FLAG LTD, 20-F, 2000-03-31

FLAG LTD
20-F, 2000-03-31
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 20-F

/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER: 333-8456
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FLAG LIMITED

(Exact name of registrant as specified in its charter)

BERMUDA
(Jurisdiction of incorporation or organization)
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EMPORIUM BUILDING
69 FRONT STREET
HAMILTON HM12, BERMUDA
(Address of principal executive offices)
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SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None

SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None

SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
OF THE ACT: 8 1/4% Senior Notes Due 2008

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:

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Shares of Class B Common Stock, $.0001 par value each....... 635,796,338
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 / / Item 18 /X/

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TABLE OF CONTENTS

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PAGE
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SAFE HARBOR STATEMENT.................................................. 1

PRESENTATION OF FINANCIAL INFORMATION.................................. 1

PART I

Item 1. Description of Business..................................... 1

Item 2. Description of Property..................................... 12

Item 3. Legal Proceedings........................................... 12

Item 4. Control of Registrant....................................... 12

Item 5. Nature of Trading Market.................................... 12

Item 6. Exchange Controls and Other Limitations Affecting Security
Holders..................................................... 13

Item 7. Taxation.................................................... 13

Item 8. Selected Financial Data..................................... 14

Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16

Item Quantitative and Qualitative Disclosures About Market
9A. Risk........................................................ 24

Item Directors and Officers of Registrant........................
10. 25

Item Compensation of Directors and Officers......................
11. 26

Item Options to Purchase Securities from Registrant or
12. Subsidiaries*............................................... 27

Item Interest of Management in Certain Transactions..............
13. 27

PART II

Item Description of Securities to be Registered*.................
14. 29

PART III

Item Defaults upon Senior Securities*............................
15. 29

Item Changes in Securities and Changes in Security for Registered
16. Securities*................................................. 29

PART IV

Item Financial Statements**......................................
17. 29

Item Financial Statements........................................
18. 29

Item Financial Statements and Exhibits...........................
19. 29

FINANCIAL STATEMENTS................................................... F-1

EXHIBITS
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* Omitted because the item is inapplicable or the answer is negative.

** The Registrant has responded to Item 18 in lieu of this Item.

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FLAG Limited (the "Company") was incorporated under the laws of Bermuda in
January 1993. Its principal executive offices are located at Emporium Building,
69 Front Street, Hamilton HM12, Bermuda. Its telephone number is
(441) 296-0909. References herein to "Flag Telecom" refer to Flag Telecom
Holdings Limited, our direct parent company.

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

The statements included in this annual report on Form 20-F ("Form 20-F")
regarding future financial performance and results and the other statements that
are not historical facts are forward-looking statements. The words "believes,"
"intends," "expects," "anticipates," "projects," "estimates," "predicts" and
similar expressions are also intended to identify forward-looking statements.
Such statements reflect various assumptions by the Company concerning
anticipated results and are subject to significant business, economic and
competitive risks, uncertainties and contingencies, including, without
limitation, the risks, uncertainties and contingencies described in registration
statements, reports and other documents filed by the Company from time to time
with the Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended.
Accordingly, there can be no assurance that such statements will be realized.
Such risks, uncertainties and contingencies could cause the Company's actual
results for 2000 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. The Company
makes no representation or warranty as to the accuracy or completeness of such
statements contained in this Form 20-F.

PRESENTATION OF FINANCIAL INFORMATION

In this Form 20-F, references to "Dollars," "dollars" and "$" are to United
States dollars, and the terms "United States" and "U.S." mean the United States
of America, its states, its territories, its possessions and all areas subject
to its jurisdiction. Certain amounts which appear in this Form 20-F may not sum
because of rounding adjustments.

Financial data included herein have been derived, unless otherwise
indicated, from, and should be read in conjunction with, the financial
statements of the Company, which have been prepared in accordance with United
States generally accepted accounting principles. Accordingly, unless otherwise
indicated, the Company has presented certain financial information contained
herein in Dollars. The Company's fiscal year ends on December 31. As used
herein, "fiscal year" refers to the twelve-month period ending December 31,
1999.

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

The Company is a facilities-based provider of telecommunications capacity to
licensed international carriers, Internet service providers and other
telecommunications companies through its ownership of the world's longest
digital fiberoptic undersea cable system. The FLAG Europe-Asia cable system
links the telecommunications markets of Western Europe and Japan through the
Middle East, India, Southeast Asia and China along a route which adjoins
countries with approximately 75% of the world's population. The FLAG Europe-Asia
cable system consists of approximately 28,000 kilometers of technologically
advanced undersea digital fiberoptic cable which comes ashore at 16 operational
landings in 13 countries. It has an aggregate capacity of 10 gigabits per second
transmitting on two fiber pairs. The system incorporates synchronous digital
hierarchy, which is the current international standard for digital transmission
and management. Expansion of the transmission capacity of the segments of the
FLAG Europe-Asia cable system may be accomplished by employing additional light
sources using the wavelength division multiplexing technique of operating at
more than one wavelength. The transmission capacity of the segments of the FLAG
Europe-Asia cable system is upgradeable to between 20 and 40 gigabits per second
depending on the location of the segment. The FLAG Europe-Asia cable system cost
approximately $1.6 billion to

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complete and was placed into commercial service on November 22, 1997 with an
initial group of 62 customers.

MARKET OPPORTUNITY

The Company developed the FLAG Europe-Asia cable system and its product and
service offerings to participate in the following important growth and strategic
shifts in the international telecommunications markets:

ADVANCES IN TELECOMMUNICATIONS AND NETWORKING TECHNOLOGY. Recent advances
in telecommunications and networking technology have dramatically lowered the
unit cost of carrying voice, data and video signal traffic. Through dense
wavelength division multiplexing (DWDM), a technology that transmits multiple
light signals through a single optical fiber, the bandwidth of submarine
fiberoptic cables can be increased by up to 40 times that of non-DWDM systems.
Several advances in switching, the process of interconnecting circuits to
form a transmission path between users, and electronics have further increased
the bandwidth, or transmission capacity, of telecommunications networks.
Historically, carriers built telecommunications networks optimized for voice
traffic. These are based on circuit switching, which establishes and keeps open
a dedicated path until a call is terminated. While circuit switching has worked
well for decades, it does not efficiently use transmission capacity, because
once a circuit is dedicated, it is unavailable to transmit any other
information, even when the particular users of that circuit are not speaking or
otherwise transmitting information. Packet switching networks optimized for data
traffic are replacing circuit based networks. Packet switching divides signals
into small "packets" which are then independently transmitted to their
destination via the quickest path. Upon their arrival, the packets are
reassembled. Packet switching provides more efficient use of the capacity in a
network because the network does not establish inefficient dedicated circuits,
which waste unused capacity. Packet switching networks can achieve lower unit
costs than circuit networks. New packet networking technologies include Internet
protocol (IP), Asynchronous Transfer Mode (ATM) and frame relay. ATM's quality
of service features support high-quality voice and video signals over packet
networks. Similar quality of service features are being developed for IP.

CONVERGENCE OF VOICE AND DATA SERVICES. Telecommunications network designs
have traditionally created separate networks using separate equipment for voice,
data and video signals. The evolution from circuit switched networks to
packet-switched networks erases the traditional distinctions between voice, data
and video transmission services. High-bandwidth packet-switched networks can
transmit mixed digital voice, data and video signals over the same network with
a high level of frequency. This capability lowers the cost to operators of
building and operating networks providing a strong economic incentive for the
implementation of unified networks. Since the Internet is the major driver of
growth, we believe it is likely that IP will emerge as the network platform of
choice.

