<Page>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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

                                  FORM 10-K/A
                                AMENDMENT NO. 1
                                ---------------

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

<Table>
<C>        <S>
                                  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 GROUP LIMITED
             (Exact name of registrant as specified in its charter)
                         ------------------------------

                                    BERMUDA
                        (State or other jurisdiction of
                         incorporation or organization)

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

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

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

    Securities registered pursuant to Section 12(g) of the Act: Common Shares,
$1.00 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 / / No /X/

    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. / /

    Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes / / No /X/

    The aggregate market value of the voting and non-voting common equity held
by non-affiliates of FLAG Telecom Holdings Limited, the predecessor company of
the registrant ("Predecessor"), as of June 30, 2002 was $35,350,000, based on
the closing price of the Predecessor's common shares on June 28, 2002, the last
business day of the Predecessor's most recent completed second fiscal quarter.
Solely for the purpose of this calculation and for no other purpose, the
non-affiliates of the Predecessor are assumed to be all shareholders of the
Predecessor other than (i) directors of the Predecessor, (ii) executive officers
of the Predecessor and (iii) any shareholder that beneficially owns 10% or more
of the Predecessor's common shares as defined in the Predecessor's Form 10-K for
the fiscal year ended December 31, 2001 filed on April 1, 2002. Such exclusion
is not intended, nor shall it be deemed, to be an admission that such persons
are affiliates of the Predecessor or the registrant.

    The number of the registrant's Common Shares outstanding as of June 15, 2003
was 2,000,000.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<Page>
    This Form 10K/A, which hereby amends the registrant's Annual Report on Form
10-K for the year ended December 31, 2002 previously filed with the Securities
Exchange Commission (the "Original Form 10-K"), is being filed by the Registrant
solely to amend the consolidated balance sheets contained in the financial
statements of the Original Form 10-K to reclassify certain deferred revenue
balance from long-term to short-term.

    The financial statements contained in the Original Form 10-K are hereby
deleted and replaced by the financial statements included herein.
<Page>
                              FINANCIAL STATEMENTS

<Table>
<Caption>
                                                                PAGE
                                                              --------
<S>                                                           <C>
FLAG TELECOM GROUP LIMITED

Report of Independent Auditors (Ernst & Young)..............    F-2

Consolidated Balance Sheets as of December 31, 2002 and
  December 31, 2001.........................................    F-3

Consolidated Statements of Operations for the period ended
  December 31, 2002, the period ended October 8, 2002 and
  the years ended December 31, 2001 and December 31, 2000...    F-4

Consolidated Statements of Comprehensive Loss for the period
  ended December 31, 2002, the period ended October 8, 2002
  and the years ended December 31, 2001 and December 31,
  2000......................................................    F-5

Consolidated Statements of Shareholders' Equity for the
  period ended December 31, 2002, the period ended
  October 8, 2002 and the years ended December 31, 2001 and
  December 31, 2000.........................................    F-6

Consolidated Statements of Cash Flows for the period ended
  December 31, 2002, the period ended October 8, 2002 and
  the years ended December 31, 2001 and December 31, 2000...    F-7

Notes to the Consolidated Financial Statements..............    F-9
</Table>

                                      F-1
<Page>
                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of FLAG Telecom Group Limited:

    We have audited the accompanying consolidated balance sheets of FLAG Telecom
Group Limited (formerly FLAG Telecom Holdings Limited), a Bermuda Company ("FLAG
Telecom"), and subsidiaries as of December 31, 2002 (Successor) and
December 31, 2001 (Predecessor) and the related consolidated statements of
operations, comprehensive loss, shareholders' equity and cash flows for the
periods from October 9, 2002 to December 31, 2002 (Successor) and January 1 to
October 8, 2002 (Predecessor) and for the years ended December 31, 2001 and 2000
(Predecessor). Our audits also included the financial statement schedule listed
in the Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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.

    As more fully described in Note 2 to the consolidated financial statements,
effective October 9, 2002, Flag Telecom emerged from protection under Chapter 11
of the U.S. Bankruptcy Code pursuant to a Reorganization Plan that was confirmed
by the Bankruptcy Court on September 26, 2002. In accordance with AICPA
Statement of Position 90-7, the Company adopted "fresh start" accounting whereby
its assets, liabilities and new capital structure were adjusted to reflect
estimated fair value at October 9, 2002. As a result, the consolidated financial
statements for the periods subsequent to October 9, 2002 reflect the Successor's
new basis of accounting and are not comparable to the Predecessor's
pre-reorganization consolidated financial statements. As discussed in Note 13 to
the financial statements, on October 9, 2002 Flag Telecom adopted the provisions
of statement of Financial Accounting Standards No. 143, Asset Retirement
Obligations. As discussed in Note 20 to the financial statements, on January 1,
2001, the Predecessor adopted the provisions of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FLAG Telecom
and subsidiaries as of December 31, 2002 (Successor) and December 31, 2001
(Predecessor) and the consolidated results of their operations and their
consolidated cash flows for the periods from October 9, 2002 to December 31,
2002 (Successor) and January 1 to October 8, 2002 (Predecessor) and for the
years ended December 31, 2001 and 2000 (Predecessor) in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

    As discussed in Note 4 to the consolidated financial statements, in 2002,
FLAG Telecom restated its 2001 and 2000 financial statements for revenue
recognition and other matters. The effect of the restatement is further
discussed in Note 4.

Ernst & Young LLP
London, United Kingdom
July 3, 2003
except for Note 3, as to which the date is August 14, 2003

                                      F-2
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
     (EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

<Table>
<Caption>
                                                              SUCCESSOR   PREDECESSOR
                                                                2002         2001
                                                              ---------   -----------
                                                                          (RESTATED)
<S>                                                           <C>         <C>
ASSETS:
Current assets:
  Cash and cash equivalents.................................  $125,777    $  417,396
  Accounts receivable, net of allowance for doubtful
    accounts of $10,444 (2001--$5,099)......................    81,850       148,919
  Prepaid expenses and other assets.........................    46,271        42,616
  Interest rate collars.....................................        --            57
                                                              --------    ----------
Total current assets........................................   253,898       608,988
Restricted cash.............................................     8,441       326,109
Capitalized financing costs, net of accumulated amortization
  of $8,543 (2001)..........................................        --        27,872
Construction in progress....................................     1,889       294,881
Other long term assets, net.................................    21,507        27,590
Property and equipment, net.................................   313,233     1,979,241
                                                              --------    ----------
Total assets................................................  $598,968    $3,264,681
                                                              ========    ==========

LIABILITIES:
Current liabilities:
  Accrued construction costs................................  $  3,456    $   52,084
  Accounts payable..........................................    32,795       113,720
  Accrued liabilities.......................................    45,796        99,354
  Deferred revenue and other................................    34,115*      119,562
  Cross currency swaps......................................        --         7,226
  Income taxes payable......................................    10,986        13,686
  Short-term debt...........................................     9,517       556,078
  Performance obligations under long term contracts.........    13,929            --
                                                              --------    ----------
Total current liabilities...................................   150,594       961,710
Long-term debt..............................................    67,911       767,953
Other long-term liabilities.................................     4,928         2,901
Deferred revenue and other..................................    17,464*    1,183,932
Performance obligations under long term contracts...........   118,757            --
                                                              --------    ----------
Total liabilities...........................................   359,654     2,916,496

Minority interest in net income of consolidated
  subsidiary................................................     2,741         2,851

SHAREHOLDERS' EQUITY:
Common stock, $1.00 (2001--$.0006) par value, 3,000,000
  (2001--300,000,000) authorized and 2,000,000
  (2001--134,139,046) issued and outstanding................     2,000            80
Additional paid-in capital..................................   266,700     1,113,455
Accumulated other comprehensive income......................     4,720         5,254
Accumulated deficit.........................................   (36,847)     (773,455)
                                                              --------    ----------
Total shareholders' equity..................................   236,573       345,334
                                                              --------    ----------
Total liabilities and shareholders' equity..................  $598,968    $3,264,681
                                                              ========    ==========
</Table>

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

*   Reclassified. See Note 3 for further details

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

                                      F-3
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
     (EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

<Table>
<Caption>
                                                                  SUCCESSOR        PREDECESSOR
                                                                 PERIOD FROM       PERIOD FROM
                                                              OCTOBER 9, 2002 TO   JANUARY 1 TO
                                                                 DECEMBER 31,       OCTOBER 8,    PREDECESSOR    PREDECESSOR
                                                                     2002              2002           2001           2000
                                                              ------------------   ------------   ------------   ------------
                                                                                                   (RESTATED)     (RESTATED)
<S>                                                           <C>                  <C>            <C>            <C>
REVENUES:
  Capacity revenue, net of discounts........................      $    2,234       $    85,821    $     67,960   $     34,834
  Operations and maintenance revenue........................           1,665            51,035          60,104         43,829
  Network services revenue..................................           8,248            41,078          35,545         21,599
Amortization of performance obligations under long-term
  contracts.................................................           9,857                --              --             --
                                                                  ----------       ------------   ------------   ------------
                                                                      22,004           177,934         163,609        100,262
EXPENSES:
  Operations and maintenance cost (including non-cash stock
    compensation expense of $0 (Successor),
    $0 (Predecessor), (2001--$255, 2000--$1,963)............          19,258            55,780          50,222         36,222
  Network expenses..........................................           8,024            40,823          45,628         18,805
  Sales, general and administrative (including non-cash
    stock compensation expense of $0 (Successor),
    $0 (Predecessor), (2001--$793, 2000--$5,705)............          15,624            57,688          69,481         48,227
  Bad debt expense..........................................           1,037            15,565            (173)        (1,289)
  Restructuring costs.......................................           4,097             2,058             217             --
  Asset impairment..........................................              --           552,900         385,598             --

  Depreciation..............................................           7,345           126,809         131,979         81,486
  Amortization..............................................              --                --           2,042            139
                                                                  ----------       ------------   ------------   ------------
                                                                      55,385           851,623         684,994        183,590
                                                                  ----------       ------------   ------------   ------------
OPERATING LOSS BEFORE REORGANIZATION ITEMS..................         (33,381)         (673,689)       (521,385)       (83,328)
  Reorganization costs......................................              --           (64,704)             --             --
  Gain on settlement of liabilities subject to compromise...              --           749,566              --             --
  Fresh start adjustments...................................              --          (308,769)             --             --
                                                                  ----------       ------------   ------------   ------------

OPERATING LOSS..............................................         (33,381)         (297,596)       (521,385)       (83,328)
INCOME FROM INVESTMENT IN FLAG ATLANTIC LIMITED.............              --                --              --          4,717
INTEREST EXPENSE............................................          (2,586)          (42,373)       (109,156)      (102,543)
FOREIGN CURRENCY (LOSS)/GAIN................................            (631)          (24,510)         (7,185)        16,812
INTEREST INCOME.............................................             293             4,041          42,870         69,817
                                                                  ----------       ------------   ------------   ------------
LOSS BEFORE INCOME TAXES, MINORITY INTEREST, AND CUMULATIVE
  EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE..................         (36,305)         (360,438)       (594,856)       (94,525)
PROVISION FOR INCOME TAXES..................................            (652)            3,787          (7,402)        (1,096)
                                                                  ----------       ------------   ------------   ------------
LOSS BEFORE MINORITY INTEREST AND CUMULATIVE EFFECT OF
  ADOPTION OF CHANGE IN ACCOUNTING PRINCIPLE................         (36,957)         (356,651)       (602,258)       (95,621)
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED
  SUBSIDIARY................................................             110                --              --             --
                                                                  ----------       ------------   ------------   ------------
NET LOSS BEFORE CUMULATIVE EFFECT OF ADOPTION OF CHANGE IN
  ACCOUNTING PRINCIPLE......................................         (36,847)         (356,651)       (602,258)       (95,621)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.........              --            (1,938)         (1,291)            --
                                                                  ----------       ------------   ------------   ------------
NET LOSS....................................................      $  (36,847)      $  (358,589)   $   (603,549)  $    (95,621)
                                                                  ==========       ============   ============   ============

Basic and diluted loss per common share before cumulative
  effect of adoption of change in accounting principle......      $   (18.42)      $     (2.66)   $      (4.49)  $      (0.73)
Cumulative effect of adoption of change in accounting
  principle.................................................              --       $     (0.01)   $      (0.01)            --
Basic and diluted loss per common share.....................      $   (18.42)      $     (2.67)   $      (4.50)  $      (0.73)
Weighted average common shares outstanding..................       2,000,000       134,139,046     134,122,061    130,763,607
                                                                  ==========       ============   ============   ============
</Table>

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

                                      F-4
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<Table>
<Caption>
                                                  SUCCESSOR        PREDECESSOR
                                                 PERIOD FROM       PERIOD FROM
                                              OCTOBER 9, 2002 TO   JANUARY 1 TO
                                                 DECEMBER 31,       OCTOBER 8,    PREDECESSOR   PREDECESSOR
                                                     2002              2002          2001          2000
                                              ------------------   ------------   -----------   -----------
                                                                                  (RESTATED)    (RESTATED)
<S>                                           <C>                  <C>            <C>           <C>
NET LOSS....................................       $(36,847)        $(358,589)     $(603,549)     $(95,621)

Foreign currency translation adjustment.....          4,720            13,293          1,770         3,285

Cumulative effect of change in accounting
  policy re SFAS No. 133....................             --                --           (526)           --

Change in fair market value of
  derivatives...............................             --               (58)           584            --
                                                   --------         ---------      ---------      --------

COMPREHENSIVE LOSS..........................       $(32,127)        $(345,354)     $(601,721)     $(92,336)
                                                   ========         =========      =========      ========
</Table>

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

                                      F-5
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
     (EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

