further competition in 2001
from Asia Global Crossing, C2C consortium system and APCN2.

    In the Europe-Asia long haul market, SMW3 is the primary direct competitor
along this route. However, we expect the strongest competition in the future to
come from an alternative routing from Europe to Asia across the Atlantic Ocean,
trans-US, and across the Pacific Ocean to Japan.

    We believe our key competitors on the trans-Pacific route will be Asia
Global Crossing, Japan-US Cable System, China-US Cable System, 360 Networks and
TyCom.

    For our FNS business, the competition in most markets is mainly from network
service companies listed above. However, in wholesale IP services, further
competition will come from the global Tier 1 ISPs such as Cable & Wireless,
UUNet ("Worldcom") and Genuity.

    The information required on the geographical split of customers is
incorporated by reference to Note 15 "Segment Reporting" of Notes to
Consolidated Financial Statements of the Company included elsewhere herein.

EMPLOYEES

    At December 31, 2000, we had approximately 266 full-time employees. We
intend to continue to expand our headcount particularly in the areas of sales,
sales support, and customer care. We believe that our relations with our
employees are good.

REGULATIONS

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

    As of March 16, 2001, Verizon holds 39,922,276 shares of the Company. We are
deemed an affiliate of Verizon under the U.S. Communications Act of 1934, as
amended. As an affiliate of Verizon, our activities are subject to increased
regulation by the Federal Communications Commission (FCC). Specifically, under
Section 271 of the U.S. Communications Act, neither Verizon nor any of its
affiliates may provide or market long distance telecommunications services
originating in a state (in-region state) in which Verizon is an incumbent
provider of local telephone service until the FCC approves an application of
Verizon to provide long distance services originating in that state. Once
constructed, the FA-1 cable system will carry trans-Atlantic long distance
traffic that originates in New York, which is a Verizon in-region state. Verizon
obtained the necessary regulatory approval from the FCC to provide long distance
services originating in New York, effective as of January 3, 2000. As an
affiliate of Verizon, we will be subject to regulatory prohibitions on the
provision and marketing of trans-Atlantic services via the FA-1 cable system to
prospective customers located in the in-region states for which Verizon has not
obtained necessary regulatory approvals.

                                       9
<PAGE>
    We have obtained, or are in the process of obtaining, applicable licenses to
operate our various cable systems. These include the licenses for FA-1, for
which we have obtained a US Landing License, a UK Public Telecommunications
Operator License and a French Article L33.1 License. For FP-1 we have obtained a
US Landing License from the FCC, subject to a further filing with the FCC on the
exact coordinates of prospective landing points.

    In addition, with the expansion of our FNS business, we have acquired, or
will apply for, applicable licenses throughout the world to enable us to be able
to operate as we consider necessary in each country. In that connection, we have
been granted infrastructure licenses in Spain, Italy, The Netherlands, Japan and
Singapore and licenses for resale activities in Belgium and Italy and have
applied, or will apply, for applicable licenses in Germany, Austria, Switzerland
and the Scandinavian countries.

FORWARD LOOKING STATEMENTS AND RISK FACTORS

    The information in this report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends" and similar expressions
are intended to identify forward-looking statements. Forward-looking statements
made in this report on Form 10-K are as of the date of filing with the
Securities and Exchange Commission and should not be relied upon as of any
subsequent date. We expressly disclaim any obligation to update information
presented herein, except as may otherwise be required by law. The Company's
actual results and the timing of certain events may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause or contribute to such a discrepancy include, but are not limited to, those
discussed elsewhere in this report and the following:

RISKS RELATED TO OUR BUSINESS

BECAUSE MANY OF OUR PRODUCTS AND SERVICES ARE IN THE EARLY STAGES OF DEVELOPMENT
OR OPERATION, WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY INTEGRATE THEM WITH
OUR EXISTING NETWORK AND, AS A RESULT, WE MAY NOT ACHIEVE THE REVENUES FROM
THESE PRODUCTS AND SERVICES THAT WE EXPECT.

    We are at the design/development stage in our planned construction of the
FP-1 cable system. While the Eastern leg of our FNAL cable system is scheduled
to go into service in the second quarter of 2001, we are at an early stage of
the construction of the Western leg. The construction of the FA-1 cable system
is at an advanced stage. Additionally we are continuing with the roll out by our
FNS business of a range of new telecommunications products and services, such as
MBS, IP-P, IP-T, co-location and web hosting. In order to complete our
transition from a business primarily involved in the operation of a single
undersea cable network with a target market consisting mainly of large operators
to one that operates a number of cable systems and also markets new products and
services to an expanded target market (including resellers, ISPs and ASPs), we
must undergo substantial further changes in our operations. These changes are
expected to be a significant challenge to our managerial, administrative,
marketing and operational resources. We are in the process of developing the
management, marketing and operational capabilities and financial and accounting
systems and controls necessary for this on-going transition. We cannot assure
you that we will succeed in developing all or any of these capabilities.

                                       10
<PAGE>
BECAUSE ACHIEVEMENT OF OUR BUSINESS OBJECTIVES DEPENDS UPON THE SUCCESSFUL
COMPLETION OF OUR CABLE SYSTEMS CURRENTLY UNDER CONSTRUCTION, WE MUST COMPLETE
OUR CABLE SYSTEMS IN A TIMELY MANNER AND WITHIN BUDGET

    We cannot guarantee that construction of our cable systems will take place
in the time planned, within budget, or at all. Successful completion of the
outstanding construction on our cable systems will be affected by a variety of
factors, many of which we cannot control, including:

    - our ability to acquire satisfactory landing sites, rights-of-way and
      permits from governmental authorities and private third parties;

    - our management of construction costs and, if cost overruns occur, our
      ability to obtain any needed additional financing;

    - timely performance by our contractors;

    - technical performance of the fiber and equipment used in our cable
      systems;

    - our ability to attract and retain qualified personnel; and

    - force majeure delays including weather.

    Failure to complete the FA-1 cable system by September 30, 2001 could result
in a default under FLAG Atlantic Limited's credit facility and an acceleration
of its indebtedness. If the FA-1 cable system does not go into service by
March 31, 2002, some of FLAG Atlantic Limited's customers may cancel their
obligation to purchase capacity. While we would not have any direct liability as
a result of FLAG Atlantic Limited's failure to complete the FA-1 cable system on
time, we could lose our investment in FLAG Atlantic Limited.

BECAUSE THE SUCCESSFUL CONSTRUCTION OF THE FNAL CABLE SYSTEM DEPENDS UPON THE
EFFORTS OF LEVEL 3 AND THE SUCCESSFUL MANAGEMENT OF OUR RELATIONSHIP WITH THEM,
WE CANNOT ASSURE THE SUCCESSFUL CONSTRUCTION OF THE FNAL CABLE SYSTEM.

    Under a Submarine Cable System Development Agreement, Level 3 has agreed to
manage the construction (or acquisition) and installation of the Eastern leg of
the cable system including certain cable stations required for the FNAL cable
system. While Level 3 has significant experience in the development of such
telecommunications systems, we cannot assure you that it will perform its
obligations under the agreement in a timely fashion, or at all.

BECAUSE WE INTEND TO RETAIN CAPACITY ON EACH OF OUR CABLE SYSTEMS FOR OUR OWN
ACCOUNT AND RESELL THIS CAPACITY FOR OUR SOLE RISK AND BENEFIT, WE MAY NOT
ULTIMATELY REALISE SUFFICIENT VALUE FROM THIS CAPACITY REQUIRED TO JUSTIFY THE
OVERALL SUCCESS OF THE PROJECT.

    We intend to retain capacity on all our cable systems for our own account,
to bundle this capacity with our respective other products and to sell these
bundled products. The future demand for such bundled products may not be
sufficient to allow us to fully utilise the retained capacity. The overall value
realised from such retained capacity may ultimately not be sufficient to cover
the costs allocated to this capacity on the various cable systems.

IF WE ARE UNABLE TO DEPLOY SOPHISTICATED TECHNOLOGIES ON A GLOBAL BASIS, WE MAY
NOT BE ABLE TO COMPETE EFFECTIVELY.

    The operation of our systems requires the coordination and integration of
sophisticated and highly specialized hardware and software technologies and
equipment located throughout the world. We cannot assure you that, even if built
to specifications, our systems will function as expected in a cost-effective
manner. In addition, our business plan calls for the use of state-of-the-art
technology which is currently under development. In particular, the FA-1, FP-1
and FNAL cable systems are designed to employ technology recently developed by
Alcatel Submarine Networks. While Alcatel Submarine Networks has successfully
tested this technology, this technology has not yet been deployed

                                       11
<PAGE>
operationally. Failure to deploy this technology on time could have a material
adverse effect on our operations and financial results. Our business plan also
calls for the upgrade of capacity on the FEA cable system by adding wavelength
division multiplexing equipment. We have received technical evaluations from
potential suppliers indicating that such upgrades can be achieved. However, we
cannot assure you that these upgrades can be successfully implemented. Failure
to achieve these upgrades could materially impact the amount of capacity which
we will be able to sell, and the types of services that we will be able to
offer.

BECAUSE WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD IMPAIR OUR ABILITY TO RAISE
OR GENERATE REQUIRED CAPITAL AND LIMIT OUR OPERATING FLEXIBILITY, WE MAY BE MORE
VULNERABLE TO CHANGES IN OUR BUSINESS OR THE ECONOMY.

    We currently have consolidated debt of $1,139 million, including the
$430 million 8 1/4% Senior Notes issued by FLAG Limited, $300 million 11 5/8%
Senior Notes issued by FLAG Telecom and the E300 million 11 5/8% Senior Notes
issued by FLAG Telecom. In addition, FLAG Atlantic Limited has borrowed
$62 million under its credit facility and FLAG Limited has $93 million of debt
outstanding under its credit facility. We intend to take on additional
borrowings to partly finance the planned expansion of the FLAG Telecom network.
Our substantial indebtedness may have important consequences for us, including
the following:

    - our ability to obtain additional financing for acquisitions, working
      capital, investments and capital or other expenditures on terms favorable
      to us may be impaired;

    - our ability to generate funds for our operations and future business
      opportunities may be impaired, since we will use a substantial portion of
      our cash flow to make principal and interest payments on our debt;

    - our existing debt facilities contain a number of significant limitations
      that restrict our ability to conduct our business and to borrow additional
      money, pay dividends or other distributions to our shareholders, make
      investments, sell assets, and engage in mergers or consolidations;

    - a substantial decrease in our net operating cash flows or an increase in
      our expenses could make it difficult for us to meet our debt service
      requirements and force us to modify our operations;

    - we may be more highly leveraged than our competitors, which may place us
      at a competitive disadvantage; and

    - our high degree of leverage makes us vulnerable to a downturn in our
      business or the economy generally.

IF WE FAIL TO OBTAIN THE RESOURCES REQUIRED TO ADAPT, UPGRADE OR EXPAND OUR
NETWORK, WE MAY NOT BE ABLE TO KEEP UP WITH DEMANDS FROM OUR CUSTOMERS OR
CHANGES IN OUR INDUSTRY.

    We may need to upgrade, expand or adapt the components of the FLAG Telecom
network to respond to the following:

    - demand for greater transmission capacity;

    - changes in our customers' service requirements;

    - technological advances; and

    - government regulation.

    Any upgrade, expansion or adaptation of the FLAG Telecom network could
require substantial additional financial, operational and managerial resources
which may not be available to us.

                                       12
<PAGE>
IF WE FAIL TO MAINTAIN CO-OPERATIVE RELATIONSHIPS WITH OUR LANDING PARTIES, OUR
OPERATIONS MAY BE IMPAIRED.

    We depend upon fifteen different landing parties to provide access to the
origination and termination points for the FEA cable system. Our ability to
offer city-to-city services is dependent on our landing parties' willingness to
provide cost-effective terrestrial services, and/or to agree to connect other
terrestrial networks to the FEA cable system. Each of these landing parties has
entered into a construction and maintenance agreement with us and some of our
customers under which each of the landing parties commits to provide access, to
charge reasonable and uniform rates to all customers accessing the FEA cable
system through the landing party's landing station and to maintain the
terrestrial portion of the FEA cable system in the landing party's country.
Despite these commitments, we cannot assure you that the landing parties will
perform their contractual obligations or that there will not be political events
or changes in relation to the landing parties which have adverse effects on us.
In addition, the construction and maintenance agreement restricts our ability to
install further equipment into cable landing facilities without the consent of
our landing parties. While none of our landing parties has ever withheld its
consent, we cannot assure you that we will be able to obtain the consent of our
landing parties to proposed future modifications of our landing facilities that
may be advantageous to us or necessary to operate the FEA cable system.

    While we remain confident of being able to secure the additional landing
parties required for our new cable systems and the expansion of our FNS network
on terms acceptable to us and in line with our plans, we cannot assure you that
we will be able to procure such landing parties at acceptable costs and terms.

    In order to complete a truly global network, we will have to interconnect
the various systems with each other and with other systems. As these will
require the co-operation of third parties (such as the FEA landing parties), we
cannot assure you that we will achieve timely connectivity at a reasonable cost.

IF USE OF THE INTERNET DOES NOT CONTINUE TO GROW AS EXPECTED, OUR BUSINESS AND
FINANCIAL PERFORMANCE MAY SUFFER.

    We continue to believe IP is emerging as the platform of choice for the next
generation of communication networks. Therefore, as part of our business
strategy, we have developed and are developing products and services which
target the specific needs of Internet service providers.

    However, wide-scale interest in and use of the Internet for commerce and by
individuals is a recent phenomenon and this growth may not continue. If
continued acceptance and growth of the Internet does not occur, demand for
telecommunication services may decline generally, with our products and services
tailored to Internet service providers being particularly affected, and
consequently, our business and financial performance could suffer.

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

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

                                       13
<PAGE>
BECAUSE MANY OF OUR CUSTOMERS DEAL PREDOMINANTLY IN FOREIGN CURRENCIES, WE MAY
BE EXPOSED TO EXCHANGE RATE RISKS AND OUR NET INCOME MAY SUFFER DUE TO CURRENCY
TRANSLATIONS.

    We invoice all capacity sales and maintenance charges in U.S. dollars.
However, we invoice some FNS products in local currencies and most of our
customers and many of our prospective customers derive their revenues in
currencies other than U.S. dollars. The obligations of customers with
substantial revenues in foreign currencies may be subject to unpredictable and
indeterminate increases in the event that such currencies devalue relative to
the U.S. dollar. Furthermore, such customers may become subject to exchange
control regulations restricting the conversion of their revenue currencies into
U.S. dollars. In such event, the affected customers may not be able to pay us in
U.S. dollars. As a result of the current global economic uncertainties, we may
experience collection delays or non-payment and we have experienced, and may
continue to experience, deferrals of purchases of our products and services by
our customers.

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

    The telecommunications industry is highly regulated. The regulatory
environment varies substantially from country to country and restricts our
ability to compete in some markets. For example, in jurisdictions where we
desire to extend the FLAG Telecom network or offer new services, we may be
required to obtain landing licenses, operator licenses and other permits.
Although we have applied, or will apply, for licenses where applicable, we
cannot assure you that we will be able to obtain the authorizations that we need
to implement our business plan and enter new markets or that these
authorizations, if obtained, will not be later revoked. Regulation of the
telecommunications industry is also changing rapidly, with effects on our
opportunities, competition and other aspects of our business. Our operations may
be subject to risks such as the imposition of governmental controls and changes
in tariffs.

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

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

BECAUSE WE FACE SIGNIFICANT COMPETITION IN THE ATTRACTION AND RETENTION OF
SKILLED PERSONNEL, WE MAY NOT BE ABLE TO HIRE AND RETAIN THE PERSONNEL NECESSARY
TO ACHIEVE OUR BUSINESS OBJECTIVES AND OPERATE THE FLAG TELECOM NETWORK
SUCCESSFULLY.

    We believe that a critical component for our success will be the attraction
and retention of qualified professional and technical personnel. We expect
further growth in the number of our personnel, particularly in connection with
our planned cable systems and our growing FNS business. We face significant
competition in the attraction and retention of personnel who possess the
technical skill sets and regional expertise that we seek. If we lose key
personnel or qualified technical staff, or are unable to recruit qualified
personnel, our ability to manage the day-to-day aspects of our complex network
will be weakened.

                                       14
<PAGE>
RISKS RELATED TO OUR INDUSTRY

BECAUSE OUR PRODUCT OFFERINGS ARE EXPANDING AND THE TELECOMMUNICATIONS INDUSTRY
IS CHANGING SIGNIFICANTLY, WE FACE COMPETITION AND PRICING PRESSURE FROM A WIDE
VARIETY OF SOURCES.

    Along the FLAG Telecom network, we face competition and pricing pressure
from existing cables, planned cables, and satellite providers, including
existing geosynchronous satellites and low-earth orbit systems now under
construction. As we expand our range of available products and services, we
expect to face competition from various carriers offering comparable products
and services. Many of our competitors have, and some potential competitors are
likely to enjoy, substantial competitive advantages, including the following:

    - greater name recognition;

    - greater financial, technical, marketing and other resources;

    - larger installed bases of customers; and

    - well-established relationships with current and potential customers.

    Significant new and potentially larger competitors could also enter our
market as a result of regulatory changes or the establishment of co-operative
relationships. In addition, recent technological advances may greatly expand the
capacity of existing and new fiberoptic cables. Although such technological
advances may enable us to increase our capacity, an increase in the capacity of
our competitors could lead to even greater competition. Increased competition
could lead to price reductions, fewer large-volume sales, under-utilization of
resources, reduced operating margins and loss of market share.

BECAUSE WE FACE RAPID TECHNOLOGICAL CHANGES, OUR INFRASTRUCTURAL INVESTMENTS AND
TECHNOLOGIES COULD BECOME OBSOLETE BEFORE WE CAN ACHIEVE ADEQUATE UTILIZATION OF
THESE ASSETS.

    The telecommunications industry is subject to rapid and significant changes
in technology. If we do not replace or upgrade technology and equipment that
becomes obsolete, we will be unable to compete effectively because we will not
be able to meet the expectations of our customers. Additionally, in recent
years, the useful economic life of telecommunications equipment has declined
significantly. Although we believe that, for the foreseeable future,
technological changes will not materially affect the use of our fiberoptic
system, we cannot predict the effect of technological changes on our business.
Our cable systems have a warranted design life of 25 years; however, we cannot
assure you that technological developments will not render the infrastructure
and technologies in which we invest obsolete before we can adequately utilize
them. The failure of a cable system to achieve its warranted design life could
have a material adverse effect on us.

                                       15
<PAGE>
ITEM 2. PROPERTIES

    We maintain our principal executive office at Cedar House, 41 Cedar Avenue,
Hamilton HM12, Bermuda. We also lease additional office space for our operations
in London, England (26,325 square feet and 6,512 square feet for the backup
network operations center), New York City (3,811 square feet), Virginia (3,907
square feet), San Francisco (3,089 square feet), Bangkok (900 square feet), Hong
Kong (3,229 square feet), Dubai (8,500 square feet), Fujairah, U.A.E. (5,300
square feet for the network operations center), New Delhi (220 square feet),
Beijing (650 square feet), Seoul (3,250 square feet), Tokyo (1,900 square feet),
Singapore (2,884 square feet), Madrid (2,800 square feet), Rome (2,690 square
feet) and Paris (2,260 square feet). Except as noted, the properties listed
service all business segments to a greater or lesser degree. The group also owns
or leases various cable landing stations and PoPs throughout the world related
to its undersea and terrestrial cable systems.

ITEM 3. LEGAL PROCEEDINGS

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

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

    The Company currently expects to hold the 2001 Annual General Meeting of
Shareholders on or about June 14, 2001.

                                    PART II

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

PRICE RANGE OF OUR COMMON SHARES

    Our common shares began trading on the NASDAQ National Market (NASDAQ) and
the London Stock Exchange (LSE) under the symbols "FTHL" and "FTL",
respectively, on February 11, 2000. The number of record holders of our common
shares as of March 16, 2001 was 70 although we believe that there are a larger
number of beneficial owners.

    The following table shows the high and low bid price for our common shares
as reported on the NASDAQ and the high and low sales prices for our common
shares as reported on the LSE for fiscal quarters since our shares began trading
on February 11, 2000:

<TABLE>
<CAPTION>
                                                            BID INFORMATION (1)           SALES PRICE (2)
                                                           ---------------------   -----------------------------
DATES                                                        HIGH         LOW          HIGH             LOW
-----                                                      ---------   ---------   -------------   -------------
<S>                                                        <C>         <C>         <C>             <C>
Feb. 11-Mar. 31, 2000....................................   $41.00      $22.50            L25.50          L14.88
April 1-June 30, 2000....................................    23.00       12.19             15.00            8.45
July 1-Sept. 30, 2000....................................    18.00       10.12             11.08            8.00
Oct. 1-Dec. 31, 2000.....................................    13.75        6.25              9.25            5.25
</TABLE>

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

(1) Based on the closing bid for NASDAQ.

(2) LSE sales prices are denominated in Sterling.

DIVIDEND POLICY

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

                                       16
<PAGE>
we change our policy on the payment of dividends, declarations will be subject
to the discretion of our Board of Directors. Our Board of Directors will take
into account such matters as general business conditions, our financial results,
capital requirements, contractual, legal and regulatory restrictions on the
payment of dividends by us or to our shareholders or by our subsidiaries to us
and such other factors as our Board of Directors may deem relevant. Our Senior
Notes (defined below) contain restrictions on our ability to pay dividends and
the 8 1/4% Senior Notes of FLAG Limited, our subsidiary, restrict, but do not
prohibit, the ability of FLAG Limited to pay dividends to us.

USE OF PROCEEDS OF INITIAL PUBLIC OFFERING

    The effective date of our registration statement (Registration
No. 333-94899) filed on Form F-1 relating to our initial public offering of
27,964,000 common shares was February 11, 2000. Of the $633.7 million raised by
us, approximately $100.0 million has been used to fund our equity contribution
to FLAG Atlantic Limited, $25.0 million has been used to repay long term
indebtedness, $26.0 million has been used to fund the development and growth of
our FNS business and the balance of the offering proceeds to us remains
available to use to fund additional expansions of the FLAG Telecom network, to
develop FNS product and service offerings and for general corporate purposes.
The occurrence of unforeseen events or changed business conditions could cause
us to use the proceeds of our initial public offering in a manner other than as
described above.

                                       17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

    The following table presents selected historical financial data of FLAG
Telecom and FLAG Limited for the periods indicated. The financial data for the
periods ended December 31, 1996, 1997 and 1998 and for the period from
January 1, 1999 to February 26, 1999 are derived from FLAG Limited's audited
consolidated financial statements. The financial data as of December 31, 2000
and for the period from incorporation to December 31, 1999 are derived from FLAG
Telecom's audited consolidated financial statements.