RAPID GROWTH OF TELECOMMUNICATIONS TRAFFIC. According to an August 1999
research report published by Ovum Ltd., total world telecommunications traffic
demand is expected to grow more than 50-fold between 1999 and 2005, with
Internet and data traffic accounting for 98% of total traffic by 2005. Several
key factors are expected to drive growth in worldwide telecommunications
traffic, including (1) the worldwide growth in the use of bandwidth-intensive
applications, such as video conferencing, video-on-demand and corporate
intranets which has resulted, in part, due to the convergence of voice and data
services, and (2) increased globalization of commerce, particularly electronic
commerce.

IMPACT OF GLOBAL DEREGULATION. The continued deregulation of the global
telecommunications industry has resulted in a significant increase in the number
of competitors, including traditional carriers, wireless operators, Internet
service providers and new local exchange service providers. This change in the
global competitive landscape is generating significant demand for broadband
telecommunications capacity as carriers seek to secure sufficient capacity for
their expansion plans. As of July 1998, Telegeography estimated that there were
over 1,000 facilities based international telecommunications operators
worldwide, representing a 184% increase since July 1995. In addition, further
telecom privatization is expected

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over the next few years, which in turn is expected to generate increased global
competition. Global deregulation has also resulted in increased demand for
city-to-city services, as new entrants to the telecommunication industry seek to
take advantage of the economic benefits of controlling facilities on an
end-to-end basis.

INCREASING CHALLENGES FOR CONSORTIA SYSTEMS AND ACCEPTANCE OF PRIVATELY
SPONSORED CABLE SYSTEMS. Historically, the planning and ownership of undersea
cable systems has been conducted through large consortia typically led by the
monopoly telecommunications providers. We believe that the consortium approach
to constructing, owning and operating undersea cable systems is becoming far
less effective as:

- carriers increasingly view significant long term capital investments in
capacity to be a suboptimal utilization of resources;

- deregulation of international telecommunications markets leads to direct
competition among consortia members for customers;

- competition from new entrants makes carriers' market share and capacity
requirements increasingly difficult to predict;

- the rapid pace of technological change creates difficulties in the ability
of carriers to accurately forecast the growth of telecommunications
traffic; and

- the complex management structure of consortia systems renders these
systems increasingly less effective in responding to rapid market changes.

We believe that telecommunications service providers have become
increasingly receptive to the advantages of independent, privately-owned cable
systems. In connection with the marketing of capacity on FLAG Europe-Asia cable
system, carriers have responded positively to our ability to offer:

- capacity as and when needed without the incurrence of significant initial
capital investments;

- a wide range of capacity purchasing options appealing to both established
carriers and new market entrants; and

- state-of-the-art system quality combined with cost-effective high quality
operations, administration and maintenance support.

BUSINESS STRATEGY

The Company is a leading carriers' carrier, providing access along the FLAG
Europe-Asia cable system to licensed international carriers.

The principal elements of the Company's business strategy include:

A LEADING CARRIERS' CARRIER. The Company has established itself as a
leading carriers' carrier by offering its customers fixed-cost, long-term
contracts allowing them to acquire capacity on the FLAG Europe-Asia cable
system without incurring the high capital costs and long lead times usually
associated with building undersea cables by a consortium or "club" of
carriers. Typically, capacity is purchased by carriers for the remaining
design life of the cable, 25 years from October 8, 1997. As a carriers'
carrier, the Company blends traditional industry characteristics, such as
offering life-of-the-system capacity purchases to established carriers, with
the competitive market characteristics of its product offerings to emerging
carriers.

MARKET-BASED FLEXIBLE PRICING STRATEGY. The Company has implemented a
flexible market-based pricing strategy coupled with volume incentives for
carriers that choose to make a sizable capacity investment in the FLAG
Europe-Asia cable system. The Company offers flexibility in the route, the
size of bandwidth, the period capacity for which is held and the payment
terms for any route requested by customers. Capacity purchases come with a
number of features such as portability and drop-and-insert options, offering
customers a high level of flexibility in selecting and managing their
bandwidth requirements. In addition to capacity purchases, the Company
offers short-term leasing with a lease-to-buy option.

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The Company provides carriers with predictability in standby maintenance
and repair charges by offering fixed prices for standby maintenance over the
life of the purchased capacity, subject to certain inflation adjustments.
Standby maintenance prices are generally based on a fixed rate per
half-minimum interest unit on each Segment. Carriers are billed for standby
maintenance annually in advance with the charges calculated by applying the
published prices to the capacity owned by each carrier.

HIGH SECURITY AND RELIABILITY. The Company has made a substantial
investment in protecting its fiberoptic system with advanced submarine cable
burial and armoring techniques as well as redundancy at its terrestrial
crossings. The Company has installed hardware and software and contracted
for alternative routes to restore service to its customers in the event of a
break or failure in the FLAG Europe-Asia cable system. The restoration plan
is a combination of an in-system restoration plan where parallel routing is
available within the FLAG Europe-Asia cable system and an out-of-system
restoration plan created in part by reciprocal arrangements with other
providers. The Company continuously monitors and maintains control of its
system on a 24-hour basis through the FLAG Network Operations Center (FNOC),
and the restoration plan will permit prompt alternate routing in the event
of a break or fault. The FNOC is responsible for system-wide surveillance,
pro-active maintenance, coordination of maintenance and repair operations
and for circuit activation and assignment and configuration of the
transmission equipment. The FNOC has the capability of a system-wide view of
all network elements in the FLAG Europe-Asia cable system through its
Integrated Transport Management (ITM-2000) system.

GLOBAL CONNECTIVITY. Part of the Company's strategy is to facilitate
point-to-point fiberoptic connectivity for its customers. In order to
enhance such global connectivity, the Company negotiates marketing
arrangements with other cable systems and evaluates potential extensions of
the FLAG Europe-Asia cable system. New landing stations in Jordan and Saudi
Arabia were added in 1999. We also intend to add additional countries to the
FLAG Europe-Asia cable system over time.

SUPERIOR CUSTOMER SERVICE. The Company has a customer care plan to
focus on quality, reliability and consistent customer support. Under such
plan, regional customer care personnel provide ongoing support to the
Company's present and prospective customers on operational and product
issues. The Company will utilize marketing studies to track the rapid
changes in the telecommunications markets in order to identify customers'
needs and changed preferences.

PRODUCTS AND SERVICES

We offer a variety of traditional telecommunications capacity products and
services to our customers and have taken steps to expand the range of products
and services which we intend to make available in the future. Originally, our
products and services were primarily tailored to the needs of the traditional
carriers which continue to form the bulk of our existing customer base. We have
also begun to offer managed and other value-added services and intend to expand
the range of these services. By doing so, we have attracted, and intend to
continue to attract, an expanded range of customers, including resellers,
Internet service providers and systems integrators. Our four main product groups
are described below.

We offer competitively priced, point-to-point connectivity, often purchased
on a lifetime right-of-use basis. Presently, our customers can purchase the
right to connect between any of our sixteen landing points in China, India,
Korea, Hong Kong, Thailand, Malaysia, Japan, Egypt, Saudi Arabia, Jordan, the
United Arab Emirates, Italy, Spain and the United Kingdom.

We believe our customers are finding it increasingly difficult to predict
their future needs for bandwidth capacity. We have responded by offering our
customers products that help them manage their network capacity. For example,
our global portability program allows customers to purchase bandwidth capacity
on one segment of the FLAG Europe-Asia cable system and then to move the
purchased capacity to another segment of the FLAG Europe-Asia cable system on an
as--needed basis.