<Table>
<Caption>
                                                                                     ACCUMULATED
                                       COMMON STOCK         ADDITIONAL   DEFERRED       OTHER                           TOTAL
                                  -----------------------    PAID-IN      STOCK     COMPREHENSIVE    ACCUMULATED    SHAREHOLDERS'
                                     SHARES       AMOUNT     CAPITAL       COMP         INCOME         DEFICIT         EQUITY
                                  ------------   --------   ----------   --------   --------------   ------------   -------------
<S>                               <C>            <C>        <C>          <C>        <C>              <C>            <C>
Predecessor Company balance
  January 1, 2000 (Restated)....    69,709,935    $   42    $ 323,136    $(8,716)      $    141       $ (74,285)     $   240,318
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      634,483         --             --              --          634,499
Options exercised...............       131,864        --          546         --             --              --              546
Stock compensation charge.......            --        --           --      7,668             --              --            7,668
Foreign currency translation
  adjustment....................            --        --           --         --          3,285              --            3,285
Net loss........................            --        --           --         --             --         (95,621)         (95,621)
                                  ------------    ------    ----------   -------       --------       ---------      -----------
Balance, December 31, 2000
  (Restated)....................   134,061,920    $   80    $1,112,960   $(1,048)      $  3,426       $(169,906)     $   945,512
Options exercised...............        77,126        --          495         --             --              --              495
Stock compensation charge.......            --        --           --      1,048             --              --            1,048
Foreign currency translation
  adjustment....................            --        --           --         --          1,770              --            1,770
Cumulative effect of change in
  accounting policy re SFAS No.
  133...........................            --        --           --         --           (526)             --             (526)
Change in fair market value of
  derivatives...................            --        --           --         --            584              --              584
Net loss........................            --        --           --         --             --        (603,549)        (603,549)
                                  ------------    ------    ----------   -------       --------       ---------      -----------
Balance, December 31, 2001
  (Restated)....................   134,139,046    $   80    $1,113,455   $    --       $  5,254       $(773,455)     $   345,334
Foreign currency translation
  adjustment....................            --        --           --         --         13,293              --           13,293
Change in fair market value of
  derivatives...................            --        --           --         --            (58)             --              (58)
Net loss........................            --        --           --         --             --        (358,589)        (358,589)
Impact of Fresh Start
  Adjustments:
Elimination of accumulated
  losses........................            --        --           --         --        (18,489)      1,132,044        1,113,555
Cancellation of shares in
  Predecessor...................  (134,139,046)      (80)   (1,113,455)       --             --              --       (1,113,535)
Issuance of shares in
  Successor.....................     2,000,000     2,000      266,700         --             --              --          268,700
                                  ------------    ------    ----------   -------       --------       ---------      -----------
Successor Company balance,
  October 9, 2002...............     2,000,000    $2,000    $ 266,700    $    --       $     --       $      --      $   268,700
Foreign currency translation
  adjustment....................            --        --           --         --          4,720              --            4,720
Net loss........................            --        --           --         --             --         (36,847)         (36,847)
                                  ------------    ------    ----------   -------       --------       ---------      -----------
Balance, December 31, 2002......     2,000,000    $2,000    $ 266,700    $    --       $  4,720       $ (36,847)     $   236,573
                                  ============    ======    ==========   =======       ========       =========      ===========
</Table>

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

                                      F-6
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<Table>
<Caption>
                                                         SUCCESSOR        PREDECESSOR
                                                        PERIOD FROM       PERIOD FROM
                                                     OCTOBER 9, 2002 TO   JANUARY 1 TO
                                                        DECEMBER 31,       OCTOBER 8,    PREDECESSOR   PREDECESSOR
                                                            2002              2002          2001          2000
                                                     ------------------   ------------   -----------   -----------
                                                                                         (RESTATED)    (RESTATED)
<S>                                                  <C>                  <C>            <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) before reorganization costs......       $(36,847)        $(293,885)    $  (603,549)  $  (95,621)
Adjustments to reconcile net loss to net cash
  provided by operating activities:
  Minority interest................................           (110)               --              --           --
  Cumulative effect of change in accounting
    principle......................................             --             1,938           1,291           --
  Amortization/write off of financing costs........             --             9,387           2,760        2,522
  Allowance for doubtful accounts..................          1,037            15,565            (173)      (1,289)
  Senior debt discount.............................             --             1,200           1,769        1,523
  Non-cash stock compensation......................             --                --           1,047        7,669
  Depreciation and amortization....................          7,345           126,809         134,021       81,625
  Non-cash asset impairment charge.................             --           552,900         359,000           --
  Non-cash fresh start adjustments.................             --           308,769              --           --
  Gain on settlement of liabilities subject to
    compromise.....................................             --          (749,566)             --           --
  Amortization of performance obligations under
    long term contracts............................         (9,857)               --              --           --
  Accretion of asset retirement obligations........            150                --              --           --
  Fair value appreciation of LT debt...............          1,410                --              --           --
  Loss on disposal of property and equipment.......             --                51              --           93
  Deferred taxes...................................             28            (2,107)         (3,410)        (363)
Add/(deduct) net changes in operating assets and
  liabilities:
  Accounts receivable..............................         (8,030)           19,091         (10,700)     (22,281)
  Due from affiliate...............................             --                --              --        2,000
  Prepaid expenses and other assets................          5,599           (17,477)        (34,307)     (16,726)
  Accounts payable and accrued liabilities.........        (13,734)           11,568          34,283       70,394
  Income taxes payable.............................            635            (3,335)          9,207          (46)
  Deferred revenue and other.......................         51,578            (5,086)        576,182      142,106
                                                          --------         ---------     -----------   ----------
  Net cash provided by (used in) operating
    activities before reorganization items.........           (796)          (24,178)        467,421      171,606
  Cash paid for reorganization items...............        (18,105)          (10,854)             --           --
                                                          --------         ---------     -----------   ----------
  Net cash provided by (used in) operating
    activities.....................................        (18,901)          (35,032)        467,421      171,606
                                                          ========         =========     ===========   ==========

CASH FLOWS FROM FINANCING ACTIVITIES:
Settlement of foreign exchange swap................             --            (6,530)             --           --
Financing costs incurred...........................             --                --          (1,683)        (891)
Repayment of long-term debt........................           (165)         (415,288)        (45,500)     (97,000)
Proceeds from issuance of long-term debt...........             --                --         232,000      576,649
Proceeds from Initial Public Offering..............             --                --              --      634,499
Proceeds from options exercised....................             --                --             495          546
                                                          --------         ---------     -----------   ----------
  Net cash provided by/(used in) financing
    activities.....................................           (165)         (421,818)        185,312    1,113,803
                                                          ========         =========     ===========   ==========
</Table>

                                      F-7
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<Table>
<Caption>
                                                         SUCCESSOR        PREDECESSOR
                                                        PERIOD FROM       PERIOD FROM
                                                     OCTOBER 9, 2002 TO   JANUARY 1 TO
                                                        DECEMBER 31,       OCTOBER 8,    PREDECESSOR   PREDECESSOR
                                                            2002              2002          2001          2000
                                                     ------------------   ------------   -----------   -----------
                                                                                         (RESTATED)    (RESTATED)
<S>                                                  <C>                  <C>            <C>           <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash........................       $  3,780         $ 313,904     $    51,769   $    5,259
Cash paid for construction.........................         (1,607)         (158,611)       (937,327)    (107,529)
Investment in FLAG Atlantic Limited prior to
  acquisition of 100% interest.....................             --                --              --     (104,814)
Acquisition of FLAG Atlantic Limited...............             --                --              --     (130,000)
Proceeds from disposals of property and
  equipment........................................             --                94              14           32
Investment in property and equipment and
  networks.........................................           (196)           (3,237)       (266,738)     (18,569)
                                                          --------         ---------     -----------   ----------
  Net cash provided by/(used in) investing
    activities.....................................          1,977           152,150      (1,152,282)    (355,621)
                                                          ========         =========     ===========   ==========

NET (DECREASE)/INCREASE IN CASH AND CASH
  EQUIVALENTS......................................        (17,089)         (304,700)       (499,549)     929,910
Effect of foreign currency movements...............          2,640            27,530           1,261      (17,278)
CASH AND CASH EQUIVALENTS, beginning of period.....        140,226           417,396         915,684        3,191
                                                          --------         ---------     -----------   ----------
CASH AND CASH EQUIVALENTS, end of period...........       $125,777         $ 140,226     $   417,396   $  915,684
                                                          ========         =========     ===========   ==========

SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
  ACTIVITIES:
(Decrease)/increase in construction in progress....       $   (804)        $ 156,758     $   969,244   $   98,256
(Increase)/decrease in accrued construction
  costs............................................          2,411             1,853         (31,917)       9,273
                                                          --------         ---------     -----------   ----------
Cash paid for construction in progress.............       $  1,607         $ 158,611     $   937,327   $  107,529
                                                          ========         =========     ===========   ==========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest expense for period........................       $  2,586         $  42,373     $   109,156   $  102,543
Amortization of financing costs....................             --           (10,587)         (4,529)      (4,045)
Decrease/(increase) in accrued interest payable....           (669)           31,597           1,367      (15,328)
Fair value appreciation of long-term debt..........         (1,410)               --              --           --
Interest transferred to liabilities subject to
  compromise.......................................             --           (40,452)             --           --
                                                          --------         ---------     -----------   ----------
Interest paid......................................            507            22,931         105,994       83,170
                                                          --------         ---------     -----------   ----------

Interest capitalized...............................             --             2,165          16,150        6,683
                                                          --------         ---------     -----------   ----------

Taxes paid.........................................       $     17         $   1,750     $     1,518   $    1,207
                                                          ========         =========     ===========   ==========
</Table>

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

                                      F-8
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

1.  BACKGROUND AND ORGANIZATION

    The Company (as defined below) is part of a multinational corporate
organization made up of more than 50 corporate entities. The Company operates a
global telecommunications network comprised of advanced fiber-optic cable
systems and interfaces that are owned by, leased to, or otherwise available to
the Company. Over its global network, the Company offers a variety of
telecommunications products and services, IP transit, IP point-to-point, leased
capacity services, managed bandwidth service, co-location services and long-term
rights of use in capacity. The Company is a "carriers' carrier", meaning that
its target customer base is the international wholesale broadband market,
consisting of established carriers or major public telephone operator
incumbents, including Application Service Providers ("ASPs") and Internet
Service Providers ("ISPs"), alternate carriers and other bandwidth intensive
users, rather than individual telecommunications consumers.

    These consolidated financial statements contain information relating to FLAG
Telecom Holdings Limited, a Bermuda corporation and its subsidiaries
(collectively, "Predecessor"), and have been prepared by the management of FLAG
Telecom Group Limited, a Bermuda corporation and the successor entity of
Predecessor. References in these consolidated financial statements to "FLAG
Telecom", the "Company", the "Group", "we", "us", the "Company" or "Successor"
refer to FLAG Telecom Group Limited and its subsidiaries. For the purposes of
continuing accounting policies, Predecessor and Successor are collectively
referred to as "FLAG". On October 9, 2002 (the "Effective Date"), Predecessor
transferred substantially all of its assets and certain liabilities, at fair
value, to Successor, as a result of transactions contemplated by a Plan of
Reorganization (the "Plan") of Predecessor and certain of its subsidiaries under
chapter 11 of the United States Bankruptcy Code and related Bermuda Schemes of
Arrangement.

    The consolidated financial statements for the period ended October 8, 2002
have been prepared while Predecessor was still involved in chapter 11
proceedings and, accordingly, have been prepared in accordance with Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code"--("SOP 90-7"). These financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that have resulted due
to Predecessor not continuing as a going concern. In addition, Predecessor's
results of operations prior to October 9, 2002 are not comparable to the
Company's results of operations after its emergence from bankruptcy due to the
adoption of fresh start accounting.

    STATEMENT OF POSITION 90-7, FINANCIAL REPORTING BY ENTITIES IN
     REORGANIZATION UNDER THE BANKRUPTCY CODE

    Successor emerged from chapter 11 bankruptcy proceedings on October 9, 2002,
as the successor to Predecessor. Effective as of the Effective Date, Successor
adopted fresh start reporting in accordance with SOP 90-7. Unlike the
consolidated financial statements for Predecessor contained herein, the
consolidated financial statements for Successor reflect reorganization
adjustments for the discharge of debt and the adoption of fresh start reporting.
This resulted in significant changes to the following balance sheet captions:
Construction in progress, Other long-term assets, Property and equipment,
Deferred revenue, Short-term debt, Accounts payable and Accruals.

    SOP 90-7 states that if the reorganization value of the assets of the
emerging entity immediately before the date of confirmation is less than the
total of all post-petition liabilities and allowed claims,

                                      F-9
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

1.  BACKGROUND AND ORGANIZATION (CONTINUED)
and if holders of existing voting shares immediately before confirmation receive
less than 50 percent of the voting shares of the emerging entity, the entity
must adopt fresh start reporting upon its emergence from chapter 11.

    Entities that adopt fresh start reporting apply the following main
principles:

    - The reorganization value of the entity should be allocated to the entity's
      assets in conformity with the procedures specified by Statement of
      Financial Accounting Standards No. 141, "Business Combinations", ("SFAS
      No. 141") for transactions reported on the basis of the purchase method.

    - Each liability existing at the plan confirmation date, other than deferred
      taxes, should be stated at present values of amounts to be paid determined
      at appropriate current interest rates.

    PLAN OF REORGANIZATION

    Following the consummation of the transactions contemplated by the Plan, the
common shares of the Successor became registered under Section 12 (g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as provided by
Rule 12g-3 under the Exchange Act. For purposes of Rule 12g-3, Successor is the
successor issuer to the Predecessor.

    Successor's authorized capital stock consists of 3,000,000 common shares and
no preferred shares. As of the Effective Date, there were 2,000,000 common
shares issued and outstanding. Successor has reserved 222,222 common shares to
be issued pursuant to its 2002 Stock Incentive Plan. The holders of common
shares (the "Shareholders") are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. The Shareholders are
entitled to receive ratably such dividends as may be declared by the Company's
Board of Directors (the "Board") out of the funds legally available for payment
of dividends. However, Successor does not presently anticipate that dividends
will be paid on the common shares in the foreseeable future. Furthermore,
payment of dividends is restricted by the terms of an indenture between
Successor and The Bank of New York, as indenture trustee, dated October 9, 2002.
In the event of a liquidation, dissolution or winding up of the Company, the
Shareholders will be entitled to share ratably in all assets remaining after
payment of liabilities. The Shareholders have no preemptive, subscription,
redemption or conversion rights. All of the outstanding common shares are
validly issued, fully paid and non-assessable.

    As of the Effective Date, Successor ceased to be a "foreign private issuer"
within the meaning of Rule 3b-4 promulgated under the Exchange Act and is filing
periodic reports under the Exchange Act as a domestic registrant.

    Pursuant to the Plan, the following transactions were completed on or about
the Effective Date;

    - Holders of Predecessor's 11 5/8% Senior Dollar Notes due 2010 and 11 5/8%
      Senior Euro Notes due 2010 received, in the aggregate, (i) $245 million in
      cash, less certain fees and expenses, (ii) notes in the original principal
      amount of $45 million, bearing simple interest between 6.67% and 8% over a
      three year period of maturity, with a call right by Successor during the
      first 18 months after the Effective Date at $30 million, and
      (iii) 100,000 shares of the issued and outstanding common shares of
      Successor, par value $1.00 per share (approximately 5%);

                                      F-10
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

    - Certain significant trade creditors amended agreements with Predecessor
      and received other consideration, including, among others, promissory
      notes, common shares and cash, as further detailed in the Plan;

    - Trade creditors of Predecessor and its affiliates, other than trade
      creditors of FLAG Atlantic Holdings Limited and its debtor subsidiaries,
      received a negotiated amount, reinstatement of their claims or payment in
      full in the sum of $6.1 million; and

    - Trade creditors of FLAG Atlantic Holdings Limited and those of its
      subsidiaries that are debtors in the chapter 11 cases received pro rata
      rights to recoveries attributable to avoidance actions belonging to the
      entity against which such trade creditors hold their claims.

    As set forth in the Plan, equity holders of Predecessor did not receive any
consideration.

    As a companion to the Plan, a Scheme of Arrangement was proposed for each of
FLAG Telecom Holdings Limited and FLAG Limited (the "Schemes"). The Schemes were
submitted to the Bermuda Court on August 7, 2002 and became effective on the
Effective Date.