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

<TABLE>
<CAPTION>
                                                                       FLAG LIMITED                          FLAG TELECOM
                                                       ---------------------------------------------   ------------------------
                                                                                        PERIOD FROM     PERIOD FROM
                                                                                         JANUARY 1,    INCORPORATION
                                                           PERIOD TO DECEMBER 31,         1999 TO           TO
                                                       ------------------------------   FEBRUARY 26,   DECEMBER 31,
                                                       1996 (1)     1997       1998         1999           1999          2000
                                                       --------   --------   --------   ------------   -------------   --------
                                                          (AS RESTATED)
                                                            (AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT PER SHARE INFORMATION)
<S>                                                    <C>        <C>        <C>        <C>            <C>             <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Capacity revenues, net of discounts (2)..............  $     --   $335,982   $184,731     $26,254        $105,612      $ 36,765
Operations and maintenance revenue(2)................        --      4,011     23,517       3,758          26,818        40,942
Network revenue......................................        --         --         --          --              --        21,599
                                                       --------   --------   --------     -------        --------      --------
                                                             --    339,993    208,248      30,012         132,430        99,306
Operating expenses:
Cost of capacity sold................................        --    196,190    101,288       8,294          41,349            --
Network expenses.....................................        --         --         --          --              --        13,036
Operations and maintenance(3)........................        --      4,600     37,931       5,114          26,201        32,298
Sales and marketing(3)...............................       316      6,598     10,680         637          11,096        12,744
General and administrative(3)(4).....................    12,345     30,339     21,674       2,870          22,901        39,189
Depreciation and amortization........................       121        276        844         233          11,133        79,414
                                                       --------   --------   --------     -------        --------      --------
                                                         12,782    238,003    172,417      17,148         112,680       176,681
                                                       --------   --------   --------     -------        --------      --------
Operating income/(loss)..............................   (12,782)   101,990     35,831      12,864          19,750       (77,375)
Income from affiliate................................        --         --         --          --             361         4,717
Interest expense.....................................        --    (20,193)   (61,128)     (9,758)        (45,062)     (102,543)
Foreign currency gain................................        --         --         --          --              --        17,014
Interest income......................................     2,408      6,637     14,875       1,825           7,188        69,817
                                                       --------   --------   --------     -------        --------      --------
Income/(loss) before minority interest and income
  taxes..............................................   (10,374)    88,434    (10,422)      4,931         (17,763)      (88,370)
Minority interest....................................        --         --         --          --          (3,826)           --
Provision for income taxes...........................        --      8,991      1,260         171           1,549         1,096
                                                       --------   --------   --------     -------        --------      --------
Net income/(loss) before extraordinary item..........   (10,374)    79,443    (11,682)      4,760         (15,486)      (89,466)
Extraordinary item(5)................................        --         --    (59,839)         --              --            --
                                                       --------   --------   --------     -------        --------      --------
Net income/(loss)....................................   (10,374)    79,443    (71,521)      4,760         (15,486)      (89,466)
                                                                                          =======        ========      ========
Cumulative pay-in-kind preferred dividends...........    14,410     16,324      1,508
Redemption premium and write-off of discount on
  preferred shares(6)................................        --         --      8,500
                                                       --------   --------   --------
Net income/(loss) applicable to common
  shareholders.......................................  $(24,784)  $ 63,119   $(81,529)
                                                       ========   ========   ========
Basic and diluted net income/(loss) per share(7)
  Class A FLAG Ltd...................................  $  (0.02)  $   0.05   $  (0.07)    $    --        $     --      $     --
  Class B FLAG Ltd...................................  $  (0.13)  $   0.14   $  (0.13)    $  0.01              --            --
  FLAG Telecom common stock..........................        --         --         --          --        $  (0.22)     $  (0.68)
</TABLE>

                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                                         FLAG LIMITED
                                                              -----------------------------------
                                                                      AS OF DECEMBER 31,                 FLAG TELECOM
                                                              -----------------------------------   -----------------------
                                                              1996 (1)       1997         1998         1999         2000
                                                              ---------   ----------   ----------   ----------   ----------
                                                                  (AS RESTATED)
<S>                                                           <C>         <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Current assets..............................................  $   3,759   $   96,677   $   76,114   $   98,716   $1,084,521
Goodwill....................................................         --           --           --           --       31,463
Restricted Cash.............................................     48,194      425,905      255,366      134,066      372,808
Capacity available for sale.................................         --    1,208,948    1,095,099      774,366           --
Capitalized financing costs.................................     74,111       61,848       12,352       11,678       28,949
Investment in FLAG Atlantic.................................         --           --           --        7,162           --
Construction in progress....................................    647,805          389       11,494           --      514,875
Other long term assets......................................         --           --           --           --       12,348
Property and equipment......................................        578        1,147        4,487      299,743    1,033,800
Total assets................................................    774,447    1,836,937    1,475,766    1,325,731    3,078,764
Current liabilities.........................................    206,486      370,555      232,814      152,402      334,025
Senior notes................................................         --           --      424,679      425,270      984,002
Bank credit facilities......................................    312,543      615,087      271,500      190,000      155,000
Deferred revenue............................................         --      176,221       84,415      100,724      594,759
Deferred taxes..............................................         --        4,600        3,562        3,973        3,371
Minority interest...........................................         --           --           --      154,817           --
Preferred Stock.............................................    113,121      129,445           --           --           --
Shareholders' equity:
Common shares, $.0006 par value.............................         --           --           --           42           80
  Class A common shares, $.0001 par value...................         13           13           13           --           --
  Class B common shares, $.0001 par value...................         22           57           57           --           --
Additional paid-in capital and deferred stock
  compensation(6)...........................................    195,135      514,389      504,381      313,848    1,110,115
Foreign currency translation adjustment.....................         --           --         (704)         141        2,364
Retained earnings (accumulated deficit).....................    (52,873)      26,570      (44,951)     (15,486)    (104,952)
Shareholders' equity........................................  $ 142,297   $  541,029   $  458,796   $  298,545   $1,007,607

STATEMENT OF CASH FLOW DATA:
Cash flow from operating activities.........................    (12,103)     285,156       88,831      115,782      194,942
Cash flow from financing activities.........................    342,011      245,677       97,818      (67,470)   1,113,016
Cash flow from investing activities.........................   (329,886)    (528,653)    (186,144)     (47,058)    (372,963)

ADDITIONAL FINANCIAL DATA:
EBITDA......................................................    (12,661)     298,456      137,963       93,623        2,039
Adjusted EBITDA.............................................    (12,661)     491,235       68,720      128,112      506,401
Cash Revenues...............................................         --      532,772      139,005      188,130      596,438
</TABLE>

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

(1) FLAG Limited restated its 1996 financial statements, as originally issued,
    to give effect to a $3.1 million discount on FLAG Limited's issuance of
    3,075,816 shares of preferred stock in 1995. For the year ended
    December 31, 1996, this restatement had no effect on FLAG Limited's net
    loss, but increased the amount of net loss applicable to common shareholders
    by $0.55 million.

(2) Certain reclassifications have been made to conform to current year
    presentation.

(3) Included in operating expenses for FLAG Telecom for the year ended
    December 31, 2000, are the following non-cash compensation expenses:
    $1.8 million in operations and maintenance expenses; $1.2 million in sales
    and marketing expenses; and $4.2 million in general and administrative
    expenses.

(4) Included in general and administrative expenses for the years ended
    December 31, 1996, 1997 and 1998 are program management expenses which
    include reimbursements to Bell Atlantic Network Systems Company, a
    shareholder of FLAG Telecom, for all costs and out-of-pocket expenses
    incurred by Bell Atlantic Network Systems Company in performing project
    management services for FLAG Limited. In addition, Bell Atlantic Network
    Systems Company received a fee equal to 16% of payroll costs and of certain
    outside contractor and consultant costs.

(5) In connection with FLAG Limited's issuance of 8 1/4% Senior Notes due 2008
    and its entry into its existing credit facility, FLAG Limited recorded an
    extraordinary loss of $59.8 million, representing the write-off of
    unamortized deferred financing costs related to its old credit facility.

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

                                       19
<PAGE>
(7) The net loss per share in 1998, excluding the extraordinary item, was $0.02
    and $0.03 for Class A and Class B shares, respectively.

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

FLAG TELECOM GROUP OF COMPANIES

    FLAG Telecom was incorporated on February 3, 1999 to be the parent company
for the FLAG Telecom group of companies. The principal companies which comprise
the FLAG Telecom group of companies are FLAG Limited, FLAG Atlantic Limited,
FLAG Telecom Development Limited, FLAG Telecom Group Services Limited, FLAG Asia
Limited and FLAG Pacific Limited. Pursuant to a restructuring on February 26,
1999, FLAG Limited became our 66% owned subsidiary and the other companies then
comprising the FLAG Telecom group of companies became our wholly owned
subsidiaries, other than FLAG Atlantic Limited in which we had a 50% ownership
interest. On January 4, 2000, we acquired the remaining 34% ownership interest
in FLAG Limited and FLAG Limited became our wholly owned subsidiary. On
December 6, 2000 we purchased the remaining 50% interest in FLAG Atlantic
Limited from GTS.

    The financial information presented in this report comprises the
consolidated results of FLAG Limited for the accounting periods to February 26,
1999 and the FLAG Telecom consolidated results for the period from incorporation
to December 31, 1999 and for the year ended December 31, 2000. On February 16,
2000, FLAG Telecom completed an initial public offering of common shares. On
March 17, 2000 FLAG Telecom completed a private placement of its 11 5/8% Senior
Notes due 2010.

REVENUE RECOGNITION

    Our primary business to date has been to provide capacity on the FEA cable
system. The primary method by which we have provided capacity has been through
agreements providing for an outright sale of, or the sale of a right of use of,
the capacity for the lifetime of this system. In addition, the customer becomes
responsible for paying the agreed maintenance charges.

    We had recognized revenues from capacity transactions on the FEA cable
system upon the date the risks and rewards of ownership of the relevant capacity
were transferred to the customer, which was the date the capacity was made
available for activation and the customer became responsible for maintenance
charges. The Financial Accounting Standards Board issued a pronouncement (FASB
Interpretation No. 43), as a result of which sales of fiber-optic cable capacity
after June 30, 1999 were to be accounted for in the same manner as sales of real
estate with property improvements or integral equipment. The application of this
pronouncement has resulted in a deferral of revenue recognition for US GAAP
purposes for certain capacity contracts that do not satisfy the necessary
requirements of FASB Interpretation No. 43. This accounting treatment does not
affect our cash flows from customers, who will continue to be liable for
payments in accordance with the signed agreements.

    FNS is a growing part of our portfolio, consisting of managed bandwidth
services, lease services and IP Transit Services. These are expected to generate
recurring revenues for the Group.

    As a result of extending our range of products and services, we expect the
greater part of our future sales to be under agreements which will require us to
recognize revenues over the relevant term of these agreements. To the extent
that we enter into contracts in the future that satisfy the requirements for
sales type lease accounting, we will recognize revenues without deferral.

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

    We have, in periods prior to June 30, 1999, considered revenues from
operating lease transactions to be incidental. We have therefore recorded these
revenues as reductions of the capacity available for

                                       20
<PAGE>
sale. However, as noted above, the magnitude of these transactions has increased
such that we now recognize revenues from lease transactions over the term of the
leases.

    Payments due from purchasers of capacity are generally payable within
30 days; however, we have outstanding receivables greater than 30 days. We have
established an allowance for doubtful accounts based on historical industry
experience with potential uncollectible receivables and our expectations as to
payments. As of December 31, 2000, we had an allowance of $5.3 million.

    All revenues from capacity sales agreements and billings of operations and
maintenance services are payable in U.S. dollars. All contracts for the
provision by third parties of restoration are invoiced to us in U.S. dollars.
Some vendor contracts for the provision to the FLAG Europe-Asia cable system of
operations and maintenance services are payable in Japanese Yen, British Pounds,
Euros, French Francs and Singapore Dollars in addition to U.S. dollars. Whenever
deemed appropriate, we have hedged, and may continue to hedge, our exposure to
foreign currency movements.

ACCOUNTING FOR THE CAPITAL COSTS OF THE FLAG TELECOM NETWORK

    We capitalized direct and indirect expenditures incurred in connection with
the construction of the FLAG Telecom network. When a system was ready for
commercial service we transferred such expenditures to capacity available for
sale and charged a proportion of these expenditures to cost of sales as we
recognized revenues from sales of capacity. In the case of the FEA cable system,
the amount charged as cost of sales was a function of the allocated costs of
construction for each segment and management's estimate of revenues from future
capacity sales. As a result of the application of FASB Interpretation No. 43,
sales on the FEA cable system do not satisfy the requirements for sales type
lease accounting. The costs of these segments were reclassified at July 1, 1999
and during the six months ended December 31, 1999 from capacity available for
sale to fixed assets and are being depreciated over their remaining useful life.

    As a result of extending our range of products and services, we expect the
greater part of our future revenue to be under agreements that will be accounted
for as operating leases or service contracts and will require us to recognize
revenues over the relevant term of the agreements. We therefore reclassified the
remaining cost of the FEA cable from capacity available for sale to fixed assets
in the first quarter of 2000. This cost will be depreciated over the remaining
estimated economic life of the system. The construction costs of the FA-1, the
FP-1 and the FNAL cable systems will be amortized over their economic life from
the date they are ready for commercial service or will be written off as cost of
sales against revenues from any transactions whose terms satisfy the
requirements of sales-type lease accounting. Capital costs associated with
development of the other elements of the FLAG Telecom network will be amortized
over their respective economic lives.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999

ADJUSTED CONSOLIDATED RESULTS

    The table below shows the selected statement of operations and cash flow
data, in thousands, for the year ended December 31, 1999, being a combination of
the results of FLAG Limited for the period from January 1, 1999 to February 26,
1999 and the results of FLAG Telecom for the period from incorporation to
December 31, 1999. These results have been adjusted to eliminate minority
interests in

                                       21
<PAGE>
order to enable a better comparison with the results for the years ended
December 31, 2000 and 1998. These adjustments will not be reflected in our
current and future financial statements.

<TABLE>
<CAPTION>
                                                                  ADJUSTED
                                                                 YEAR ENDED
                       (IN THOUSANDS)                         DECEMBER 31, 1999
                       --------------                         -----------------
<S>                                                           <C>
Revenue:
Capacity sales..............................................      $131,866
Operations and maintenance revenues.........................        30,576
                                                                  --------
                                                                  $162,442

Operating expenses:
Cost of capacity sold.......................................      $ 49,643
Operations and maintenance (including non-cash compensation
  expense of $2,647)........................................        31,315
Sales and marketing (including non-cash compensation expense
  of $1,534)................................................        11,733
General and administrative (including non-cash compensation
  expense of $4,619)........................................        25,771
Depreciation and amortization...............................        11,366
Interest expense............................................       (54,820)
Interest income.............................................         9,013
Income from Affiliates......................................           361
                                                                  --------
Loss before income taxes....................................      $(12,832)
Provision for taxes.........................................         1,720
                                                                  --------
Net loss....................................................      $(14,552)
                                                                  ========

EBITDA......................................................      $ 93,623
                                                                  ========
Adjusted EBITDA.............................................      $128,112
                                                                  ========
Cash Revenues...............................................      $188,130
                                                                  ========

Cash flows from operating activities........................        92,678
                                                                  ========
Cash flows from financing activities........................       (46,240)
                                                                  ========
Cash flows from investing activities........................       (46,470)
                                                                  ========
</TABLE>

    EBITDA comprises operating income or loss plus the amounts for the following
non-cash items: depreciation and amortization and cost of capacity sold.
Adjusted EBITDA is EBITDA adjusted for changes in deferred revenues plus stock
compensation. Management believes that these measures give a better view of the
cash generation of the business due to the significant non-cash items included
in the statement of operations. Some of this cash generated is subject to
restrictions on use under agreements with lenders who are funding the various
elements of the capital costs of the network.

REVENUES

    We recognized total revenue during the year ended December 31, 2000 of
$99.3 million compared to $162.4 million in total revenue for the year ended
December 31, 1999. This reduction is due to the application of FASB
Interpretation No. 43, with effect from July 1, 1999. See details below.

    We recognized revenue from the sale of capacity of $36.8 million for the
year ended December 31, 2000 compared to $131.9 million during the year ended
December 31, 1999. As a result of the issuance

                                       22
<PAGE>
of FASB Interpretation No. 43, with effect from July 1, 1999, certain sales of
capacity may no longer be recognized as current revenue because they do not
satisfy the requirements for sales type lease accounting. Revenues from these
capacity sales are now deferred and amortized over the term of the contracts.
The change to accounting treatment has no impact on cash flows.

    As of December 31, 2000, we had entered into sales transactions with in
excess of 100 international telecommunication carriers and internet service
providers compared to 90 as of December 31, 1999.

    We recognized revenue from operations and maintenance services of
$40.9 million for the year ended December 31, 2000 compared to $30.6 million for
the year ended December 31, 1999, as a result of the increase in cumulative
capacity sales and activations on the FEA cable system.

    We recognized revenue from FNS of $21.6 million for the year ended
December 31, 2000. No Network Services revenue was generated for the year ended
December 31, 1999.

OPERATING EXPENSES

    For the year ended December 31, 2000, we recorded $79.4 million of
depreciation compared to $61.0 million for depreciation and cost of capacity
sold recorded in the year ended December 31, 1999. The adoption of FASB
Interpretation No. 43 discussed above has meant that the remaining capacity
available for sale has been reclassified to property and equipment on
January 1, 2000 and is being depreciated over the remaining economic life of the
network, rather than being written off as cost of sales.

    During the year ended December 31, 2000, we incurred $13.0 million in
network services costs. No network services costs were incurred for the year
ended December 31, 1999. These costs relate primarily to local backhaul,
connection and restoration costs.

    During the year ended December 31, 2000, we incurred $32.3 million in
operations and maintenance costs compared to $31.3 million for the year ended
December 31, 1999. Operations and maintenance costs relate primarily to the
provision of standby maintenance under maintenance zone agreements as well as
salaries and overhead expenses directly associated with operations and
maintenance activities. The increase is primarily due to additional costs
arising from increased activity plus use of contracted services.

    During the year ended December 31, 2000, we incurred $12.7 million in sales
and marketing costs compared to $11.7 million incurred during the year ended
December 31, 1999. Sales and marketing costs are comprised of all sales and
marketing activities that are directly undertaken by FLAG Telecom. The increase
in sales and marketing costs is due to greater employment and related costs
associated with the increased world-wide sales and marketing activity.

    During the year ended December 31, 2000, we incurred $39.2 million of
general and administrative expenses compared to $25.8 million during the year
ended December 31, 1999. The increase in general and administrative costs in the
year ended December 31, 2000, is largely due to recruitment and salaries of
additional staff and increased office related costs.

    Costs for the year ended December 31, 2000 noted above include charges for
non-cash compensation expense in respect of stock option awards under our long
term incentive plan. These charges are required under US accounting standards
and are purely accounting charges having no effect on cash flows.

INTEREST EXPENSE, FOREIGN CURRENCY GAIN, AND INTEREST INCOME

    Interest expense on borrowings increased to $102.5 million for the year
ended December 31, 2000 from $54.8 million for the year ended December 31, 1999.
The increase in interest expense of

                                       23
<PAGE>
$47.7 million is attributable to additional borrowings obtained. See also
"Liquidity and Capital Resources".

    The foreign exchange gain of $17.0 million arises from the translation at
the year end of the net Euro denominated borrowings from Euros to US dollars at
the balance sheet exchange rate. On December 20, 2000, we entered into a cross
currency swap to hedge the foreign exchange exposure of our Euro 300 million
11 5/8% Senior Notes.

    During the year ended December 31, 2000 we capitalized $6.6 million of
interest costs as a component of construction in progress.

    We earned interest income of $69.8 million during the year ended
December 31, 2000 compared to $9.0 million earned during the year ended
December 31, 1999. Interest was earned on cash balances and short term
investments held by the collateral trustee for FLAG Limited's credit facility,
the restricted cash balances in FLAG Atlantic Limited and balance of the
proceeds from the IPO and high yield funds held by FLAG Telecom.

PROVISION FOR TAXES

    The provision for taxes was $1.1 million for the year ended December 31,
2000 compared to $1.7 million for the year ended December 31, 1999. The
provision for income taxes reflected in the accompanying statement of operations
consists of taxes incurred on the income earned or activities performed by Group
companies in certain jurisdictions, where they are deemed to have a taxable
presence or are otherwise subject to tax. At the present time, no income,
profit, capital or capital gains taxes are levied in Bermuda. In the event that
such taxes are levied, we have received on undertaking from the Bermuda
Government exempting us from all such taxes until March 28, 2016.

    As Bermuda does not impose an income tax, the statutory amount of tax is
zero. The provision for income taxes for the year ended December 31, 2000, and
the period from incorporation to December 31, 1999, results in an effective tax
charge that differs from the Bermuda tax charge as follows:

<TABLE>
<CAPTION>
                                                            2000             1999
                                                          --------         --------
<S>                                                       <C>              <C>
Statutory Bermuda tax charge............................   $    0           $    0
Current foreign taxes...................................    1,419            1,080
Deferred and other taxes................................     (323)             469
                                                           ------           ------
Effective tax charge....................................   $1,096           $1,549
                                                           ======           ======
</TABLE>

EBITDA

    We recognized EBITDA of $2.0 million for the year ended December 31, 2000
compared to $93.6 million for the year ended December 31, 1999. This decrease is
a result of the application of FASB Interpretation No. 43, which stated that,
with effect from July 1, 1999, certain sales of capacity may no longer be
recognized as current revenue because they do not satisfy the requirements for
sales type lease accounting. Revenues from these capacity sales are now deferred
and amortized over the term of the contracts. Based on original expectations
under the new measurements, EBITDA was positive one year ahead of plans.

ADJUSTED EBITDA

    We recognized adjusted EBITDA of $506.4 million for the year ended
December 31, 2000 compared to $128.1 million for the year ended December 31,
1999. This increase includes the effect of

                                       24
<PAGE>
the FA-1 presales. Excluding the effect of FA-1, adjusted EBITDA was
$147.7 million for the year, up 15% on 1999.

CASH REVENUES

    We recognized cash revenues of $596.4 million for the year ended
December 31, 2000 compared to $188.1 million for the year ended December 31,
1999. This increase includes the effect of the FA-1 presales. Excluding the
effect of FA-1, cash revenues were $237.8 million for the year, up 26% on 1999.

YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998

REVENUES

    We recognized total revenue during the year ended December 31, 1999 of
$162.4 million compared to $208.2 million in total revenue for the year ended
December 31, 1998.

    We recognized revenue from the sale of capacity of $131.9 million for the
year ended December 31, 1999 compared to $184.7 million during the year ended
December 31, 1998. The reduction in revenue is partly attributable to our
deferring the recognition of revenues to subsequent periods as the result of our
adoption of FASB Interpretation No. 43 with effect from July 1, 1999 and partly
as a result of accounting revenues in 1998 including certain non-cash items. As
of December 31, 1999, we had entered into sales transactions with over 90
international telecommunication carriers and internet service providers compared
to 80 as of December 31, 1998.

    We recognized revenue from operations and maintenance services of
$30.6 million for the year ended December 31, 1999 compared to $23.5 million for
the year ended December 31, 1998. The increase of $7.1 million for the year
ended December 31, 1999 is primarily a result of the increase in cumulative
capacity sales on the FEA cable system.

OPERATING EXPENSES

    For the year ended December 31, 1999, we recorded $49.6 million in respect
of the cost of capacity sold compared to $101.3 million recorded in the year
ended December 31, 1998. The decrease in the cost of capacity sold in the year
ended December 31, 1999 is primarily a result of lower revenue recognized from
capacity sales combined with sales of capacity on segments having a lower cost
of sales percentage, computed as described above for that segment, compared to
the cost of sales for the segments on which capacity was sold during the year
ended December 31, 1998.

    During the year ended December 31, 1999, we incurred $31.3 million in
operations and maintenance costs compared to $37.9 million for the year ended
December 31, 1998. Operations and maintenance costs relate primarily to the
provision of standby maintenance under maintenance zone agreements as well as
salaries and overhead expenses directly associated with operations and
maintenance activities. The decrease in operations and maintenance costs is
largely a result of the termination of the program management services agreement
with Bell Atlantic Network Systems in May 1998 combined with lower costs of some
maintenance zone agreements.

    During the year ended December 31, 1999, we incurred $11.7 million in sales
and marketing costs compared to $10.7 million incurred during the year ended
December 31, 1998. Sales and marketing costs are comprised of all sales and
marketing activities that are directly undertaken by us.

    During the year ended December 31, 1999, we incurred $25.8 million of
general and administrative expenses compared to $21.7 million during the year
ended December 31, 1998. The increase in general and administrative costs in the
year ended December 31, 1999, is largely due to the non-cash compensation
expense of $4.6 million.

                                       25
<PAGE>
    Costs for the year ended December 31, 1999 noted above include charges for
non-cash compensation expense in respect of awards under our long term incentive
plan. These charges are required under US accounting standards and are purely
accounting charges having no effect on cash flows.

    Depreciation expense for the year ended December 31, 1999 was $11.4 million
compared to $0.8 million for the year ended December 31, 1998. The increase of
$10.6 million is primarily a result of us adopting FASB Interpretation No. 43
which was effective from July 1, 1999, pursuant to which the cost of part of the
FEA cable system which does not satisfy the requirements of sales type lease
accounting is being depreciated over its remaining economic life. Prior to
July 1, 1999, the cost of the FEA cable system was wholly accounted for as
capacity available for sale for which no depreciation was recorded but which was
expensed as cost of capacity sold as revenues were recognized.

INTEREST EXPENSE AND INTEREST INCOME

    Interest expense on borrowings decreased from $61.1 million for the year
ended December 31, 1998 to $54.8 million for the year ended December 31, 1999.
The decrease in interest expense of $6.3 million was attributable to a reduction
in long term debt facility from $271.5 million as at December 31, 1998 to
$190.0 million as at December 31, 1999 combined with a $1.8 million reduction in
amortized financing costs.

    During the year ended December 31, 1999 we capitalized $1.3 million of
interest costs as a component of construction in progress.

    We earned interest income of $9.0 million during the year ended
December 31, 1999 compared to $14.9 million earned during the year ended
December 31, 1998. Interest was earned on cash balances and short term
investments held by the collateral trustee for FLAG Limited's credit facility or
in escrow arising from ongoing business operations.

PROVISION FOR TAXES

    The provision for taxes was $1.7 million for the year ended December 31,
1999 compared to $1.3 million for the year ended December 31, 1998. The tax
provisions for these periods consisted of taxes on income derived from capacity
sales and standby maintenance revenue from customers in certain jurisdictions
along the FEA cable system route where we are deemed to have a taxable presence
or are otherwise subject to tax. At the present time, no income, profit, capital
or capital gains taxes are levied in Bermuda. In the event that such taxes are
levied, we have received an undertaking from the Bermuda Government exempting us
from all such taxes until March 28, 2016.