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Capacity leases are another means by which we offer our customers
flexibility. While most of our customers have tended to purchase capacity for
the entire life of the relevant system, many of our customers and potential
customers have expressed an interest in shorter-term arrangements to help them
manage demand uncertainty. To meet these needs, we offer capacity leases with
terms ranging from a few months to as long as five years. These customers can
convert a capacity lease into a lifetime right-of-use at any time during the
term of the lease on payment of a conversion charge.

Our "drop & insert" product also offers flexibility to the customers of the
FLAG Europe-Asia cable system. This product allows our customers to take a
single STM-1 circuit and drop traffic off at multiple locations along the FLAG
Europe-Asia cable system route. (One STM-1 unit carries 155,500 kilobits per
second of capacity.) By offering a United Kingdom-Japan circuit with drop-off
points in the Middle East and Asia, we can offer a product that cannot be
replicated by routing traffic between the United Kingdom and Japan through the
United States (the most cost-effective way to route traffic between the United
Kingdom and Japan). We believe this flexibility strengthens our market position
in the Europe-Asia long haul market.

COMPETITIVE ADVANTAGES

We believe we have several competitive advantages that will facilitate the
achievement of our business goals. These competitive advantages include:

WE HAVE AN EXTENSIVE EXISTING NETWORK AND CUSTOMER BASE. We currently
operate the largest independent, privately-owned fiberoptic submarine cable in
the world. We have an established customer base of approximately 90 customers,
many of whom are among the world's leading telecommunications and Internet
companies, including 17 of the top 20 international carriers based on traffic
volume. We also have network operations centers in the United Arab Emirates and
the United Kingdom through which we monitor the operations of, and can provide
maintenance and repairs to, the FLAG Europe-Asia cable system, 365 days per
year, 24 hours per day. We believe this existing network organizational
infrastructure and customer base will significantly facilitate our sales of
additional capacity and our introduction of additional product and service
offerings.

WE FOLLOW A FLEXIBLE MARKET-BASED STRATEGY. We have implemented a
market-based pricing strategy for our products and services. In order to
maintain market-based pricing, we analyze, among other things, currently
available alternatives for carriers along segments on our cable and terrestrial
systems. We provide carriers with standby maintenance and repair charges by
offering fixed prices for standby maintenance over the life of purchased
capacity, subject to certain inflation adjustments. This feature differs from
club cable maintenance charges which vary based on the capacity share of the
actual maintenance expenses incurred in a particular period. We have also
developed flexible payment terms and short-term commitment arrangements, such as
leases and lease to buy contracts, which are attractive to emerging carriers
facing uncertainty with respect to growth patterns of their traffic and
potential regulatory obstacles. We have developed a global portability program
option that allows carriers to change segments within a cable system as often as
they wish. We have also developed a "drop & insert" feature for our STM-1
product that allows customer to drop-off traffic for long haul circuits at
various intermediate points on the FLAG Europe-Asia cable system. We believe our
flexible market-based approach enables us to be highly responsive to the
individual requirements of our customers.

OUR NETWORK IS SECURE AND RELIABLE. We have made a substantial investment
in protecting our fiberoptic systems with advanced submarine cable burial and
armoring techniques, as well as redundancy at our terrestrial crossings. We have
installed hardware and software and contracted for alternative routes to restore
service to our customers in the event of a break or failure in the FLAG
Europe-Asia cable. Our restoration plan is a combination of an in-system
restoration plan, where parallel routing is available within the FLAG
Europe-Asia cable system, and an out-of-system restoration plan created in part
by reciprocal arrangements with other providers. We continuously monitor and
maintain control of our systems on a

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24-hour basis through the FLAG Europe-Asia cable system operations centers and
our restoration plans permit prompt alternate routing in the event of a break or
fault.

WE PROVIDE SUPERIOR CUSTOMER SERVICE. We have developed a customer care
approach focused on providing quality, reliability and consistency of customer
support. Through the FLAG Europe-Asia cable system operations centers, we are
able to provide circuit activation and transmission capacity within hours of a
customer's determination to use our products and services. We have regionally
based sales personnel who are available to provide ongoing support to our
present and prospective customers on operational and product issues. We utilize
marketing studies to track the rapid changes in the telecommunications markets
in order to identify customers' needs and changing preferences. Our marketing
and sales personnel will seek to maintain ongoing communication with customers
and market sources in order to adapt pricing and product structures to changed
conditions and changed competitive pressures. We believe the fact that over half
of our original 62 customers have made multiple purchases from us is indicative
of the success of this approach to customer service.

OUR MANAGEMENT TEAM HAS SIGNIFICANT INDUSTRY EXPERIENCE AND REGIONAL
EXPERTISE. Our management team has a proven track record. We constructed the
FLAG Europe-Asia cable system on time and within budget. We have assembled and
will continue to build a strong management team comprised of executives and key
employees with extensive operating experience in the global telecommunications
industry and significant project management and international commercial
experience. We have a network of senior executives and senior advisors who are
based in the regions for which they have management responsibility and who have
acquired much of their professional experience in these regions. We believe that
as a result of this emphasis on both industry experience and regional expertise,
our management team:

- has developed a better understanding of customers' needs in the regions it
serves;

- is better able to anticipate and react to developments in these regions,
such as deregulation, that may impact our network and future expansion
plans; and

- can more effectively implement our business initiatives as a result of the
regional contacts it has established and its enhanced understanding of
local cultural, political and legal matters.

THE FLAG EUROPE-ASIA CABLE SYSTEM

The FLAG Europe-Asia cable system consists of approximately 28,000
kilometers of undersea digital fiberoptic cable with a 580-kilometer dual land
crossing in Egypt and a 450-kilometer dual land crossing in Thailand. The FLAG
Europe-Asia cable system connects with communication networks in the United
Kingdom, Spain, Italy, Egypt, Jordan, Saudi Arabia, the United Arab Emirates,
India, Malaysia, Thailand, Hong Kong, China, Korea and Japan.

We offer capacity for digital transmission over the FLAG Europe-Asia cable
system. Typically, each party that purchased capacity on the FLAG Europe-Asia
cable system prior to September 1998 became a signatory to the construction and
maintenance agreement relating to the FLAG Europe-Asia cable system. This
agreement sets forth the rights and obligations of the Company, the landing
parties and these other signatories with respect to the ownership, operation,
maintenance and expansion of the FLAG Europe-Asia cable system. Commencing in
late 1998, we began leasing capacity and selling capacity on a right of use
basis.

The FLAG Europe-Asia cable system employs the most advanced technology
available and proven in commercial installations at the date of construction of
the FLAG Europe-Asia cable system. The aggregate system capacity is 10 gigabits
per second transmitting on two fiber pairs. The FLAG Europe-Asia cable system
incorporates synchronous digital hierarchy, which is the current international
standard for digital transmission and management. Proven designs for an ocean
cable are incorporated into the FLAG Europe-Asia cable system including passive
branching units, non-zero dispersion shifted fibers and fully redundant laser
pumps in the optical amplifiers which are located at intervals of approximately
80 kilometers along the undersea route. Expansion of the transmission capacity
of the segments of the FLAG Europe-Asia cable system can be accomplished by
employing additional light sources using the wavelength

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division multiplexing technique of operating at more than one wavelength. This
enhancement can be added by system modifications at one or more landing stations
and without modification of the submerged portion of the FLAG Europe-Asia cable
system. The transmission capacity of the segments of the FLAG Europe-Asia cable
system is upgradeable to between 20 and 40 gigabits per second depending on the
location of the segment.

SYSTEM EXPANSIONS. We have expanded the FLAG Europe-Asia cable system from
its original system design to include landing stations in China, Japan, Saudi
Arabia and Jordan. We completed additional landing stations in China and Japan
prior to putting the FLAG Europe-Asia cable system in operation in 1997. We
completed the landing stations in Saudi Arabia and Jordan in July 1999. As part
of our efforts to extend our network, we are actively evaluating a number of
potential expansions to the FLAG Europe-Asia cable system.