    By orders of the Supreme Court of Bermuda on October 11, 2002, the joint
provisional liquidators of FLAG Limited and FLAG Asia Limited were discharged
and leave was granted to withdraw the petitions for the winding up of these two
entities. On the same day, the powers of the joint provisional liquidators of
FLAG Telecom Holdings Limited and FLAG Atlantic Limited were extended thereby
extinguishing any residual power of the board and management of these entities.
In addition, on October 11, 2002, a petition was filed seeking a winding up
order in respect of FLAG Atlantic Holdings Limited, and an order appointing
joint provisional liquidators of that company was granted.

    On November 15, 2002, a winding up order was made in respect of Predecessor,
FLAG Atlantic Holdings Limited and FLAG Atlantic Limited by the Supreme Court of
Bermuda. Pursuant to this order, the appointment of Mr. Richard Heis and
Ms. Chris Laverty, both of KPMG LLP in England and Mr. Robert D. Steinhoff of
KPMG in Bermuda, as Joint Provisional Liquidators of these entities, was
continued. As a result, Predecessor, FLAG Atlantic Holdings Limited and FLAG
Atlantic Limited are now in liquidation under Bermuda law.

2.  ACCOUNTING FOR BANKRUPTCY ACTIVITIES

    The Company's emergence from chapter 11 bankruptcy proceedings resulted in a
new reporting entity and adoption of fresh start reporting in accordance with
SOP 90-7. The consolidated financial statements for the period ended October 8,
2002 reflect organization adjustments for the discharge of debt and adoption of
fresh start reporting.

    The reorganization value of $347.7 million was determined by the Company
with the assistance and analysis of its financial advisors.The reorganization
value was primarily determined on a discounted cash flow analysis utilizing both
recent operating results and future projected cash flows over the lives

                                      F-11
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

2.  ACCOUNTING FOR BANKRUPTCY ACTIVITIES (CONTINUED)
of the network assets were evaluated. The estimated reorganization value of the
Company is consistent with the basis for the Plan approved by the bankruptcy
court.

    The reorganization value was used to determine the equity value allocated to
the assets and liabilities of the Reorganized Company in proportion to their
relative fair value in conformity with SFAS No. 141. In accordance with SOP
90-7, all expenses incurred in connection with Predecessor's reorganization have
been reflected as reorganization items in the accompanying consolidated
statement of operations.

    The following table reflects the fresh start reporting and reorganization
adjustments to the Company's Condensed Consolidated Balance Sheet as of
emergence from bankruptcy:

<Table>
<Caption>
                                                        BALANCE SHEET AS AT OCTOBER 9, 2002
                                          ---------------------------------------------------------------
                                                        REORGANIZATION      FRESH START
                                          PREDECESSOR    ADJUSTMENTS        ADJUSTMENTS         SUCCESSOR
                                          -----------   --------------      -----------         ---------
<S>                                       <C>           <C>                 <C>                 <C>
Current assets..........................  $   509,332    $  (244,537)(1)    $        --         $264,795
Restricted cash.........................       94,965        (82,751)(2)             --           12,214
Long-term assets........................       38,660             --            (17,445)(d)(e)    21,215
Property and equipment, net.............    1,769,582             --         (1,447,765)(a)      321,817
                                          -----------    -----------        -----------         --------
Total assets............................  $ 2,412,539    $  (327,288)       $(1,465,210)        $620,041
                                          ===========    ===========        ===========         ========
Accounts payable and accrued
  liabilities...........................      119,865          5,149 (3)             --          125,014
Short-term debt.........................           --          9,517 (1,3)           --            9,517
Long-term debt..........................       82,751        (16,085)(1,3)           --           66,666
Deferred revenue........................    1,298,408             --         (1,298,408)(b)           --
Performance obligations under long-term
  contracts.............................           --             --            142,543 (c)      142,543
Other long-term liabilities.............        5,346             --               (596)(e)        4,750
Liabilities subject to Compromise.......    1,338,885     (1,338,885)                --               --
                                          -----------    -----------        -----------         --------
Total liabilities.......................  $ 2,845,255    $(1,340,304)       $(1,156,461)        $348,490
Minority interest.......................        2,851             --                 --            2,851
Accumulated deficit.....................   (1,567,591)       744,316 (1,3)      823,275 (f)           --
Other shareholders equity...............    1,132,024        268,700 (1,3)   (1,132,024)(f)      268,700
                                          -----------    -----------        -----------         --------
Total liabilities and shareholders
  equity................................  $ 2,412,539    $  (327,288)       $(1,465,210)        $620,041
                                          ===========    ===========        ===========         ========
</Table>

    Reorganization adjustments in the December 31, 2002 consolidated financial
statements result primarily from the following:

1.  Exchange of Old Notes and accrued interest for $245 million in cash,
    $45 million in New Notes and approximately 68% of the New Common Stock of
    the Successor.

2.  Bank lenders received approximately 26% of the New Common Stock of the
    Successor in addition to the $82.8 million they seized just prior to the
    filing of chapter 11 proceedings on April 12, 2002.

3.  Trade creditors received promissory notes, New Common Stock and cash as
    detailed in the Plan of Reorganization.

                                      F-12
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

2.  ACCOUNTING FOR BANKRUPTCY ACTIVITIES (CONTINUED)
    Fresh start adjustments in the December 31, 2002 consolidated financial
statements result primarily from the following:

    (a) Reduction of the property, plant and equipment carrying values to
       reflect fair value.

    (b) Elimination of the deferred revenue balances of the Predecessor
       ($1,298.4 million).

    (c) Recognition of the performance obligations under long-term contracts
       that were entered into by Predecessor ($142.5 million) to reflect fair
       value.

    (d) Reduction in the carrying values of long-term assets ($17.4 million).

    (e) Elimination of deferred tax liability ($0.6 million) and deferred tax
       asset ($2.9 million), included in (d) above.

    (f) Cancellation of FLAG's common stock and the elimination of accumulated
       deficit.

    These adjustments were based on the work of outside financial advisors, as
well as internal valuation estimates using discounted cash flow analyses, to
determine the relative fair values of the Company's assets and liabilities.

    REORGANIZATION COSTS

    In the period from January 1, 2002 to October 8, 2002, we incurred
$64.7 million in reorganization costs. These costs represent items arising from
the application of SOP 90-7. Specifically, these costs relate to professional
fees ($35.0 million), retainers ($2.5 million), write-off of capitalized finance
cost ($18.2 million) and underwriter's discount ($12.3 million) paid, partially
offset by interest income ($3.3 million) earned during the period we commenced
chapter 11 proceedings.

3.  SIGNIFICANT ACCOUNTING POLICIES

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

    BASIS OF CONSOLIDATION

    The financial statements consolidate the financial statements of FLAG and
its subsidiary companies after eliminating intercompany transactions and
balances and recording minority interests. Investments in which FLAG has an
investment of 20%-50% or investments in which FLAG can assert significant
influence, but does not control, are accounted for under the equity method.
However, the Company has a 49% interest in Seoul Telenet Inc which is accounted
for under the principles of consolidation. The Company consolidates Seoul
Telenet Inc as it exercises control over the operations despite having an
investment of 49%. At December 31, 2002, there were no equity method investments
remaining (see Note 7).

    USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at the date of the financial statements, as well as
the

                                      F-13
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

3.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenue and expenses during the reporting period. The most
critical estimates include accounts receivable reserves, impairment charges,
useful lives of fixed assets, asset retirement obligations and performance
obligations under long term contracts. Actual amounts and results could differ
from those estimates.

    REVENUE RECOGNITION

    CAPACITY

    Capacity contracts are accounted for as leases. Capacity contracts that do
not qualify for sales-type lease accounting are accounted for as operating
leases and revenue is recognized over the term of the lease. Predecessor has
recorded only operating leases for capacity transactions for the periods
presented.

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

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

    RECIPROCAL TRANSACTIONS FOR CAPACITY

    Historically, in accordance with U.S. GAAP, amounts invoiced as part of
reciprocal transactions for capacity were recorded at fair value as deferred
revenue. Predecessor amortized deferred revenue on a straight-line basis as
earned over the term of the relevant agreement. During the periods presented,
Predecessor was not a party to any reciprocal transaction that would require it
to recognize revenues up front.

    Predecessor adopted the guidance issued by the AICPA--SEC Regulations
Committee on August 2, 2002 (the "AICPA Guidance"), applied this retrospectively
and restated the comparative period financial statements. The adoption of the
AICPA Guidance resulted in a change to Predecessor's accounting policy for
reciprocal transactions for capacity and, consequently, they are no longer
capitalized. See Note 4.

    OPERATIONS AND MAINTENANCE

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

    NETWORK REVENUES

    Network revenues are revenues derived from the sale of managed bandwidth
leases and Internet Protocol ("IP") services. Revenue associated with leased
capacity is recognized as operating lease

                                      F-14
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

3.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
revenue unless the criteria under FASB Interpretation No. 43 for sales-type
lease accounting are met. During the periods presented, FLAG did not record any
sales-type leases.

    PERFORMANCE OBLIGATIONS

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

    DIRECT COSTS RELATED TO REVENUE

    CAPACITY

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

    RECIPROCAL TRANSACTIONS FOR CAPACITY

    Historically, Predecessor recorded capacity acquired as part of reciprocal
transactions for capacity either as property and equipment, prepaid expenses and
other assets or other long-term assets, depending upon when Predecessor
anticipated that they would be brought into service, and were charged as network
expense or depreciated on a straight-line basis over the shorter of 15 years or
the term of the purchase agreement.

    As discussed in Note 4, Predecessor adopted the AICPA Guidance issued on
August 2, 2002, applied this retrospectively and restated the comparative period
financial statements.

    OPERATIONS AND MAINTENANCE COSTS

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

    NETWORK EXPENSES

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

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

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

    COMMISSIONS

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

                                      F-15
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

3.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    ADVERTISING COSTS

    Advertising costs are expensed as incurred. Such costs are included in
sales, general and administrative expenses in the accompanying consolidated
statements of operations. Advertising costs charged to the income statement were
$68, $784, $2,087 and $1,570 for the period October 9, 2002 to December 31,
2002, the period January 1, 2002 to October 8, 2002, and the years ended
December 31, 2001 and 2000, respectively.

    PENSIONS

    All eligible employees of FLAG are covered by a non-contributory defined
contribution pension plan. Pension costs charged to the income statement were
$837, $1,611, $2,419 and $706 for the period October 9, 2002 to December 31,
2002, the period January 1, 2002 to October 8, 2002, and the years ended
December 31, 2001 and 2000, respectively.

    INCOME TAXES

    Income taxes are accounted for under the liability method. Deferred taxes
are determined based on the difference between the tax basis of an asset or
liability and its reported amount in the financial statements. A deferred tax
liability or asset is recorded using the enacted tax rates expected to apply to
taxable income in the period in which the deferred tax liability or asset is
expected to be settled or realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period in
which the change is enacted. Future tax benefits attributable to these
differences, if any, are recognizable to the extent that realization of such
benefits is more likely than not. Valuation allowance is applied to deferred tax
assets in order to recognize them at fair value at the balance sheet date.

    NET LOSS PER COMMON SHARE

    Basic net loss per common share is computed by dividing net loss applicable
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share is computed by
dividing net loss by the weighted average number of common shares and common
share equivalents outstanding during the period.

    CONSTRUCTION IN PROGRESS

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

                                      F-16
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

3.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    PROPERTY AND EQUIPMENT

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

<Table>
<S>                                            <C>
Computer equipment...........................  3 years
Fixtures and fittings........................  5 years
Leasehold improvements.......................  Remaining lease term
Motor vehicles...............................  5 years
Network assets...............................  15 years or remaining useful lives
</Table>

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

    IMPAIRMENT OF LONG-LIVED ASSETS

    Effective as of January 1, 2002, Predecessor adopted Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets". FLAG 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 FLAG.

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

    CASH AND CASH EQUIVALENTS

    FLAG 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 are approximate to fair value.

    RESTRICTED CASH

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

    DERIVATIVE FINANCIAL INSTRUMENTS

    Prior to the commencement of its chapter 11 proceedings, Predecessor had
been using derivative financial instruments for the purpose of reducing its
exposure to adverse fluctuations in interest rates, currencies and other market
risks. Predecessor did not utilize derivative financial instruments for

                                      F-17
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

3.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
trading or other speculative purposes. The counter-parties to these instruments
are major financial institutions with high credit quality. Predecessor was
exposed to credit loss in the event of non-performance by these counter-parties.

    FLAG records all derivative instruments on the balance sheet at fair value.
Changes in a derivative's fair value are recognized in earnings unless specific
hedge criteria are met. If the derivative is designated as a fair value hedge,
the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized as a charge or credit to
earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in other
comprehensive income (loss) and are recognized in the consolidated statement of
earnings when the hedged item affects earnings and the cash flows are classified
consistent with the underlying hedged item. For purchased foreign currency
options the entire change in fair value is included in the measurement of hedge
effectiveness for cash flow hedges. Ineffective portions of changes in the fair
value of cash flow hedges are recognized as a charge or credit to earnings.

    FLAG designates and assigns derivatives as hedges of forecasted
transactions, specific assets or specific liabilities. When hedged assets or
liabilities are sold or extinguished or the forecasted transactions being hedged
are no longer expected to occur, the Company recognizes the gain or loss on the
designated hedging financial instruments.

    CAPITALIZED INTEREST AND FINANCING COSTS

    Interest costs on qualifying assets are capitalized and amortized over the
asset's useful life. Costs incurred to obtain financing are capitalized and
amortized over the term of the related borrowings. Capitalized finance costs
were written off and included in the reorganization costs in connection with the
bankruptcy proceedings.

    TRANSLATION OF FOREIGN CURRENCIES

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

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

    STOCK OPTIONS

    Prior to the emergence from chapter 11, as permitted by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"), Predecessor accounted for employee stock options
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"), and, accordingly, recognized compensation expense for
stock option grants to the extent that the fair value of the stock exceeded the
exercise price of the

                                      F-18
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

3.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
option at the measurement date under fixed plan awards. The compensation expense
was charged ratably over the vesting period of the options. Upon emergence from
bankruptcy and as of December 31, 2002, Successor did not have any stock options
outstanding.

    CONCENTRATION OF CREDIT RISK

    Financial instruments that potentially subject the Group to a concentration
of credit risk are accounts receivable. The Group performs ongoing credit
evaluations of its larger customers' financial condition. Geographical risk is
mitigated by the fact that revenues are not concentrated in one part of the
world. See Note 23, "Segment Reporting", for concentrations by geographic areas.

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

    ALLOWANCE FOR DOUBTFUL ACCOUNTS

    FLAG maintains an allowance for doubtful accounts. Payments due from
purchasers of capacity are generally payable within 30 days; however, we have
outstanding receivables greater than 30 days. We have established an allowance
for doubtful accounts based on our experience with potential uncollectable
receivables and our expectations as to payments. As of December 31, 2002, we had
an allowance of $10.4 million (2001 $5.1 million). This allowance could require
adjustments based on changing circumstances, including changes in the economy or
in the particular circumstances of individual customers.

    REPAIRS AND MAINTENANCE COSTS

    Expenditures for repairs, replacement and maintenance are expensed as
incurred. Such costs include routine maintenance and repair work to office
buildings and equipment. Repairs and maintenance costs charged to the income
statement were $31, $113, $83 and $99 for the period October 9, 2002 to
December 31, 2002, the period January 1, 2002 to October 8, 2002, and the years
ended December 31, 2001 and 2000, respectively.