    As Bermuda does not impose an income tax, the statutory rate of tax is zero.
The effective rate of tax relates to income tax on the activities of
subsidiaries of the Company in taxable jurisdictions or where the income of
subsidiaries is otherwise subject to tax.

EXTRAORDINARY ITEM

    In connection with a refinancing that took place on January 30, 1998, we
recorded an extraordinary loss of $59.8 million in the statement of operations
for the year ended December 31, 1998. The loss on refinancing represents the
write-off of unamortized deferred financing costs related to FLAG Limited's
prior credit facility. No refinancing occurred in the year ended December 31,
1999.

    In addition, in connection with the refinancing in January 1998, FLAG
Limited redeemed its outstanding preferred stock at a redemption price of 105%
of the liquidation preference. We reflected the $8.5 million excess of the
redemption value over the carrying value of the preferred stock on the date of
the redemption as a decrease in additional paid-in capital in the year ended
December 31, 1998. There were no costs of this nature recorded in the year ended
December 31, 1999.

                                       26
<PAGE>
EBITDA

    We recognized EBITDA of $93.6 million for the year ended December 31, 1999
compared to $138.0 million for the year ended December 31, 1998. This decrease
is a result of the application of FASB Interpretation No. 43, which stated that,
with effect from July 1, 1999, certain sales of capacity may no longer be
recognized as current revenue because they do not satisfy the requirements for
sales type lease accounting. Revenues from these capacity sales are now deferred
and amortized over the term of the contracts.

ADJUSTED EBITDA

    We recognized adjusted EBITDA of $128.1 million for the year ended
December 31, 1999 compared to $68.7 million for the year ended December 31,
1998. This increase is due to the increase in deferred revenues resulting from
the application of FASB Interpretation No. 43.

CASH REVENUES

    We recognized cash revenues of $188.1 million for the year ended
December 31, 1999 compared to $139.0 million for the year ended December 31,
1998. This increase is due to increased revenues on the FEA cable system.

LIQUIDITY AND CAPITAL RESOURCES

    We have financed our operations to date through a combination of equity
contributions, bank debt, the proceeds of debt offerings, and the proceeds of
our IPO.

    On February 16, 2000 we sold 27,964,000 common shares at $24 per share in
our IPO. We received $633.8 million in net proceeds from that offering. On
March 17, 2000 we completed our sale of 11 5/8% Senior Notes due in the US and
Europe, raising net proceeds of $576.6 million.

    On February 16, 2000, FLAG Limited amended its existing credit facilities to
consist of a $150 million six-year term loan facility ($93 million of which
remained outstanding at December 31, 2000 and all of which was outstanding at
December 31, 1999) and a $10 million revolving credit facility (none of which
was outstanding at December 31, 2000 and 1999). Dresdner Kleinwort Benson and
Barclays Capital acted as joint lead arrangers. These facilities bear interest
at a rate of 225 basis points over LIBOR for the first six months and thereafter
at a rate of between 150 and 250 basis points over LIBOR, depending on the
credit rating of the 8 1/4% Senior Notes of FLAG Limited. The current interest
rate is 200 basis points over LIBOR. The facilities are secured by a pledge by
us of all of the capital stock of FLAG Limited and by assignment of FLAG
Limited's contracts and a security interest in its bank accounts and intangible
property. In connection with this amendment, FLAG Limited paid fees and expenses
to the joint lead arrangers totaling approximately $3.3 million.

    At the end of March 1998, FLAG Limited entered into two interest rate swap
agreements to manage our exposure to interest rate fluctuations on FLAG
Limited's credit facilities. Under the swap agreements, we paid a fixed rate of
5.6% on a notional amount of $60 million and a fixed rate of 5.79% on a notional
amount of $100 million and the swap counterparty paid the floating rate based on
LIBOR. One swap agreement terminated in January 2000 and the other swap
agreement terminated in July 2000. In August 2000 we entered into an interest
rate collar transaction for an initial notional amount of $60 million, reducing
in increments to $20 million in the final quarter. The transaction terminates on
April 30, 2002. The collar is comprised of a LIBOR cap at 8% and a floor of
5.85%. We recognize the net cash amount received or paid on interest rate
hedging instruments as an adjustment to interest cost on the related debt.

    On December 20, 2000, we entered into a cross currency swap to hedge the
foreign exchange exposure of our E300 million 11 5/8% Senior Notes. Under the
swap agreement we exchanged

                                       27
<PAGE>
E300 million for $268.98 million. On June 20, 2002, we will exchange back the
$268.98 million for E300 million. At the end of 2000, this transaction was
accounted for as a hedge under US GAAP, pre-adoption of Statement of Financial
Accounting Standard No. 133 (see New Accounting Pronouncements).

    FLAG Atlantic Limited ("FLAG Atlantic") has a $575 million construction/term
loan facility (of which $62 million was outstanding at December 31, 2000) and a
$25 million revolving credit facility (none of which was outstanding at
December 31, 2000 and 1999). These facilities have a term of 7.5 years and bear
interest at LIBOR plus 125 basis points for that portion of the loans (not to
exceed 50% of the outstanding loans) which are backed by investment grade
receivables and LIBOR plus 300 basis points for the balance of the loans. FLAG
Atlantic has elected, over the course of the construction contract, to cancel
$68.175 million of the un-drawn construction/term loan facility as a result of
capacity pre-sales over and above the anticipated pre-sale targets. Commitment
fees accrue on the undrawn balance of the loans at between 37.5 basis points and
75 basis points.

    In October 1999, FLAG Atlantic entered into an interest rate collar
transaction for an initial notional amount of $31 million, increasing in
increments to $106 million in the final quarter of 2001. The transaction
terminates on November 30, 2001. The collar is comprised of a LIBOR cap at 7%
and a floor of 6.27%. We recognized the net cash amount received or paid on
interest rate hedging instruments as an adjustment to interest cost on the
related debt.

    FLAG Atlantic's bank facility is secured by an assignment of all of FLAG
Atlantic's assets and a pledge of all of the stock in FLAG Atlantic.

    On December 6, 2000 we completed the purchase from GTS of its interest in
FLAG Atlantic, the 50/50 joint venture that is building the FA-1 cable system.
FLAG Atlantic has now become a wholly-owned subsidiary of FLAG Telecom from the
acquisition date. Under the terms of the agreement, GTS receives $135 million in
cash from FLAG Telecom, and FLAG Telecom assumes FLAG Atlantic's cash of
$265.8 million at December 31, 2000, which is restricted to use for FLAG
Atlantic purposes only, along with all other remaining assets and liabilities of
FLAG Atlantic. The transaction was accounted for under the purchase method of
accounting, and accordingly, the excess of the assets acquired and liabilities
assumed has been recorded as goodwill. The initial purchase price allocation is
based on current estimates. The Company will make final purchase price
allocations based upon the final values for certain assets and liabilities. As a
result, the final purchase price allocation may differ from the presented
estimate. Funding arrangements for the project, including all pre-sale
commitments of $800 million, are unaffected.

    The undersea survey for the FP-1 cable system has been completed. We expect
to fund the costs required to complete the project from some of the proceeds
from our IPO and the proceeds from our 11 5/8% Senior Notes offering and other
debt financings and pre-sales.

    As of December 31, 2000, the Group had net current assets of $750.5 million
compared to net current liabilities of $53.7 million, at December 31, 1999. The
working capital deficit at December 31, 1999 was primarily a result of the
accounts payable to contractors which are classified as current liabilities but
for which the associated funds held in escrow were classified as a non-current
asset and were hence excluded from working capital.

    Total cash provided by operating activities was $194.9 million and that used
in investing activities was $373.0 million, during the twelve months ended
December 31, 2000. At December 31, 2000, cash on deposit, or with the collateral
trustee or in escrow had increased to $1,292.5 million from $137.3 million at
December 31, 1999, primarily as a result of the additional funds obtained from
the IPO of $633.8 million and from the 11 5/8% Senior Notes offering of
$576.6 million.

    Total cash provided by operating activities was $92.7 million and that used
in investing activities was $46.5 million, during the twelve months ended
December 31, 1999.

                                       28
<PAGE>
ASSETS

    One of our primary assets is the remaining capital cost of the FLAG Telecom
network and construction in progress recorded in property and equipment totaling
$1,538.0 million.

    As a result of the application of FASB Interpretation No. 43, the costs of
certain segments of the FLAG Telecom network were reclassified from capacity
available for sale to fixed assets and are being depreciated over their
remaining useful life.

    As a result of extending our range of products and services, we expect the
greater part of our future revenue to be under agreements that will be accounted
for as operating leases or service contracts and will require us to recognize
revenues over the relevant terms of the agreements. We have therefore
reclassified the remaining cost of the FLAG Telecom network from capacity
available for sale to fixed assets in the first quarter of 2000. This cost will
be depreciated over the remaining estimated economic life of the system.

    The capitalised costs incurred in the construction of the various FLAG
Telecom cable systems under construction have been included in Construction in
Progress. These are comprised of FA-1, $461.7 million, FNAL, $36 million and
FP-1, $17.2 million, as of December 31, 2000. See additional discussion on the
progress of the assets under construction contained in Item 1, under the FLAG
Telecom network.

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

ACCOUNTS RECEIVABLE

    The accounts receivable balance at December 31, 2000 of $141.2 million
includes $50.6 million relating to sales contracts payable in accordance with
agreed payment schedules over periods up to one year and due for payment on
normal payment terms on invoicing. The comparable figure at December 31, 1999
was $49.9 million.

IMPACT OF THE INTRODUCTION AND ADOPTION OF THE EURO

    On January 1, 1999, eleven of the 15 member countries of the European Union,
including France, Germany, Ireland, Italy and Spain, where FLAG Telecom has
operations, established fixed conversion rates between their existing sovereign
currencies and a new currency called the "Euro" (E). These countries adopted the
Euro as their common legal currency on that date. The Euro trades on currency
exchanges and is available for non-cash transactions. Hereafter and until
January 1, 2002, the existing sovereign currencies will remain legal tender in
these countries. On January 1, 2002, the Euro is scheduled to replace the
sovereign legal currencies of these countries.

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

INFLATION

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

                                       29
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CURRENCY RISK.

    We are exposed to a degree of foreign currency risk in our international
operations. The value of the liability of the E300 million of 11 5/8% Senior
Notes, as expressed in U.S. dollars on our Balance Sheet, is dependent on the
U.S. dollar/Euro exchange rate at each balance sheet date. The change in this
liability over a period is reflected in our Income Statement in accordance with
US GAAP.

    We have entered into a cross currency swap agreement to hedge the effect of
changes in the exchange rate. The hedge is for a period of 18 months, after
which time we will review the exposure again and may enter into further hedge
transactions if considered appropriate.

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

    The impact of the introduction of the Euro is discussed in Item 7 in the
Liquidity and Capital Resources section.

INTEREST RATE RISK.

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

SENIOR NOTES AS OF DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                               CURRENCY      CURRENCY
                                                                             AND PRINCIPAL   AND FAIR         FLAG
TYPE OF                     PRINCIPAL                                           AMOUNT         VALUE         OPTION
INSTRUMENT                PAYMENTS DUE    MATURITY DATE    INTEREST RATE       (MILLION)     (MILLION)     TO REDEEM
----------                -------------   -------------   ----------------   -------------   ---------   --------------
<S>                       <C>             <C>             <C>                <C>             <C>         <C>
11 5/8% Senior Notes      Semi-annually    March 2010      Fixed 11 5/8%        $300.0        $234.0     Any time after
                                                                                                           March 2005
11 5/8% Senior Notes      Semi-annually    March 2010      Fixed 11 5/8%        E300.0        E239.5     Any time after
                                                                                                           March 2005
</TABLE>

DERIVATIVE FINANCIAL INSTRUMENTS AS OF DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                         NOTIONAL
TYPE OF           PAYMENTS        MATURITY        RATE        RATE        AMOUNT      FAIR VALUE
INSTRUMENT           DUE            DATE        PAYABLE    RECEIVABLE   ($ MILLION)   ($ MILLION)
----------      -------------   -------------   --------   ----------   -----------   -----------
<S>             <C>             <C>             <C>        <C>          <C>           <C>
Cross Currency  Semi-annually   June 20, 2002   1.265 %      Nil          $268.98      12.2
  Swap                                                                     E300.0
</TABLE>

                                       30
<PAGE>
LONG-TERM DEBT AS OF DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                      PRINCIPAL                      FLAG
TYPE OF                PRINCIPAL                                       AMOUNT      FAIR VALUE       OPTION
INSTRUMENT           PAYMENTS DUE    MATURITY DATE   INTEREST RATE   ($ MILLION)   ($ MILLION)     TO REDEEM
----------           -------------   -------------   -------------   -----------   -----------   -------------
<S>                  <C>             <C>             <C>             <C>           <C>           <C>
8 1/4% Senior Notes  Semi-annually   January 2008    Fixed 8 1/4%     430.0          365.5         Any time
                                                                                                 after January
                                                                                                     2003
FLAG Limited credit    Quarterly     January 2006      Floating         93            93          At any time
  facility                                           LIBOR + 150
                                                     to 250 basis
                                                        points
</TABLE>

FOREIGN CURRENCY DERIVATIVE FINANCIAL INSTRUMENTS AS OF DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                 NOTIONAL
TYPE OF       PAYMENTS     MATURITY       RATE        RATE        AMOUNT      FAIR VALUE
INSTRUMENT       DUE         DATE       PAYABLE    RECEIVABLE   ($ MILLION)   ($ MILLION)
----------    ---------   -----------   --------   ----------   -----------   -----------
<S>           <C>         <C>           <C>        <C>          <C>           <C>
LIBOR Collar  Quarterly   April 2002    Floor at   Cap at 8%     60.0           (0.09  )
                                         5.85%
</TABLE>

    The three-month LIBOR rate at December 31, 2000 was 6.39875%.

LONG-TERM DEBT AS OF DECEMBER 31, 2000

<TABLE>
<CAPTION>
               PRINCIPAL                                     PRINCIPAL                     FLAG
TYPE OF         PAYMENTS                                      AMOUNT      FAIR VALUE      OPTION
INSTRUMENT        DUE       MATURITY DATE   INTEREST RATE   ($ MILLION)   ($ MILLION)    TO REDEEM
----------     ----------   -------------   -------------   -----------   -----------   -----------
<S>            <C>          <C>             <C>             <C>           <C>           <C>
FLAG Atlantic  Quarterly    April 2007        Floating        62            62          At any time
  Limited                                   LIBOR + 125
  credit                                    to 300 basis
  facility                                     points
</TABLE>

INTEREST RATE DERIVATIVE FINANCIAL INSTRUMENTS AS OF DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                               NOTIONAL
TYPE OF       PAYMENTS    MATURITY      RATE        RATE        AMOUNT      FAIR VALUE
INSTRUMENT       DUE        DATE      PAYABLE    RECEIVABLE   ($ MILLION)   ($ MILLION)
----------    ---------   ---------   --------   ----------   -----------   -----------
<S>           <C>         <C>         <C>        <C>          <C>           <C>
LIBOR Collar  Quarterly   November    Floor at   Cap at 7%     86.0          (0.4  )
                            2001       6.27%
</TABLE>

NEW ACCOUNTING STANDARDS

    In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows gains and losses on a
derivative to offset related results on the hedged item in the income statement,
and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, is effective for fiscal years
beginning after June 15, 2000, and cannot be applied retroactively.

                                       31
<PAGE>
    The Company expects that the adoption of SFAS No.'s 133, 137, and 138 may
have a material impact on the financial position or the results of operations of
the Company, but is unable to estimate the effects of adoption at this time.
Specifically, the Company believes that the following changes in its accounting
policies will result from the adoption of SFAS No. 133:

    - The Company currently considers certain interest rate collars as hedges
      under which payments due to or from the counterparties are recorded as an
      increase or reduction in expense. The Company believes that these interest
      rate collars will be recorded as effective cash flow hedges under the
      provisions of SFAS No. 133 and, accordingly, changes in the intrinsic
      value associated with the interest rate collars will be recorded directly
      to other accumulated comprehensive income and changes in the time value of
      the interest rate collars will be recorded directly to current period
      earnings.

    - The Company currently accounts for a cross currency swap arrangement as a
      hedge of the fair value of debt denominated in a foreign currency. The
      Company believes that this cross currency swap will not be recorded under
      the hedge accounting provisions of SFAS No. 133 and consequently changes
      in the fair value of the cross currency swap arrangement and fluctuation
      in the value of the underlying debt which are expected to be equal and
      opposite, will both be recorded through current period earnings after
      adoption of SFAS No. 133.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

    See Pages F-1 through F-45 setting forth the financial statements that are
filed as a part of this Form 10-K.

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

    None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The following table sets forth, as of March 1, 2001, the names, ages and
positions of the directors and executive officers of the Company. Additional
biographical information concerning these individuals is provided in the text
following the table.

<TABLE>
<CAPTION>
NAME                                          AGE                       POSITION
----                                        --------                    --------
<S>                                         <C>        <C>
Andres Bande..............................  56         Chairman and Chief Executive Officer
Edward McCormack..........................             Deputy Chairman and Chief Operating
                                            46         Officer
Larry Bautista............................  37         Chief Financial Officer
Stuart Rubin..............................  53         General Counsel and Secretary
Michael Fitzpatrick.......................  52         Director
Thomas Bartlett...........................  42         Director
Soopakij Chearavanont.....................  37         Director
Adnan Omar................................  49         Director
Alfred Giammarino.........................  45         Director
Dr. David A. Riffelmacher.................  50         Director
Umberto Silvestri.........................  68         Director
</TABLE>

ANDRES BANDE

    Mr. Bande has served as Chairman of the Board and Chief Executive Officer
("CEO") since January 1998. Before joining us, Mr. Bande was the President of
Sprint International from 1996 to the

                                       32
<PAGE>
beginning of 1998. Prior to that, he was President of Ameritech International
Corporation from 1990 to 1996.

EDWARD MCCORMACK

    Mr. McCormack has been a member of the Board since October 1999 and has
served as Deputy Chairman of the Board since March 2000. He served as the Chief
Financial Officer from February 1996 to November 2000 and was appointed Chief
Operating Officer in March 2000. Prior to that time, Mr. McCormack spent
17 years with Bechtel, an engineering and construction company. His final
position with Bechtel was Chief Financial Officer of Bechtel Europe, Africa,
Middle East and South West Asia.

LARRY BAUTISTA

    Mr. Bautista was appointed Chief Financial Officer in November 2000. He
joined the Company in 1999 and was appointed Deputy Chief Financial Officer in
March 2000. Between 1996 and 1999 he served as Vice President-Finance and
Treasurer of the Company while on secondment from Verizon. Prior to his
secondment, Mr. Bautista spent over 5 years with Verizon in various finance
functions.

STUART RUBIN

    Mr. Rubin has served as the General Counsel of the Company since
January 1996. Prior to joining us, Mr. Rubin spent over twenty years with the
law firm of Coudert Brothers, as a partner for the last twelve years,
specializing in cross border financial transactions, joint ventures and other
commercial transactions.

MICHAEL FITZPATRICK

    Mr. Fitzpatrick has been a member of our Board since January 2000.
Mr. Fitzpatrick has been General Partner of Seabury Venture Partners since
October 2000. He was previously Chairman of the Board, President and Chief
Executive Officer of E-TEK Dynamics, Inc., a fiber optic manufacturer from
October 1997 to October 2000. Prior thereto, Mr. Fitzpatrick was President and
Chief Executive Officer of Pacific Telesis Enterprises from 1993 to
October 1997. Mr. Fitzpatrick currently serves as a director of NorthPoint
Communications Group, Inc., a national provider of local data network services
and Adva Optical Networking, a worldwide optical networking solutions provider
located in Germany.

THOMAS BARTLETT

    Mr. Bartlett has been a member of our Board since October 2000.
Mr. Bartlett has been President of Verizon Global Solutions Inc., Verizon's
provider of worldwide end-to-end communications solutions since July 2000. From
1995 to July 2000 he was President and Chief Executive Officer of Bell Atlantic
International Wireless.

ADNAN OMAR

    Mr. Omar was a director of FLAG Limited from April 1994 until the corporate
restructuring in February 1999 and has since been a member of our Board.
Mr. Omar has been the Executive Director of Al-Jazirah Transport Holding
Company, which invests in diversified businesses through its subsidiaries and is
fully owned by the Dallah Albaraka Group, since March 1998. From 1990 to
March 1998, he was Technical Director of Al-Jazirah Transport Holding Company.
Mr. Omar also serves on the board of directors of BASAFOJAGU CO., Al-Sham
Shipping Co. Syria, Dallah Transport Co. Saudi Arabia and Dallah Lebanon
Tourism & Transport Co.

                                       33
<PAGE>
ALFRED GIAMMARINO

    Mr. Giammarino was appointed a director in October 2000. Mr. Giammarino has
been Senior Vice President and Chief Financial Officer (CFO) for the
international group of Verizon Communications Inc. since January 2000. From
July 1998 to December 1999 he was Senior Vice President--International Finance,
Planning and Business Development for GTE. Prior to that, he was Vice
President--International Finance and Planning from 1997 to July 1998 and Vice
President--Finance from 1995 to 1997.

DR. DAVID A. RIFFELMACHER

    Dr. Riffelmacher was appointed to the Board in October 2000. He is currently
Group Vice President--Marketing, Product Development and Strategic Planning for
Verizon Global Solutions Inc. From January 1996 to June 2000 he was Vice
President of Professional Services for Bell Atlantic International Wireless.

UMBERTO SILVESTRI

    Mr. Silvestri has been a member of the Board of the Company since
October 1999. Mr. Silvestri was the Chairman of STET International Netherlands
from 1997 until December 1999 and was the Chairman of Telecom Italia from 1994
until June 1997.

SOOPAKIJ CHEARAVANONT

    Mr. Chearavanont was appointed to the Board in September 2000.
Mr. Chearavanont has been President of Telecom Holding Co., Ltd. since 1999,
President of UBC Group, which operates a pay television business, since 1998 and
Chairman and Chief Executive Officer of Hong Kong Fortune Limited, a real estate
and property investment company since 2000. He has also been a director of
TelecomAsia Corporation Public Co. Ltd. since 1994.

    There is no family relationship among any of the above-named officers or any
director of the Company.

    Pursuant to Bye-law 82 of the Company's Bye-laws, each shareholder holding
at least 9% of the issued and outstanding shares has the right to designate one
director for each 9% of the issued and outstanding shares held by such
shareholder. Notwithstanding the above, even if they are not entitled to
designate any directors under the arrangement described above, for so long as
either Bell Atlantic Network Systems Company and/or Rathburn Limited owns any
shares, that shareholder shall have the right to appoint one director. As a
result, Bell Atlantic Network Systems Company, which beneficially owns
approximately 29.8% of the issued and outstanding shares, has the right to
designate three directors, and each of Rathburn Limited, which beneficially owns
approximately 12.7% of the issued and outstanding Shares, and K.I.N. (Thailand)
Co., Ltd., which beneficially owns approximately 9.0% of the issued and
outstanding shares, has the right to designate one director. Pursuant to such
rights, Bell Atlantic Network Systems Company has named Messrs. Bartlett,
Giammarino and Riffelmacher as their designees, Rathburn Limited has named
Mr. Omar as its designee and K.I.N. (Thailand) Co., Ltd. has named
Mr. Chearavanont as its designee. Otherwise, only a director retiring by
rotation may be appointed as a director unless a person is either recommended by
the Board or is nominated in accordance with procedures set out in the Companies
Act 1981 of Bermuda. Under the Company's Bye-laws directors who are executive
officers are not subject to retirement by rotation.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

    Not applicable.

                                       34
<PAGE>
ITEM 11.   EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

    The table below sets forth information concerning compensation paid to the
CEO and the Company's four (4) most highly compensated executives other than the
CEO for each of fiscal years 1998, 1999 and 2000.

<TABLE>
<CAPTION>
                                                                                          LONG TERM
                                                                                        COMPENSATION
                                                ANNUAL COMPENSATION               -------------------------
                                     ------------------------------------------   RESTRICTED    SECURITIES
                                                                 OTHER ANNUAL       STOCK       UNDERLYING       ALL OTHER
                            YEAR      SALARY      BONUS         COMPENSATION(1)    AWARD(S)    OPTIONS/SARS   COMPENSATION(2)
                          --------   --------   ----------      ---------------   ----------   ------------   ---------------
<S>                       <C>        <C>        <C>             <C>               <C>          <C>            <C>
Andres Bande(3).........    2000     $450,000   $1,157,210(4)      $181,000              --            --         $31,912
Chairman and CEO........    1999      450,000      848,700          156,000              --            --         168,492
                            1998      438,362    1,505,556(5)       156,000              --     1,071,707         250,970

Edward McCormack........    2000      274,333      499,320(6)       106,327              --       180,000              --
Deputy Chairman and.....    1999      217,666      399,499               --              --        50,000              --
Chief Operating
  Officer...............    1998      177,935      699,000(7)            --              --       268,000              --

Stuart Rubin............    2000      270,000      491,820(8)       154,401              --       165,000         357,477
General Counsel and.....    1999      214,166      259,250          183,997              --        25,000         125,279
Secretary...............    1998      176,667      571,000(9)        78,953              --       268,000          24,810

Samih Kawar(10).........    2000      204,006      256,300(11)      101,540              --       105,000          30,058
Executive
  Vice-President........    1999      188,750      183,000           83,339              --        16,667          38,940
Operation and
  Maintenance...........    1998      120,000       90,000          133,639              --       166,667          17,857

Larry Bautista(12)......    2000      190,836      353,500(13)      101,165              --        66,000          72,715
Chief Financial
  Officer...............    1999      126,685      135,000               --              --        10,000              --
</TABLE>

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

(1) Other Annual Compensation means perquisites and other personal benefits
    received, if over $50,000, such as education, housing and car allowances.