LANDING PARTIES. In order for the FLAG Europe-Asia cable system to be
accessible to carriers, it comes ashore in various countries along the FLAG
Europe-Asia route and connects with domestic cable systems and other submarine
cable systems at landing stations in the countries where the cable lands. Our
landing parties have agreed to provide and to maintain in operation the landing
stations and the terrestrial portion of the FLAG Europe-Asia cable system.
Landing parties recover landing station capital and maintenance costs through
"right of use" charges and annual maintenance charges that are borne by carriers
entering the FLAG Europe-Asia cable system at that landing station. We reimburse
each landing party for the cost of maintaining the terrestrial portion of the
FLAG Europe-Asia cable system. Set forth below are the landing parties for the
FLAG Europe-Asia cable system:

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COUNTRY LANDING PARTY
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United Kingdom........................... Cable & Wireless Communications

Spain.................................... Telefonica de Espana

Italy.................................... Telecom Italia

Egypt.................................... Telecom Egypt

Jordan................................... Jordan Telecommunications

Saudi Arabia............................. Saudi Telecom

United Arab Emirates..................... Etisalat

India.................................... VSNL

Malaysia................................. Telekom Malaysia

Thailand................................. The Communications Authority of Thailand

China.................................... China Telecom Cable & Wireless
HKT International

Korea.................................... Korea Telecom

Japan.................................... IDC KDD
</TABLE>

CAPACITY SALES. Each user of capacity on the FLAG Europe-Asia cable system
enters into an agreement with us to acquire capacity. We entered into agreements
to acquire capacity with 62 carriers prior to commencement of service of the
FLAG Europe-Asia cable system. We now have approximately 90 customers.

CONSTRUCTION AND MAINTENANCE. The construction and maintenance agreement
for the FLAG Europe-Asia cable system governs use of the capacity and the rights
and obligations of the landing parties, purchasers of capacity who have become
signatories to the construction and maintenance agreement and the Company. Under
the construction and maintenance agreement, we are responsible for arranging
maintenance for the submarine portion of the FLAG Europe-Asia cable system. The
construction and

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maintenance agreement also restricts us from selling, leasing or directly
providing capacity to any entity which is not authorized or permitted under the
laws of its country to acquire and use facilities for the provision of
international telecommunication services. Each signatory to the construction and
maintenance agreement correspondingly agrees that it will not sell or transfer
capacity to third parties, with certain exceptions relating to transfers to
affiliates, transfers to other carriers in a signatory's country and transfers
to which we consent. The construction and maintenance agreement gives limited
rights to vote to the signatories; for example, the unanimous vote of the
signatories is required to add a new landing station to the FLAG Europe-Asia
cable system. System enhancements which are approved by the signatories must be
paid for by the signatories and us in relation to capacity on the affected
segment.

OPERATION AND MAINTENANCE. The FLAG Europe-Asia cable system is designed to
provide service continuity at a standard of 99.999% availability (exclusive of
cable cuts) and to ensure error-free service throughout a design life of
25 years. During the period from its inception to December 31, 1999 the FLAG
Europe-Asia cable system's actual availability was 99.994%. The FLAG Europe-Asia
cable system performance has met or exceeded relevant International
Telecommunications Union recommendations consistently throughout the entire
system since it went into commercial service. The FLAG Europe-Asia cable system
is controlled by the FLAG Europe-Asia cable system operations center in
Fujairah, United Arab Emirates, which is responsible for system-wide
surveillance, proactive maintenance, coordination of maintenance and repair
operations, circuit activation and assignment and configuration of the
transmission equipment 24 hours a day, 365 days a year. Most other submarine
cable systems maintain monitoring services at their landing stations and do not
maintain full-time, around-the-clock surveillance. The FLAG Europe-Asia cable
system operations center has the capability of a system-wide view of all network
elements in the FLAG Europe-Asia cable system through its integrated transport
management (ITM2000) system. The ITM2000 performs real-time surveillance and
control of the FLAG Europe-Asia cable system including provisioning and
restoration at each of the landing stations. We believe that the FLAG
Europe-Asia cable system operations center, which is an innovation in system
maintenance of undersea cables, and the hardware and software installed by the
Company provide a higher standard of service and continuity than can be provided
by other international cable systems. Given the importance of redundancy within
the telecommunications industry, we established a backup FLAG Europe-Asia cable
system operations center in a location near Heathrow, United Kingdom in 1998.

We have entered into four zone agreements which provide maintenance services
from the United Kingdom to Gibraltar in the Mediterranean; from Gibraltar to
Djibouti at the entry to the Red Sea; from India to a point south of Okinawa;
and in the Pacific Ocean north of 25 DEG. latitude. Maintenance zone agreements
are cooperative standby agreements among all cable operators in major ocean
areas to share the expense of assuring constant availability of cable ships
capable of providing repairs to undersea cables. In addition, we have entered
into a bilateral agreement for maintenance of the area from the Red Sea to a
point south of India. We have entered into this agreement to facilitate more
rapid repairs than would be possible under a zone agreement whose area includes
the area covered by the bilateral agreement.

FACILITY RESTORATION PLAN. We have developed a comprehensive restoration
plan for the entire FLAG Europe-Asia cable system to arrange the availability of
alternative routing of traffic in the event of an outage in transmission.
Although the undersea cable is protected by means of burial and armoring, the
cable is nonetheless susceptible to damage from fishing activities, ships and
the elements. We developed the restoration plan on two levels. In-system
restoration routes traffic around faulty equipment or a system break where
parallel routing is available as part of the FLAG Europe-Asia cable system; for
example, on the dual terrestrial crossings in Egypt and Thailand or the
temporary outage of one fiber pair. Out-of-system restoration routes traffic to
alternative systems in accordance with predetermined plans and arrangements with
operators of other cables, land lines and satellites. All segments of the FLAG
Europe-Asia cable system are covered by restoration alternatives using
fiberoptic cable which is laid undersea or on land except that restoration from
Italy to Malaysia is, in part, currently provided by a satellite link. Since
restoration over another cable is preferable in order to maintain consistency of
service quality, we are arranging with Sea MeWe3 (SMW3) for restoration with
respect to the link from Italy to

8
<PAGE>
Malaysia. While we undertake to arrange restoration capacity for our customers,
we have no obligation to provide restoration to our customers on the FLAG
Europe-Asia cable system. Each customer decides whether to accept the
restoration plan offered by us, and the customers accepting restoration capacity
must share and reimburse us for the associated charges.

MARKETING AND SALES

We market our network capacity and telecommunications products and services
through a sales force of 6 people located in offices in Bermuda and the United
Arab Emirates (Dubai and Fujairah).

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<PAGE>
OUR CUSTOMERS

Our top 50 customers are the telecommunications and Internet companies
listed below. These customers have accounted for approximately 95% of our
revenues to date.