    ASSET RETIREMENT OBLIGATIONS

    As a result of fresh start accounting, the Company adopted Statement of
Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset
Retirement Obligations". This adoption resulted in the calculation of a
liability of $4.7 million, which will be accreted over the remaining life of the
assets. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset and
depreciated over the life of the associated fixed asset.

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

                                      F-19
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

3.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrying amount of the liability and as an expense classified as an operating
item in the statement of income.

    COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES

    The Company adopted Statement of Financial Accounting Standards No. 146
("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities"
upon emergence from bankruptcy in accordance with the provisions of SOP 90-7.
There was no impact on the Company's results upon adoption of this standard.

    Prior to this date, Predecessor accounted for such costs under Emerging
Issues Task Force (EITF) Issue No. 94-3, ("EITF 94-3") "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)".

    SFAS 146, which nullifies EITF 94-3, requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan.

    RECLASSIFICATIONS

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

    Information has come to light since the filing of our 10-K on July 3, 2003
which has resulted in the reclassification of deferred revenue balances to the
value of $26.8 million from long-term to short-term.

    RECENT ACCOUNTING STANDARDS

GOODWILL AND OTHER INTANGIBLE ASSETS

    Effective as of January 1, 2002, Predecessor adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". This resulted in a change to Predecessor's accounting policy for
goodwill and, consequently, goodwill is no longer amortized. This adoption did
not impact Predecessor's results of operations, financial position or cash flows
since its goodwill balance was impaired during 2001 and the Company no longer
has goodwill recorded on its books.

ASSET RETIREMENT OBLIGATIONS

    In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires companies to record the fair
value of a liability for asset retirement obligations in the period in which the
legal or contractual removal obligation is incurred. The Company adopted this
statement as of October 9, 2002 as part of implementing fresh start accounting
as required by SOP 90-7.

                                      F-20
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

3.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AMENDMENT AND RESCISSION OF PREVIOUS ACCOUNTING STANDARDS

    In April 2002, FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No.4, 44 and 64, Amendment
of FASB Statement 13 and Technical Corrections". This statement rescinds FASB
Statement No.4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that statement, FASB Statement No.64, "Extinguishments of Debt Made
to Satisfy Sinking-fund Requirements". This statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers". This
statement amends FASB Statement No.13, "Accounting for Leases", to eliminate
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company adopted SFAS 145 as part of the implementation of fresh
start accounting as required by SOP 90-7. This adoption did not have a material
impact on the Company's results of operations, financial position or cash flows.

ACCOUNTING FOR STOCK-BASED COMPENSATION

    In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure" (SFAS 148) that amends SFAS 123 to
provide alternative methods of transition for a voluntary change to SFAS 123's
fair value method of accounting for stock-based employee compensation. SFAS 148
also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28,
"Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. The Company
adopted this standard in accordance with the provisions of SOP 90-7. We do not
expect the adoption of SFAS 148 to have a material effect on our financial
position, results of operations, or cash flows. Successor has elected to
continue to follow the intrinsic value method of accounting as prescribed by APB
Opinion No. 25 to account for employee stock options.

AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

    In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. The Company does
not expect the adoption of this statement to have a material impact on its
operating results of financial position.

GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES

    In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a

                                      F-21
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

3.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. FLAG Telecom adopted this
standard in accordance with SOP 90-7. We do not expect the adoption of FIN 45 to
have a material effect on our financial position, results of operations, or cash
flows.

CONSOLIDATION OF VARIABLE INTEREST ENTITIES

    In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses the financial
reporting by enterprises involved with variable interest entities. FIN 46
addresses both unconsolidated variable interest entities and any new variable
interest entities that are created subsequent to the issuance of the
interpretation. As of December 31, 2002, we did not have any unconsolidated
variable interest entities. Any future variable interest entities will be
accounted for in accordance with FIN 46.

REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES

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

4.  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

    The Company has recorded certain restatement adjustments to its previously
issued 2001 and 2000 financials. The effects of the adjustments are as follows:

<Table>
<Caption>
                                        AS            AUDIT          RECIPROCAL
                                     REPORTED    ADJUSTMENTS(B)    TRANSACTIONS(A)    RESTATED
                                    ----------   ---------------   ---------------   ----------
<S>                                 <C>          <C>               <C>               <C>
CONDENSED CONSOLIDATED BALANCE
  SHEET AS AT DECEMBER 31, 2001
Current assets....................  $  644,436      $ (2,950)         $ (32,498)     $  608,988
Non-current assets................   2,832,230        15,251           (191,788)      2,655,693
                                    ----------      --------          ---------      ----------
Total assets......................  $3,476,666      $ 12,301          $(224,286)     $3,264,681
                                    ==========      ========          =========      ==========

Current liabilities...............  $1,038,941      $(23,794)         $ (53,437)     $  961,710
Non-current liabilities...........   2,007,805       104,434           (154,602)      1,957,637
Shareholders equity...............     429,920       (68,339)           (16,247)        345,334
                                    ----------      --------          ---------      ----------
Total liabilities and equity......  $3,476,666      $ 12,301          $(224,286)     $3,264,681
                                    ==========      ========          =========      ==========
</Table>

                                      F-22
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

4.  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (CONTINUED)
<Table>
  STATEMENT OF OPERATIONS FOR THE
  YEAR ENDED DECEMBER 31, 2001
Revenues..........................  $  188,323      $    824          $ (25,538)     $  163,609
<Caption>
                                        AS            AUDIT          RECIPROCAL
                                     REPORTED    ADJUSTMENTS(B)    TRANSACTIONS(A)    RESTATED
                                    ----------   ---------------   ---------------   ----------
CONDENSED CONSOLIDATED
<S>                                 <C>          <C>               <C>               <C>
Operating expenses................     556,685         1,242             (6,954)        550,973
Depreciation and amortization.....     131,910         4,120             (2,009)        134,021
                                    ----------      --------          ---------      ----------

Operating loss....................    (500,272)       (4,538)           (16,575)       (521,385)
                                    ==========      ========          =========      ==========
Net loss..........................    (582,990)       (3,984)           (16,575)       (603,549)
                                    ==========      ========          =========      ==========
Net loss per share................       (4.35)        (0.03)             (0.12)          (4.50)

Retained earnings (accumulated
  deficit)........................  $ (687,942)     $(69,266)         $ (16,247)     $ (773,455)
<Caption>
                                        AS            AUDIT          RECIPROCAL
                                     REPORTED    ADJUSTMENTS(B)    TRANSACTIONS(A)    RESTATED
                                    ----------   ---------------   ---------------   ----------
CONDENSED CONSOLIDATED
<S>                                 <C>          <C>               <C>               <C>
  BALANCE SHEET AS AT DECEMBER 31,
  2000
Current assets....................  $1,084,521      $ (5,709)         $      --      $1,078,812

Non-current assets................   1,994,243        28,972            (24,472)      1,998,743
                                    ----------      --------          ---------      ----------
Total assets......................  $3,078,764      $ 23,263          $ (24,472)     $3,077,555
                                    ==========      ========          =========      ==========

Current liabilities...............     334,025       (11,886)            (5,113)        317,026

Non-current liabilities...........  $1,737,132      $ 97,571          $ (19,687)     $1,815,016
Shareholders equity...............   1,007,607       (62,422)               328         945,513
                                    ----------      --------          ---------      ----------
Total liabilities and equity......  $3,078,764      $ 23,263          $ (24,472)     $3,077,555
                                    ==========      ========          =========      ==========
</Table>

                                      F-23
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

4.  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
                                        AS            AUDIT          RECIPROCAL
                                     REPORTED    ADJUSTMENTS(B)    TRANSACTIONS(A)    RESTATED
                                    ----------   ---------------   ---------------   ----------
CONDENSED CONSOLIDATED
<S>                                 <C>          <C>               <C>               <C>
  STATEMENT OF OPERATIONS FOR THE
  YEAR ENDED DECEMBER 31, 2000
Revenues..........................  $   99,306      $    956          $      --      $  100,262
Operating expenses................      97,267         4,698                 --         101,965
Depreciation and amortization.....      79,414         2,539               (328)         81,625
                                    ----------      --------          ---------      ----------

Operating loss....................     (77,375)       (6,281)               328         (83,328)
                                    ==========      ========          =========      ==========
Net loss..........................     (89,466)       (6,483)               328         (95,621)
                                    ==========      ========          =========      ==========
Net loss per share................       (0.68)        (0.05)             (0.00)          (0.73)

Retained earnings (accumulated
  deficit)........................  $ (104,952)     $(65,282)         $     328      $ (169,906)
</Table>

    (A)  RECIPROCAL TRANSACTIONS REVERSALS

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

    Historically, we treated reciprocal transactions as if they were
non-monetary transactions in accordance with Accounting Principles Board Opinion
No. 29 "Accounting for Non-monetary Transactions" ("APB No. 29"). In order to
determine whether our reciprocal transactions should be accounted for as revenue
and a capital expenditure at fair value as deferred revenue and deferred costs,
in accordance with APB No. 29, we assessed whether:

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

    - the fair values of the assets exchanged were determinable within
      reasonable limits.

    Our reciprocal transactions fall into three categories: services for
services, operating leases for operating leases and operating leases for capital
leases. Under the terms of both service contracts and operating leases, we do
not exchange an interest in a productive asset but provide a service to, and
receive a service from, our customers. Consequently, these transactions were
recorded at fair value as deferred revenue on a straight-line basis over the
term of the relevant agreement. We also considered that operating leases and
capital leases were dissimilar in nature and consequently were not exchanges of
similar productive assets within the definition of APB No. 29.

                                      F-24
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

4.  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (CONTINUED)

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

    In August 2002, the staff of the Securities and Exchange Commission (the
"SEC") indicated that the SEC staff had concluded that all non-monetary exchange
transactions for telecommunications capacity should be accounted for as an
exchange of assets, irrespective of whether the transaction involved the lease
of assets. The conclusion was based on the SEC staff's view that the right to
use an asset (that is, a lease), is in fact an asset and not a service contract,
irrespective of whether such asset is characterized as an asset on the balance
sheet. This conclusion requires that non-monetary exchange transactions for
telecommunications capacity involving the exchange of one or more operating
leases be recognized based on the carrying value of the assets exchanged, rather
than at fair value, resulting in no recognition of revenue for the transactions.
Prior to the SEC's communication on this issue, Predecessor's accounting for
these transactions, which resulted in Predecessor recognizing revenue, had been
consistent with guidance for these types of transactions. The SEC indicated that
it expects affected companies to retroactively apply this guidance to historical
non-monetary exchange capacity transactions that occurred in prior years and, if
appropriate, restate their financial statements.

(B) AUDIT ADJUSTMENTS

    ADJUSTMENTS TO OPENING RETAINED EARNINGS

    The accounting for sales of capacity has evolved over the last few years as
the interpretation and application of certain pronouncements by the SEC and
accounting standard setting bodies have been clarified. To take account of these
developments and to be consistent with current industry practice, the accounting
for certain sales transactions has been re-stated as follows:

    - A contract signed in September 1998 but related to a customer commitment
      in an earlier period was treated as a sales type lease because the
      customer had a fixed period to commit to draw down the capacity and to
      start paying maintenance charges for certain specifically identified
      capacity on our network, otherwise the customer would lose the capacity
      with no refund. On re-evaluation of the contract the Company has accounted
      for these capacity sales as operating leases as and when drawn down.

    - A contract, which was signed in September 1999, was treated as a sales
      type lease contract because the customer had committed to the purchase in
      an earlier period and some capacity had been activated prior to June 1999.
      On re-evaluation of the contract and taking account of the criteria stated
      in FIN 43 and SFAS 66 for the "transfer of title" for capacity contracts
      entered into after June 1999, the Company has accounted for the contract
      as an operating lease.

    - The Company had entered into a contract in August 1998, which involved the
      sale of capacity and the customer having a "rent free" period from paying
      standby operations and maintenance charges. The entire contract was
      treated as a sales type lease contract and the Company set up a provision
      for costs to be incurred during the free maintenance period. Subsequently
      the Company also recognised capacity credits as revenues in 2001. On
      re-evaluation of the terms and components of the contract, adjustments
      have been made to revenues in 1998, 1999, 2000 and 2001.

                                      F-25
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

4.  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (CONTINUED)
    - The impact of these adjustments has been a decrease to 2000 opening
      retained earnings of $58.8 million.

    ADJUSTMENTS TO 2000 AND 2001

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

    - The Company also adjusted the revenues for the years 2000 and 2001, upon
      further analysis of the deliveries of capacity to customers, in compliance
      with the current revenue recognition policy.

    - In December 2001, the Company accrued for an upgrade on the FA-1 system,
      which was committed to be purchased. Upon further analysis by management,
      the accruals and related assets have been reversed to reflect the fact
      that the work had not been undertaken by the supplier in 2001.

    - The Company identified additional fixed assets for which depreciation had
      to be charged in 2001.

    - Adjustments to cash and expense accounts to reflect payments made to
      suppliers but not recorded posted to the accounts payable ledger in 2001.
      Upon further analysis, the Company identified certain accruals at December
      2001, which were not required and therefore reversed.

    - Correction of book keeping and accounting errors.

    The total impact of all adjustments in 2001 and 2000 is to reduce previously
reported net income in 2001 and 2000 is $20.4 million and $6.2 million,
respectively.

5.  RESTRUCTURING

    During the third quarter of 2002, the Predecessor implemented a
restructuring plan to reduce the employee base and close certain offices in
order to reduce the level of fixed costs. The employees affected were in Sales
(51), Operations (47) and Finance and Administration (15). The following
summarizes the costs incurred by Predecessor.

<Table>
<Caption>
                                                              EMPLOYEE TERMINATION BENEFITS
                                                              -----------------------------
<S>                                                           <C>
Balance at January 1, 2002..................................             $   --
Amounts charged to expense..................................              2,058
Amounts paid................................................             (1,991)
                                                                         ------
Balance at October 8, 2002..................................             $   67
                                                                         ======
</Table>

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

    Upon emergence from Bankruptcy, the Successor initiated a further plan for a
number of office closures, employee relocations and further employment
terminations, the details of which were finalized during 2002 and early 2003.
The employees affected were in Sales (4), Operations (17) and Finance and
Administration (14). The Successor expects to incur $4.9 million in costs, as
part of the plan. The Successor has incurred $4.1 million in one-time
termination costs in December 31, 2002. There are a

                                      F-26
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

5.  RESTRUCTURING (CONTINUED)
further $0.6 million of one-time termination and $0.2 million of other
associated costs expected to be incurred and paid in 2003.

    The last office closure occurred in April 2003 and the final employee
termination is expected in August 2003.

    The following summarizes the activity for the restructuring costs incurred
by the Successor

<Table>
<Caption>
                                                              ONE-TIME TERMINATION
                                                                     COSTS
                                                              --------------------
<S>                                                           <C>
Beginning balance
  October 9, 2002(1)........................................         $   67
Amounts charged to expense..................................          4,097
Amounts paid................................................         (1,560)
                                                                     ------
Closing balance December 31, 2002...........................         $2,604
                                                                     ======
</Table>

(1) Represents employee termination benefits of Predecessor paid by Successor.