(2) All Other Compensation means perquisites and other compensation for the
    covered fiscal year such as tax equalization, insurance premiums paid on
    behalf of the registrant during the covered fiscal year with respect to term
    life insurance and other professional fees.

(3) Mr. Bande joined the Company on January 12, 1998.

(4) Mr. Bande received an annual bonus of $900,000 and a special award related
    to the IPO of $257,210.

(5) Mr. Bande received a signing bonus of $905,500 paid in January 1998 and an
    annual bonus of $600,000.

(6) Mr. McCormack received an annual bonus of $324,976 and a special award
    related to the IPO of $174,346.

(7) Mr. McCormack received a moving bonus of $444,000 in addition to his annual
    bonus of $255,000. The moving bonus was in lieu of a completion bonus which
    would have been payable approximately six (6) months later and in
    consideration for Mr. McCormack not exercising a right to terminate his
    contract because he was being required to change his place of employment.

(8) Mr. Rubin received an annual bonus of $317,490 and a special award related
    to the IPO of $174,330.

(9) Mr. Rubin received a moving bonus of $316,000 in addition to his annual
    bonus of $255,000. The moving bonus was in lieu of a completion bonus which
    would have been payable approximately six (6) months later and in
    consideration for Mr. Rubin not exercising a right to terminate his contract
    because he was being required to change his place of employment.

(10) Mr. Kawar joined the Company as an employee on May 1, 1998.

(11) Mr. Kawar received an annual bonus of $206,288 and a special award related
    to the IPO of $50,012.

(12) Mr. Larry Bautista joined the Company on April 1, 1999.

(13) Mr. Bautista received an annual bonus of $227,497 and a special award
    related to the IPO of $126,003.

                                       35
<PAGE>
                                 OPTION GRANTS

    The table below sets forth information concerning options granted in 2000 to
the CEO and the Company's four (4) most highly compensated executives other than
the CEO in 2000.

<TABLE>
<CAPTION>
                                                                                                          POTENTIAL REALIZABLE
                                                      INDIVIDUAL GRANTS                                         VALUE AT
                           -----------------------------------------------------------------------        ASSUMED ANNUAL RATES
                           NUMBER OF     % OF TOTAL                                                          OF STOCK PRICE
                           SECURITIES     OPTIONS                    MARKET PRICE                        APPRECIATION FOR OPTION
                           UNDERLYING    GRANTED TO                   OF COMMON                                  TERM(1)
                            OPTIONS     EMPLOYEES IN   EXERCISE OR     STOCK ON       EXPIRATION     -------------------------------
NAME                        GRANTED     FISCAL YEAR    BASE PRICE     GRANT DATE         DATE           0%          5%        10%
----                       ----------   ------------   -----------   ------------   --------------   ---------   --------   --------
<S>                        <C>          <C>            <C>           <C>            <C>              <C>         <C>        <C>
FISCAL YEAR 2000
Andres Bande.............        --           --              --            --                  --         --         --          --

Edward McCormack.........   120,000        1.774%         $22.50        $22.50      April 10, 2010         --    $78,966    $161,784
                             60,000        0.887%         $12.00        $12.00       Sept 14, 2010         --    $39,483    $ 80,892

Stuart Rubin.............   110,000        1.626%         $22.50        $22.50      April 10, 2010         --    $72,386    $148,302
                             55,000        0.813%         $12.00        $12.00       Sept 14, 2010         --    $36,193    $ 74,151

Samih Kawar..............    70,000        1.035%         $22.50        $22.50      April 10, 2010         --    $46,064    $ 94,374
                             35,000        0.517%         $12.00        $12.00       Sept 14, 2010         --    $23,032    $ 47,187

Larry Bautista...........    44,000        0.651%         $22.50        $22.50      April 10, 2010         --    $28,954    $ 59,321
                             22,000        0.325%         $12.00        $12.00       Sept 14, 2010         --    $14,477    $ 29,660
</TABLE>

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

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

                                       36
<PAGE>
              AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                         FISCAL YEAR-END OPTION VALUES

    The table below sets forth information concerning exercises of stock options
by the CEO and the Company's four (4) most highly compensated executives other
than the CEO during the last fiscal year, and the fiscal year-end value of such
executives' unexercised options. Amounts in the table are given as of
December 31, 2000. There were no options exercised during the fiscal year ended
December 31, 2000.

<TABLE>
<CAPTION>
                                                                      NUMBER OF               VALUE OF UNEXERCISED
                                                                SECURITIES UNDERLYING             IN-THE-MONEY
                                        SHARES                UNEXERCISED OPTIONS/SARS            OPTIONS/SARS
                                       ACQUIRED                AT FY-END (#)(1)(2)(3)          AT FY-END ($)(1)(4)
                                          ON       VALUE     ---------------------------   ---------------------------
NAME                                   EXERCISE   REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                                   --------   --------   -----------   -------------   -----------   -------------
<S>                                    <C>        <C>        <C>           <C>             <C>           <C>
Andres Bande.........................      --          --     1,071,707            --       3,860,626             --
Edward McCormack.....................      --          --       268,000       230,000         965,421      1,872,717
Stuart Rubin.........................      --          --       268,000       190,000         965,421      1,641,609
Samih Kawar..........................      --          --       166,667       121,667         600,387      1,047,390
Larry Bautista.......................      --          --        66,667        76,000         240,156        656,643
</TABLE>

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

(1) All Share information has been adjusted to reflect the Company's 6-for-1
    stock split in February 2000.

(2) Options granted during 2000 were granted at an exercise price of $22.50 and
    $12.00 on April 10, 2000 and September 14, 2000, respectively.

(3) An Incentive Stock Option ("ISO") award vests in two equal annual
    installments over two years, 50% vesting upon the first anniversary of the
    date of its grant and 50% vesting upon the second anniversary of the date of
    its grant. The ISO awards provide for acceleration of vesting and the
    lifting of the two year prohibition on exercise in the event of a change of
    control, as defined in the FLAG Telecom Long-Term Incentive Plan.

(4) The fair value of each option grant mentioned above is estimated on the date
    of grant using the Black-Scholes option pricing model with the following
    assumptions used for grants in 1998, 1999 and 2000: risk-free interest rates
    ranging from 5.1% to 6.2%; expected lives of 5 years; expected dividend
    yield of zero percent; and expected volatility of 59.22% for 1998 and 1999;
    41.5% for April 10, 2000 and 70.9% for September 14, 2000.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

    The Compensation Committee of the FLAG Telecom Board consists of
Messrs. Bande, Omar and Bartlett. Both Mr. Bande and Mr. Omar hold options of
the Company, and Mr. Bande is Chairman and CEO of the Company.

CERTAIN COMPENSATION ARRANGEMENTS

    The Company, directly and through one or more of its subsidiaries, is party
to employment agreements with Andres Bande, Ed McCormack and Stuart Rubin. Each
agreement with the Company provides that employment shall continue until
terminated. Compensation paid under these agreements and awards under the
Company's Long-Term Incentive Plan are set forth in the foregoing tables. The
agreements provide that if (i) the Company terminates the employee without Cause
or (ii) the employee terminates his employment for Good Reason (as each term is
defined in the respective agreements), the Company will pay Mr. Bande
$1,440,000, Mr. McCormack one year's worth of salary and guaranteed bonus and
Mr. Rubin one year's worth of salary and guaranteed bonus. In addition, the
unvested stock options of Messrs. McCormack and Rubin would vest if such
termination occurred within three years of a Change of Control (as such term is
defined in the option grant certificates).

                                       37
<PAGE>
COMPENSATION OF OUTSIDE DIRECTORS

    Each director who is not an employee of the Company is paid his reasonable
travel, hotel and incidental expenses in attending and returning from meetings
of the Board on committees or general meetings. In addition, each such director
is paid all expenses properly and reasonably incurred by him in the conduct of
the Company's business or in the discharge of his duties as a director and is
entitled to US$1,500 per day for each day spent working on one or more matters
related to the Company as requested by the Board or the Chairman.

    The Company provides an annual retainer of US$30,000 to each independent
director, in addition to reimbursing travel expenses for attendance at Board
meetings. During 2000, the three independent directors, Mr. Umberto Silvestri,
Mr. Michael Fitzpatrick and Mr. Jonathan Solomon (deceased in May 2000) each
received an annual retainer of $30,000 and reimbursements for such travel
expenses.

    In 1999, each of the non-employee directors at the time, other than
independent directors, was granted options over 41,667 shares that vested wholly
upon the IPO. Of those directors, only Mr. Omar is still on the Board.

    Independent directors Mr. Silvestri, Mr. Solomon and Mr. Fitzpatrick were
also granted the same amount of options at their respective appointments, but
only 20% vested upon the IPO. The remaining 80% vest in two equal installments
on each of the first and second anniversary dates of their respective grants
provided the relevant individual is still a director. The estate of Mr. Solomon
has until May 21, 2001 to exercise his options that vested upon the IPO.

LONG-TERM INCENTIVE PLAN

    In 1999, our Board of Directors and our shareholders adopted the FLAG
Limited 1998 Long-Term Incentive Plan, originally adopted in 1998 by the Board
of Directors and shareholders of FLAG Limited. The purpose of the Plan is to
allow us to attract, retain and reward officers, employees, consultants and
certain other individuals and to compensate them in a way that provides
additional incentives and enables such individuals to increase their ownership
interests. Individual awards under the Plan may take the form of:

    - incentive stock options ("ISOs") or non-qualified stock options ("NQSOs");

    - stock appreciation rights ("SARs");

    - restricted or deferred stock;

    - dividend equivalents;

    - bonus shares and awards in lieu of our obligations to pay cash
      compensation; and

    - other awards the value of which is based in whole or in part upon the
      value of the common shares.

    The Plan is administered by the Compensation Committee, whose members are
appointed by our Board of Directors. The Committee is empowered to select the
individuals who will receive awards and the terms and conditions of those
awards, including exercise prices for options and other exercisable awards,
vesting and forfeiture conditions (if any), performance conditions, the extent
to which awards may be transferable and periods during which awards will remain
outstanding. Awards may be settled in cash, shares, other awards or other
property, as determined by the committee.

    The Plan may be amended by the Board of Directors without the consent of our
shareholders, except that any amendment, although effective when made, will be
subject to shareholder approval if required by any Federal or state law or
regulation or by the rules of any stock exchange or automated quotation system
on which our common shares may then be listed or quoted. The number and kind of
shares reserved or deliverable under the Plan and the number and kind of shares
subject to outstanding awards are subject to adjustment in the event of stock
splits, stock dividends and other extraordinary

                                       38
<PAGE>
corporate events. Following completion of our IPO, we filed a registration
statement on Form S-8 to register the issuance of our common shares under the
Plan.

    The maximum number of common shares that may be subject to awards under the
Plan may not exceed 9,263,791, as of March 30, 2001.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The following table sets forth as of March 16, 2001, the beneficial
ownership of FLAG Telecom shares by:

    - those persons known by the Company to own beneficially more than 5% of
      FLAG Telecom's outstanding shares;

    - each of the executive officers and directors named elsewhere in this
      document and the Company's four (4) most highly compensated executives
      other than the CEO; and

    - all directors, executive officers and named executives of the Company as a
      group.

<TABLE>
<CAPTION>
                                                                                     % OF
                                                                                  OUTSTANDING
                                                              NUMBER OF COMMON   COMMON SHARES
                                                                SHARES OWNED         OWNED
BENEFICIAL OWNER                                              BENEFICIALLY(1)    BENEFICIALLY
----------------                                              ----------------   -------------
<S>                                                           <C>                <C>
Verizon Communications Inc. (formerly Bell Atlantic
  Corporation)(2)...........................................     39,922,276          29.8%
Dallah Albaraka Holding Company(3)..........................     20,790,157          15.5%
TelecomAsia Corporation Public Co. Ltd.(4)..................     12,130,114           9.0%
The Asian Infrastructure Fund(5)............................      7,600,515           5.7%
Marubeni Corporation........................................      6,818,330           5.1%
Government of Singapore Investment Corporation Pte Ltd(6)...      6,803,438           5.1%
Andres Bande................................................      1,071,707             *
Edward McCormack............................................        268,000             *
Stuart Rubin................................................        268,000             *
Samih Kawar.................................................        166,667             *
Larry Bautista..............................................         66,667             *
Adnan Omar..................................................         41,667             *
Michael Fitzpatrick.........................................         25,001             *
Umberto Silvestri...........................................         25,001             *
Thomas Bartlett.............................................             --             *
Soopakij Chearavanont.......................................             --             *
Alfred Giammarino...........................................             --             *
David A. Riffelmacher.......................................             --             *
All Current Directors and Executive Officers as a Group (13
  persons)(7)...............................................      2,099,377           1.5%
</TABLE>

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

*   Less than 1%

(1) The amounts and percentages shown are amounts and percentages owned
    beneficially as of March 16, 2001, based on information furnished or
    publicly disclosed by the persons named. A person is deemed to be the
    beneficial owner of shares if such person, either alone or with others, has
    the power to vote or to dispose of such shares. Shares beneficially owned by
    a person include shares that the person has the right to acquire under stock
    options that were exercisable on March 16, 2001 or that become exercisable
    within 60 days after March 16, 2001. All shares beneficially owned by the
    individuals Andres Bande, Edward McCormack, Stuart Rubin, Samih

                                       39
<PAGE>
    Kawar, Larry Bautista, Adnan Omar, Michael Fitzpatrick and Umberto Silvestri
    are shares that the person has the right to acquire upon the exercise of
    options.

(2) Verizon Communications Inc. is the ultimate parent of a wholly-owned
    subsidiary, Bell Atlantic Network Systems Company, which directly owns our
    shares. The business address of the direct owner is Bell Atlantic Network
    Systems Company, 4 West Red Oak Lane, White Plains, NY 10604, USA.

(3) Dallah Albaraka Holding Company (DABHC) is the parent of a wholly-owned
    subsidiary, Rathburn Limited, which owns 17,000,000 shares of the Company.
    Dallah Albaraka Securities Holding Ltd., another wholly-owned subsidiary of
    DABHC, owns 3,790,157 shares of the Company. The business address of
    Rathburn Limited is Abbot Building, Main Street, P.O. Box 3186, Road Town,
    Tortola, BVI. The business address of Dallah Albaraka Securities
    Holding Ltd. is P.O. Box 1111, West Wind Building, Harbour Drive, Grand
    Cayman, Cayman Islands, B.W.I. Rathburn Limited has pledged 17,000,000
    Shares to Barclays Bank PLC under a security agreement relating to the
    obligations of Dallah Albaraka Holding Company E.C.

(4) TelecomAsia Corporation Public Co. Ltd. is the ultimate parent of a
    wholly-owned subsidiary, K.I.N. (Thailand) Co., Ltd., which directly owns
    our Shares. The business address of the direct owner is K.I.N. (Thailand)
    Co., Ltd., c/o Telecom Holding Co., Ltd., 30th Floor, Telecom Tower, 18
    Ratchadaphisak Road, Huai Khwang, Bangkok 10310, Thailiand. Verizon
    Communications Inc. holds approximately 19% of the shares of TelecomAsia
    Corporation Public Co. Ltd.

(5) The business address of The Asian Infrastructure Fund is: c/o Caledonian
    Bank & Trust Limited, Caledonian House, Mary Street, Georgetown, Grand
    Cayman, Cayman Islands.

(6) Based on information in a Schedule 13G filed with the SEC on February 6,
    2001, Government of Singapore Investment Corporation Pte Ltd holds 6,803,438
    shares of the Company.

(7) All shares are subject to options.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    There exist various agreements between the Company or our subsidiaries and
our shareholders (or their affiliates) for the development, construction,
operation, financing and marketing of the FEA cable system and the FA-1 cable
system. The following paragraphs are a summary of the material provisions of
certain of these agreements.

MARKETING SERVICES AGREEMENT

    FLAG Limited and Bell Atlantic Network Systems Company entered into a
Marketing Services Agreement pursuant to which Bell Atlantic Network Systems
Company was responsible for marketing the assignable capacity of the FEA cable
system. Bell Atlantic Network Systems Company was appointed the exclusive sales
agent for FLAG Limited throughout the world and bore all marketing expenses and
costs it incurred in connection with these marketing services. FLAG Limited
agreed to pay commissions at the rate of 4% of commitments obtained prior to
July 3, 1995 and 3% of the commitments obtained thereafter. From inception
through September 1999, FLAG Limited incurred commissions and other costs in the
amount of $18.4 million. In May 1998, under a Marketing Transition Agreement,
FLAG Limited and Bell Atlantic Network Systems Company agreed to terminate the
Marketing Services Agreement. Under the Marketing Transition Agreement, FLAG
Limited agreed to pay certain closing down expenses, certain commissions in
connection with their pre-termination activities, and up to $3.0 million in
commissions resulting from certain post-termination sales. In this regard, FLAG
Limited incurred $0.5 million in closing down expenses, $15.9 million related to
commissions in connection with pre-termination sales activity and $2.0 million
in connection with post-termination sales activity. No further commissions are
due in relation to post-termination sales activity. As at September 30, 1999,
$1.7 million of the above remained unpaid and fully accrued

                                       40
<PAGE>
by FLAG Limited. Also, under the Marketing Transition Agreement, FLAG Limited
agreed to pay a 50% commission in the event that Bell Atlantic Network Systems
Company or an affiliate secures the sale of four whole DS3s (each DS3 consisting
of 45 MBS of capacity) on the FEA cable system. While our obligations under this
agreement continue, no such sales of DS3s have occurred to date.

EMPLOYEE SERVICES AGREEMENT

    In May 1998 FLAG Limited entered into an Employee Services Agreement with
Bell Atlantic Global Systems Company under which Bell Atlantic Global Systems
Company seconded certain employees to FLAG Limited. During 2000 and 1999, two
Bell Atlantic Global Systems Company employees were seconded to FLAG Limited and
FLAG Limited incurred total costs of $321,000 for this service.

CAPACITY PURCHASE AGREEMENTS

    Affiliates of Verizon have agreed to purchase $22.5 million of capacity on
the FA-1 cable system under various Capacity Purchase Agreements.

PRIMARY SUPPLIER AGREEMENT

    In January 2000, we entered into a Primary Supplier Agreement with Bell
Atlantic Global Systems Company under which Bell Atlantic Global Systems Company
has agreed to purchase from us 50% of the undersea facilities based
communications capacity in any fiber optic cable needed by Bell Atlantic Global
Systems Company or certain of its affiliates in each of the four calendar years
beginning on January 1, 2000. The purchase of capacity may be on the FEA cable
system, the FA-1 cable system or any additional system constructed or acquired
in the future.

EXCHANGE AGREEMENT AND PLAN OF REORGANIZATION; TAX AGREEMENT

    On February 26, 1999, FLAG Limited's shareholders other than Bell Atlantic
Network Systems Company exchanged all their shares of common stock in FLAG
Limited for Shares in FLAG Telecom. Bell Atlantic Network Systems Company,
however, exchanged only a limited portion of its shares of common stock in FLAG
Limited for 3,666,155 Shares in FLAG Telecom. At the same time, Bell Atlantic
Network Systems Company and FLAG Telecom entered into an Exchange Agreement and
Plan of Reorganization providing that Bell Atlantic Network Systems Company's
remaining shares of common stock in FLAG Limited would be exchanged for Shares
in FLAG Telecom in the event that, prior to February 26, 2002, Bell Atlantic
received certain regulatory approvals from the Federal Communications Commission
allowing Bell Atlantic to offer long distance service. Effective January 4,
2000, Bell Atlantic Network Systems Company exchanged the remaining 36,256,121
shares of common stock it held in FLAG Limited for an equivalent number of
Shares in FLAG Telecom.

    The initial transfer by Bell Atlantic Network Systems Company of some of its
shares of common stock in FLAG Limited and the subsequent transfer by Bell
Atlantic Network Systems Company of its remaining shares in FLAG Limited are
intended to be treated as tax-free transactions for United States federal income
tax purposes. Under a tax agreement between FLAG Telecom and Bell Atlantic
Network Systems Company, FLAG Telecom agreed to make customary representations
that are designed to ensure that each exchange is treated as a tax-free
transaction and not to dispose of any shares in FLAG Limited or to permit FLAG
Limited to dispose of substantially all of its assets for a five-year period
following the initial or any subsequent exchange of shares in FLAG Limited. Any
breach of this agreement would require FLAG Telecom to indemnify Verizon and
Bell Atlantic Network Systems Company against any resulting United States
federal, state or local tax consequences.

                                       41
<PAGE>
PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

    (a)(2)  Financial Statement Schedules. The Financial Statement Schedules
            described below are filed as part of this report on pages F-44 to
            F-50. All other schedules are omitted because they are not
            applicable, not required or the required information is in the
            Financial Statements or the Notes thereto.

    DESCRIPTION:

    Schedule I--Condensed Financial Information of Registrant

    Schedule II--Valuation and Qualifying Accounts

    (a)(3)  The following Exhibits are filed as part of this Report as required
            by Regulation S-K. The Exhibits designated by an asterisk (*) are
            management contracts and compensation plans and arrangements
            required to be filed as Exhibits to this Report.