<TABLE>
<CAPTION>
THE AMERICAS EUROPE ASIA/PACIFIC MIDDLE EAST/AFRICA
- ---------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>

AT&T Belgacom (Belgium) Cable & Wireless HKT Batelco (Bahrain)
Axistel British Telecom International Etisalat (UAE)
Infonet C&W (UK) China Telecom General Telecom Org.
MCI WorldCom Deutsche Telekom Chunghwa Telecom of Oman
PSINet Infostrada (Italy) (Taiwan) Golden Lines (Israel)
Sprint KPN Communications Jordan
Teleglobe (The Netherlands) Authority of Thailand Telecommunications
Viatel MATAV (Hungary) DACOM (Korea) Ministry of
OTE (Greece) IDC (Japan) Communications
Rostelcom (Russia) KDD (Japan) (Kuwait)
Swisscom Korea Telecom Office of National
Telecom Italia NTT (Japan) Posts & Telecoms
Telefonica de Espana ONSE Telecom (Morocco)
Telia (Sweden) (Korea) Qatar Public Telecom.
TPSA (Poland) Optus (Australia) Corp.
UKRTELECOM Telecom Malaysia Saudi Telecom
(Ukraine) VSNL (India) Syrian
Telecommunications
Establishment
Telecom Egypt
Telecommunications
Co. of Iran
Telkom S.A.
(South Africa)
Turk
Telekomunikayon
</TABLE>

COMPETITION

As a global carriers' carrier, we compete in a wide variety of different
geographic markets, in each of which we face and expect in the future to face
specific regional competitors. We also compete against a small number of other
carriers' carriers that aspire to build global networks. We compete or expect to
compete in five key markets:

- global services;

- intra-European services;

- Middle Eastern services;

- Asia/Pacific regional transit services; and

- Europe-Asia long haul services.

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<PAGE>
GLOBAL SERVICES COMPETITORS

A number of companies are presently engaged in building global carriers'
carrier networks. We believe that because of the high cost of building truly
global networks this is a market in which there will always be a limited number
of players.

Two other companies at present propose to build global carriers' carrier
networks: Global Crossing and Level 3 Communications. Global Crossing is a
Bermuda based telecommunications company which currently has three operational
cable systems: Atlantic-Crossing-1 (AC-1), Pacific-Crossing (PC-1) and
Pan-European Crossing (PEC). Global Crossing is currently building a number of
other systems covering Asia (Asia Global Crossing) and Latin America (SAC, MAC
and PAC). We believe we compete with Global Crossing on quality, as well as on
the coverage and cost effectiveness of our network. Level 3 Communications
currently operates a United States city-to-city cable network based on
company-owned infrastructure and is building a European city-to-city network.
Level 3 Communications has announced the construction of a single, high capacity
cable cross the Atlantic Ocean. Level 3 has made investments in a trans-Pacific
cable system (US-Japan) in addition to its own facilities.

In addition, in January 2000, Tyco International Ltd., a manufacturing and
service company, announced that its undersea fiber optics business will design,
build, operate and maintain its own global undersea fiber optics communications
network. Tyco announced that the trans-Atlantic portion of the first phase will
be completed and operational by the end of 2001 and the remainder of the first
phase, consisting of trans-Pacific and European systems, will be completed and
operational by the end of 2002.

INTRA-EUROPEAN SERVICES COMPETITORS

We believe that the intra-European market will become very competitive in
the next 12-18 months as a result of the large number of proposed pan-European
operators. At least eight pan-European networks have been announced or commenced
operations, including: GTS, BT Farland, MCI WorldCom Ulysses, Alcatel/The
Petabit Network, iaxis, Global Crossing PEC, Viatel Circe and KPN/Qwest.

MIDDLE EASTERN TRANSMISSION SERVICES COMPETITORS

We expect to compete against two primary competitors in this market:

- SEA ME WE 3 (SMW3) This is a consortium cable system that connects the
Asia/Pacific region via the Middle East to Western Europe along a similar
route to the FLAG Europe-Asia cable system. SMW3 was originally planned to
be in service in late 1997; however, it was significantly delayed and only
recently entered commercial service. SMW3 has an initial capacity of 20
gigabits per second and is upgradeable to 40 gigabits per second. SMW3 has
major investors that include many of the incumbent telecommunications
operators along its route.

- SATELLITE In addition to the SMW3 cable, carriers have the alternative of
transmission by satellite, including existing geosynchronous satellites
and low earth orbit systems now under construction. In general, satellite
service is considered to be of inferior quality, because time delays and
echos affect transmission, and service interruptions are more frequent.
Furthermore, satellite systems are more expensive to launch and to
maintain per circuit and generally have a shorter useful life and less
capacity. Nonetheless, there are many communications satellites in
geosynchronous orbit which are available to provide service.

ASIA/PACIFIC REGIONAL TRANSIT COMPETITORS

At present, two other systems compete in the Asia/Pacific market, SMW3 and
APCN. Both are consortium systems.

11
<PAGE>
- SMW3 In Asia, this system connects from Singapore north through Asia to
Japan, and also south to Australia.

- APCN This consortium system is an established regional transit system
around Asia. Many of the region's traditional operators are participants.

In addition, several further systems are planned that may come into service
between 2001-2003. These include APCN2, backed by incumbent Asian operators,
PA-1, backed by NTT and US and European operators, and a system proposed by
Global Crossing.

EUROPE-ASIA LONG HAUL SERVICES COMPETITORS

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

REGULATION

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

EMPLOYEES

At December 31, 1999, the Company had approximately 46 full-time employees.
None of the Company's employees are represented by a union or covered by a
collective bargaining agreement. The Company believes that its relations with
its employees are good. In connection with the construction and maintenance of
the FLAG Europe-Asia cable system, the Company has used third-party contractors,
some of whose employees may be represented by unions or covered by collective
bargaining agreements.

ITEM 2. DESCRIPTION OF PROPERTY.

We maintain executive and administrative offices at Emporium Building, 69
Front Street, Hamilton HM12, Bermuda, where we lease approximately 4,000 square
feet of office space. We also lease additional office space for our operations
in London, England (2,000 square feet for the network operations center),
Bangkok (900 square feet), Dubai (8,500 square feet) and Fujairah, U.A.E. (5,300
square feet for the network operations center).

ITEM 3. LEGAL PROCEEDINGS.

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

ITEM 4. CONTROL OF REGISTRANT.

The Company is a wholly owned subsidiary of FLAG Telecom.

ITEM 5. NATURE OF TRADING MARKET.

There is no established trading market for the Company's common shares.

12
<PAGE>
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.

Under Bermuda law, there are currently no restrictions on the export or
import of capital, including foreign exchange controls, or on the remittance of
dividends, interest or other payments to nonresident holders of securities.
Neither Bermuda law nor the constituent documents of the Company provide for any
limitations on the right of persons who are not citizens or residents of Bermuda
to hold securities of the Company.

ITEM 7. TAXATION.

Under current Bermuda law, no income, withholding or other taxes or stamp or
other duties are imposed upon United States security holders.

There is a limited income tax convention between the United States and
Bermuda, the application of which generally is limited to insurance income.

13
<PAGE>
ITEM 8. SELECTED FINANCIAL DATA.