6.  ASSET IMPAIRMENT

    In accordance with SOP 90-7 and SFAS 141, the Company constructed a
valuation model to determine the values of its long-term assets, telecoms and
non-telecoms plant and equipment assets upon Emergence from bankruptcy as part
of fresh start accounting. The forecast period was assessed to be 15 years and
the assumptions used reflect lighting dark fiber expenditures, taxation and
working capital requirements. The value of the property and equipment was
calculated to be $322.0 million, resulting in an impairment write-down of
$1,447.8 million. This was recorded as part of the fresh start adjustments in
the income statement.

    In 2002, the Company accounted for impairment of long-lived assets in
accordance with SFAS 144. Upon filing for chapter 11, the Company concluded that
impairment indictors existed and performed a test for recoverability based on
management's estimate of undiscounted future cash flows attributable to the
assets as compared to the carrying value of the assets, calculated as net book
value less deferred revenues. For the purpose of the impairment exercise, the
financial forecasts were projected up to the useful lives of the fiber-optic
systems in question with no further terminal value assumed beyond their useful
lives. Valuation metrics were referenced and benchmarked against comparable
company and market data.

    The undiscounted cash flows were less than the carrying value of the FEA and
FNAL systems. We discounted the cash flow model and determined that
Predecessor's fiber-optic telecommunication FEA and FNAL systems were impaired
as at June 30, 2002. In determining the appropriate cost of capital, the capital
asset pricing model was used.

    FLAG EUROPE ASIA SYSTEM:  The FEA system was put into place in 1997 and
links the telecommunications markets of Western Europe and Japan through the
Middle East, India, Southeast Asia and China. The FEA system consists of
approximately 28,000 kilometers of undersea fiber-optic cable with a 580
kilometer dual land crossing in Egypt and a 450 kilometer dual land crossing in
Thailand. There is increasingly high level of competition in terms of
alternative supply, lower than

                                      F-27
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

6.  ASSET IMPAIRMENT (CONTINUED)
generally expected demand and significant over-supply for this route. As at
June 30, 2002 we have reassessed future revenue opportunities for the life of
this route when preparing our future cash flows of the asset. Predecessor has
recognized an impairment charge of $327.9 million in respect of the FEA system
based upon our estimates of future cash flows at the time.

    FLAG NORTH ASIAN LOOP:  FNAL is connected to FEA in Hong Kong and Japan, and
to two trans-Pacific cable systems on which we own facilities, the PC-1 and
Japan-U.S. networks. FNAL was put in place in 2002 to offer intra-regional,
city-to-city connectivity between the high traffic centers of Hong Kong, Seoul,
Tokyo and Taipei. There is increasingly high level of competition in terms of
alternative supply, lower than generally expected demand and significant
over-supply for this route. As at June 30, 2002 we have reassessed future
revenue opportunities for the life of this route when preparing our future cash
flows of the asset. Predecessor has recognized an impairment charge of
$225.0 million in respect of the FNAL system based upon our estimates of future
cash flows at the time.

    Prior to 2002, Predecessor determined impairment in accordance with
SFAS 121 by comparing the carrying values of each of the fiber-optic systems to
their fair values.

    FLAG ATLANTIC-1 SYSTEM:  In 2001, Predecessor determined that our FA-1
system was impaired. Given the high level of competition in terms of alternative
supply, price erosion and continued lack of demand on the trans-Atlantic route,
Predecessor reviewed the prospects for demand on that route and concluded that,
in accordance with its accounting policy, the FA-1 system was impaired. It was
determined that the carrying amount of the FA-1 system exceeded its fair value,
and Predecessor therefore recognized an impairment charge of $359 million in the
year. It was determined the fair value of the FA-1 system based on the present
value of future cash flows expected to be generated by the FA-1 system according
to management's latest demand forecasts. The impairment charge, which is
included in operating loss, reduced the carrying values of Goodwill and Property
and equipment in the balance sheet by $30 million and $329 million respectively.

    FLAG PACIFIC-1 SYSTEM:  Asset impairment charges of $26.6 million were
recorded in the third quarter of 2001. On August 7, 2001 Predecessor announced
that it had decided not to proceed with the FLAG Pacific-1 ("FP-1") project in
association with TyCo Telecommunications that had been announced in the second
quarter. The agreement in principle with TyCo Telecommunications was conditional
upon Predecessor obtaining financing on satisfactory terms. However, despite
substantial efforts on Predecessor's part and given the capital market
conditions prevailing at the time, the financing proposal received fell short of
expectations. Following this decision three employment agreements were
terminated and amounts already paid or due in connection with preliminary build
evaluation were written off. Predecessor had commissioned a marine survey for
the construction of the FP-1 project and entered into other project related
expenditure commitments. Following the decision not to proceed, the residual
value of the costs incurred was $nil and the consequent asset impairment charge
was $26.6 million, comprising $24.0 million in abandoned survey and preliminary
build costs and $2.6 million of other project related costs.

                                      F-28
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

6.  ASSET IMPAIRMENT (CONTINUED)
    The asset impairment charges are as follows:

<Table>
<Caption>
                                                    SUCCESSOR   PREDECESSOR   PREDECESSOR   PREDECESSOR
                                                      2002         2002          2001          2000
                                                    ---------   -----------   -----------   -----------
<S>                                                 <C>         <C>           <C>           <C>
FEA
  Asset impairment................................  $     --    $  327,900      $     --     $      --
FNAL
  Asset impairment................................        --       225,000            --            --
FLAG Atlantic-1
  Asset impairment................................        --            --       359,000            --
FLAG Pacific-1
  Asset impairment................................        --            --        26,598            --
Fresh Start
  Asset impairment................................        --    $1,447,765            --            --
                                                    ---------   ----------      --------     ---------
Total Impairment..................................  $     --    $2,000,665      $385,598     $      --
                                                    =========   ==========      ========     =========
</Table>

7.  BUSINESS ACQUISITIONS

    On December 6, 2000, Predecessor 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 had been recorded as goodwill. Following the impairment of
the FLAG Atlantic-1 asset (see Note 6 above) the goodwill was written off in
full in the year ended December 31, 2001.

8.  ACCOUNTS RECEIVABLE

    Accounts receivable consist of the following:

<Table>
<Caption>
                                                              SUCCESSOR   PREDECESSOR
                                                                2002         2001
                                                              ---------   -----------
<S>                                                           <C>         <C>
Billed......................................................   $66,947      $130,183
Unbilled....................................................    14,903        18,736
                                                               -------      --------
                                                               $81,850      $148,919
                                                               =======      ========
</Table>

                                      F-29
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

9.  PREPAID EXPENSES AND OTHER ASSETS

    Prepaid expenses and other assets consist of the following:

<Table>
<Caption>
                                                              SUCCESSOR   PREDECESSOR
                                                                2002         2001
                                                              ---------   -----------
<S>                                                           <C>         <C>
VAT recoverable.............................................   $26,234      $16,083
Other assets................................................    20,037       26,533
                                                               -------      -------
                                                               $46,271      $42,616
                                                               =======      =======
</Table>

10.  RESTRICTED CASH

    The Group designates funds held by collateral trustees, in escrow or legally
designated for specific projects or commitments by bank agreements, as
restricted cash. Restricted cash as at December 31, 2002 totals $8.4 million and
represents amounts held in escrow accounts. Restricted cash as at December 31,
2001 consisted of funds held by collateral trustees totaling $326.1 million. As
at December 31, 2001 there was $122.4 million restricted for use in relation to
FLAG Atlantic Limited, $137.8 million in relation to FLAG Asia Limited and
$65.9 million in relation to Predecessor. As part of the Plan, all amounts
previously restricted became unrestricted at the Effective Date.

11.  CAPITALIZED INTEREST COSTS

    Interest costs on qualifying assets are capitalized and amortized over their
useful lives. There was no interest capitalized in the period ended
December 31, 2002. Total interest capitalized to construction in progress during
the period from January 1, 2002 to October 8, 2002 and the years ended
December 31, 2001 and 2000, was $2,165, $16,150 and $6,683, respectively.

12.  PROPERTY AND EQUIPMENT

    Property and equipment, including assets held under capital leases, consist
of the following:

<Table>
<Caption>
                                                              SUCCESSOR   PREDECESSOR
                                                                2002         2001
                                                              ---------   -----------
<S>                                                           <C>         <C>
Fixtures and fittings.......................................  $  2,195    $    3,689
Leasehold improvements......................................     4,436         6,377
Computer equipment..........................................     7,401        13,775
Motor vehicles..............................................        --           343
Network assets..............................................   306,546     2,511,612
                                                              --------    ----------
                                                               320,578     2,535,796
Less -- Accumulated depreciation and impairment.............    (7,345)     (556,555)
                                                              --------    ----------
Net book value..............................................  $313,233    $1,979,241
                                                              ========    ==========
</Table>

    Pursuant to the adoption of fresh start reporting, the Company wrote down
the gross value of its property and equipment by $2,445 million, and the balance
of accumulated depreciation by $997 million. The total fresh start value of
network assets was allocated to each cable system based

                                      F-30
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

12.  PROPERTY AND EQUIPMENT (CONTINUED)
upon expected future cash flows. The new values are being amortized over the
remaining estimated useful lives of the assets, ranging from 10 to 14 years.

    The Company leases office equipment under various capital lease
arrangements. Assets recorded under capital lease agreements included in
property and equipment consisted of equipment with a gross value of $867 with an
associated balance of accumulated depreciation of $405 as of December 31, 2002.
As of December 31, 2001, the comparative balances were $867 and $231,
respectively.

13.  ASSET RETIREMENT OBLIGATIONS

    The Company implemented SFAS No. 143 relating to asset retirement
obligations as part of implementing fresh start accounting and recorded a
cumulative effect of change in accounting principle of $1.9 million to
October 8, 2002. The cumulative effect of change in accounting principle
represents accretion and depreciation expenses the company would have recorded
had the provisions of SFAS No. 143 been in effect on the dates the obligations
were incurred. The Company's asset retirement obligations relate to the cable
systems. The estimation of the fair value of asset retirement obligations
requires the significant use of estimates regarding the amounts and timing of
expected cash flows. The fair value of the asset retirement obligations was
calculated using the Company's weighted average cost of capital and assuming an
expected time to retirement of 20 years for each section of the cable.

    Upon adoption of SFAS No. 143 as of October 9, 2002, the company recorded an
asset retirement obligation of $4.7 million. For the period to December 31,
2002, the Company recognized $0.1 million of expense in depreciation to accrete
the liability to $4.8 million as of December 31, 2002.

    If the Company had adopted SFAS No. 143 on January 1, 2001, it would have
recorded a liability of $3.8 million. Accretion expense for the year ended
December 31, 2001 and the period to October 8, 2002 would have been
$0.5 million and $0.4 million, respectively. The liability as of December 31,
2001 would have been $4.3 million.

14.  ACCRUED LIABILITIES

    Accrued liabilities as of December 31 consisted of the following:

<Table>
<Caption>
                                                              SUCCESSOR   PREDECESSOR
                                                                2002         2001
                                                              ---------   -----------
<S>                                                           <C>         <C>
Accrued VAT committment.....................................     8,000            --
Other accruals..............................................    37,796        99,354
                                                               -------      --------
                                                               $45,796      $ 99,354
                                                               =======      ========
</Table>

                                      F-31
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

15.  LONG-TERM DEBT

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

<Table>
<Caption>
                                                              SUCCESSOR   PREDECESSOR
                                                                2002         2001
                                                              ---------   -----------
<S>                                                           <C>         <C>
Short-term debt
  11 5/8% Senior Notes, due 2010, interest payable
    semi-annually, (2001-net of unamortized discount of
    $9,662).................................................   $    --    $  556,078
  7% Secured note (FNAL Note)...............................     6,000            --
  Other notes...............................................     3,517            --
                                                               -------    ----------
                                                               $ 9,517    $  556,078
                                                               -------    ----------

Long-term debt
  Senior secured notes Series A, interest variable between
    6.67% and 8%, due 2005, interest payable
    semi-annually...........................................    38,740            --
  Senior secured notes Series B, interest variable between
    10% and 11%, due 2004, interest payable semi-annually...     4,000            --
  Senior secured notes Series C, interest variable between
    10% and 11%, due 2004, interest payable semi-annually...     1,250            --
  7% Secured note (FNAL Note)...............................    21,352            --
  Other notes...............................................     2,569            --
  Bank credit facilities....................................        --    $  341,500
  8 1/4% Senior Notes, due 2008, interest payable
    semi-annually, (2001 -- net of unamortized discount of
    $3,547).................................................        --    $  426,453
                                                               -------    ----------
                                                               $67,911    $  767,953
                                                               -------    ----------
                                                               $77,428    $1,324,031
                                                               =======    ==========
</Table>

    On March 17, 2000, Predecessor completed a sale of 11 5/8% Senior Notes due
2010 in the United States and Europe, raising net proceeds of $576.6 million. As
of the Effective Date, these notes were cancelled and the holders of these notes
received $245 million in cash, a $45 million promissory note (callable by the
Company at $30 million for 18 months) and 5% of the common stock of the Company.

    FLAG Limited had $430.0 million 8 1/4% senior notes repayable at par in
2008. As of the Effective Date, these notes were redeemed and the holders of
these notes received approximately 63% of the common stock of the Company.

    FLAG Atlantic Limited had a term loan of $253.0 million prior to emergence
from chapter 11. As of the Effective Date, FLAG Atlantic Limited's creditors
received approximately 26% of the common stock of the Company and the loan was
thereby discharged. FLAG Atlantic Limited has since then been in liquidation
under Bermudan law, pursuant to the Plan.

    Prior to the Effective Date, Predecessor had outstanding 11 5/8% Senior
Dollar Notes due 2010 in the aggregate principal amount of $300 million and
11 5/8% Senior Euro Notes due 2010 in the aggregate principal amount of
E300 million. In addition, prior to the Effective Date, FLAG Limited had
outstanding 8 1/4% Notes due 2008 in the aggregate principal amount of
$430 million. On the Effective Date and pursuant to the Plan, these notes were
exchanged in favor of new notes, cash and

                                      F-32
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

15.  LONG-TERM DEBT (CONTINUED)
common shares, and subsequently discharged. See "Legal Proceedings" for a more
detailed discussion of the Plan and these transactions

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

    THE SERIES A NOTES

    We issued Series A Notes to the bondholders of Predecessor in the original
principal amount of $45 million, which are due and payable on October 1, 2005,
and bear simple interest on this amount, less any principal repayments made, at
the following rates: 6.67% per annum for the first 12 months after the Effective
Date; 7.33% per annum for months 13 through 24 after the Effective Date; and 8%
per annum for months 25 through 36 after the Effective Date.

    At any time up until April 2004, we have the right, in our sole and absolute
discretion, provided that no default or event of default has occurred or is
continuing, to redeem all of the Series A Notes by paying the sum of
$30 million, plus accrued but unpaid interest. Such discount redemption must be
done via Board resolution with 30 days prior notice to the trustee and can only
be done in a situation where there is no default. Each subsequent month, the
repayment sum increases by $0.833 million until October 1, 2005 whereby the
total sum would be $45 million.