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------   ------------------------------------------------------------
<C>                     <S>
         3.1            Memorandum of Association of FLAG Telecom (Incorporated by
                          Reference to the Registrant's Registration Statement on
                          Form F-1 (Registration No. 333-94899))
         3.2            FLAG Telecom Bye-laws.
         4.1            Form of share certificate (Incorporated by Reference to the
                          Registrant's Registration Statement on Form F-1
                          (Registration No. 333-94899))
         4.2            Letter to GE Capital Project Finance VI Ltd., from FLAG
                          Telecom regarding registration rights (Incorporated by
                          Reference to the Registrant's Registration Statement on
                          Form F-1 (Registration No. 333-94899))
         4.3            Letter to AT&T Capital Corporation from FLAG Telecom
                          regarding registration rights (Incorporated by Reference
                          to the Registrant's Registration Statement on Form F-1
                          (Registration No. 333-94899))
         4.4*           Grant of options to Andres Bande pursuant to the Long-Term
                          Incentive Plan of FLAG Telecom (Incorporated by Reference
                          to the Registrant's Registration Statement on Form F-1
                          (Registration No. 333-94899))
         4.5*           Grant of options to Edward McCormack pursuant to the
                          Long-Term Incentive Plan of FLAG Telecom (Incorporated by
                          Reference to the Registrant's Registration Statement on
                          Form F-1 (Registration No. 333-94899))
         4.6*           Grant of options to Stuart Rubin pursuant to the Long-Term
                          Incentive Plan of FLAG Telecom (Incorporated by Reference
                          to the Registrant's Registration Statement on Form F-1
                          (Registration No. 333-94899))
         4.7            Form of Registration Rights Agreement (Incorporated by
                          Reference to the Registrant's Registration Statement on
                          Form F-1 (Registration No. 333-94899))
         4.8            Purchase Agreement dated March 14, 2000 among FLAG Telecom
                          Holdings Limited, as Issuer, and Salomon Smith
                          Barney Inc., Morgan Stanley & Co. International Limited,
                          Deutsche Bank Securities Inc. and Bear Stearns & Co. Inc,
                          as Initial Purchasers (Incorporated by Reference to the
                          Registrant's Current Report on Form 8-K dated March 23,
                          2000))
         4.9            Indenture dated March 17, 2000 between FLAG Telecom Holdings
                          Limited and The Bank of New York, as Trustee, relating to
                          11 5/8% Senior Euro Notes Due 2010 (Incorporated by
                          Reference to the Registrant's Current Report on Form 8-K
                          dated March 23, 2000)
</TABLE>

                                       42
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------   ------------------------------------------------------------
<C>                     <S>
         4.10           Indenture dated March 17, 2000 between FLAG Telecom Holdings
                          Limited and The Bank of New York, as Trustee, relating to
                          11 5/8% Senior Dollar Notes Due 2010 (Incorporated by
                          Reference to the Registrant's Current Report on Form 8-K
                          dated March 23, 2000)
         4.11           Registration Agreement dated March 17, 2000 among FLAG
                          Telecom Holdings Limited, as Issuer, and Salomon Smith
                          Barney Inc., Morgan Stanley & Co. International Limited,
                          Deutsche Bank Securities Inc. and Bear Stearns &
                          Co. Inc., as Initial Purchasers (Euro Notes) (Incorporated
                          by Reference to the Registrant's Current Report on
                          Form 8-K dated March 23, 2000)
         4.12           Registration Agreement dated March 17, 2000 among FLAG
                          Telecom Holdings Limited, as Issuer, and Salomon Smith
                          Barney Inc., Morgan Stanley & Co. International Limited,
                          Deutsche Bank Securities Inc. and Bear Stearns &
                          Co. Inc., as Initial Purchasers (Dollar Notes)
                          (Incorporated by Reference to the Registrant's Current
                          Report on Form 8-K dated March 23, 2000)
        10.1*           Amended and Restated Long-Term Incentive Plan of FLAG
                          Telecom.
        10.2            Credit Agreement, dated as of January 28, 1998, among FLAG
                          Limited, the Term Lenders thereto, the Revolving Lenders
                          thereto, Barclays Bank PLC and International Trust Company
                          of Bermuda Limited, including all amendments thereof
                          (Incorporated by Reference to the Registrant's
                          Registration Statement on Form F-1 (Registration
                          No. 333-94899))
        10.3            Amended and Restated Credit Agreement, dated as of
                          February 16, 2000, among FLAG Limited, the Term Lenders
                          thereto, the Revolving Credit Lenders thereto, Barclays
                          Capital, Dresdner Bank AG, New York and Grand Cayman
                          Branches, Barclays Bank PLC and International Trust
                          Company of Bermuda Limited.
        10.4            Indenture for 8 1/4% Senior Notes Due 2008, dated as of
                          January 30, 1998, between FLAG Limited and IBJ Schroeders
                          Bank & Trust Company (Incorporated by Reference to the
                          Registrant's Registration Statement on Form F-1
                          (Registration No. 333-94899))
        10.5            Exchange Agreement and Plan of Reorganization, dated as of
                          February 26, 1999, between FLAG Telecom and Bell Atlantic
                          Network Systems Company (Incorporated by Reference to the
                          Registrant's Registration Statement on Form F-1
                          (Registration No. 333-94899))
        10.6            Tax Agreement, dated as of February 26, 1999, among FLAG
                          Telecom, Bell Atlantic Corporation and Bell Atlantic
                          Network Systems Company (Incorporated by Reference to the
                          Registrant's Registration Statement on Form F-1
                          (Registration No. 333-94899))
        10.7            Marketing Transition Agreement, dated as of May 14, 1998,
                          among FLAG Limited, Bell Atlantic Network Systems Company
                          and NYNEX Network Systems Company (Incorporated by
                          Reference to the Registrant's Registration Statement on
                          Form F-1 (Registration No. 333-94899))
        10.8            Employee Services Agreement, dated as of May 21, 1998,
                          between FLAG Limited and Bell Atlantic Global Systems
                          Company (Incorporated by Reference to the Registrant's
                          Registration Statement on Form F-1 (Registration
                          No. 333-94899))
        10.9            Construction and Maintenance Agreement, dated as of
                          December 14, 1994, among FLAG Limited and each of the
                          landing party and other signatories (Incorporated by
                          Reference to the Registrant's Registration Statement on
                          Form F-1 (Registration No. 333-94899))
        10.10           Operations Contract for the FLAG Network Operations Center,
                          dated as of June 30, 1997, between FLAG Limited and
                          Emirates Telecommunications Corporation (Incorporated by
                          Reference to the Registrant's Registration Statement on
                          Form F-1 (Registration No. 333-94899))
</TABLE>

                                       43
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------   ------------------------------------------------------------
<C>                     <S>
        10.11           Credit Agreement dated as of October 8, 1999 among FLAG
                          Atlantic Limited, Barclays Bank plc, as the Administrative
                          Agent, Dresdner Bank AG, New York Branch, as the
                          Documentation Agent, Westdeutsche Landesbank Girozentrale,
                          New York Branch, as the Syndication Agent, Barclays Bank
                          plc and the other Lenders listed therein, as Lenders and
                          Barclays Capital, as the Lead Arranger (Incorporated by
                          Reference to the Registrant's Registration Statement on
                          Form F-1 (Registration No. 333-94899))
        10.12           First Amendment to Credit Agreement and Equity Contribution
                          Agreement dated as of December 14, 1999 among FLAG
                          Atlantic Limited, Barclays Capital, as Lead Arranger,
                          Westdeutsche Landesbank Girozentrale, New York Branch, as
                          Syndicate Agent, Dresdner Bank AG, New York and Grand
                          Cayman Branches, as Document Agent and Barclays Bank PLC,
                          as Administrative Agent.
        10.13           Second Amendment to Credit Agreement dated as of
                          November 16, 2000 among FLAG Atlantic Limited, Barclays
                          Capital, as Lead Arranger, Westdeutsche Landesbank
                          Girozentrale, New York Branch, as Syndicate Agent,
                          Dresdner Bank AG, New York and Grand Cayman Branches, as
                          Document Agent and Barclays Bank PLC, as Administrative
                          Agent.
        10.14           FLAG Atlantic Fibre Optic Cable System Contract, dated 20
                          September 1999, among FLAG Atlantic Limited, FLAG Atlantic
                          UK Limited, FLAG Atlantic USA Limited, FLAG Atlantic
                          France SARL, Alcatel Submarine Networks, Alcatel Submarine
                          Networks, Alcatel Submarine Networks, Inc. and Alcatel
                          Submarine Networks Limited (Incorporated by Reference to
                          the Registrant's Registration Statement on Form F-1
                          (Registration No. 333-94899))
        10.15           Shareholder Pledge Agreement, dated as of October 8, 1999,
                          among GTS TransAtlantic Holdings, Ltd., FLAG Atlantic
                          Holdings Limited and Barclays Bank plc, as Secured Party
                          (Incorporated by Reference to the Registrant's
                          Registration Statement on Form F-1 (Registration
                          No. 333-94899))
        10.16           Capacity Right of Use Agreement dated 7 October, 1999 among
                          FLAG Atlantic Limited, FLAG Atlantic USA Limited and NYNEX
                          Long Distance Company, d/b/a Bell Atlantic Long Distance
                          (Incorporated by Reference to the Registrant's
                          Registration Statement on Form F-1 (Registration
                          No. 333-94899))
        10.17           Capacity Right of Use Agreement dated 8 October, 1999 among
                          FLAG Atlantic Limited, FLAG Atlantic USA Limited and GTE
                          (Incorporated by Reference to the Registrant's
                          Registration Statement on Form F-1 (Registration
                          No. 333-94899))
        10.18           Fiber, Capacity and Facilities Purchase Agreement dated
                          8 October, 1999 among FLAG Atlantic Limited, FLAG Atlantic
                          USA Limited and GTS Transatlantic Carrier Services Limited
                          (Incorporated by Reference to the Registrant's
                          Registration Statement on Form F-1 (Registration
                          No. 333-94899))
        10.19           Indefeasible Right of Use Agreement dated 8 October, 1999
                          among FLAG Atlantic Limited, FLAG Atlantic USA Limited and
                          Teleglobe USA Inc. (Incorporated by Reference to the
                          Registrant's Registration Statement on Form F-1
                          (Registration No. 333-94899))
        10.20           South East Asia and Indian Ocean Cable Maintenance
                          Agreement, dated as of June 1, 1986, among FLAG Limited
                          and the other parties listed on Schedule A1 and
                          Supplemental Agreements thereto (Incorporated by Reference
                          to the Registrant's Registration Statement on Form F-1
                          (Registration No. 333-94899))
        10.21           Atlantic Cable and Maintenance Repair Agreement, dated as of
                          January 20, 1998, among FLAG Limited and the parties
                          identified on Schedule A attached thereto (Incorporated by
                          Reference to the Registrant's Registration Statement on
                          Form F-1 (Registration No. 333-94899))
</TABLE>

                                       44
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------   ------------------------------------------------------------
<C>                     <S>
        10.22           Mediterranean Cable Maintenance Agreement, dated April 20,
                          1999, among FLAG Limited and the other Signatories listed
                          on Schedule A1 thereto (Incorporated by Reference to the
                          Registrant's Registration Statement on Form F-1
                          (Registration No. 333-94899))
        10.23           ROV Service Agreement, dated as of January 1, 1999, among
                          FLAG Limited, France Cables et Radio, Elettra TLC S.p.A.
                          and the other entities identified on Schedule 1 thereto
                          (Incorporated by Reference to the Registrant's
                          Registration Statement on Form F-1 (Registration
                          No. 333-94899))
        10.24           SCARAB III and IV Users Agreement dated February 28, 1990
                          among FLAG Limited and those other parties listed
                          (Incorporated by Reference to the Registrant's
                          Registration Statement on Form F-1 (Registration
                          No. 333-94899))
        10.25           Primary Supplier Agreement dated January 18, 2000 between
                          Bell Atlantic Global Systems Company and the Company
                          (Incorporated by Reference to the Registrant's
                          Registration Statement on Form F-1 (Registration
                          No. 333-94899))
        21.1            List of subsidiaries of the Company.
</TABLE>

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

    (b) Reports on Form 8-K

       We filed the following Form 8-K Current Reports during the period from
       October 1 through December 31, 2000:

<TABLE>
<S>                <C>
November 3, 2000   Incorporating press release announcing Share Purchase
                   Agreement with GTS

December 11, 2000  Incorporating press release announcing closing of GTS
                   acquisition
</TABLE>

                                       45
<PAGE>
                              FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
FLAG Telecom Holdings Limited

Report of Independent Public Accountants (Arthur
  Andersen).................................................     F-2
Consolidated Balance Sheets as of December 31, 2000 and
  December 31, 1999.........................................     F-3
Consolidated Statements of Operations for the year ended
  December 31, 2000 and the period from incorporation to
  December 31, 1999.........................................     F-4
Consolidated Statements of Comprehensive Income for the year
  ended December 31, 2000 and the period from incorporation
  to December 31, 1999......................................     F-5
Consolidated Statements of Shareholders' Equity for the year
  ended December 31, 2000 and the period from incorporation
  to December 31, 1999......................................     F-6
Consolidated Statements of Cash Flows for the year ended
  December 31, 2000 and the period from incorporation to
  December 31, 1999.........................................     F-7
Notes to the Consolidated Financial Statements..............     F-9

FLAG Limited

Report of Independent Public Accountants (Arthur
  Andersen).................................................    F-26
Consolidated Statements of Operations for the period from
  January 1, 1999 to February 26, 1999 and the year ended
  December 31, 1998 (audited)...............................    F-27
Consolidated Statements of Comprehensive Income for the
  period from January 1, 1999 to February 26, 1999 and the
  year ended December 31, 1998 (audited)....................    F-28
Consolidated Statements of Shareholders' Equity for the
  period from January 1, 1999 to February 26, 1999 and the
  year ended December 31, 1998.(audited)....................    F-29
Consolidated Statements of Cash Flows for the period from
  January 1, 1999 to February 26, 1999 and the year ended
  December 31, 1998 (audited)...............................    F-30
Notes to Consolidated Financial Statements..................    F-32
</TABLE>

                                      F-1
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of FLAG Telecom Holdings Limited:

    We have audited the accompanying consolidated balance sheets of FLAG Telecom
Holdings Limited, a Bermuda company ("FLAG Telecom"), and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, comprehensive income, shareholders' equity and cash flows for the
year ended December 31, 2000, and the period from incorporation to December 31,
1999. These financial statements are the responsibility of FLAG Telecom's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FLAG Telecom and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the year ended December 31, 2000 and the
period from incorporation to December 31, 1999, in conformity with accounting
principles generally accepted in the United States.

    Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules in Item 14 are presented
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

Arthur Andersen
Hamilton, Bermuda
March 28, 2001

                                      F-2
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                        AS OF DECEMBER 31, 2000 AND 1999

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

<TABLE>
<CAPTION>
                                                                 2000         1999
                                                              ----------   ----------
<S>                                                           <C>          <C>
ASSETS:
Current assets:
  Cash and cash equivalents.................................  $  919,709   $    3,191
  Accounts receivable, net of allowance for doubtful
    accounts of $5,289 (1999--$6,827).......................     141,221       90,065
  Due from affiliate........................................          --        2,000
  Prepaid expenses and other assets.........................      23,591        3,460
                                                              ----------   ----------
                                                               1,084,521       98,716
Goodwill, net of accumulated amortization of $139
  (1999--$0)................................................      31,463           --
Restricted cash.............................................     372,808      134,066
Capacity available for sale.................................          --      774,366
Capitalized financing costs, net of accumulated amortization
  of $5,783 (1999--$2,731)..................................      28,949       11,678
Investment in Flag Atlantic Limited.........................          --        7,162
Construction in progress....................................     514,875           --
Other long term assets, net.................................      12,348           --
Property and equipment, net.................................   1,033,800      299,743
                                                              ----------   ----------
                                                              $3,078,764   $1,325,731
                                                              ==========   ==========

LIABILITIES:
Current liabilities:
  Accrued construction costs................................  $   49,138   $   52,411
  Accounts payable..........................................     163,109        7,807
  Accrued liabilities.......................................      65,702       39,152
  Deferred revenue and other................................      51,597       48,501
  Income taxes payable......................................       4,479        4,531
                                                              ----------   ----------
                                                                 334,025      152,402
Long-term debt..............................................   1,139,002      615,270
Deferred revenue and other..................................     594,759      100,724
Deferred taxes..............................................       3,371        3,973
                                                              ----------   ----------
                                                               2,071,157      872,369
MINORITY INTEREST...........................................          --      154,817
SHAREHOLDERS' EQUITY:
Common stock, $.0006 (1999--$.0001) par value, 300,000,000
  (1999--1,139,000) authorized and 134,061,920
  (1999--69,709,935) issued and outstanding.................          80           42
Additional paid-in capital..................................   1,112,173      323,136
Deferred stock compensation.................................      (2,058)      (9,288)
Accumulated other comprehensive income--foreign currency
  translation...............................................       2,364          141
Accumulated deficit.........................................    (104,952)     (15,486)
                                                              ----------   ----------
                                                               1,007,607      298,545
                                                              ==========   ==========
                                                              $3,078,764   $1,325,731
                                                              ==========   ==========
</TABLE>

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

                                      F-3
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

<TABLE>
<CAPTION>
                                                                  2000          1999
                                                              ------------   -----------
<S>                                                           <C>            <C>
REVENUES:
  Capacity revenue, net of discounts........................  $     36,765   $   105,612
  Operations and maintenance revenue........................        40,942        26,818
Network revenue.............................................        21,599            --
                                                              ------------   -----------
                                                                    99,306       132,430

EXPENSES:
  Cost of capacity sold.....................................            --        41,349
  Operations and maintenance cost (including non-cash stock
    compensation expense of $1,845 (1999--$2,647)...........        32,298        26,201
  Network expenses..........................................        13,036            --
  Sales and marketing (including non-cash stock compensation
    expense of $1,164 (1999--$1,534)).......................        12,744        11,096
  General and administrative (including non-cash stock
    compensation expense of $4,221 (1999--$4,619)...........        39,189        22,901
  Depreciation and amortization.............................        79,414        11,133
                                                              ------------   -----------
                                                                   176,681       112,680
                                                              ------------   -----------

OPERATING (LOSS)/INCOME.....................................       (77,375)       19,750
INCOME FROM INVESTMENT IN FLAG ATLANTIC LIMITED.............         4,717           361
INTEREST EXPENSE............................................      (102,543)      (45,062)
FOREIGN CURRENCY GAIN.......................................        17,014            --
INTEREST INCOME.............................................        69,817         7,188
                                                              ------------   -----------
LOSS BEFORE MINORITY INTEREST AND INCOME TAXES..............       (88,370)      (17,763)
MINORITY INTEREST...........................................            --        (3,826)
                                                              ------------   -----------
LOSS BEFORE INCOME TAXES....................................       (88,370)      (13,937)
PROVISION FOR INCOME TAXES..................................         1,096         1,549
                                                              ------------   -----------
NET LOSS....................................................  $    (89,466)  $   (15,486)
                                                              ============   ===========
Basic and diluted loss per common share.....................  $      (0.68)  $     (0.22)
                                                              ============   ===========
Weighted average common shares outstanding..................   130,763,607    69,709,935
                                                              ============   ===========
</TABLE>

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

                                      F-4
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
NET LOSS....................................................  $(89,466)  $(15,486)
Foreign currency translation adjustment.....................     2,223        141
                                                              --------   --------
COMPREHENSIVE LOSS..........................................  $(87,243)  $(15,345)
                                                              ========   ========
</TABLE>

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

                                      F-5
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

<TABLE>
<CAPTION>
                                                                             ACCUMULATED
                                                                                OTHER
                                                                            COMPREHENSIVE
                                                                               INCOME
                            COMMON STOCK        ADDITIONAL     DEFERRED       & FOREIGN                       TOTAL
                       ----------------------    PAID-IN        STOCK         CURRENCY      ACCUMULATED   SHAREHOLDERS'
                         SHARES       AMOUNT     CAPITAL     COMPENSATION    TRANSLATION      DEFICIT        EQUITY
                       -----------   --------   ----------   ------------   -------------   -----------   -------------
<S>                    <C>           <C>        <C>          <C>            <C>             <C>           <C>
Opening balance......           --     $ --     $       --     $     --         $   --       $      --     $       --
Issuance of shares in
  exchange for shares
  in FLAG Limited
  (see Note 9).......   69,709,935       42        305,048           --             --              --        305,090
Stock compensation
  accrued............           --       --         18,088      (18,088)            --              --             --
Stock compensation
  charge.............           --       --             --        8,800             --              --          8,800
Foreign currency
  translation
  adjustment.........           --       --             --           --            141              --            141
Net loss.............           --       --             --           --             --         (15,486)       (15,486)
                       -----------     ----     ----------     --------         ------       ---------     ----------
Balance, December 31,
  1999...............   69,709,935     $ 42     $  323,136     $ (9,288)        $  141       $ (15,486)    $  298,545
Issuance of shares in
  exchange for shares
  in FLAG Limited....   36,256,121       22        154,795           --             --              --        154,817
Shares issued in
  initial public
  offering...........   27,964,000       16        633,696           --             --              --        633,712
Options exercised....      131,864       --            546           --             --              --            546
Stock compensation
  charge.............           --       --             --        7,230             --              --          7,230
Foreign currency
  translation
  adjustment.........           --       --             --           --          2,223              --          2,223
Net loss.............           --       --             --           --             --         (89,466)       (89,466)
                       -----------     ----     ----------     --------         ------       ---------     ----------
Balance, December 31,
  2000...............  134,061,920     $ 80     $1,112,173     $ (2,058)        $2,364       $(104,952)    $1,007,607
                       ===========     ====     ==========     ========         ======       =========     ==========
</TABLE>

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

                                      F-6
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              ---------   --------
<S>                                                           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................  $ (89,466)  $(15,486)
Adjustments to reconcile net loss to net cash provided by
  operating activities:
  Minority interest.........................................         --     (3,826)
  Amortization of financing costs...........................      2,522      1,370
  Provision for doubtful accounts...........................     (1,548)    (1,803)
  Senior debt discount......................................      1,523        493
  Stock compensation........................................      7,230      8,800
  Depreciation and amortization.............................     79,414     11,133
  Loss on disposal of property and equipment................         93         --
  Deferred taxes............................................       (363)       625
  Add/(deduct) net changes in operating assets and
    liabilities:
    Accounts receivable.....................................    (25,183)     1,078
    Due from affiliate......................................      2,000     (2,000)
    Prepaid expenses and other assets.......................    (23,394)        86
    Capacity available for sale.............................         --     47,463
    Accounts payable and accrued liabilities................     77,136     24,972
    Income taxes payable....................................        (46)    (2,793)
    Due to affiliate........................................         --     (1,175)
    Deferred revenue and other..............................    165,024     46,845
                                                              ---------   --------
      Net cash provided by operating activities.............    194,942    115,782
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs incurred....................................       (891)      (970)
Net proceeds from issuance of 11 5/8% Senior Notes..........    576,649         --
Repayment of long-term debt.................................    (97,000)   (66,500)
Proceeds from Initial Public Offering.......................    633,769         --
Proceeds from options exercised.............................        489         --
                                                              ---------   --------
      Net cash provided by/(used in) financing activities...  1,113,016    (67,470)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash.................................     10,340     85,068
Cash paid for construction..................................   (109,201)  (123,557)
Investment in FLAG Atlantic Limited prior to acquisition of
  100% interest.............................................   (104,814)    (7,162)
Acquisition of FLAG Atlantic Limited........................   (130,000)        --
Proceeds from disposals of property and equipment...........         32         --
Investment in property and equipment and networks...........    (39,320)    (1,407)
                                                              ---------   --------
      Net cash used in investing activities.................   (372,963)   (47,058)
                                                              ---------   --------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................    934,995      1,254
Effect of foreign currency movements........................    (18,477)        21
CASH AND CASH EQUIVALENTS, beginning of period..............      3,191      1,916
                                                              ---------   --------
CASH AND CASH EQUIVALENTS, end of year......................  $ 919,709   $  3,191
                                                              =========   ========
</TABLE>

                                      F-7
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              ---------   --------
<S>                                                           <C>         <C>
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Decrease in capacity available for sale.....................  $ 774,366   $ 59,463
Transfer to property and equipment..........................   (774,366)        --
Decrease in accrued construction costs......................         --    (12,000)
                                                              ---------   --------
Cost of capacity sold.......................................  $      --   $ 47,463
                                                              =========   ========
Increase in construction in progress........................  $ 105,928   $ 34,039
Decrease in accrued construction costs......................      3,273     89,519
                                                              ---------   --------
Cash paid for construction in progress......................  $ 109,201   $123,558
                                                              =========   ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest expense for period.................................  $ 102,543   $ 45,062
Amortization of financing costs.............................     (4,045)    (1,863)
Increase in accrued interest payable........................    (15,328)    (4,170)
                                                              ---------   --------
Interest paid...............................................  $  83,170   $ 39,029
                                                              =========   ========

Interest capitalized........................................  $   6,683   $  1,281
                                                              =========   ========

Taxes paid..................................................  $   1,207   $  1,771
                                                              =========   ========
</TABLE>

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

                                      F-8
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

1.  BACKGROUND AND ORGANIZATION

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

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

    FLAG Limited is a facilities-based provider of telecommunications capacity
to licensed international carriers through its ownership of an independent,
privately-owned digital fiberoptic undersea cable system. The FLAG Europe-Asia
cable system links the telecommunications markets of Western Europe and Japan
through the Middle East, India, Southeast Asia and China. The FLAG Europe-Asia
cable system, which was placed in commercial service on November 22, 1997, cost
approximately $1.6 billion to construct, and consists of over 28,000 kilometers
of fiberoptic cable.

    On December 6, 2000, FLAG Telecom acquired the remaining 50% it did not
already own of its previously equity accounted joint venture, FLAG Atlantic
Limited ("FLAG Atlantic"), set up to build, own and operate a transatlantic
fiber optic cable system connecting the United States, United Kingdom and
France.

    FLAG Telecom is currently developing the FLAG Pacific-1, a multi-terabit 8
fiber pair dual cable system spanning the Pacific Ocean, and the FLAG North
Asian Loop cable system, a six-fiber pair dual cable system offering
intra-regional, city-to-city connectivity between Hong Kong, Seoul, Tokyo and
Taipei.

    FLAG Telecom's Network Services division markets a range of managed
bandwidth and value added services targeted at carriers, ISPs, and ASPs
worldwide.

    Risks and Other Important Factors

    The Group's operations and ability to grow may be affected by numerous
factors, including, but not limited to: early stages of development or operation
of certain of the Group's products and services; deployment of sophisticated
technologies on a global basis which in certain instances have not yet been
successfully implemented; availability of resources required to adapt, upgrade
or expand the Group's network; rapid technological change in the Group's
industry; maintenance of cooperative relationships with landing parties; U.S.
and foreign regulations; possible international economic and

                                      F-9
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

political instability; industry competition and pricing pressures from a wide
variety of sources; and exposure to foreign exchange rate risks. The Group
cannot predict which, if any, of these or other factors might have a significant
impact on the telecommunications industry in the future, nor can it predict what
impact, if any, the occurrence of these or other events might have on the
Group's operations.

    The Group has devoted substantial resources to the buildout of its network
and expansion of its market offerings. As a result, the Group experienced
operating losses in 2000 and 1999. These losses are expected to continue for
additional periods in the future. There can be no assurance that the Group's
operations will become profitable. The Group's capital requirements for the
continued buildout of its network and growth of its customer base are
substantial. The Group intends to fund its operational and capital requirements
in 2001 using cash on hand, cash flow from operations, and its available credit
facilities. In the event that the Group is unable to maintain sufficient
financing, it would be required to limit or curtail its expansion plans, network
buildout, and marketing programs.