The following table sets forth selected historical financial data for the
Company. The balance sheet data presented below as of December 31, 1995, 1996,
1997, 1998 and 1999 and the statement of operations data presented below for the
years ended December 31, 1994, 1995, 1996, 1997, 1998 and 1999 are derived from
the financial statements of the Company, which have been audited by Arthur
Andersen, independent public accountants, and have been prepared in accordance
with U.S. GAAP. The operating data presented below are derived from the
Company's records. The Company was a development stage company until October 8,
1997, the date as of which provisional system acceptance of the FLAG Europe-Asia
cable system occurred. The following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the historical financial statements of the Company and the notes
thereto.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995(1)(2) 1996(2) 1997 1998 1999
------------- ------------- ---------- ---------- ----------
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Capacity sales, net of
discounts....................... $ -- $ -- $ 335,982 $ 182,935 $ 120,269
Standby maintenance and
restoration revenue............. -- -- 4,011 25,313 40,188
-- -- 339,993 208,248 160,457
Sales and other operating
expenses:
Cost of capacity sold............. -- -- 196,190 101,288 49,643
Operations and maintenance(7)..... -- -- 4,600 37,931 30,482
Sales and marketing(3)(7)......... 10,253 316 6,598 10,680 11,998
General and
administrative(4)(7)............ 10,560 12,466 30,615 22,518 36,486
-------- -------- ---------- ---------- ----------
20,813 12,782 238,003 172,417 128,609
-------- -------- ---------- ---------- ----------
Operating income (loss)........... (20,813) (12,782) 101,990 35,831 31,848
Interest expense.................. -- -- 20,193 61,128 54,409
Interest income................... 439 2,408 6,637 14,875 8,992
Gulf settlement(1)................ -- -- -- -- --
-------- -------- ---------- ---------- ----------
Income (loss) before income
taxes........................... (20,374) (10,374) 88,434 (10,422) (13,596)
Provision for income taxes........ -- -- 8,991 1,260 1,163
-------- -------- ---------- ---------- ----------
Net income (loss) before
extraordinary item.............. (20,374) (10,374) 79,443 (11,682) (14,732)
Extraordinary item(5)............. -- -- -- (59,839) --
-------- -------- ---------- ---------- ----------
Net income (loss)................. (20,374) (10,374) 79,443 (71,521) (14,732)
Cumulative pay-in-kind preferred
dividends....................... 1,787 14,410 16,324 1,508 --
Redemption premium and write-off
of discount on preferred
shares(6)....................... -- -- -- 8,500 --
-------- -------- ---------- ---------- ----------
Net income (loss) applicable to
common shareholders............. $(22,161) $(24,784) $ 63,119 $ (81,529) $ (14,732)
Ratio of earnings to fixed
charges......................... -- -- 1.60x
Deficiency of earnings to
fixed charges................... $(22,852) $(38,802) -- $ (11,930) $ (13,569)
</TABLE>

14
<PAGE>

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

(1) The 1995 and subsequent financial statements have been restated to reflect
the $7.6 million portion of the $9.0 million payable to Gulf Associates
Communications, Limited under a settlement agreement as an expense as this
amount primarily related to their agreement to discontinue arbitration
proceedings. This restatement increased net loss and net loss applicable to
common shareholders as of December 31, 1994 by $7.6 million. This
restatement had no effect on net loss and net loss applicable to common
shareholders in 1995, 1996, 1997, 1998 or 1999.

(2) The 1996 and 1995 financial statements, as originally issued in March 1997,
were restated to give effect for a $3.1 million discount on the issuance of
the Preferred Shares in 1995 relating to the 3,075,816 Class B common shares
issued to the preferred shareholders. For the years ended December 31, 1996
and 1995, this restatement had no effect on net loss, increased net loss
applicable to common shareholders by $550 and $70, respectively, and had no
effect on basic and diluted loss per common share for Class A and Class B.

(3) Commissions of $10.6 million incurred for purchase commitments obtained
prior to July 3, 1995 were not contingent upon reaching and have been
expensed in 1995 and 1996. Commissions for purchase commitments obtained
after July 3, 1995 are recognized as an expense upon recognition of the
related revenues.

(4) Included in general and administrative expenses for years ended
December 31, 1995 to 1997 are program management expenses which include
reimbursements to BANSC, a former shareholder of the Company, for all costs
and out-of-pocket expenses incurred by BANSC in performing project
management services pursuant to its arrangement with the Company. Costs and
out-of-pocket expenses include payroll costs of BANSC employees and approved
Bell Atlantic employees who work on the FLAG Europe-Asia cable system, rent,
professional fees, office support and other costs. In

15
<PAGE>
addition, BANSC receives a fee equal to 16% of payroll costs and of certain
outside contractor and consultant costs.

(5) In connection with the Refinancing, the Company recorded an extraordinary
loss of $59.8 million, at December 31, 1998, representing the write-off of
unamortized deferred financing costs related to the Old Credit Facility.

(6) In connection with the Refinancing, the Company redeemed the Preferred
Shares at a redemption price of 105% of the liquidation preference. The
excess of the redemption value over the carrying value of the Preferred
Shares on the date of the redemption of $8.5 million has been reflected as a
decrease in additional paid-in capital at December 31, 1998.

(7) Included in operating expenses for FLAG Limited are the following non-cash
expenses: $2.6 million in operations and maintenance expenses; $1.5 million
in sales and marketing expenses; $4.1 million in general and administrative
expenses.

ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion and analysis should be read in conjunction with the
accompanying audited consolidated financial statements of the Company, including
the notes related thereto appearing elsewhere in this Form 20-F.

OVERVIEW

Pursuant to a restructuring on February 26, 1999, the Company became a 66%
owned subsidiary of FLAG Telecom Holdings Limited. On January 4, 2000, the
remaining 34% of the Company was acquired by FLAG Telecom Holdings Limited.

REVENUE

Our primary business to date has been to sell capacity on the FLAG
Europe-Asia cable system. The primary method by which we have sold capacity has
been through agreements providing for an outright sale of, or the sale of a
right of use of, the capacity for the lifetime of this system. Each agreement
provides that, in return for payment of the purchase price, the customer
receives beneficial ownership of the relevant capacity. In addition, the
customer becomes responsible for paying the agreed maintenance charges.

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

16
<PAGE>
As a result of extending our range of products and services, we expect the
greater part of our future sales to be under agreements which will require us to
recognize revenues over the relevant term of these agreements. To the extent
that we enter into contracts in the future that satisfy the requirements for
sales type lease accounting, we will recognize revenues without deferral.

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

We have previously considered revenues from operating lease transactions to
be incidental. We have therefore recorded these revenues as reductions of the
capacity available for sale. However, as noted above, the magnitude of these
transactions has increased such that we now recognize revenues from lease
transactions over the term of the leases.

Payments due from purchasers of capacity are generally payable within
30 days; however, we have receivables outstanding greater than 30 days. We have
established an allowance for doubtful accounts based on historical industry
experience with potential uncollectible receivables and our expectations as to
payments. As of December 31, 1999, we had an allowance of $6.8 million which
principally relates to potential uncollectible amounts due from two carriers.

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

CAPACITY AVAILABLE FOR SALE

The Company capitalized direct and indirect expenditures incurred in
connection with the construction of the FLAG Europe-Asia cable system and such
capitalized expenditures are charged to cost of sales as revenues from sales of
capacity are recognized. Capacity available for sale totalled $774.4 million as
of December 31, 1999.

ACCOUNTING FOR THE CAPITAL COSTS OF THE FLAG EUROPE-ASIA CABLE SYSTEM

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

As a result of extending our range of products and services, we expect the
greater part of our future revenue to be under agreements that will be accounted
for as operating leases or service contracts and will require us to recognize
revenues over the relevant term of the agreements. We have therefore
reclassified the remaining cost of the FLAG Europe-Asia cable from capacity
available for sale to fixed assets in the first quarter of 2000. This cost will
be depreciated over the remaining estimated economic life of the system. Capital
costs associated with development of the other elements of the FLAG Europe-Asia
cable system will be amortized over their respective economic lives.

17
<PAGE>
RESULTS OF OPERATIONS

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

REVENUES

Total revenue recognized by the Company during the year ended December 31,
1999, was $160.5 million compared to $208.2 million in total revenue for the
year ended December 31, 1998.

We recognized revenue from the sale of capacity of $120.2 million for the
year ended December 31, 1999 compared to $182.9 million during the year ended
December 31, 1998. The reduction in revenue is partly attributable to our
deferring the recognition of some revenues to subsequent periods as the result
of our adoption of FASB Interpretation No. 43 with effect from July 1, 1999 and
partly as a result of accounting revenues in 1998 including certain non-cash
items. As of December 31, 1999, we had entered into sales transactions with over
90 international telecommunication carriers and internet service providers
compared to 80 as of December 31, 1998.