    In the event of a liquidation event or Change of Control (defined below),
the original principal amount of $45 million will be payable in full plus
accrued but unpaid interest, less any principal repayments made. "Change of
Control" is defined to mean, in summary: (i) when any person or group becomes
the beneficial holder of more than 50% of our voting stock; or (ii) when we
consolidate or merge with or into any other person or sell all or substantially
all of our assets.

    To secure payment of the Series A Notes liens were granted on substantially
all of the assets of our company and certain of our subsidiaries in favor of The
Bank of New York, as Trustee to the Indenture (the "Indenture"). Such lien ranks
PARI PASSU in priority and right of payment with the Series B Note and the
Series C Note.

    THE SERIES B NOTE

    We issued the Series B Note to The Blackstone Group, which acted as our
financial advisor during our chapter 11 proceedings, on the Effective Date. The
Series B Note has an original principal amount of $4 million, is due and payable
on October 1, 2004 and bears simple interest on this amount, less any principal
repayments made, at the following rates: 10% per annum until October 1, 2003;
and 11% thereafter. Unlike the Series A Notes, the Series B Note is not
redeemable at a discount.

    We may issue senior secured debt obligations equal and ratable to the
Series B Note upon payment by us of $15 million of the original principal amount
of the Series A Notes.

    In the event of a liquidation or Change of Control, the original principal
amount of $4 million plus a $2 million premium is payable in full plus accrued
but unpaid interest, less any principal repayments made.

    The Series B Note is cross-defaulted with both the Series A Notes and the
Series C Note. The Series B Note is secured by liens on the same assets as the
Series A Notes and ranks PARI PASSU in priority and right of payment with the
Series A Notes and the Series C Note. Upon the payment by us

                                      F-33
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

15.  LONG-TERM DEBT (CONTINUED)
of $5 million of the original principal amount of the Series A Notes, the liens
securing the Series B Note will be cancelled and released.

    SERIES C NOTE

    We issued the Series C Note to Houlihan Lokey Howard & Zukin Capital
("Houlihan"), which acted as the financial advisor to the Unsecured Creditors'
Committee during our chapter 11 proceedings, on the Effective Date. The
Series C Note has an original principal amount of $1.25 million, is due and
payable on October 1, 2004 and has the same material terms and conditions as the
Series B Note.

    In the event of a liquidation or Change of Control, the original principal
amount of $1.25 million is payable in full plus accrued but unpaid interest,
less any principal repayments made. The Series C Note is cross-defaulted with
both the Series A Notes and the Series B Note. The Series C Note is secured by
liens on the same assets as the Series A Notes and ranks PARI PASSU in priority
and right of payment with the Series A Notes and the Series B Note. Upon the
payment by us of $5 million of the original principal amount of the Series A
Notes, the liens securing the Series C Note will be cancelled and released.

    We may issue senior secured debt obligations equal and ratable to the
Series C Note upon the payment by us of $15 million of the original principal
amount of the Series A Notes.

    INDENTURE FOR SERIES A, B AND C NOTES

    The Series A Notes, the Series B Note and the Series C Note are each
governed by an Indenture, dated as of October 9, 2002, between FLAG Telecom and
The Bank of New York, as indenture trustee. We are prohibited from retiring any
debt prior to its scheduled maturity, other than the Series A, B and C Notes,
non-recourse debt, and intercompany debt. Therefore, we cannot retire the FNAL
Note (see below) without the consent of the Series A, B and C Noteholders.
However, the FNAL Note and other indebtedness does not prevent us from
repurchasing the Series A, B and C Notes.

    Furthermore, any payment of dividends would be restricted by the terms of
the Indenture between FLAG Telecom and the Bank of New York, as Indenture
Trustee, dated October 9, 2002. The Indenture provides that any dividend or
distribution paid pursuant to the provisions of the Security and Pledge
Agreement, also with the Bank of New York, as Collateral Trustee, dated
October 9, 2002, shall be paid to the Bank of New York and such dividend or
distribution paid will be used to redeem the Series A, B & C Notes on a pro rata
basis. Any and all dividends and interest paid or payable in case in respect of
any Security Collateral (i.e. Pledged Stock, Pledged Notes, additional shares of
Capital Stock and additional indebtedness from time to time) in connection with
a partial or total liquidation or dissolution or in connection with a reduction
of capital surplus or paid-in-surplus, and cash paid, payable or otherwise
distributed in respect of principal of, or redemption of, or in exchange for,
any Security Collateral, shall be forthwith delivered to the Collateral Trustee
to be held as Security Collateral.

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

                                      F-34
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

15.  LONG-TERM DEBT (CONTINUED)
    We also entered into a Security and Pledge Agreement, dated as of
October 9, 2002, with The Bank of New York, as collateral trustee, under which
we have pledged and granted a security interest in substantially all of our
current and future assets to secure the payment of all the Series A Notes, the
Series B Note and the Series C Note.

    OTHER INDEBTEDNESS

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

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

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

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

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

                                      F-35
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

15.  LONG-TERM DEBT (CONTINUED)
    As at December 31, 2002, contractual maturities of the Group's indebtedness,
excluding interest, were as follows:

<Table>
<Caption>
YEAR ENDING DECEMBER 31,                                       TOTAL
------------------------                                      --------
<S>                                                           <C>
2003........................................................  $ 9,517

2004........................................................   14,741

2005........................................................   59,429

2006........................................................       --

2007........................................................       --

Thereafter..................................................       --
                                                              -------

Total.......................................................  $83,687
                                                              =======
</Table>

DEBT COVENANTS

    We review the covenants of our debt instruments on a monthly basis to ensure
compliance, and to enable the Chief Financial Officer to make the certifications
regarding these covenants that are required by certain of these instruments.

    The major covenants can be categorized as follows:

    Operational Covenants

    - No incurrence of additional Indebtedness

    - Conduct of business

    - Restrictions on payments and investments

    - Restrictions on transactions with affiliates

    - Record keeping required

    - Compliance with laws and payment of taxes

    Perfection and dealings with creditors and creditors' agents

    - Payment of principal and interest

    - Perfection of security interests

    - Reporting to trustees and bondholders

    Structural Covenants

    - Corporate existence

    - Maintenance, retention and insurance of assets

    - No creation of additional liens

Currently, we are of the opinion that we are in compliance with the covenants
contained in all of our debt instruments.

                                      F-36
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

16.  SHAREHOLDER'S EQUITY

    PREDECESSOR

    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 Predecessor. Bell Atlantic Network Systems, however, exchanged only a
limited portion of its common shares in FLAG Limited for 3,666,155 common shares
in Predecessor. At the same time, Bell Atlantic Network Systems and Predecessor
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 Predecessor 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 the
Predecessor on January 4, 2000.

    On February 16, 2000 the Predecessor completed an initial public offering
(IPO) of 27,964,000 common shares at $24 per share. The Predecessor received
$634,499 in net proceeds from that offering.

    SUCCESSOR

    The Successor's authorized capital stock consists of 3,000,000 common shares
and no preferred shares. As of the Effective Date, there were 2,000,000 common
shares issued and outstanding. Successor has reserved 222,222 common shares to
be issued pursuant to its 2002 Stock Incentive Plan. The holders of common
shares (the "Shareholders") are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. The Shareholders are
entitled to receive ratably such dividends as may be declared by the Company's
Board of Directors (the "Board") out of the funds legally available for payment
of dividends. Payment of dividends is restricted by the terms of an indenture
between Successor and The Bank of New York, as indenture trustee, dated
October 9, 2002. In the event of a liquidation, dissolution or winding up of the
Company, the Shareholders will be entitled to share ratably in all assets
remaining after payment of liabilities. The Shareholders have no preemptive,
subscription, redemption or conversion rights. All of the outstanding common
shares are validly issued, fully paid and non-assessable.

17.  STOCK OPTIONS

    As at December 31, 2001, Predecessor had 11,224,210 options outstanding.
Pursuant to the Plan, all outstanding Predecessor common stock and stock options
were cancelled on the Effective Date. The historical stock option disclosures
have therefore been excluded from the financial statements due to the
immateriality of the number of options and pro forma compensation expense.

    In connection with the Plan, the Company established the 2002 Stock
Incentive Plan and reserved 222,222 common shares to be issued to employees. No
shares were issued in 2002 pursuant to the Incentive Plan. As at June 15, 2003,
options to acquire 198,525 common shares were outstanding under the Incentive
Plan.

                                      F-37
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

18.  ACCUMULATED OTHER COMPREHENSIVE INCOME

    The Group's components of accumulated other comprehensive income is
presented below:

<Table>
<Caption>
                                                                  CUMULATIVE
                                                      FOREIGN     EFFECT OF     CHANGE IN
                                                     CURRENCY     CHANGE IN    FAIR MARKET
                                                    TRANSLATION   ACCOUNTING    VALUE OF
                                                    ADJUSTMENTS     POLICY     DERIVATIVES    TOTAL
                                                    -----------   ----------   -----------   --------
<S>                                                 <C>           <C>          <C>           <C>
Predecessor
Balance at December 31, 2000 (Restated)...........     $3,426        $  --        $ --        $3,426
Balance at December 31, 2001 (Restated)...........     $5,196        $(526)       $584        $5,254
Successor
Balance at December 31, 2002......................     $4,720        $  --        $ --        $4,720
</Table>

19.  EARNINGS PER SHARE

    Basic net loss per common share is computed by dividing net loss applicable
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share is computed by
dividing net loss by the weighted average number of common shares and common
share equivalents outstanding during the period. For the period from October 9,
2002 to December 31, 2002, the period from January 1 to October 8, 2002, and the
years ended December 31, 2001 and 2000 presented, no outstanding stock options
have been included in the calculation of diluted net loss per share amounts as
the effect would be anti-dilutive.

<Table>
<Caption>
                                              SUCCESSOR        PREDECESSOR
                                               COMPANY           COMPANY
                                             PERIOD FROM       PERIOD FROM
                                            INCORPORATION     JANUARY 1 TO    PREDECESSOR   PREDECESSOR
                                           TO DECEMBER 31,     OCTOBER 8,       COMPANY       COMPANY
                                                 2002             2002           2001          2000
                                           ----------------   -------------   -----------   -----------
<S>                                        <C>                <C>             <C>           <C>
Net loss as reported.....................       N/A               N/A         $  (582,990)  $   (89,466)
Basic and diluted EPS....................       N/A               N/A         $     (4.34)  $     (0.68)
Cumulative effect of change of accounting
  principle..............................       N/A               N/A               (0.01)           --
Basic and diluted EPS....................       N/A               N/A         $     (4.35)  $     (0.68)
Weighted average common shares
  outstanding............................       N/A               N/A         134,122,061   130,763,607
                                              ==========       ===========    ===========   ===========
Net loss as restated (See Note 4)........     $  (36,847)      $  (358,589)   $  (603,549)  $   (95,621)
Basic and diluted EPS....................                      $     (2.66)   $     (4.49)  $     (0.73)
Cumulative effect of change in accounting
  principle..............................             --             (0.01)         (0.01)           --
Basic and diluted EPS....................     $   (18.42)      $     (2.67)   $     (4.50)  $     (0.73)
Weighted average common shares
  outstanding............................      2,000,000       134,139,046    134,122,061   130,763,607
                                              ==========       ===========    ===========   ===========
Pro forma basic and diluted EPS *........       N/A            $   (179.29)   $   (301.77)  $    (47.81)
Pro forma weighted average common shares
  outstanding -- Successor...............       N/A              2,000,000      2,000,000     2,000,000
                                              ==========       ===========    ===========   ===========
</Table>

*   The pro forma information has been provided to disclose the impact of the
    share structure of the Successor assuming the shares had been outstanding in
    the entire period.

                                      F-38
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

20.  FINANCIAL INSTRUMENTS

    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.

    Predecessor's interest rate collars were accounted for as effective cash
flow hedges and, accordingly, upon adoption of SFAS No. 133 on January 1, 2001,
their fair values were recorded as liabilities in the balance sheet, with the
corresponding effect of adoption recorded directly to accumulated other
comprehensive income. The interest rate collars were terminated by the counter-
party on April 30, 2002, resulting in a gain of $194, which was included in the
other comprehensive income balance in the shareholder's equity of the
Predecessor.

    Predecessor's cross currency swap held at January 1, 2001 was not designated
as an accounting hedge; consequently, upon the adoption of SFAS No. 133, the
swap was recorded in the balance sheet at fair value, and Predecessor's
underlying economically hedged Euro-denominated debt was recorded at current
foreign currency rates. The resulting adjustment of $1.3 million was recorded as
the cumulative effect of adoption of SFAS No.133. This swap agreement was
terminated by the counter-party on April 15, 2002, resulting in a loss of
$6.5 million, which was included in the foreign currency loss in the income
statement of Predecessor.

    The following summarizes the Company's financial instruments:

<Table>
<S>                                         <C>
Senior Secured Notes Series A.............  The carrying amount of the Senior Secured Notes Series A
                                            is based on the fair value of the Notes.

Senior Secured Notes Series B.............  The carrying amount of the Senior Secured Notes Series B
                                            is based on the repayment value of the Notes. The
                                            carrying value approximates the fair value of these
                                            notes.

Senior Secured Notes Series C.............  The carrying amount of the Senior Secured Notes Series C
                                            is based on the repayment value of the Notes. The
                                            carrying value approximates the fair value of these
                                            notes.

7% Secured Note (FNAL Note)...............  The carrying amount of the Secured Note is the repayment
                                            value of the Note. The carrying value approximates the
                                            fair value of these notes.

Other Notes...............................  The carrying amount of the Other Notes is the repayment
                                            value of the Notes. The carrying value approximates the
                                            fair value of these notes.

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, 2001.

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, 2001.
</Table>

                                      F-39
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

20.  FINANCIAL INSTRUMENTS (CONTINUED)
<Table>
<S>                                         <C>
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 and swaps...........  The interest rate collar and swap agreements are "zero
                                            cost" meaning that the cost of acquiring the contract is
                                            embedded in the interest rate spread. As such, the
                                            agreements have not previously had a carrying value. The
                                            fair values are 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. Since the adoption of SFAS No. 133
                                            "Accounting for Derivative Instruments and Hedging
                                            Activities" on January 1, 2001, the calculated fair
                                            value is accounted for in the financial statements and
                                            reflected as the carrying value.

Cross currency swaps......................  The cross currency swap agreement, by its nature, has
                                            not previously had a carrying value. The fair value is
                                            estimated using an option pricing model and values the
                                            changes in interest rates and foreign exchange rates
                                            since inception, and the potential for future changes
                                            over the remaining term. Since the adoption of SFAS No.
                                            133 "Accounting for Derivative Instruments and Hedging
                                            Activities" on January 1, 2001, the calculated fair
                                            value is accounted for in the financial statements and
                                            reflected as the carrying value.

Cash and restricted cash..................  Due to the nature of this asset, carrying value
                                            approximates fair value.
</Table>

    A fair value exercise on the Group's financial instruments was performed in
2001. Swaps and collars were marked to market based on valuations obtained from
respective counter-parties.

    In 2002, the carrying value of the financial instruments, which is the
Company's debt, approximated fair value.