2.  SIGNIFICANT ACCOUNTING POLICIES

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

    a)  Basis of Consolidation

    The financial statements consolidate the financial statements of FLAG
Telecom and its subsidiary companies after eliminating intercompany transactions
and balances. Investments in which FLAG Telecom has an investment of 20%-50% or
investments in which FLAG Telecom can assert significant influence, but does not
control, are accounted for under the equity method. At December 31, 2000, there
were no equity method investments remaining (see Note 3).

    b)  Use of Estimates

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

    c)  Revenue Recognition

Capacity

    Capacity contracts are accounted for as leases. Capacity contracts that do
not qualify for sales type lease accounting are accounted for as operating
leases and revenue is recognized over the term of the lease. In compliance with
FASB Interpretation No. 43, "Real Estate Sales, an Interpretation of FASB
Statement No. 66," capacity contracts entered into after June 30, 1999, are
deemed not to be sales of real estate and, therefore, are not accounted for as
sales type leases. The Group has recorded only operating leases for capacity
transactions after June 30, 1999 for the periods presented. Until June 30,

                                      F-10
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

1999 revenues from operating lease transactions were considered incidental and
recorded as a reduction of the capacity available for sale, thereafter
recognised over the period of the contract.

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

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

Operations and Maintenance

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

Network Revenues

    Network revenues are revenues derived from the sale of managed bandwidth
lease and Internet Protocol ("IP") services. Revenue associated with short-term
leased capacity is recognised as operating lease revenues unless the criteria
under FASB Interpretation No. 43 for sales-type lease accounting are met. During
the periods presented, there were no sales-type leases recorded.

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

    d)  Direct Costs Related to Revenue

Capacity

    The cost relating to capacity sold under outright sale or sales type lease
contracts is recognized as cost of sales upon recognition of revenues. The
amount charged to cost of sales is based on the ratio of capacity sales
recognized as revenues in the period to total expected revenues over the entire
life of the cable system multiplied by the total construction costs. This
calculation of cost of sales matches costs with the relative sales value of each
sale to total expected revenues.

    Management's estimate of total expected revenues over the life of the cable
system may change due to a number of factors affecting estimated future revenues
including changes in management's estimate of the units of capacity to be sold
and changes in the expected sales value per unit of capacity to be sold.
Additionally, the cost per unit will decrease in the event the capacity of the
cable system is upgraded in the future to increase the units of capacity
available for sale. Changes in management's estimate of total expected revenues
over the life of the cable system will result in adjustments to the calculations
of cost of sales. These adjustments will be recorded on a prospective basis over
future periods commencing with the period management revises its estimate.

                                      F-11
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

    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 as incurred.

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.

    e)  Commissions

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

    f)  Advertising Costs

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

    g)  Net Income/(Loss) per Common Share

    SFAS No. 128 "Earnings per Share" requires dual presentation of basic and
diluted earnings per share on the face of the statements of operations for all
periods presented. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.

    h)  Cash and Cash Equivalents

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

    i)  Goodwill

    Goodwill representing excess purchase price over fair value of assets and
liabilities acquired relating to the acquisition of FLAG Atlantic Limited is
amortized on a straight-line basis over a period of 15 years.

                                      F-12
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

    j)  Restricted Cash

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

    k)  Capitalized Interest and Financing Costs

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

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

    l)  Construction in Progress

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

    m) Property and Equipment

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

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

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

    n)  Impairment of Long-Lived Assets

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

    o)  Income Taxes

    Deferred taxes are determined based on the difference between the tax basis
of an asset or liability and its reported amount in the financial statements. A
deferred tax liability or asset is recorded using

                                      F-13
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

the enacted tax rates expected to apply to taxable income in the period in which
the deferred tax liability or asset is expected to be settled or realized.
Future tax benefits attributable to these differences, if any, are recognizable
to the extent that realization of such benefits is more likely than not.

    p)  Derivative Financial Instruments

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

    For certain derivatives to qualify for hedge accounting, the debt instrument
being hedged must create an exposure to the Group and, at the inception of the
derivative instrument and throughout the period the derivative is held, there
must be a high correlation of changes in the market value of the derivative and
underlying debt instrument. Under hedge accounting, payments due to or from the
counterparties are recorded as an increase or reduction in expense through the
end of 2000.

    q)  Translation of Foreign Currencies

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

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

    r)  Stock Options

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

    s)  Concentration of Credit Risk

    Financial instruments that potentially subject the Group to a concentration
of credit risk are accounts receivable. The Group performs ongoing credit
evaluations of its larger customers' financial condition.

    See Note 15, Segmental Reporting, for concentrations by geographic areas.

                                      F-14
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

    The Company 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. The Company deals only
with highly rated counterparties.

    t)  Reverse Stock Split

    The accompanying consolidated financial statements have been retroactively
restated to give effect to the reverse stock split of 6:1 carried out by the
Company on February 11, 2000.

    u)  Reclassifications

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

    v)  New Accounting Standards

    In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards no. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows gains and losses on a
derivative to offset related results on the hedged item in the income statement,
and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, is effective for fiscal years
beginning after June 15, 2000, and cannot be applied retroactively.

    The Group expects that the adoption of SFAS No.'s 133, 137, and 138 may have
a material impact on the financial position or the results of operations of the
Group, but is unable to estimate the effects of adoption at this time.
Specifically, the Company believes that the following changes in its accounting
policies will result from the adoption of SFAS No. 133:

    - The Group currently considers certain interest rate collars as hedges
      under which payments due to or from the counterparties are recorded as an
      increase or reduction in expense. The Group believes that these interest
      rate collars will be recorded as effective cash flow hedges under the
      provisions of SFAS No. 133 and, accordingly, changes in the intrinsic
      value associated with the interest rate collars will be recorded directly
      to other accumulated comprehensive income and changes in the time value of
      the interest rate collars will be recorded directly to current period
      earnings.

    - The Group currently accounts for a cross currency swap arrangement as a
      hedge of the fair value of debt denominated in a foreign currency. The
      Group believes that this cross currency swap will not be recorded under
      the hedge accounting provisions of SFAS No. 133 and consequently changes
      in the fair value of the cross currency swap arrangement and fluctuation
      in the value of the underlying debt which are expected to be equal and
      opposite, will both be recorded through current period earnings after
      adoption of SFAS No. 133.

                                      F-15
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

3.  BUSINESS ACQUISITIONS

    On December 6, 2000, FLAG Telecom acquired the remaining 50% equity interest
in FLAG Atlantic Limited from Global TeleSystems Group, Inc. ("GTS") for a cash
consideration of $135 million. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the assets and liabilities
assumed have been recorded at fair value as of the date of acquisition. The
excess of purchase price over the fair value of the assets acquired and the
liabilities assumed has been recorded as goodwill. The initial purchase price
allocation is based on current estimates. The Group will make final purchase
price allocations based upon final values for certain assets and liabilities. As
a result, the final purchase price allocation may differ from the presented
estimate.

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

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                        -------------------------
                                                           2000          1999
                                                        -----------   -----------
                                                        (UNAUDITED)   (UNAUDITED)
<S>                                                     <C>           <C>
Revenue...............................................     92,751       130,799
                                                          =======       =======
Net loss..............................................    (89,406)      (19,117)
                                                          =======       =======
Loss per share........................................      (0.68)        (0.27)
                                                          =======       =======
</TABLE>

4.  ACCOUNTS RECEIVABLE

    Accounts receivable consisted of the following:

<TABLE>
<CAPTION>
                                                             2000       1999
                                                           --------   --------
<S>                                                        <C>        <C>
Billed...................................................   127,262    84,037
Unbilled.................................................    13,959     6,028
                                                           --------   -------
                                                           $141,221   $90,065
                                                           ========   =======
</TABLE>

5.  RESTRICTED CASH

    Included in restricted cash as at December 31, 2000 and 1999, are funds held
by collateral trustees totalling $372,808 and $134,066, respectively. Of the
balance held at December 31, 2000, $261,182 is restricted for use in relation to
the construction of the FLAG Atlantic-1 cable system.

6.  CAPITALIZED INTEREST COSTS

    Interest costs on qualifying assets are capitalized and amortized over their
useful lives. Total interest capitalized to construction in progress during the
year ended December 31, 2000, and the period from incorporation to December 31,
1999, was $6,683 and $1,281, respectively

                                      F-16
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

7.  PROPERTY AND EQUIPMENT

    Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                           2000        1999
                                                        ----------   --------
<S>                                                     <C>          <C>
Fixtures and fittings.................................  $    3,059   $  1,504
Leasehold improvements................................       5,565      2,667
Computer equipment....................................       5,737      3,031
Motor vehicles........................................         353        286
Network assets........................................   1,109,994    304,508
                                                        ----------   --------
                                                         1,124,708    311,996
Less--Accumulated depreciation........................     (90,908)   (12,253)
                                                        ----------   --------
Net book value........................................  $1,033,800   $299,743
                                                        ==========   ========
</TABLE>

    As a result of the application of FASB Interpretation No. 43, sales on
certain parts of the FLAG system are not able to satisfy the requirements for
sales type lease accounting. Accordingly the costs of these parts of the system
have been reclassified with effect from July 1, 1999 from capacity available for
sale to fixed assets and are being depreciated over their remaining useful
economic life of 15 years.

8.  LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                 2000        1999
                                                              ----------   --------
<S>                                                           <C>          <C>
Bank credit facilities......................................  $  155,000   $190,000
8 1/4% Senior Notes, due 2008, interest payable
  semi-annually, net of unamortized discount of $4,139
  (1999--$4,730)............................................  $  425,861   $425,270
11 5/8% Senior Notes, due 2010, interest payable
  semi-annually, net of unamortized discount of $10,839.....  $  558,141         --
                                                              ----------   --------
                                                              $1,139,002   $615,270
                                                              ==========   ========
</TABLE>

    On March 17, 2000 the Company completed the issue of 11 5/8% Senior Notes in
the US and Europe, raising net proceeds of $576,649.

    On February 16, 2000, FLAG Limited amended and restated its existing credit
facilities to consist of a $150,000 six-year term loan facility ($93,000 of
which is outstanding at December 31, 2000, and $190,000, including additional
amounts under the pre-amended facility) was outstanding at December 31, 1999)
and a $10,000 revolving credit facility (none of which was outstanding at
December 31, 2000 and 1999). These facilities bear interest at a rate of 225
basis points over LIBOR for the first six months and thereafter at a rate of
between 150 and 250 basis points over LIBOR, depending on the credit rating of
the 8 1/4% Senior Notes of FLAG Limited (8.4% at December 31, 2000, and before
the amendment & restatement of February 2000, LIBOR plus 190 basis points, or
7.90% at December 31, 1999). The current interest rate is 200 basis points over
LIBOR. The facilities are secured by a pledge by the Company of all of the
capital stock of FLAG Limited and by

                                      F-17
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

assignment of FLAG Limited's contracts and a security interest in its bank
accounts and intangible property.

    FLAG Atlantic Limited has a $575,000 construction/term loan facility
($62,000 of which was outstanding at December 31, 2000) and a $25,000 revolving
credit facility (of which none was outstanding at December 31, 2000). These
facilities have a term of 7.5 years, commencing October 8, 1999. The
construction/term loan facility bears interest at LIBOR plus 125 basis points
for that portion of the loans (not to exceed 50% of the outstanding loans) which
are backed by investment grade receivables and LIBOR plus 300 basis points for
the balance of the loans (7.65% and 9.4%, respectively, at December 31, 2000.).
The revolving credit facility bears interest at the rate of LIBOR plus 300 basis
points. FLAG Atlantic Limited's bank facility is secured by an assignment of all
of FLAG Atlantic Limited's assets and a pledge of all of the stock in FLAG
Atlantic Limited. FLAG Atlantic Limited has elected, over the course of the
construction contract, to cancel $68.175 million of the un-drawn
construction/term loan facility as a result of capacity pre-sales over and above
the anticipated pre-sale targets.

    FLAG Limited has outstanding $430,000 of 8 1/4% Senior Notes with an
effective interest rate at December 31, 2000 of 11.4%. The Senior Notes were
issued in January 1998.

    On March 17, 2000 the Group completed the issue of $300,000 and Euro 300,000
11 5/8% Senior Notes at par in the US and Europe, raising combined net proceeds
of $576,649. The effective interest rates at December 31, 2000 were 16.3% on the
US Dollar Notes and 15.8% on the Euro Notes.

    The Credit Facilities and the indentures under which the Senior Notes were
issued impose certain operating and financial restrictions on the respective
borrowers / issuers. Such restrictions will affect, and in many respects
significantly limit or prohibit, among other things, the ability of FLAG
Limited, FLAG Atlantic Limited and FLAG Telecom to incur additional
indebtedness, repay indebtedness (including the Senior Notes) prior to stated
maturities, sell assets, make investments, engage in transactions with
shareholders and affiliates, issue capital stock, create liens or engage in
mergers or acquisitions. These restrictions could also limit the ability of each
company to effect future financings, make needed capital expenditures, withstand
a future downturn in its business or the economy in general, or otherwise
conduct necessary corporate activities. In addition, FLAG Limited's and FLAG
Atlantic Limited's Credit Facilities contain financial covenants with respect to
maintaining an interest coverage ratio of 1.7 and maintaining a remaining asset
value coverage ratio of 8.5. Both companies were in compliance with these
financial covenants throughout 2000 and 1999.

                                      F-18
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

    As at December 31, 2000, contractual maturities of the Group's indebtedness
were as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                                        TOTAL
------------------------                                      ---------
<S>                                                           <C>
2001........................................................         --
2002........................................................      4,650
2003........................................................     27,194
2004........................................................     39,979
2005........................................................     51,511
Thereafter..................................................  1,015,668
                                                              ---------
Total.......................................................  1,139,002
                                                              =========
</TABLE>

9.  SHAREHOLDER'S EQUITY

    The authorized capital stock of the Company consists of 300 million Common
Shares, par value $0.0006 per share. One common share has one vote.

    On February 26, 1999, FLAG Limited's shareholders other than Bell Atlantic
Network Systems exchanged all their common shares in FLAG Limited for common
shares in FLAG Telecom. Bell Atlantic Network Systems, however, exchanged only a
limited portion of its common shares in FLAG Limited for 3,666,155 common shares
in FLAG Telecom. At the same time, Bell Atlantic Network Systems and FLAG
Telecom entered into an Exchange Agreement and Plan of Reorganization providing
that Bell Atlantic Network System's remaining common shares in FLAG Limited
would be exchanged for common shares in FLAG Telecom in the event that, prior to
February 26, 2002, Bell Atlantic received certain regulatory approvals from the
Federal Communications Commission allowing Bell Atlantic to offer long distance
service. Such regulatory approvals were obtained and Bell Atlantic exchanged its
remaining common shares in FLAG Limited for 36,256,121 common shares in FLAG
Telecom on January 4, 2000.

    On February 16, 2000 the Company completed an initial public offering (IPO)
of 27,964,000 common shares at $24 per share. The Company received $633,769 in
net proceeds from that offering.

    By ownership of their common shares, the shareholders are entitled to one
vote per share at each meeting of the shareholders and, at any general meeting
or special meeting of all shareholders. Common shareholders are entitled to
receive dividends or distributions declared or paid, pro rata in proportion to
the total number of common shares held.

10. STOCK OPTIONS

    In March 1998, FLAG Limited adopted a Long-Term Incentive Plan under which
options could be granted on up to 4,206,305 shares of common stock to eligible
members of staff. The plan was adopted by the Company in 1999, during which, the
maximum number of options that could be granted under the plan was increased to
6,763,791. In February 2001, the maximum number of options that could be granted
under the plan was increased to 9,263,791. Generally, options granted under this
plan vest over periods up to three years from the date of their grant, subject
to meeting certain qualifying criteria. All options vest no later than eight
years and expire ten years after the date of grant.

                                      F-19
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

    The following summarizes stock option activity under this plan:

<TABLE>
<CAPTION>
                                                                 WEIGHTED AVERAGE
                                                      SHARES      EXERCISE PRICE
                                                     ---------   ----------------
<S>                                                  <C>         <C>
Balance January 1, 1998............................         --            --
Granted............................................  2,441,047        $ 6.42
Forfeited..........................................         --            --
                                                     ---------        ------
Balance December 31, 1998..........................  2,441,047          6.42
Granted............................................  1,648,352          6.82
Forfeited..........................................    (48,083)         6.42
                                                     ---------        ------
Balance December 31, 1999..........................  4,041,316          6.58
Granted............................................  2,725,515         16.54
Forfeited..........................................   (103,790)        16.52
                                                     ---------        ------
Balance December 31, 2000..........................  6,663,041        $10.50
                                                     =========        ======
</TABLE>

    At December 31, 2000 and 1999, 3,162,490 and 1,204,024 options had vested,
respectively. The weighted average remaining contractual life of all options is
8.51 years.

    The weighted average fair value of options granted during the year was $3.89
and $7.77 per share at December 31, 2000 and 1999, respectively. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions used for grants in 1999:
risk-free interest rates ranging from 5.1% to 5.8%, expected lives of
5.0 years; expected dividend yield of zero percent; and expected volatility of
59%. The following assumptions were used for 2000: risk-free interest rates
ranging from 5.9% to 6.1%, expected lives of 5.0 years; expected dividend yield
of zero percent; and expected volatility of 50%.

    Had compensation expense for share options been determined based on fair
value at the grant dates in accordance with SFAS No. 123, the Group's net loss
and loss per share would have been:

<TABLE>
<CAPTION>
NET LOSS                                                    2000       1999
--------                                                  --------   --------
<S>                                                       <C>        <C>
  As reported...........................................  $(89,466)  $(15,486)
  Pro forma.............................................  $(92,696)  $(26,967)
Basic and diluted loss per share
  As reported...........................................  $  (0.68)  $  (0.22)
  Pro forma.............................................  $  (0.71)  $  (0.39)
</TABLE>

    The effects of applying SFAS No. 123 for disclosing compensation cost may
not be representative of the effects on reported net income for future years.

                                      F-20
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

11. FINANCIAL INSTRUMENTS

    The following table presents the carrying amounts and fair values of the
Group's financial instruments as of December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                        PRINCIPAL/        2000                PRINCIPAL/     1999
                                         NOTIONAL       CARRYING     FAIR      NOTIONAL    CARRYING     FAIR
                                          AMOUNT         AMOUNT     VALUE       AMOUNT      AMOUNT     VALUE
                                      ---------------   --------   --------   ----------   --------   --------
<S>                                   <C>               <C>        <C>        <C>          <C>        <C>
8 1/4% Senior Notes.................          430,000   425,861    365,500      430,000    425,270    395,600
11 5/8% Senior Notes--US$...........          300,000   294,475    234,000           --         --         --
11 5/8% Senior Notes--Euro..........          288,540   263,966    225,513           --         --         --
Long-term debt......................          155,000   155,000    155,000      190,000    190,000    190,000
Interest rate collar................           60,000        --        (94)     160,000         --        370
Interest rate collar................           86,000        --       (432)          --         --         --
Cross currency swap.................  $      268,980/        --     12,200           --         --         --
                                             E300,000
</TABLE>

    The notional amounts of interest rate derivatives do not represent amounts
exchanged by the parties and, thus, are not a measure of the Group's exposure
through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the derivatives.

<TABLE>
<S>                            <C>
8 1/4% Senior Notes.........   The carrying amount of the 8 1/4% Senior Notes is the net
                               proceeds of the Senior Notes issue. The fair value is based
                               on the market price of the Senior Notes at December 31, 2000
                               and 1999.
11 5/8% Senior Notes........   The carrying amount of the 11 5/8% Senior Notes is the net
                               proceeds of the Senior Notes issue. The fair value is based
                               on the market price of the Senior Notes at December 31, 2000
                               and 1999.
Long-term debt..............   The carrying amount of the long-term debt is the proceeds
                               drawn under the available credit facilities. The debt is
                               subject to variable interest rates, and therefore, in
                               management's opinion, the carrying amount approximates the
                               fair value of the long-term debt.
Interest rate collars.......   The interest rate collars agreements are "zero cost" meaning
                               that the cost of acquiring the contract is embedded in the
                               interest rate spread. As such, the agreement does not have a
                               carrying value. The fair value is estimated using an option
                               pricing model and values the changes in interest rates since
                               inception, and the potential for future changes over the
                               remaining term.
Cross currency swaps........   The cross currency swap agreement does not have a carrying
                               value by its nature. The fair value is estimated using an
                               option pricing model and values the changes in interest
                               rates since inception, and the potential for future changes
                               over the remaining term.
</TABLE>

12. TAXES

    At the present time, no income, profit, capital or capital gains taxes are
levied in Bermuda. In the event that such taxes are levied in the future, FLAG
Telecom and all its subsidiaries registered in

                                      F-21
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

Bermuda have received an undertaking from the Bermuda Government exempting them
from all such taxes until March 28, 2016.

    The provision for income taxes reflected in the accompanying statement of
operations consists of taxes incurred on the income earned or activities
performed by Group companies in certain jurisdictions, where they are deemed to
have a taxable presence or are otherwise subject to tax.

    The provision for income taxes, which consists entirely of taxes payable to
foreign governments outside Bermuda, is comprised of the following:

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Current.....................................................    1,419      1,080
Deferred....................................................     (323)       469
                                                               ------     ------
                                                               $1,096     $1,549
                                                               ======     ======
</TABLE>

    Deferred taxes arise principally because, for tax purposes, in certain
jurisdictions, revenues from capacity sales are deferred and recognized as
taxable income over the estimated life of the appropriate cable system. The
deferred taxes recorded in the balance sheet comprise the following:

<TABLE>
<CAPTION>
                                                              2000       1999
                                                            --------   --------
<S>                                                         <C>        <C>
Capacity sales revenues deferred for tax purposes.........  $17,066    $17,066
Deferred commissions for tax purposes.....................   (1,851)    (1,851)
Depreciation..............................................   (8,648)    (8,648)
Tax losses carried forward (expiring over periods of
  5 years or more)........................................   (2,543)    (2,220)
Other.....................................................     (653)      (374)
                                                            -------    -------
                                                            $ 3,371    $ 3,973
                                                            =======    =======
</TABLE>

    As Bermuda does not impose an income tax, the statutory amount of tax is
zero. The provision for income taxes for the year ended December 31, 2000, and
the period from incorporation to December 31, 1999, results in an effective tax
charge that differs from the Bermuda tax charge as follows:

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Statutory Bermuda tax charge................................   $   0      $   0
Current foreign taxes.......................................   1,419      1,080
Deferred and other taxes....................................    (323)       469
                                                               -----      -----
Effective tax charge........................................   1,096      1,549
                                                               =====      =====
</TABLE>

13. RELATED PARTY TRANSACTIONS

    In May 1998, FLAG Limited entered into an Employee Services Agreement with
Bell Atlantic Global Systems ("BAGS"), a subsidiary of one of the Company's
shareholders, pursuant to which BAGS employees were seconded to FLAG Limited.
The total cost incurred for this service during the

                                      F-22
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

year ended December 31, 2000, and the period from incorporation to December 31,
1999, was $23 and $298, respectively. These costs have been expensed in the
accompanying statements of operations.

    Effective October 8, 1999, FLAG Telecom Group Services Limited ("FTGSL"), a
100% owned subsidiary of the Company, entered into a construction management
services agreement with FLAG Atlantic Limited (the "Agreement"), which prior to
the acquisition by a subsidiary of all of the equity on December 6, 2000, was a
50:50 joint venture with GTS. (See note 3)

    The Agreement calls for FTGSL to provide project planning, monitoring,
budget reviewing, survey approving, observation and inspection of installation
and commissioning activities, performance reviews and other related services
required to oversee the construction of the network.

    Up until December 6, 2000, the Company recorded it's 50% share of the
profits under the Agreement. After the December 6, 2000 acquisition from GTS,
all intercompany revenues in connection with the Agreement were eliminated on
consolidation.

    Total revenues recognised under the Agreement during the year ended
December 31, 2000 and the period from incorporation to December 31, 1999 were
$6,465 and $1,631 respectively.

14. COMMITMENTS AND CONTINGENCIES

    As of December 31, 2000, FLAG Limited was committed under supply contracts
for the cable system for final payments totaling $49,138 representing funds
withheld pending the completion of certain outstanding items under the supply
contracts. Provision has been made in full in the Group's financial statements
to cover the anticipated final payments.

    During 1997, FLAG Limited entered into an operations contract for the FLAG
Network Operations Center (the "FNOC") with one of the landing parties on the
FLAG Europe-Asia cable system. The terms of the contract require the landing
party to provide a permanent facility in which to locate the FNOC along with
qualified personnel and additional support as required to assist in the
operations of the FNOC. This is an ongoing commitment. In exchange for the
services provided under the contract, FLAG Limited is committed to compensate
the landing party an annual fixed charge for rent of the premises where the FNOC
is located equal to $200 for the first year of the contract increasing in 5%
increments for the following three years. Costs incurred by the landing party to
provide qualified personnel and additional support are to be reimbursed by FLAG
Limited on a "cost plus" basis.