We recognized revenue from standby maintenance and restoration services of
$40.2 million for the year ended December 31, 1999 compared to $25.3 million for
the year ended December 31, 1998. The increase of $14.9 million for the year
ended December 31, 1999 is primarily a result of the increase in cumulative
capacity sales on the FLAG Europe-Asia cable system combined with an increase in
revenue from restoration services. Restoration services refer to receipts from
third party cable systems in respect of traffic routed on the FLAG Europe-Asia
cable system during periods when these cable systems are temporarily out of
service.

OPERATING EXPENSES

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

During the year ended December 31, 1999, we incurred $30.5 million in
operations and maintenance costs compared to $37.9 million for the year ended
December 31, 1998. Operations and maintenance costs relate primarily to the
provision of standby maintenance under maintenance zone agreements as well as
salaries and overhead expenses directly associated with operations and
maintenance activities. The decrease in operations and maintenance costs is
largely a result of the termination of the program management services agreement
with Bell Atlantic Network Systems in May 1998 combined with lower costs of some
maintenance zone agreements.

During the year ended December 31, 1999, we incurred $12.0 million in sales
and marketing costs compared to $10.7 million incurred during the year ended
December 31, 1998. Sales and marketing costs are comprised of all sales and
marketing activities that are directly undertaken by us.

During the year ended December 31, 1999, we incurred $36.5 million of
general and administrative expenses compared to $22.5 million during the year
ended December 31, 1998. The increase in general and administrative costs in the
year ended December 31, 1999, is largely due to higher depreciation costs of
$10.6mn. This is a result of us adopting FASB Interpretation No. 43 which is
effective from July 1, 1999, pursuant to which the cost of part of the FLAG
Europe-Asia cable system which does not satisfy the requirements of sales type
lease accounting is being depreciated over its remaining economic life. Prior to
July 1, 1999, the cost of the cable system was wholly accounted for as capacity
available for sale for which no depreciation was recorded but which was expensed
as cost of capacity sold as revenues were recognized. In addition, operating
expenses include a non-cash compensation expense of $4.1 million in respect of

18
<PAGE>
awards under our long term incentive plan. These charges are required under US
accounting standards and are purely accounting charges having no effect on cash
flows.

INTEREST EXPENSE AND INTEREST INCOME

During the year ended December 31, 1999 the Company incurred $54.4 million
in interest expense on borrowings compared to $61.1 million incurred for the
year ended December 31, 1998. The decrease in interest expense of $6.7 million
is attributable to a reduction in long term debt facility from $271.5 million as
at December 31, 1998 to $190.0 million as at December 31, 1999 combined with a
$1.8 million reduction in amortized financing costs.

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

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

PROVISIONS FOR TAXES

The provision for taxes was $1.2 million for the year ended December 31,
1999 compared to $1.3 million for the year ended December 31, 1998. The tax
provisions for both years consist of taxes on income derived from capacity sales
and standby maintenance revenue from customers in certain jurisdictions along
the FLAG Europe-Asia cable system where the Company is deemed to have a taxable
presence or is otherwise subject to tax. At the present time, no income, profit,
capital or capital gains taxes are levied in Bermuda. In the event that such
taxes are levied, the Company has received an undertaking from the Bermuda
Government exempting it from all such taxes until March 28, 2016.

EXTRAORDINARY ITEM

In connection with the refinancing that took place on January 30, 1998, the
Company recorded an extraordinary loss of $59.8 million in the statement of
operations. The loss on refinancing represents the write-off of unamortized
deferred financing costs related to the Company's initial project financing (the
"Old Credit Facility"). No refinancing occurred in the year ended December 31,
1999.

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

NET LOSS AND NET LOSS APPLICABLE TO COMMON SHAREHOLDERS

For the year ended December 31, 1999 the Company recorded a net loss of
$14.7 million compared to a net loss of $56.8 million for the year ended
December 31, 1998, a decrease of $56.8 million. This decrease was attributable
to a decrease in operating income of $4.0 million, a reduction in interest
expense of $6.7 million, a decrease in extraordinary items of $59.8 million and
a decrease in interest income of $5.9 million.

The net loss applicable to common shareholders for the year ended
December 31, 1999 was $14.7 million compared to a net loss for the year ended
December 31, 1998 of $81.5 million.

Basic and diluted income (loss) per Class A common shares increased from
loss per share of ($0.07) in 1998 to Nil per share in 1999 reflecting the
transfer of all Class A common shares to Class B common

19
<PAGE>
shares on February 26, 1999. Basic and diluted income (loss) per Class B common
share decreased from a loss of ($0.13) per share in 1998 to a loss of ($0.02) in
1999 reflecting the increase in the number of shares from 565,858,741 to
635,796,338.

YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997

REVENUES

Total revenue recognized by the Company during the year ended December 31,
1998, was $208.2 million compared to $340.0 million in total revenue for the
year ended December 31, 1997.

Revenue recognized from the sale of capacity was $182.9 million for the year
ended December 31, 1998 compared to $336.0 million during the period from
October 8, 1997, the provisional system acceptance date, to December 31, 1997.
The decrease in revenue recognized from capacity sales of $153.1 million from
the period from provisional system acceptance to December 31, 1997 compared to
the year ended December 31, 1998 is a result of 1997 revenue including sales of
capacity entered into prior to provisional system acceptance of which
$316 million was recognized as revenue. As of December 31, 1998, the Company had
entered into sales transactions with 80 international telecommunication carriers
compared to 66 as of December 31, 1997.

Revenue recognized from standby maintenance fee was $25.3 million for the
year ended December 31, 1998 compared to $4.0 million for the period from
provisional system acceptance to December 31, 1997. The increase in standby
maintenance revenue of $19.5 million for the year ended December 31, 1998 is due
to the Company recognizing 12 months of standby maintenance revenue in 1998
compared to only three months in 1997 as a result of the Company commencing
operations in October of 1997. The Company also generated revenues from
restoration services during the year ended December 31, 1998. Revenues from
these services, provided to alternate cable systems on a non-reciprocal basis,
were $1.7 million. No revenues were recognized in respect of restoration
services in 1997.

OPERATING EXPENSES

For the year ended December 31, 1998, the Company recorded $101.3 million in
respect of the cost of capacity sold compared to $196.2 million recorded in
1997. The gross profit on capacity sales of 44.60% for the year ended
December 31, 1998 compares to a gross profit of 41.60% realized in the period
from provisional system acceptance to December 31, 1997. The cost of sales
recorded in 1997 included a $28.9 million provision related to price protection
credits, discussed below, compared to no such provision included in the 1998
cost of sales. The provision for price protection credits recorded in 1997
contributed to the lower gross margin experienced in 1997 compared to 1998. Cost
of sales percentages used are a function of the allocated cost of constructing
the FLAG Europe-Asia cable system and management's current best estimate of
future capacity sales and third party market forecasts of capacity sales.
Changes in management's estimate of future capacity sales revenues, including
the expected sales value per unit, will result in prospective changes to cost of
sales.

In connection with certain sales, the Company has entered into price
protection arrangements entitling the relevant customers to capacity credits if
the Company lowers its list prices prior to December 31, 1999. For periods
during which the Company lowers its prices, the Company records a provision for
cost of sales based on the estimated cost value of the additional capacity
granted. No adjustment was made to the Company's list prices in 1998, and
accordingly no such provision was recorded in the year ended December 31, 1998.
Currently, the Company does not plan to offer price protection on future sales
of capacity.

During the year ended December 31, 1998 the Company incurred $37.9 million
in operations and maintenance costs compared to $4.6 million for the period from
provisional system acceptance to December 31, 1997. Operations and maintenance
expenses relate primarily to the provision of standby

20
<PAGE>
maintenance under maintenance zone agreements as well as salaries and overheads
directly associated with operations and maintenance activities. Costs recognized
in 1997 represent the portion of standby operations and maintenance expenses
incurred from provisional system acceptance to December 31, 1997. No maintenance
costs were incurred by the Company during construction.