                                      F-40
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

20.  FINANCIAL INSTRUMENTS (CONTINUED)
    The following table presents the carrying amounts and fair values of the
Group's financial instruments as of December 31, 2002 and 2001:

<Table>
<Caption>
                                                  PRINCIPAL/     2002                  PRINCIPAL/     2001
                                                   NOTIONAL    CARRYING                 NOTIONAL    CARRYING
                                                    AMOUNT      AMOUNT    FAIR VALUE     AMOUNT      AMOUNT    FAIR VALUE
                                                  ----------   --------   ----------   ----------   --------   ----------
<S>                                               <C>          <C>        <C>          <C>          <C>        <C>
Senior Secured Notes Series A...................    $45,000    $38,740     $ 38,740     $     --    $     --    $     --
Senior Secured Notes Series B...................      4,000      4,000        4,000
Senior Secured Notes Series C...................      1,250      1,250        1,250
7% Secured Note (FNAL Note).....................     27,352     27,352       27,352           --          --          --
Other Notes.....................................      6,656      6,086        6,086           --          --          --
8 1/4% Senior Notes.............................         --         --           --      430,000     426,453     292,400
11 5/8% Senior Notes--US$.......................         --         --           --      300,000     295,072     126,000
11 5/8% Senior Notes--Euro......................         --         --           --      288,540     261,006     111,611
Long-term debt..................................         --         --           --      341,500     341,500     341,500
Interest rate collar............................         --         --           --       20,000         376         376
Interest rate swap..............................         --         --           --      260,000        (244)       (244)
Interest rate swap..............................         --         --           --       89,200        (188)       (188)
Cross currency swap.............................    $    --    $    --     $     --     $268,980    $ (7,226)   $ (7,226)
</Table>

21.  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 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>
                                                  SUCCESSOR   PREDECESSOR   PREDECESSOR   PREDECESSOR
                                                    2002         2002          2001          2000
                                                  ---------   -----------   -----------   -----------
<S>                                               <C>         <C>           <C>           <C>
Current charge/(credit).........................    $635        $(1,546)      $10,782       $1,419
Deferred charge/(credit)........................      17         (2,241)       (3,380)        (323)
                                                    ----        -------       -------       ------
                                                    $652        $(3,787)      $ 7,402       $1,096
                                                    ====        =======       =======       ======
</Table>

    The tax charge has increased from $1.1 million for 2000 to $7.4 million for
2001 primarily as a result of provisions being made during 2001 for potential
tax liabilities in a number of jurisdictions. The tax credit for the period from
January 1, 2002 to October 9, 2002 was $3.8 million. The tax charge for the
period from October 10, 2002 to December 31, 2002 was $0.7 million. The movement
from a tax charge for 2001 of $7.4 million to an overall tax credit, on a
combined basis, for 2002 of $3.1 million arises because certain provisions made
in 2001 were not required in 2002, and from the release of certain of the 2001
provisions as certain liabilities are now not expected to crystallize.

                                      F-41
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

21.  TAXES (CONTINUED)
    The increase in the balance sheet current tax liability from $4.5 million at
December 31, 2000 to $13.7 million at December 31, 2001 arose primarily as a
result of provisions referred to above being made. The balance sheet current tax
liability decreased from $13.7 million at December 31, 2001 to $10.9 million at
December 31, 2002 primarily as a result of the provision release referred to
above.

    Deferred tax liabilities arise principally because revenues from certain
capacity sales entered into prior to July 1, 1999 were recognized in accordance
with FLAG's accounting policies applicable at that time (up front revenue
recognition on sale type leases), in advance of when they are recognized for tax
purposes in certain jurisdictions.

<Table>
<Caption>
                                                                2002        2001
                                                              ---------   --------
<S>                                                           <C>         <C>
Capacity sales revenues net of commissions deferred for tax
  purposes..................................................  $   6,772   $ 15,377
Other.......................................................         79     (3,773)
                                                              ---------   --------
Deferred tax liability......................................      6,851     11,604
Fixed assets including impact of asset impairments..........   (118,174)   (73,035)
Operating losses carried forward (majority of which expire
  between 5 and 20 years)...................................    (11,198)    (8,104)
Less valuation allowances...................................    122,600     69,496
                                                              ---------   --------
Total deferred tax (asset)/liability........................  $      79   $    (39)
                                                              =========   ========
</Table>

    SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Management
has determined that a $122.6 million valuation allowance as at December 31, 2002
is necessary to reduce the deferred tax assets to the amount that will more
likely than not be realized.

    The comparative numbers disclosure for 2001 has been restated to reflect the
effect of deferred tax in relation to the impairment of the FA-1 cable system at
31 December 2001. The figure for operating losses for 2001 was $2.9 million but
has been restated to $8.1 million as the tax position for certain entities has
been determined with additional information since the filing of the 10-K for
2001. Since in management's opinion the deferred tax asset arising from the
impairment and the losses should be fully offset by a valuation allowance, there
is no impact on the net deferred tax liability for the year ended 31
December 2001.

    As Bermuda does not impose an income tax, the statutory amount of tax is
zero. The provision for income taxes for the years ended December 31, 2002 and
2001, results in an effective tax charge/ (credit) that differs from the Bermuda
tax charge as follows:

<Table>
<Caption>
                                                             9 MONTHS
                                               3 MONTHS TO      TO
                                                DEC 2002     OCT 2002      2001       2000
                                               -----------   ---------   --------   --------
<S>                                            <C>           <C>         <C>        <C>
Statutory Bermuda tax charge.................      $ --       $    --    $    --     $   --
Current foreign taxes........................       635        (1,546)    10,782      1,419
Deferred and other taxes.....................        17        (2,241)    (3,380)      (323)
                                                   ----       -------    -------     ------
Effective tax charge/(credit)................      $652       $(3,787)   $ 7,402     $1,096
                                                   ====       =======    =======     ======
</Table>

                                      F-42
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

21.  TAXES (CONTINUED)
    The reorganization that took place as part of the chapter 11 process is not
expected to have a material adverse impact on the tax position of the Company by
increasing tax liabilities or by reducing or extinguishing tax assets.

    The discharge of the debt in accordance with the Plan is not expected to
have a material impact on the taxation of the Group, as the debt was held by
group entities located in Bermuda.

    Certain losses arising in foreign jurisdictions are expected to continue to
be available to the Group after the reorganization, though their use may be
subject to some restrictions in the US and elsewhere.

22.  RELATED PARTY TRANSACTIONS

    The following summarizes the transactions entered into by Successor and
Predecessor with all known related parties:

AGREEMENT WITH SPAGNOLO GROUP LP

    On October 10, 2002, we entered into an agreement with Spagnolo Group LP,
pursuant to which Mr. Mark Spagnolo acted as our Interim Chief Executive Officer
during the period from October 10, 2002 to February 28, 2003 and received $80
per month for the term of the agreement. The term of the agreement was for the
lesser of six months from the Effective Date or until a new Chief Executive
Officer was retained. Patrick Gallagher was retained as our Chief Executive
Officer as of March 1, 2003 and, accordingly, this agreement was terminated as
of February 28, 2003.

AGREEMENTS WITH VERIZON

    Verizon Communications Inc. ("Verizon") is the ultimate parent of a
controlled subsidiary Verizon International Holdings Ltd., which directly owned
18.6% of the common shares of Predecessor prior to the Effective Date. As of the
Effective Date, Verizon did not hold any of our common shares. We entered into
the following four agreements with subsidiaries of Verizon throughout 2001, all
of which have been renegotiated as a result of the liquidation of KPNQwest:

NETWORK ALLIANCE AGREEMENT

    On April 3, 2001, FLAG Telecom Ireland Network Limited ("FTINL"), a
subsidiary of the Company, entered into a Network Alliance Agreement with
Verizon Global Solutions Holdings II Ltd. ("VGS") under which both parties
agreed to create a network alliance to develop a European network. FTINL and its
affiliates will have the right to acquire from VGS capacity on this European
network on an indefeasible right of use ("IRU") basis. FTINL paid VGS
$35.6 million for such IRU over the European network and agreed to pay annual
operating and maintenance fees. The annual operating and maintenance fees
consist of $1.78 million paid in years one up to and including year five of the
IRU, $1.068 million paid in years six to ten, and $712 paid in years eleven to
fifteen. This agreement was terminated in May 2003 and is no longer in force.

COLLOCATION AGREEMENT

    On April 4, 2001, FLAG Atlantic UK Limited and FLAG Atlantic France Sarl,
both subsidiaries of the Company (collectively "FLAG Atlantic"), entered into a
Collocation Agreement with Verizon

                                      F-43
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

22.  RELATED PARTY TRANSACTIONS (CONTINUED)
Global Solutions U.K. Ltd. and Verizon Global Solutions France SAS (collectively
"Verizon UK/ France") under which FLAG Atlantic agreed to license to Verizon
UK/France co-location space in FA-1 PoPs in both London and Paris. Verizon
UK/France agreed to pay approximately $15.5 million for the license in the UK
and approximately $6.1 million for the license in France. The space has been
used by VGS to create the London and Paris PoPs for its European network, which
will provide capacity to subsidiaries of the Company under the Network Alliance
Agreement referred to above. This agreement is still in force.

RE-SALE AND PURCHASE AGREEMENT

    On April 3, 2001, FTINL and FLAG Telecom Global Networks Limited ("FTGNL"),
both subsidiaries of the Company, entered into a Re-Sale and Purchase Agreement
with VGS under which VGS agreed to purchase for $17.6 million approximately 30%
of the dark fiber pairs and co-location facilities located on the KPNQwest
Services UK Limited ("KPNQwest") EuroRings Network. The fiber pairs and
co-location facilities were originally purchased pursuant to a Dark Fiber IRU
and Collocation Facilities Agreement, dated February 28, 2001, among FTINL,
FTGNL and KPNQwest (the "KPNQwest Agreement"). This agreement was terminated in
May 2003 and is no longer in force.

TRI-PARTITE AGREEMENT

    On April 3, 2001, FTGNL, KPNQwest and VGS entered into a Tri-Partite
Agreement under which FTGNL assigned all of its rights, title, interest and
obligations under the KPNQwest Agreement to VGS and KPNQwest acknowledged and
consented to such assignment. This agreement was terminated in May 2003 and is
no longer in force.

MARINE MAINTENANCE SERVICE AGREEMENT WITH TGN

    TGN Holdings Ltd. ("TGN") directly owned 11.2% of the common shares of
Predecessor prior to the Effective Date. As of the Effective Date, TGN did not
hold any common shares of the Company. On June 1, 2001, FLAG Atlantic Limited
("FAL"), a subsidiary of Predecessor, entered into a Marine Maintenance Service
Agreement with TyCom Contracting Limited ("TyCom"), an affiliate of TGN, under
which TyCom agreed to provide certain marine maintenance services to Predecessor
for our FA-1 undersea fiber-optic cable systems. FAL agreed to pay $6.9 million
per annum for such services. Pursuant to a settlement agreement and release
between FLAG Atlantic Limited and TyCo Contracting Limited (formerly TyCom
Contracting Limited) ("TyCo") dated as of September 13, 2002 when we were in
chapter 11, the fee we have to pay TyCo is reduced to $4.7 million per annum
plus running charges. The earliest date on which we could withdraw from this
contract is also amended to May 1, 2004.

AGREEMENT WITH ADNAN OMAR

    On December 10, 2001, Predecessor entered into an agreement with Mr. Adnan
Omar, a director on Predecessor's board, pursuant to which Mr. Omar was
appointed President of FLAG Telecom Development Services Company LLC, a
subsidiary of the Company in Egypt. The agreement was for a fixed two-year term
under which Mr. Omar was entitled to a monthly payment of $30. On October 31,
2002, the Company entered into a Termination Agreement with Mr. Adnan Omar.
Mr. Omar was paid a severance payment of $610 pursuant to this agreement.

                                      F-44
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

22.  RELATED PARTY TRANSACTIONS (CONTINUED)
AGREEMENTS WITH TRADE CREDITORS

    We have three trade creditors who also hold certain portions of our debt and
share capital as at December 31, 2002. Those debt balances are $33.4 million.
Interest in the amount of $0.5 million has been paid in the period from
October 9, 2002 to December 31, 2002.

23.  LEGAL PROCEEDINGS

    LOFTIN ACTION--CLASS ACTION LAWSUIT

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

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

    As we, per the Plan, have no liability for any claims relating to the period
prior to the Effective Date, we believe there is no potential liability for us
and therefore no reserves have been established. There is a contingent
liability, on the part of the Company, of $3.25 million for a defense fund in
case the Directors' & Officers' Liability policy ("D&O policy") is invalidated
or attempted to be by the insurance company. No provision for these liabilities
has been made in our financial statements.

    Predecessor and the insurers under the D&O policy have executed an interim
funding agreement by which the insurers are willing to advance reasonable and
necessary costs and expenses in connection with the above matters. In the
meantime, the insurers have confirmed the existence of the D&O policies.

    RESOLUTION OF PSINET ACTION

    FLAG Atlantic Limited and FLAG Atlantic USA Limited were defendants in
litigation filed by PSINet, Inc. and its related affiliates and subsidiaries
("PSINet"). On May 31, 2001, PSINet initiated chapter 11 bankruptcy proceedings
in the United States Bankruptcy Court in the Southern District of New York.
Pursuant to those proceedings, PSINet commenced litigation against FLAG Atlantic
Limited

                                      F-45
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

23.  LEGAL PROCEEDINGS (CONTINUED)
and FLAG Atlantic USA Limited to recover an alleged preference payment under the
Bankruptcy Code. Prior to PSINet filing for bankruptcy, FLAG Atlantic Limited
and FLAG Atlantic USA Limited entered into a Capacity Right of Use Agreement
with three affiliated PSINet entities. After PSINet defaulted on payments due on
that agreement, on or about March 20, 2001, the parties entered into a Restated
Capacity Right of Use Agreement, amended the capacity, amended the term and
PSINet paid FLAG Atlantic Limited and FLAG Atlantic USA Limited $23.8 million.
PSINet claimed that this payment could be avoided as a preference because it was
made within 90 days of PSINet's bankruptcy, was on account of a prior debt and
allowed FLAG Telecom, as a creditor of PSINet, to recover more than it would
have if the payment had not occurred and it instead filed a claim in PSINet's
bankruptcy. PSINet alleged that it was entitled to recover the amount of the
payment, together with interest. FLAG Telecom filed an answer to the complaint
in which it denied the allegations of the complaint and asserted several
affirmative defenses. Because of Predecessor's own bankruptcy proceedings,
PSINet's action was stayed. The PSINet action was settled in connection with the
Plan and no further payments were made.

    RESOLUTION OF SOGETREL ACTION

    On July 15, 2002, Sogetrel, a company domiciled and doing business in
France, commenced litigation against the French subsidiary of FLAG Atlantic
Limited and FLAG Atlantic France SARL, for alleged unpaid invoices. The amount
of the claim was approximately E6,689,374. The claim was the subject of a motion
for summary judgment, which was dismissed on March 27, 2002. In December 2002,
the Sogetrel action was settled in an amount of E2,096,647.