    The Group has entered into lease agreements for the rental of office space.
Rent expense of $1,959 and $1,364 was recorded for the year ended December 31,
2000 and the period from

                                      F-23
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

incorporation to December 31, 1999, respectively. Estimated future minimum
rental payments under the leases are as follows:

<TABLE>
<S>                                                           <C>
2001........................................................    3,650
2002........................................................    3,058
2003........................................................    3,058
2004........................................................    2,915
2005........................................................    2,915
Thereafter..................................................   35,510
</TABLE>

    FLAG Limited is also committed to make quarterly payments under standby
maintenance agreements for the period commencing October 8, 1997 and continuing
through December 31, 2007. Estimated future payments under the standby
maintenance agreements are as follows:

<TABLE>
<S>                                                           <C>
2001........................................................   24,790
2002........................................................   25,286
2003........................................................   25,792
2004........................................................   26,307
2005........................................................   26,833
Thereafter..................................................   55,288
</TABLE>

    The estimated future payments under the standby maintenance agreements are
based on a number of assumptions, including, among other things, the proportion
of the total cable system capacity sold at any point in time and the number of
other cable systems serviced under the agreement.

    Capital expenditure contracted but not provided for as at December 31, 2000
amounted to approximately $633,000 in relation to the construction of the FLAG
Atlantic Limited cable system.

    The Group is subject to legal proceedings and claims in the ordinary course
of business. Based on consultations with legal counsel, management does not
believe that any of these proceedings or claims will have a material effect on
the Group's financial position or results of operations.

15. SEGMENT REPORTING

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

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

    Details of the financial results of the two business segments for the year
ended December 31, 2000 are summarized below, reconciled to the totals for the
Group as a whole. Substantially all the revenues and operating results in 1999
and earlier periods arose from Capacity and Operations. There was no Network
Service revenue recognised in 1999.

                                      F-24
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
               THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999

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

    The following table presents selected items for December 31, 2000, by
segment are as follows:

<TABLE>
<CAPTION>
                                              CAPACITY AND   NETWORK    CONSOLIDATED
SELECTED ITEMS                                 OPERATIONS    SERVICES      TOTAL
--------------                                ------------   --------   ------------
<S>                                           <C>            <C>        <C>
Revenue.....................................       77,707     21,599         99,306
Operation expenses..........................      150,840     25,841        176,681
                                                ---------    -------      ---------
Operating loss..............................      (73,133)    (4,242)       (77,375)
                                                ---------    -------      ---------

Segmental assets............................    1,017,830    530,845      1,548,675
                                                =========    =======
Common assets...............................                              1,530,089
                                                                          ---------
Total assets................................                              3,078,764
                                                                          =========

Cash revenues...............................      574,839     21,599        596,438
                                                =========    =======      =========
Adjusted EBITDA.............................      509,092     (2,691)       506,401
                                                =========    =======      =========
</TABLE>

Cash revenues and adjusted EBITDA are additional measures reported to and used
by the Group's chief operating decision maker for purposes of making decisions
about allocating resources to the segment and assessing its performance. Cash
revenues are defined as revenues adjusted for changes in deferred revenues.
Adjusted EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, stock compensation charges, and adjusted for changes in deferred
revenues.

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

    The revenue generated by geographic location of customers is as follows:

<TABLE>
<CAPTION>
                                                                2000       1999
REVENUE:                                                      --------   --------
<S>                                                           <C>        <C>
North America...............................................   20,962     43,627
Europe......................................................   29,597     49,901
Middle East.................................................   22,420      6,572
Asia........................................................   26,327     32,330
                                                               ------    -------
Consolidated Revenue........................................   99,306    132,430
                                                               ======    =======
</TABLE>

                                      F-25
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of FLAG Limited:

    We have audited the accompanying consolidated statements of operations,
comprehensive income, shareholders' equity and cash flows of FLAG Limited (a
Bermuda company) and subsidiaries for the period from January 1, 1999 to
February 26, 1999 and for the year ended December 31, 1998. These financial
statements are the responsibility of FLAG Limited's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the consolidated statements of operations, comprehensive
income, shareholders' equity and cash flows referred to above present fairly, in
all material respects, the results of operations and cash flows for FLAG Limited
and subsidiaries for the period from January 1, 1999 to February 26, 1999 and
for the year ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States.

Arthur Andersen & Co.
Hamilton, Bermuda
December 30, 1999

                                      F-26
<PAGE>
                                  FLAG LIMITED

                     CONSOLIDATED STATEMENTS OF OPERATIONS

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

<TABLE>
<CAPTION>
                                                                  1999           1998
                                                              ------------   ------------
<S>                                                           <C>            <C>
REVENUES:
  Capacity sales, net of discounts..........................  $     25,554   $    182,935
  Standby maintenance and restoration revenue...............         4,458         25,313
                                                              ------------   ------------
                                                                    30,012        208,248
SALES AND OTHER OPERATING EXPENSES:
  Cost of capacity sold.....................................         8,294        101,288
  Operations and maintenance................................         5,114         37,931
  Sales and marketing.......................................           637         10,680
  General and administrative................................         2,870         21,674
  Depreciation and amortization.............................           233            844
                                                              ------------   ------------
                                                                    17,148        172,417
OPERATING INCOME............................................        12,864         35,831
INTEREST EXPENSE............................................         9,758         61,128
INTEREST INCOME.............................................         1,825         14,875
                                                              ------------   ------------
INCOME/(LOSS) BEFORE INCOME TAXES...........................         4,931        (10,422)
PROVISION FOR INCOME TAXES..................................           171          1,260
                                                              ------------   ------------
INCOME/(LOSS) BEFORE EXTRAORDINARY ITEM.....................         4,760        (11,682)
EXTRAORDINARY ITEM..........................................            --         59,839
                                                              ------------   ------------
NET INCOME/(LOSS)...........................................         4,760        (71,521)
CUMULATIVE PAY-IN-KIND PREFERRED DIVIDENDS..................            --          1,508
REDEMPTION PREMIUM AND WRITE OFF OF DISCOUNT ON PREFERRED
  SHARES....................................................            --          8,500
                                                              ------------   ------------
NET INCOME/(LOSS) APPLICABLE TO COMMON SHAREHOLDERS.........  $      4,760   $    (81,529)
                                                              ============   ============
Basic and diluted net income/(loss) per common share--Class
  A.........................................................  $       0.00   $      (0.07)
                                                              ============   ============
Basic and diluted net income/(loss) per common share--Class
  B.........................................................  $       0.01   $      (0.13)
                                                              ============   ============
Weighted average common shares outstanding--Class A.........            --    132,000,000
Weighted average common shares outstanding--Class B.........   635,796,338    565,858,741
</TABLE>

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

                                      F-27
<PAGE>
                                  FLAG LIMITED

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
NET INCOME/(LOSS)...........................................   $4,760    $(81,529)
Foreign currency translation adjustment.....................      178        (704)
                                                               ------    --------
COMPREHENSIVE INCOME/(LOSS).................................   $4,938    $(82,233)
                                                               ======    ========
</TABLE>

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

                                      F-28
<PAGE>
                                  FLAG LIMITED

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

          (EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT NUMBERS OF SHARES)

<TABLE>
<CAPTION>
                                   CLASS A                  CLASS B                          FOREIGN       RETAINED
                                COMMON SHARES            COMMON SHARES        ADDITIONAL    CURRENCY       EARNINGS        TOTAL
                           -----------------------   ----------------------    PAID-IN     TRANSLATION   (ACCUMULATED   SHAREHOLDERS
                              SHARES       AMOUNT      SHARES       AMOUNT     CAPITAL     ADJUSTMENT      DEFICIT)        EQUITY
                           ------------   --------   -----------   --------   ----------   -----------   ------------   ------------
<S>                        <C>            <C>        <C>           <C>        <C>          <C>           <C>            <C>
Balance, December 31,
  1997...................   132,000,000       13     565,858,741      57        514,389          --          26,570       541,029
Preferred share dividends
  and accretion..........            --       --              --      --         (1,508)         --           1,508            --
Premium on redemption of
  preferred shares.......            --       --              --      --         (6,641)         --           6,641            --
Write-off of unamortized
  discount on issuance of
  preferred shares.......            --       --              --      --         (1,859)         --           1,859            --
Foreign currency
  translation
  adjustment.............            --       --              --      --             --        (704)             --          (704)
1998 net loss applicable
  to common
  shareholders...........            --       --              --      --             --          --         (81,529)      (81,529)
                           ------------     ----     -----------     ---       --------       -----        --------       -------
Balance, December 31,
  1998...................   132,000,000       13     565,858,741      57        504,381        (704)        (44,951)      458,796
Conversion of Class A
  shares into Class B
  shares
  Class A shares
    [retired]............  (132,000,000)     (13)             --      --             13          --              --            --
  Class B shares
    issued...............            --               69,937,597       7             (7)         --              --            --
Foreign currency
  translation
  adjustment.............            --       --              --      --             --         178              --           178
1999 net income
  applicable to common
  shareholders...........            --       --              --      --             --          --           4,760         4,760
                           ------------     ----     -----------     ---       --------       -----        --------       -------
Balance, February 26,
  1999...................            --     $ --     635,796,338     $64       $504,387       $(526)       $(40,191)      463,734
                           ============     ====     ===========     ===       ========       =====        ========       =======
</TABLE>

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

                                      F-29
<PAGE>
                                  FLAG LIMITED

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   ---------
<S>                                                           <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) applicable to common shareholders.........  $  4,760   $ (81,529)
                                                              --------   ---------
Adjustments to reconcile net income/(loss) to net cash
  provided by/(used in) operating activities:
  Pay-in-kind preferred dividends...........................        --       1,508
  Amortization of financing costs...........................       274       3,427
  Provision for doubtful accounts...........................        --        (424)
  Depreciation..............................................       233         844
  Deferred taxes............................................        --      (1,038)
  Preferred share redemption premium........................        --       8,500
  Loss on debt refinancing..................................        --      59,839
  Senior debt discount                                              98         591
  Add/(deduct) net changes in operating assets and
    liabilities:
    Accounts receivable.....................................     1,710      42,500
    Due from affiliates and other receivables...............        --         484
    Prepaid expenses and other assets.......................      (645)       (272)
    Capacity available for sale.............................     8,664     113,849
    Accounts payable and accrued liabilities................   (16,541)     12,250
    Income taxes payable....................................       168       2,062
    Due to affiliate........................................      (668)     (4,049)
    Deferred revenue........................................   (21,157)    (69,711)
                                                              --------   ---------
      Net cash (used in)/provided by operating activities...   (23,104)     88,831
CASH FLOWS FROM FINANCING ACTIVITIES:
  Organization and financing costs incurred.................        --     (13,769)
  Proceeds from long-term debt..............................        --     320,000
  Proceeds from 8 1/4% Senior Notes.........................        --     424,088
  Repayment of long-term debt...............................   (15,000)   (663,587)
  Redemption of preferred shares............................        --    (139,453)
  Decrease in funds held by collateral trustee..............    36,230     170,539
                                                              --------   ---------
      Net cash provided by financing activities.............    21,230      97,818
CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash paid for construction in progress....................       788    (181,998)
  Purchase of fixed assets..................................      (200)     (4,146)
                                                              --------   ---------
      Net cash provided by/(used in) investing activities...       588    (186,144)
NET (DECREASE)/INCREASE IN CASH.............................    (1,286)        505
  Effect of foreign currency movements......................       178          29
CASH, beginning of year.....................................     3,024       2,490
                                                              --------   ---------
CASH, end of year...........................................  $  1,916   $   3,024
                                                              ========   =========
</TABLE>

                                      F-30
<PAGE>
                                  FLAG LIMITED

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
  Costs (reimbursed)/incurred for construction in
    progress................................................  $  (788)   $ 11,105
  Decrease/(increase) in accrued liabilities................       --     170,893
                                                              -------    --------
  Cash paid for construction in progress....................  $  (788)   $181,998
                                                              =======    ========
SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW
  INFORMATION:
Interest paid...............................................  $22,668    $ 39,171
                                                              =======    ========
Taxes paid..................................................  $    --    $     --
                                                              =======    ========
</TABLE>

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

                                      F-31
<PAGE>
                                  FLAG LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

1.  BACKGROUND

    The Company is a facilities-based provider of telecommunications capacity to
licensed international carriers through its ownership of the world's longest
independent, privately-owned digital fiberoptic undersea cable system, the FLAG
Europe-Asia cable system. The FLAG Europe-Asia cable system links the
telecommunications markets of Western Europe and Japan through the Middle East,
India, Southeast Asia and China (the "FLAG Route"), along a route which adjoins
countries with approximately 70% of the world's population. The FLAG Europe-Asia
cable system was constructed to address the growing demand for high performance,
secure and cost-effective digital communications for voice, data and video along
the FLAG Route. The Company provides capacity on the FLAG Europe-Asia cable
system at market-based prices to licensed international carriers. The FLAG
Europe-Asia cable system, which was placed in commercial service on
November 22, 1997, cost approximately $1.6 billion to construct, and consists of
over 28,000 kilometers of fiberoptic cable.

    On February 26, 1999, the Company was part of a reorganization whereby FLAG
Telecom Holdings Limited ("FTHL"), a Bermuda company, became the holding company
for the FLAG Telecom group of companies. Pursuant to this reorganization, all of
the Class A common shares of the Company were converted to Class B common shares
and the shareholders of the Company transferred to FTHL 418,259,688 Class B
common shares in exchange for an equal number of shares in FTHL. As a result of
this reorganization, FTHL held 65.79% of the share capital of the Company with
the balance of 34.21% being held by Bell Atlantic Network Systems Company.

2.  SIGNIFICANT ACCOUNTING POLICIES

    These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States and are expressed in U.S.
Dollars ("Dollars"). The preparation of financial statements in conformity with
U.S. generally accepted accounting principles ("U.S. GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

    The significant accounting policies are summarized as follows:

    a)  Basis of Consolidation

    The financial statements consolidate the financial statements of the Company
and its subsidiary companies after eliminating intercompany transactions and
balances.

    b)  Sales and Cost of Sales Recognition

    Revenues are recognized upon the date the risks and rewards of ownership are
transferred to the purchaser, which is the date the capacity is made available
for activation and the customer becomes responsible for standby maintenance and
repairs.

    Because substantially all receivables under agreements qualifying as
sales-type leases are receivable within 75 days of the date the risks and
rewards of ownership are transferred to the customer, the

                                      F-32
<PAGE>
                                  FLAG LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

accounts receivable balance in the accompanying balance sheets, representing the
gross future minimum lease payments due, approximates the present value of
future minimum lease payments. Amounts billed to customers for maintenance and
repair services are invoiced separately from capacity lease payments. There are
no guaranteed or unguaranteed residual values accruing to the benefit of the
Company. The Company has no minimum lease payments due in 1999 and no minimum
lease payments for all subsequent years.

    As of December 31, 1998, in exchange for construction costs incurred, the
Company had granted credits to suppliers toward future capacity. In addition,
certain customers have committed to purchase capacity at a future date under
signed capacity credit agreements. Such amounts received or receivable under
these agreements and the capacity credits granted to suppliers are recorded 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. Deferred revenue also includes amounts invoiced for standby
maintenance which are applicable to future periods.

    For certain customers, the Company has granted price protection credits
entitling them to additional capacity if the Company lowers its prices prior to
December 31, 1999. In the period that it becomes probable that the Company will
lower its list prices, the Company records a provision for expected cost of
sales for the additional units of capacity granted.

    The cost of the FLAG Europe-Asia cable system relating to capacity sold is
recognized as cost of sales upon recognition of revenues. The amount charged to
cost of sales is based on the ratio of capacity sales recognized as revenues in
the period to total expected revenues over the entire life of the FLAG
Europe-Asia cable system multiplied by the total construction costs. This
calculation of cost of sales matches costs with the relative sales value of each
sale to total expected revenues.

    Management's estimate of total expected revenues over the life of the FLAG
Europe-Asia cable system may change due to a number of factors affecting
estimated future revenues including changes in management's estimate of the
units of capacity to be sold and changes in the expected sales value per unit of
capacity to be sold. Additionally, the cost per unit will decrease in the event
the Company elects to upgrade the capacity of the FLAG Europe-Asia cable system
in the future to increase the units of capacity available for sale. Changes in
management's estimate of total expected revenues over the life of the FLAG
Europe-Asia cable system will result in adjustments to the calculations of cost
of sales. These adjustments will be recorded on a prospective basis over future
periods commencing with the period management revises its estimate. As the
revenue from operating lease transactions is incidental, such transactions are
recorded as a reduction of capacity available for resale and no depreciation is
recorded.

    Standby maintenance charges are invoiced separately from capacity sales.
Revenue relating to standby maintenance is recognized over the period in which
the service is provided.

    c)  Commissions

    Commissions for purchase commitments are recognized as an expense upon
recognition of the related revenues.

                                      F-33
<PAGE>
                                  FLAG LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

    d)  Capacity Available for Sale and Construction in Progress

    Capacity available for sale is recorded at the lower of cost or fair value
less cost to sell and is charged to cost of sales as capacity is sold.
Construction in progress is transferred to capacity available for sale at the
date it is completed and placed into commercial operation. Construction in
progress includes direct and indirect expenditures which are stated at cost and
includes the accumulated work in progress for construction of the FLAG
Europe-Asia cable system. Capitalized costs include costs incurred under the
construction contract, engineering and consulting fees, legal fees related to
obtaining landing right licenses, costs related to program management, costs for
the route surveys, interest and other costs necessary for developing the FLAG
Europe-Asia cable system.

    e)  Capitalized Financing Costs

    Costs incurred by the Company to obtain financing for the FLAG Europe-Asia
cable system have been capitalized and are being amortized over the term of the
related borrowings. Capitalized costs relating to existing financings are
written off when a refinancing occurs.

    f)  Fixed Assets

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

<TABLE>
<S>                                                      <C>
Computer equipment.....................................  33 1/3% per annum
Fixtures and fittings..................................  20% per annum
Leasehold improvement..................................  remaining lease term
Motor vehicles.........................................  20% per annum
</TABLE>

    g)  Interest Rate Derivatives

    The Company uses derivative financial instruments for the purpose of
reducing its exposure to adverse fluctuations in interest rates. The Company
does not utilize derivative financial instruments for trading or other
speculative purposes. The counterparties to these instruments are major
financial institutions with high credit quality. The Company is exposed to
credit loss in the event of nonperformance by these counterparties.

    At the end of March 1998, the Company entered into two interest rate swap
agreements to manage the Company's exposure to interest rate fluctuations on the
$370,000 bank credit facility undertaken on January 30, 1998 (the "New Credit
Facility"). Under the swap agreements, the Company pays a fixed rate of 5.60% on
a notional amount of $60,000, a fixed rate of 5.79% on a notional amount of
$100,000, and the counterparty pays the floating rate based on LIBOR. The swap
agreements terminate in January and July 2000, respectively, unless extended by
an additional one year and six months, respectively, at the option of the
counterparty.

    The 8 1/4% Senior Notes arising on the refinancing undertaken on
January 30, 1998 (the "Senior Notes") accrue interest at the rate of 8 1/4% per
annum paid semi-annually on January 30 and July 30 of each year, commencing on
July 30, 1998 (see Note 3. "Long-term Debt"). Interest is expensed as it
accrues. The Senior Notes are redeemable at the Company's option, in whole or in
part, at any time on or after January 30, 2003, at specified option prices. In
the event of any equity offering before

                                      F-34
<PAGE>
                                  FLAG LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

January 31, 2001, the Company may use all or a portion of the net proceeds
therefrom to redeem up to 33 1/3% of the original principal amount of the Senior
Notes at a redemption price of 108.25% plus accrued and unpaid interest. If the
Company has excess cash flow, as defined, for any fiscal year commencing in
2001, the Company is required, subject to certain exceptions and limitations, to
make an offer to purchase the Senior Notes at specified prices. Upon a change in
control, the note holders may require the Company to purchase all or any portion
of the outstanding notes at a price equal to 101% of the principal amount plus
accrued but unpaid interest.

    For interest rate derivatives to qualify for hedge accounting, the debt
instrument being hedged must expose the Company to interest rate risk and, at
the inception of the derivative instrument and throughout the period the
derivative is held, there must be a high correlation of changes in the market
value of the derivative and interest expense of the hedged item. Gains and
losses on interest rate derivatives and other derivative instruments which do
not meet this criteria would be recorded in the statement of operations.

    If an interest rate derivative instrument were to terminate or be replaced
by another instrument and no longer qualify as a hedge instrument, then it would
be marked to market and carried on the balance sheet at fair value.

    h)  Translation of Foreign Currencies

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

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

    i)  Stock Option Plan

    The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25") and accordingly, recognizes compensation expense for stock option
grants to the extent that the fair value of the stock exceeds the exercise price
of the option at the measurement date.

    j)  Income Taxes

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

                                      F-35
<PAGE>
                                  FLAG LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

    k)  Net Income (Loss) per Common Share

    In February 1999, the shareholders of all Class A common shares in the
Company converted their shares into Class B common shares of equivalent value.
Basic net income per Class B common share in 1999 is based on dividing the net
income by the number of Class B common shares outstanding for the period as if
the exchange had occurred on January 1, 1999. The basic net loss per Class A and
Class B common share in 1998 are based on dividing net loss applicable to
Class A and Class B shareholders by the weighted average number of common shares
outstanding during the period.

    l)  Pending Accounting Standards

    The Financial Accounting Standards Board has also recently issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which is effective for periods beginning
after June 15, 2000. This pronouncement requires the recognition of all
derivative instruments on the balance sheet at fair-value. Any subsequent
changes in fair-value are then recognized in earnings unless the derivative
qualifies for treatment as a hedge. Management has not yet assessed the impact
of the adoption of SFAS 133 on the Company's financial position or results of
operations, although it may lead to increased volatility in the Company's
earnings and comprehensive income.

    The Financial Accounting Standards Board has recently issued Interpretation
No. 43, "Real Estate Sales, an interpretation of FASB Statement No. 66." This
interpretation clarifies that sales of real estate with property improvements or
integral equipment that cannot be removed and used separately from the real
estate without incurring significant costs should be accounted for under FASB
Statement No. 66, "Accounting for Sales of Real Estate" ("FAS 66"). The
provisions of this Interpretation are effective for all sales of real estate
with property improvements or integral equipment entered into after June 30,
1999. It is expected that the provisions of this pronouncement will affect
timing of the Company's recognition of revenues and costs associated with future
sales of capacity.

3.  LONG-TERM DEBT

    In the first quarter of 1998, the Company recognized a loss on refinancing
of approximately $59,839 which has been reflected as an extraordinary item in
the accompanying statement of operations. The loss on refinancing primarily
represents the write-off of the remaining unamortized deferred financing costs
on the outstanding borrowings under an Amended and Restated Participation
Agreement.

4.  PREFERRED SHARES

    On January 30, 1998, the Company completed a refinancing which resulted in
the redemption of all the Preferred Shares. In addition, the Company paid a
premium of $6,641 to redeem the Preferred Shares, which, together with the
write-off of the remaining $1,859 of discount related to the Preferred Shares,
was charged to additional paid-in capital during 1998. The shares had a par
value of $.0001 per

                                      F-36
<PAGE>
                                  FLAG LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

share and a liquidation value of $100 per share. The following number of shares
were issued and outstanding:

<TABLE>
<CAPTION>
                                                         1999        1998         1997
                                                       ---------   ---------   ----------
<S>                                                    <C>         <C>         <C>
Shares outstanding...................................        --          --     1,306,429
Share capital........................................  $     --    $     --    $  129,445
</TABLE>

    The holders of such shares were entitled to receive cumulative pay-in-kind
dividends, at an annual rate of 13% of the $100 liquidation value per share from
the issue date through and including the redemption date. The Preferred Shares
ranked senior to all common shares with respect to dividend rights, rights of
redemption or rights on liquidation.

    By ownership of their Preferred Shares, the preferred shareholders had the
right to vote 5.22% of the total voting interests of the Company, and to elect
one director and the right to receive additional Class B common shares such that
in total they maintained their 3.88% ownership of Class B common shares.

    The preferred shareholders were issued 3,075,816 Class B common shares when
they purchased the Preferred Shares. The Class B common shares had a fair value
of $1 and therefore $3,076 was assigned to the Class B common shares issued and
recorded as a discount on the Preferred Shares issued. The discount was being
amortized over the term of the Preferred Shares and the amortization is included
in cumulative pay-in-kind preferred dividends in the accompanying statements of
operations.

    During the years ended December 31, 1998 and 1997 the Board of Directors
declared Preferred Share pay-in-kind dividends resulting in the issue of 21,701
and 156,885 additional shares, respectively, of Preferred Shares. In addition,
as of December 31, 1997, the Company accrued approximately $708 for additional
pay-in-kind dividends for the period from December 16, 1997 to December 31,
1997.