    RESOLUTION OF EMPLOYMENT DISPUTE

    FLAG Limited was involved in a dispute with two former employees,
Messrs. Reda and Jalil, which centered on the lawfulness of the termination of
their employment contracts and the sums payable in that termination. The Court
of Appeal of Bermuda ruled on this issue in our favor. Messrs. Reda and Jalil
subsequently appealed to the Privy Council in the United Kingdom and the hearing
took place on April 16-18, 2002. The Privy Council ruled on this issue in FLAG
Telecom's favor on July 11, 2002. The only issue remaining in the case is that
of the amounts payable to Messrs. Reda and Jalil in respect of their lawful
termination. FLAG Telecom paid L1,691 into an escrow account in Bermuda in
October 2000. In 1999, Reda and Jalil received the sum of $855 which was paid
into Court. In October 2000, a further sum of $501 was paid to them out of the
escrow account. After the Privy Council decision another $558 was paid out of
the escrow. The remaining money in the escrow account was distributed to FLAG
Telecom, part of which was used to pay the costs incurred in the Court of Appeal
and the Privy Council.

    OTHER

    We have received third party subpoenas from the SEC seeking documents in
connection with the SEC's investigations of both Global Crossing and KPNQwest.
We intend to cooperate fully with the SEC's request for such documents.

                                      F-46
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

23.  LEGAL PROCEEDINGS (CONTINUED)

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

24.  NON-MONETARY TRANSACTIONS

    During 2001, we entered into three transactions wherein we provided capacity
in exchange for facilities and construction of landing station at approximately
the same time. In accordance with Accounting Principle Board's Opinion 29,
since, these are not reciprocal transfers of similar productive assets, we
recorded the transactions as prepaid assets or construction work in progress and
deferred revenues at fair values totaling $8.2 million. Since the capacity
exchanged was not activated, no revenues were recorded.

25.  COMMITMENTS AND CONTINGENCIES

    As part of the settlement, the Company agreed with one of its trade
creditors to pay $8 million if it recovered E16 million from the French
authorities in respect of its VAT claim. This amount of $8 million was to be
discharged in cash of $4 million and an unsecured promissory note of
$4 million. This note is to have an 18-month term and 7% interest. If the
Company does not recover the entire amount, it has the right to pay 57 per cent
of the amount recovered equally in cash and in a note payable. The Company
believes it will recover the full VAT reclaim and has recorded an accrued
liability of $8 million in respect of the commitment.

    During 1997, Predecessor 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, the Company is currently committed to
compensate the landing party with $243 as an annual fixed charge for rent of the
premises where the FNOC is located, subject to review in future years. Costs
incurred by the landing party to provide qualified personnel and additional
support is 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 $1,325, $5,563, $6,107 and $1,959 was recorded for the period
from October 9, 2002 to December 31, 2002, for the period from January 1, 2002
to October 8, 2002 and for the years ended December 31, 2001 and 2000,
respectively. The Group is also committed to make payments under various standby

                                      F-47
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

25.  COMMITMENTS AND CONTINGENCIES (CONTINUED)
maintenance agreements for the cable systems currently in use. Estimated future
minimum payments under the leases and standby maintenance agreements are as
follows:

<Table>
<Caption>
                                                         STANDBY      OFFICE
                                                       MAINTENANCE    SPACE      TOTAL
                                                       -----------   --------   --------
<S>                                                    <C>           <C>        <C>
2003.................................................    $28,305     $ 3,642    $ 31,947

2004.................................................     18,929       3,468      22,397

2005.................................................     11,850       2,697      14,547

2006.................................................     10,305       2,652      12,957

2007.................................................     10,441       2,652      13,093

Thereafter...........................................     18,549      28,433      46,982
                                                         -------     -------    --------

                                                         $98,379     $43,544    $141,923
                                                         =======     =======    ========
</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.

    The Company has capitalized the future minimum lease payments of property
and equipment under leases that qualify as capital leases. At December 31, 2002,
future minimum payments under these capital leases are as follows (in thousands)
and are included in other current liabilities and other deferred liabilities in
the accompanying consolidated balance sheet:

<Table>
<Caption>
                                                               PROPERTY AND
                                                              EQUIPMENT HELD
                                                               UNDER CAPITAL
                                                                  LEASES
                                                              ---------------
<S>                                                           <C>
2003........................................................       $273

2004........................................................         --

2005........................................................         --

2006........................................................         --

2007........................................................         --

Thereafter..................................................         --
                                                                   ----

Total.......................................................       $273
                                                                   ====
</Table>

    Capital expenditure contracted but not provided for as at December 31, 2002
amounted to approximately $5,174 in relation to the construction of our global
network.

26.  SEGMENT REPORTING

    Predecessor has historically reported its segmental disclosures in its two
primary operational areas: Capacity and Operations and Network Services. The
Company has changed the way it has managed its

                                      F-48
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

26.  SEGMENT REPORTING (CONTINUED)
business. Although our sales and marketing function is structured
geographically, we sell the full range of our products and services across the
global network. The Successor evaluates the performance of one segment, the
global network. The prior period segment disclosures have been restated.

    As described in Note 2--Basis of Presentation and Fresh Start Accounting,
the Company adopted fresh start accounting at the Effective Date. Accordingly,
the segment information of the Successor and Predecessor is not comparable.

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

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

<Table>
<Caption>
                                             SUCCESSOR     PREDECESSOR    PREDECESSOR     PREDECESSOR
                                             PERIOD TO      PERIOD TO       YEAR TO         YEAR TO
                                           DECEMBER 31,    OCTOBER 8,    DECEMBER 31,    DECEMBER 31,
REVENUE:                                       2002           2002           2001            2000
--------                                   -------------   -----------   -------------   -------------
<S>                                        <C>             <C>           <C>             <C>
North America............................     $ 3,093       $ 75,169        $ 49,885        $ 19,000
Europe...................................       2,743         27,789          53,117          23,293
Middle East..............................       1,273         24,033          17,487          26,328
Asia.....................................       5,038         50,943          43,120          31,641
                                              -------       --------        --------        --------
Total geographic revenue.................      12,147        177,934         163,609         100,262
Amortization of performance obligations
  under long-term contracts..............       9,857             --              --              --
                                              -------       --------        --------        --------
Consolidated Revenue.....................     $22,004       $177,934        $163,609        $100,262
                                              =======       ========        ========        ========
</Table>

    No assets are located in the Company's country of domicile. All network
assets are located across geographic borders, therefore it is impractical to
disclose assets by geographic location.

27.  UNAUDITED SUPPLEMENTARY DATA

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

    Due to the adoption of fresh start accounting as of October 9, 2002,
Successor's post-fresh start balance sheet; statement of operations; statement
of comprehensive income; statement of shareholders' equity and statement of cash
flows have not been prepared on a consistent basis with, and are generally not
comparable to, those of Predecessor. Prior to the application of fresh start
accounting, in accordance with SOP 90-7, Successor's balance sheet; statement of
operations; statement of comprehensive income; statement of shareholders' equity
and statement of cash flows have been presented separately from those of
Predecessor.

                                      F-49
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

27.  UNAUDITED SUPPLEMENTARY DATA (CONTINUED)
    The following table presents selected unaudited operating results of
Predecessor for 2001, three quarters ended September 30, 2002, and the period
from October 1 through October 8, 2002, and selected unaudited operating results
of Successor for the period from October 9, through December 31, 2002.

<Table>
<Caption>
                                                     PREDECESSOR                             SUCCESSOR
                             -----------------------------------------------------------   -------------
                                                                             OCTOBER 1,     OCTOBER 9,
                                                                              2002 TO         2002 TO
                                                SECOND                       OCTOBER 8,    DECEMBER 31,
                             FIRST QUARTER     QUARTER      THIRD QUARTER       2002           2002            YEAR
                             -------------   ------------   -------------   ------------   -------------   ------------
                              (RESTATED)
<S>                          <C>             <C>            <C>             <C>            <C>             <C>
2002
Net sales..................  $     53,523    $     62,756   $      56,419   $      5,236   $     22,004    $    199,938
Operating profit/(loss)....       (48,535)       (625,644)        (57,002)       433,585        (33,381)       (330,977)

Loss before cumulative
  effect of change in
  accounting principal.....       (80,377)       (656,110)        (51,567)       431,403        (36,847)       (393,498)
                             ------------    ------------   -------------   ------------   ------------    ------------
Net loss as restated.......  $    (80,377)   $   (656,110)  $     (51,567)  $    429,465   $    (36,847)   $   (395,436)
                             ------------    ------------   -------------   ------------   ------------    ------------
Net loss as reported.......  $    (74,060)            N/A             N/A            N/A            N/A             N/A
Net loss per share--as
  restated
  Net loss per share before
    cumulative effect of
    change in accounting
    principal..............  $      (0.60)   $      (4.89)  $       (0.38)  $       3.22   $     (18.42)
  Basic and diluted........  $      (0.60)   $      (4.89)  $       (0.38)  $       3.20   $     (18.42)
Net loss per share--as
  reported
  Net loss per share before
    cumulative effect of
    change in accounting
    principal..............  $      (0.55)            N/A             N/A            N/A            N/A             N/A
  Basic and diluted........  $      (0.55)            N/A             N/A            N/A            N/A             N/A
Weighted average common
  shares outstanding.......   134,139,046     134,139,046     134,139,046    134,139,046      2,000,000
                             ============    ============   =============   ============   ============
</Table>

                                      F-50
<Page>
                  FLAG TELECOM GROUP LIMITED AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

27.  UNAUDITED SUPPLEMENTARY DATA (CONTINUED)

<Table>
<Caption>
                                                                   PREDECESSOR (RESTATED)
                                          -------------------------------------------------------------------------
                                                             SECOND         THIRD          FOURTH
                                          FIRST QUARTER     QUARTER        QUARTER        QUARTER          YEAR
                                          -------------   ------------   ------------   ------------   ------------
<S>                                       <C>             <C>            <C>            <C>            <C>
2001
Net sales...............................  $     31,887    $     33,521   $     49,288   $     48,913   $    163,609
Operating loss..........................       (15,538)        (29,125)       (70,153)      (406,589)      (521,385)
Loss before cumulative effect of change
  in accounting principal...............       (34,695)        (45,555)       (88,950)      (433,058)      (602,258)
                                          ------------    ------------   ------------   ------------   ------------
Net loss as restated....................       (35,986)        (45,555)       (88,950)      (433,058)      (603,549)
                                          ------------    ------------   ------------   ------------   ------------
Net loss as reported....................  $    (39,522)   $    (39,858)  $    (80,895)  $   (422,715)  $   (582,990)
                                          ------------    ------------   ------------   ------------   ------------
Net loss per share--as restated
  Net loss per share before cumulative
    effect of change in accounting
    principal...........................  $      (0.26)   $      (0.34)  $      (0.66)  $      (3.23)  $      (4.49)
  Basic and diluted.....................  $      (0.27)   $      (0.34)  $      (0.66)  $      (3.23)  $      (4.50)
Net loss per share--as reported
  Net loss per share before cumulative
    effect of change in accounting
    principal...........................  $      (0.29)   $      (0.30)  $      (0.60)  $      (3.15)  $      (4.34)
  Basic and diluted.....................  $      (0.29)   $      (0.30)  $      (0.60)  $      (3.15)  $      (4.35)

Weighted average common shares
  outstanding...........................   134,093,171     134,125,171    134,132,484    134,122,061    134,122,061
                                          ============    ============   ============   ============   ============
</Table>

QUARTERLY EFFECTS OF RECIPROCALS & AUDIT ADJUSTMENTS

    As discussed in Note 4, Predecessor has restated its prior period financial
statements. The following summarizes the impact of the adjustments:

    For the first quarter of 2001 the net loss was reduced by $3.5 million
primarily as a result of additional revenue of $2.9 million recognized on
contracts entered into prior to 2000 and $0.3 million due to reciprocal
restatements.

    For the second quarter of 2001, the net loss was increased by $5.7 million.
Reciprocal restatements increased the net loss by $1.9 million and other audit
adjustments resulted in increased sales, general and administrative expenses of
$3.0 million, depreciation $0.3 million and interest expense $0.3 million.

    For the third quarter of 2001, net losses were increased by $8.1 million.
Reciprocal restatements increased the net loss by $6.5 million and the audit
adjustments have resulted in increased O&M costs of $0.5 million and additional
sales, general and administrative expenses of $1.1 million.

    For the fourth quarter of 2001, net losses were increased by $10.3 million.
Reciprocal restatements increased the net loss by $8.4 million and the audit
adjustments have resulted revenue reductions of $2.3 million and a decrease in
sales, general and admin expenses of $0.8 million.

    For the first quarter of 2002, net losses were increased by $6.3 million.
Reciprocal restatements decreased profit by $10.9 million, which was offset by
revenue increases of $4.3 million, an increase in network expenses of
$1.5 million. Additionally there was a decrease in sales, general &
administration expenses of $2.1 milion.

                                      F-51
<Page>
                           FLAG TELECOM GROUP LIMITED
                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                      (EXPRESSED IN THOUSANDS OF DOLLARS)

<Table>
<Caption>
                                                         ADDITIONS
                                              BALANCE    CHARGED TO    RELEASE                  BALANCE
                                             BEGINNING   COSTS AND    TO INCOME                  END OF
                                             OF PERIOD    EXPENSES    STATEMENT   WRITTEN OFF    PERIOD
                                             ---------   ----------   ---------   -----------   --------
<S>                                          <C>         <C>          <C>         <C>           <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
PREDECESSOR
December 31, 2000..........................   $6,827      $   102      $(1,391)     $   (249)   $ 5,289
December 31, 2001 (Restated)...............    5,289        1,008       (1,181)          (17)     5,099
January 1 to October 8, 2002...............    5,099       21,278       (5,713)      (11,257)     9,407
SUCCESSOR
October 9, 2002 to December 31, 2002.......   $9,407      $ 1,037      $    --      $     --    $10,444
</Table>

    As described in Note 2 to the financial statements--Basis of Presentation
and Fresh Start Accounting, the Company adopted fresh start accounting on
October 9, 2002. Accordingly, the valuation and qualifying accounts of the
Successor and Predecessor are not comparable.

                                      F-52
<Page>
                                   SIGNATURE

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act 1934, the registrant has duly caused this amendment to be signed on
its behalf by the undersigned, thereunto duly authorized.

<Table>
<S>                                                    <C>        <C>
                                                       FLAG TELECOM GROUP LIMITED
                                                       (Registrant)

                                                       By:                         /s/ ALEXANDER GERSH
                                                                        -----------------------------------------
                                                                                  Name: Alexander Gersh
Date: August 14, 2003                                                        Title: CHIEF FINANCIAL OFFICER
</Table>
<Page>
    The following Exhibits are filed as part of this Report as required by
Regulation S-K.

<Table>
<Caption>
       EXHIBIT
       NUMBER           DESCRIPTION
---------------------   -----------
<S>                     <C>
 31.1*                  Certification of the Chief Executive Officer pursuant to
                        Section 302 of the Sarbanes-Oxley Act of 2002.

 31.2*                  Certification of the Chief Financial Officer pursuant to
                        Section 302 of the Sarbanes-Oxley Act of 2002.

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

 32.2+                  Certification of the Chief Financial Officer pursuant to
                        Section 906 of the Sarbanes-Oxley Act of 2002.
</Table>

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

*   Filed herewith

+  Furnished herewith