5.  SHAREHOLDERS' EQUITY

    a)  Class A Common Shares

    In February 1999, the shareholders of all Class A common shares in the
Company converted their shares into Class B common shares of equivalent value.
132,000,000 Class A shares were converted to 69,937,597 Class B shares.

    As of December 31, 1998, 132,000,000 Class A common shares were issued and
outstanding.

    By ownership of their Class A common shares, the Class A shareholders were
entitled to one vote per share at any meeting of Class A shareholders and, at
any general meeting or special meeting of all shareholders, to a vote
representing 11% of the total voting interests of the Company, multiplied by the
percentage of Class A common shares held. Class A shareholders were entitled to
receive 11% of any dividends or distributions declared, paid pro rata in
proportion to the number of Class A common shares held, prior to the payment of
any dividends or distributions to the Class B shareholders.

                                      F-37
<PAGE>
                                  FLAG LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

    b)  Class B Common Shares

    The authorized Class B common shares capital of the Company consists of
1,000,000,000 shares with a par value of $.0001 per share. The following number
of shares were issued and outstanding.

<TABLE>
<CAPTION>
                                                       1999           1998
                                                   ------------   ------------
<S>                                                <C>            <C>
Shares outstanding...............................   635,796,338    565,858,741
Share capital....................................  $         64   $         57
</TABLE>

    By ownership of their Class B common shares, the Class B shareholders are
entitled to one vote per share at each meeting of Class B shareholders and, at
any general meeting or special meeting of all shareholders, to a vote
representing 89% of the total voting interests of the Company, multiplied by the
percentage of Class B common shares held. Class B shareholders are entitled to
receive dividends or distributions declared or paid, pro rata in proportion to
the total number of Class B common shares held, after taking into account the
rights of Class A shareholders to such dividends and distributions.

6.  STOCK OPTIONS

    In March, 1998, the Company adopted a Long-Term Incentive Plan under which
the Company may grant up to 25,237,831 shares of common stock to eligible
members of staff. During the year ended December 31, 1998, options to purchase
14,146,239 Class B common shares were granted under the plan. No options were
granted under the plan from January 1, 1999 to February 26, 1999. Generally, the
options vest and are exercisable on the third and fourth anniversaries of their
grant, subject to meeting certain qualifying criteria. All options vest no later
than eight years and expire ten years after the date of grant. The options can
vest, and are exercisable, earlier on the commencement of an initial public
offering of equity in the Company. All of the options were granted at an
exercise price of $1.07 per share. No options had vested. Since the Company
accounts for employee options in accordance with APB No. 25, the Company has not
recognized compensation expense with respect to the options granted since the
exercise price did not exceed management's estimated fair value of the shares on
the date of the grant (the measurement date).

    Had the compensation for the Company's Long Term Incentive Plan (see above
in this Note 6) been determined in accordance with SFAS 123, the Company's net
loss and earnings per share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
                                                                1999
                                                              --------
<S>                                                           <C>
Net income attributable to common shareholders
  --as reported.............................................   4,760
  --pro forma...............................................   4,501
Earnings per share
  --as reported.............................................    0.01
  --pro forma...............................................    0.01
</TABLE>

    The effects of applying SFAS 123 for disclosing compensation cost may not be
representative of the effects on reported net income for future years.

                                      F-38
<PAGE>
                                  FLAG LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

    The weighted average fair value of options granted during 1998 was $0.61 per
share. The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing model using the following weighted
average assumptions.

<TABLE>
<CAPTION>
                                                                1999
                                                              ---------
<S>                                                           <C>
Dividend yield..............................................  0.0%
Expected volatility.........................................  0.59
Risk-free interest rate.....................................  6.0%
Expected lives of the options...............................  5.0 years
</TABLE>

    The weighted average remaining contractual life of all options is
9.31 years.

7.  BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE

<TABLE>
<CAPTION>
                                                         1999                            1998
                                            -------------------------------   ---------------------------
                                                CLASS A          CLASS B        CLASS A        CLASS B
                                            ----------------   ------------   ------------   ------------
<S>                                         <C>                <C>            <C>            <C>
Net income (loss) before extraordinary
  item....................................              --     $      4,760   $    (21,690)  $    (21,690)
Extraordinary item........................              --               --   $    (59,839)  $    (59,839)
Net income (loss).........................              --     $      4,760   $    (81,529)  $    (81,529)
Percentage entitlement....................              --              100%            11%            89%
Net income (loss) per class before
  extraordinary item......................              --     $      4,760   $     (2,386)  $    (19,304)
Extraordinary item........................              --               --   $     (6,582)  $    (53,257)
Net income (loss) per class...............              --     $      4,760   $     (8,968)  $    (72,561)
Number of shares..........................              --      635,796,333    132,000,000    565,858,741
Income (loss) per share before
  extraordinary item......................              --     $       0.01   $      (0.02)  $      (0.03)
Extraordinary item per share..............              --               --   $      (0.05)  $      (0.10)
Net income (loss) per share...............              --     $       0.00   $      (0.07)  $      (0.13)
</TABLE>

    In February 1999, the shareholders of all Class A common shares in the
Company converted their shares into Class B common shares of equivalent value.
Basic net income per Class B common share in 1999 is based on dividing the net
income by the number of Class B common shares outstanding for the period as if
the exchange had occurred on January 1, 1999. The basic net loss per Class A and
Class B common share in 1998 is based on dividing net loss applicable to
Class A and Class B shareholders by the weighted average number of common shares
outstanding during the period.

    No stock options were granted during the period from January 1, 1999 to
February 26, 1999. The stock options granted during 1998, discussed in Note 6,
did not have a dilutive effect on 1999 net income per common share or 1998 net
loss per common share.

                                      F-39
<PAGE>
                                  FLAG LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

8.  TAXES

    At the present time, no income, profit, capital or capital gains taxes are
levied in Bermuda. In the event that such taxes are levied, the Company has
received an undertaking from the Bermuda Government exempting it from all such
taxes until March 28, 2016.

    The provision for income taxes reflected in the accompanying statement of
operations consists of taxes incurred on income derived from capacity sales and
standby maintenance revenues from customers in certain jurisdictions along the
FLAG Europe-Asia cable system where the Company is deemed to have a taxable
presence or is otherwise subject to tax.

    Income tax expense, which consists entirely of taxes payable to foreign
governments, is comprised of the following:

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Current.....................................................    $171      $2,281
Deferred....................................................      --      (1,021)
                                                                ----      ------
                                                                $171      $1,260
                                                                ====      ======
</TABLE>

    Deferred taxes arise principally because, for tax purposes, in certain
jurisdictions, revenues from capacity sales are deferred and recognized as
taxable income over the estimated life of the FLAG Europe-Asia cable system.

    Since Bermuda does not impose an income tax, the difference between reported
tax expense in the accompanying statements of operations and tax as computed at
statutory rates, is attributable to the provisions for foreign taxes shown
above.

9.  RELATED PARTY TRANSACTIONS

    The Company and certain of its Shareholders or affiliates thereof have
entered into agreements for the development, construction, operation, financing
and marketing of the FLAG Europe-Asia cable system.

    a)  Program Management Services Agreement

    Under the terms of a Program Management Services Agreement, Bell Atlantic
Network Systems ("BANS"), a Shareholder of the Company, managed all aspects of
the planning and construction of the FLAG Europe-Asia cable system. The Company
reimbursed BANS for all related costs and out-of-pocket expenses plus a fee
equal to 16% of payroll costs and certain outside contractor and consultant
costs.

    Effective May 14, 1998, the Company entered into a Termination and Release
Agreement providing for the termination of the Program Management Services
Agreement with BANS. In June 1998, the Company made a final payment to BANS to
settle all outstanding liabilities under the Program Management Services
Agreement.

                                      F-40
<PAGE>
                                  FLAG LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

    b)  Marketing Services Agreement

    The Company and BANS, entered into a Marketing Services Agreement pursuant
to which BANS was responsible for marketing the assignable capacity of the FLAG
Europe-Asia cable system. BANS invoiced the Company for commissions at the rate
of 3% of the commitments obtained.

    Effective May 21, 1998, under a Marketing Transition Agreement the Company
and BANS agreed to terminate the Marketing Services Agreement. Under the
Marketing Transition Agreement, the Company agreed to pay certain BANS' closing
down expenses and certain commissions in connection with their pre-termination
and post-termination activities. The Company will pay BANS (i) commissions
accrued under the Marketing Services Agreement but remaining unpaid and (ii) up
to $3,000 commissions resulting from certain sales. Also under the Marketing
Transition Agreement the Company has agreed to pay BANS or its affiliate a 50%
commission where BANS or its affiliate secures the sale of four whole DS-3s
(which equates to 84 whole MIUs) on the FLAG Europe-Asia cable system. The
Company will accrue a liability for the commissions in the period it becomes
probable that BANS or its affiliate will obtain the sales and that the amount of
the commissions can be reasonably estimated.

    c)  Employee Services Agreement

    In May 1998, the Company entered into an Employee Services Agreement with
Bell Atlantic Global Systems ("BAGS") pursuant to which BAGS seconds certain
employees to the Company.

    Total amounts incurred for the above services are as follows:

<TABLE>
<CAPTION>
                                            PROGRAM      MARKETING      BUSINESS      EMPLOYEE
                                           MANAGEMENT     SERVICES     DEVELOPMENT    SERVICES
                                          ------------   ----------   -------------   ---------
<S>                                       <C>            <C>          <C>             <C>
1999...................................      $   --        $   --         $             $208
1998...................................      $2,823        $2,229         $662          $411
</TABLE>

    Program management and business development costs directly related to the
construction of the FLAG System have been capitalized. Total program management
and business development costs capitalized through PSA were $49,199. All other
program management and business development costs have been expensed in the
accompanying statements of operations. All marketing services commissions and
employee services in the above table have been expensed in the accompanying
statements of operations.

    Marubeni Corporation, the administrative agent for the financing provided
under Tranche B, which was repaid in January 1998, is affiliated with Marubeni
Telecom Development Limited, a Shareholder of the Company. Under the terms of
the Agreement, Marubeni Corporation was entitled to certain arrangement and
commitment fees. Fees incurred payable to Marubeni Corporation for the year
ended December 31, 1998 was $58, respectively. At the end of the year, no amount
were payable. Interest in relation to financing provided by Marubeni for the
year ended December 31, 1998 was $1,953 of which $nil was payable at the end of
the year.

10. COMMITMENTS AND CONTINGENCIES

    As of February 26, 1999, the Company was committed under the Contract for a
final payment totaling $132,725. FLAG Limited is currently holding discussions
with Tyco and KDD Submarine Cable

                                      F-41
<PAGE>
                                  FLAG LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

Systems Inc. regarding the final payment. Provision has been made in the
Company's financial statements to cover the anticipated final payment.

    During the year, the Company signed agreements with two new landing parties.
The Company reached formal agreements with the Saudi Telecom Company and the
Jordan Telecommunications Company to add landing points in Jeddah and Aqaba
respectively. The estimated cost to construct these landing points is
approximately $53 million and is being funded through the Company's cash flow
and contributions from one of the landing parties. The landing stations are
expected to enter service in July 1999.

    During 1997 the Company entered into an operations contract for the FLAG
Network Operations Center (the "FNOC") with one of the landing parties on the
FLAG Europe-Asia cable system. The terms of the contract require the landing
party to provide a permanent facility in which to locate the FNOC along with
qualified personnel and additional support as required to assist in the
operations of the FNOC. In exchange for the services provided under the
contract, the Company is committed to compensate the landing party an annual
fixed charge for rent of the premises where the FNOC is located equal to $200
for the first year of the contract increasing in 5% increments for the following
three years. Costs incurred by the landing party to provide qualified personnel
and additional support are to be reimbursed by the Company on a cost plus basis.

    The Company has entered into lease agreements for the rental of office
space. Estimated future minimum rental payments under the leases are for the
period February 27, 1999 to December 31, 1999 and for the years ended
December 2000, 2001, 2002 and 2003 and thereafter are as follows:

<TABLE>
<S>                                                           <C>
Remainder of 1999...........................................   $  963
2000........................................................      824
2001........................................................      537
2002........................................................      549
2003........................................................      549
Thereafter..................................................    2,910
</TABLE>

    The Company is also committed to make quarterly payments under standby
maintenance agreements for the period commencing October 8, 1997 and continuing
through December 31, 2007. Estimated future payments under the standby
maintenance agreements are for the period February 27, 1999 to December 31, 1999
and for the years ended December 2000, 2001, 2002 and 2003 and thereafter are as
follows:

<TABLE>
<S>                                                           <C>
Remainder of 1999...........................................  $18,694
2000........................................................   24,546
2001........................................................   25,105
2002........................................................   25,197
2003........................................................    8,820
Thereafter..................................................   35,280
</TABLE>

    The estimate future payments under the standby maintenance agreements are
based on a number of assumptions, including, among other things, the proportion
of the total FLAG Europe-Asia cable

                                      F-42
<PAGE>
                                  FLAG LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

          FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
                      FOR THE YEAR ENDED DECEMBER 31, 1998

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

system capacity sold at any point in time and the number of other cable systems
serviced under the agreement.

    The Company is subject to legal proceedings and claims in the ordinary
course of business. Based on consultations with legal counsel, management does
not believe that any of these proceedings or claims will have a material effect
on the Company's financial position or results of operations.

11. SUBSEQUENT EVENTS.

    On February 26, 1999, the Company was part of a reorganization whereby FLAG
Telecom Holdings Limited, a Bermuda company, became the holding company for the
FLAG Telecom group of companies. As a result of this reorganization, the Company
became a majority-owned subsidiary of FLAG Telecom Holdings Limited.

                                      F-43
<PAGE>
                         FLAG TELECOM HOLDINGS LIMITED
                                   SCHEDULE I
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                     INDEX

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
Condensed Balance Sheets as of December 31, 2000 and 1999...    F-45
Condensed Statements of Operations for the year ended
  December 31, 2000 and the period from incorporation to
  December 31, 1999.........................................    F-46
Condensed Statements of Comprehensive Income for the year
  ended December 31, 2000 and the period from incorporation
  to December 31, 1999......................................    F-47
Condensed Statements of Cash Flows for the year ended
  December 31, 2000 and the period from incorporation to
  December 31, 1999.........................................    F-48
Notes to the Condensed Financial Statements.................    F-49
</TABLE>

                                      F-44
<PAGE>
                         FLAG TELECOM HOLDINGS LIMITED
                            CONDENSED BALANCE SHEETS
                        AS OF DECEMBER 31, 2000 AND 1999
     (EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 2000        1999
                                                              ----------   --------
<S>                                                           <C>          <C>
                           ASSETS
Current assets:
  Cash and cash equivalents.................................  $  893,574   $     --
  Due from equity method investments........................     331,646         11
  Prepaid expenses and other assets.........................       7,058         --
                                                              ----------   --------
                                                               1,232,278         11

Equity method investments...................................     347,903    298,534
Capitalized financing costs, net of accumulated amortization
  of $119 (1999--$Nil)......................................       1,713         --
                                                              ----------   --------
                                                              $1,581,894   $298,545
                                                              ==========   ========
                        LIABILITIES
Current liabilities:
  Accounts payable..........................................          19         --
  Accrued liabilities.......................................      16,127         --
                                                              ----------   --------
                                                                  16,146         --
Long-term debt..............................................     558,141         --
                                                              ----------   --------
                                                                 574,287         --
                    SHAREHOLDERS' EQUITY
Common stock, $.0006 (1999--$.0001) par value, 300,000,000
  (1999--1,139,000) authorized and 134,061,920
  (1999--69,709,935) issued and outstanding.................          80         42
Additional paid-in capital..................................   1,112,173    323,136
Deferred stock compensation.................................      (2,058)    (9,288)
Accumulated other comprehensive income--foreign currency
  translation...............................................       2,364        141
Accumulated deficit.........................................    (104,952)   (15,486)
                                                              ----------   --------
                                                               1,007,607    298,545
                                                              ----------   --------
                                                              $1,581,894   $298,545
                                                              ==========   ========
</TABLE>

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

                                      F-45
<PAGE>
                         FLAG TELECOM HOLDINGS LIMITED
                       CONDENSED STATEMENTS OF OPERATIONS
   FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM INCORPORATION TO
                               DECEMBER 31, 1999
     (EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                  2000           1999
                                                              ------------   ------------
<S>                                                           <C>            <C>
EXPENSES:
  General and administrative, including non-cash stock
    compensation expense of $228 (1999--$492)...............         1,180            492
                                                              ------------   ------------
                                                                     1,180            492
                                                              ------------   ------------

OPERATING LOSS..............................................        (1,180)          (492)
LOSS FROM EQUITY METHOD INVESTMENTS.........................      (109,737)       (14,994)
INTEREST EXPENSE............................................       (51,184)            --
FOREIGN CURRENCY GAIN.......................................        17,014             --
INTEREST INCOME.............................................        55,621             --
                                                              ------------   ------------

LOSS BEFORE INCOME TAXES....................................       (89,466)       (15,486)
PROVISION FOR INCOME TAXES..................................            --             --
                                                              ------------   ------------
NET LOSS....................................................  $    (89,466)  $    (15,486)
                                                              ------------   ------------

Basic and diluted loss per common share.....................  $      (0.68)  $      (0.22)
                                                              ------------   ------------
Weighted average common shares outstanding..................   130,763,607     69,709,935
                                                              ============   ============
</TABLE>

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

                                      F-46
<PAGE>
                         FLAG TELECOM HOLDINGS LIMITED
                  CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
   FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM INCORPORATION TO
                               DECEMBER 31, 1999
                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
NET LOSS....................................................  $(89,466)  $(15,486)
Foreign currency translation adjustment.....................     2,223        141
                                                              --------   --------
COMPREHENSIVE LOSS..........................................  $(87,243)  $(15,345)
                                                              ========   ========
</TABLE>

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

                                      F-47
<PAGE>
                         FLAG TELECOM HOLDINGS LIMITED
                       CONDENSED STATEMENTS OF CASH FLOWS
   FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM INCORPORATION TO
                               DECEMBER 31, 1999
                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                 2000        1999
                                                              ----------   --------
<S>                                                           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................  $  (89,466)  $(15,486)
Adjustments to reconcile net loss to net cash provided by
  operating activities:
  Amortization of financing costs...........................         119         --
  Stock compensation........................................         228        492
  Equity method investments.................................     109,737     14,994
  Add (deduct) net changes in operating assets and
  liabilities:
    Due from affiliate......................................    (331,849)        --
    Prepaid expenses and other assets.......................      (7,058)        --
    Accounts payable and accrued liabilities................      16,146         --
                                                              ----------   --------
      Net cash used in operating activities.................    (302,143)        --
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs incurred....................................      (1,682)        --
Net proceeds from issuance of 11 5/8% Senior Notes..........     576,649         --
Proceeds from Initial Public Offering.......................     633,769         --
Proceeds from options exercised.............................         489         --
                                                              ----------   --------
      Net cash provided by/(used in) financing activities...   1,209,225         --
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividend from equity method investment......................      30,000         --
Capital contribution to equity method investment............     (25,000)        --
                                                              ----------   --------
      Net cash used in investing activities.................       5,000         --
                                                              ----------   --------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................     912,082         --
Effect of foreign currency movements........................     (18,508)        --
CASH AND CASH EQUIVALENTS, beginning of period..............          --         --
                                                              ----------   --------
CASH AND CASH EQUIVALENTS, end of year......................  $  893,574         --
                                                              ==========   ========
</TABLE>

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

                                      F-48
<PAGE>
                 FLAG TELECOM HOLDINGS LIMITED AND SUBSIDIARIES
                  NOTES TO THE CONDENSED FINANCIAL STATEMENTS
   FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM INCORPORATION TO
                               DECEMBER 31, 1999
     (EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

1. BACKGROUND AND ORGANIZATION

    FLAG Telecom Holdings Limited ("the Company" or "FLAG Telecom") was
incorporated on February 3, 1999 to serve as the holding company for the FLAG
Telecom group of companies. On February 26, 1999, FLAG Telecom acquired
approximately 66% of FLAG Limited by exchanging 69,709,935 shares of FLAG
Limited common stock for the same number of shares of FLAG Telecom common stock.
The minority shareholder of FLAG Limited exchanged its remaining shareholding in
FLAG Limited for 36,256,121 shares in FLAG Telecom on January 4, 2000 such that
on that date FLAG Limited became a wholly owned subsidiary of FLAG Telecom.

    FLAG Telecom is a global network services provider and independent carriers'
carrier, providing an innovative range of products and services to the
international carrier community, Application Service Providers ("ASPs") and
Internet Service Providers ("ISPs") across a global network platform designed to
support the next generation of Internet Protocol ("IP") over optical data
networks.

2. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
11 5/8% Senior Notes, due 2010, interest payable
  semi-annually, net of unamortized discount of $10,839.....  $558,141         --
                                                              --------   --------
                                                               558,141         --
                                                              ========   ========
</TABLE>

    On March 17, 2000 the Company completed the issue of $300,000 and
Euro 300.000 11 5/8% Senior Notes at par in the US and Europe, raising combined
net proceeds of $576,649. The effective interest rates at December 31, 2000 were
16.3% on the Dollar Notes and 15.8% on the Euro Notes.

    The Credit Facilities and the indentures under which the Senior Notes were
issued impose certain operating and financial restrictions on the respective
borrowers / issuers. Such restrictions will affect, and in many respects
significantly limit or prohibit, among other things, the ability of the Company
to incur additional indebtedness, repay indebtedness (including the Senior
Notes) prior to stated maturities, sell assets, make investments, engage in
transactions with shareholders and affiliates, issue capital stock, create liens
or engage in mergers or acquisitions. These restrictions could also limit the
ability of the company to effect future financings, make needed capital
expenditures, withstand a future downturn in its business or the economy in
general, or otherwise conduct necessary corporate activities.

3. EQUITY METHOD INVESTMENTS

    A dividend received during 2000 from FLAG Limited of $30,000 is reflected
within equity method investments in the accompanying balance sheet.

                                      F-49
<PAGE>
                         FLAG TELECOM HOLDINGS LIMITED
                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                       ADDITIONS
                                                                -----------------------
                                                     BALANCE    CHARGED TO   CHARGED TO                BALANCE
                                                    BEGINNING   COSTS AND      OTHER                    END OF
                                                    OF PERIOD    EXPENSES     ACCOUNTS    DEDUCTIONS    PERIOD
                                                    ---------   ----------   ----------   ----------   --------
<S>                                                 <C>         <C>          <C>          <C>          <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
1998--FLAG Limited................................   $9,054        1,445           --       (1,869)     $8,630
January 1 through February 26,
  1999--FLAG Limited..............................   $8,630           --           --           --       8,630
Incorporation through December 31, 1999...........   $8,630           --           --       (1,803)     $6,827
December 31, 2000.................................   $6,827          102           --       (1,640)     $5,289
</TABLE>
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act 1934, FLAG Telecom Holdings Limited has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, the State of New York, on the 29th day of March, 2001.

<TABLE>
<S>                                                    <C>  <C>
                                                       FLAG TELECOM HOLDINGS LIMITED

                                                       By:               /s/ STUART RUBIN
                                                            -----------------------------------------
                                                                        Name: Stuart Rubin
                                                                         TITLE: SECRETARY
</TABLE>

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the date indicated.

<TABLE>
<CAPTION>
                        NAME                                      TITLE                    DATE
                        ----                                      -----                    ----
<C>                                                    <S>                          <C>
                  /s/ ANDRES BANDE
     -------------------------------------------       Chairman and Chief             March 29, 2001
                    Andres Bande                         Executive Officer

                /s/ EDWARD MCCORMACK
     -------------------------------------------       Chief Operating Officer and    March 29, 2001
                  Edward McCormack                       Director

                 /s/ LARRY BAUTISTA
     -------------------------------------------       Chief Financial Officer        March 29, 2001
                   Larry Bautista

                  /s/ STUART RUBIN
     -------------------------------------------       General Counsel and            March 29, 2001
                    Stuart Rubin                         Secretary

               /s/ MICHAEL FITZPATRICK
     -------------------------------------------       Director                       March 29, 2001
                 Michael Fitzpatrick

                 /s/ THOMAS BARTLETT
     -------------------------------------------       Director                       March 29, 2001
                   Thomas Bartlett

                   /s/ ADNAN OMAR
     -------------------------------------------       Director                       March 29, 2001
                     Adnan Omar

                /s/ ALFRED GIAMMARINO
     -------------------------------------------       Director                       March 29, 2001
                  Alfred Giammarino

              /s/ SOOPAKIJ CHEARAVANONT
     -------------------------------------------       Director                       March 29, 2001
                Soopakij Chearavanont

                /s/ UMBERTO SILVESTRI
     -------------------------------------------       Director                       March 29, 2001
                  Umberto Silvestri

              /s/ DAVID A. RIFFELMACHER
     -------------------------------------------       Director                       March 29, 2001
                David A. Riffelmacher
</TABLE>