During the year ended December 31, 1998, $10.7 million in sales and
marketing costs were recognized compared to $6.6 million recognized during the
period from provisional system acceptance to December 31, 1997. Sales and
marketing costs comprise sales commissions due under agreements with the
Company's suppliers and BANS plus costs associated with sales and marketing
activities.

In May 1998, the Company and BANS agreed to terminate the Marketing Services
Agreement which appointed BANS as the exclusive sales agent for the Company
throughout the world. Sales and marketing activities are now undertaken directly
by the Company. Sales commissions incurred under the Marketing Services
Agreement prior to its termination are expensed at the time the related revenue
is recognized. Commissions on sales capacity credits or half-MIUs where there
has been no match of a correspondent carrier are reflected as a prepaid expense
at the time incurred and expensed when the related revenue is recognized.

General and administrative expenses decreased from $30.6 million for the
year ended December 31, 1997 to $22.5 million for the year ended December 31,
1998. The decrease is due to the partial reversal of the allowance for doubtful
accounts made in 1997, resulting from collections from customers of amounts
previously provided, partially offset by costs associated with the transition of
the Company from a development stage company to an operating company.

INTEREST EXPENSE AND INTEREST INCOME

During the year ended December 31, 1998 the Company incurred $61.1 million
in interest expense on borrowings compared to $20.2 million incurred during the
period from provisional system acceptance to December 31, 1997. Prior to
provisional system acceptance, the Company capitalized interest costs as a
component of construction in progress.

Interest income of $14.9 million was earned during the year ended
December 31, 1998 compared to $6.6 million earned during the year December 31,
1997. In 1998, interest was earned on cash balances and short-term investments
held by the Collateral Trustee or in escrow arising from ongoing business
operations and the various reserve accounts established pursuant to a new credit
facility entered into by the Company in connection with the Refinancing which
occurred on January 30, 1998 (the "New Credit Facility"). Interest earned in
1997 consisted primarily of interest earned on cash balances received from
equity contributions during the year.

PROVISIONS FOR TAXES

The provision for taxes was $1.3 million for the year ended December 31,
1998 compared to $9.0 million for the period from provisional system acceptance
to December 31, 1997. The tax provisions for both years consist of taxes on
income derived from capacity sales and standby maintenance revenue from
customers in certain jurisdictions along the FLAG Europe-Asia cable system where
the Company is deemed to have a taxable presence or is otherwise subject to tax.
At the present time, no income, profit, capital or capital gains taxes are
levied in Bermuda. In the event that such taxes are levied, the Company has
received an undertaking from the Bermuda Government exempting it from all such
taxes until March 28, 2016. The decrease in tax expense of $7.7 million is due
to a greater proportion of sales recorded in 1998 to customers in jurisdictions
where the Company does not have a taxable presence.

21
<PAGE>
EXTRAORDINARY ITEM

In addition, in connection with the refinancing, the Company redeemed the
preferred shares at a redemption price of 105% of the liquidation preference.
The excess of the redemption value over the carrying value of the preferred
shares on the date of the redemption of $8.5 million has been reflected as a
decrease in additional paid-in capital.

NET LOSS AND NET LOSS APPLICABLE TO COMMON SHAREHOLDERS

For the year ended December 31, 1998 the Company recorded a net loss of
$71.5 million compared to net income of $79.4 million for the year ended
December 31, 1997, a decrease of $150.9 million. This decrease was attributable
to a reduction in operating income of $66.2 million, an increase in interest
expense of $40.9 million and an extraordinary loss on refinancing of
$59.8 million partially offset by an $8.2 million increase in interest income
and a $7.7 million reduction in tax expense.

The net loss applicable to common shareholders for the year ended
December 31, 1998 was $81.5 million compared to a net income for the year ended
December 31, 1997 of $63.1 million.

Basic and diluted income (loss) per Class A common shares decreased from
income per share of $0.05 in 1997 to a loss of $0.07 per share in 1998
reflecting the loss applicable to common shareholders in 1998. Basic and diluted
income (loss) per Class B common share decreased from income per share of $0.14
in 1998 to a loss of $0.13 per share in 1998 reflecting the loss applicable to
common shareholders in 1998 and an increase in the weighted average Class B
common shares outstanding during the period from 396,890,512 to 565,858,741.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations to date through a combination of equity
contributions, shareholder advances, bank debt and the proceeds of a debt
offering. On January 30, 1998, the Company completed a refinancing which
resulted in the repayment of all outstanding borrowings under its then existing
credit facility and the redemption of its Series A preferred shares. The
refinancing consisted of $320.0 million of bank loans (and a revolving credit
facility of $50 million) maturing January 30, 2005 and $430 million of 8 1/4%
Senior Notes maturing January 30, 2008.

Subsequent to the refinancing, the Company made principal prepayments to
reduce the bank loans to approximately $175 million. On February 16, 2000, the
Company repaid a further $25 million and amended its existing credit facilities
to consist of a $150 million six-year term loan facility (all of which is
outstanding) and a $10 million revolving credit facility (none of which is
outstanding). Dresdner Kleinwort Benson and Barclays Capital acted as joint lead
arrangers. These facilities bear interest at a rate of 225 basis points over
LIBOR for the first six months and thereafter at a rate of between 150 and 250
basis points over LIBOR, depending on the credit rating of the 8 1/4% Senior
Notes of the Company. The facilities are secured by a pledge of all of the
capital stock of the Company and by assignment of the Company's contracts and a
security interest in its bank accounts and intangible property. In connection
with this amendment, the Company paid fees and expenses to the joint lead
arrangers totaling approximately $3.5 million.

At the end of March 1998, we entered into two interest rate swap agreements
to manage our exposure to interest rate fluctuations on our credit facilities.
Under the swap agreements, we pay a fixed rate of 5.6% on a notional amount of
$60 million and a fixed rate of 5.79% on a notional amount of $100 million and
the swap counterparty pays the floating rate based on LIBOR. One swap agreement
terminated in

22
<PAGE>
January 2000 and the other swap agreement terminates in July 2000, unless
extended for an additional six months at the option of the swap counterparty.
Under the bank loan facility as now in effect, we are obligated to hedge
interest rate risk to the extent of 50% of the outstanding principal amount of
the loans for three years. We recognize the net cash amount received or paid on
interest rate hedging instruments as an adjustment to interest cost on the
related debt.

The Company believes that it will have no need for additional borrowing
based on current plans. The Company intends to finance future operations through
proceeds from the sale or lease of capacity, revenues from billings of standby
maintenance charges and restoration services, investment income on cash and
investment balances, borrowings under the revolving credit facility, if any, and
available funds in reserve accounts.

As of December 31, 1999, 1998, 1997 and 1996, the Company had working
capital deficits of $42.8 million, $156.7 million, $273.9 million and
$202.7 million, respectively. The working capital deficits as of December 31,
1999 and 1998 were primarily a result of the current accounts payable to the
contractors for the FLAG Europe-Asia cable system which is classified as a
current liability but for which the associated funds held in escrow are
classified as a non-current asset and are hence excluded from the measure of
working capital. The working capital deficits as of December 31, 1997 and 1996
are primarily the result of: (i) proceeds from equity capital calls and the
issuance of the Preferred Shares held by the Collateral Trustee being classified
as a non-current asset and therefore excluded from working capital;
(ii) drawdowns under the Old Credit Facility not taking place until expenditures
for capacity available for sale are made; and (iii) the Company recording
current accounts payable to the Contractors and to BANSC for costs incurred
under the Construction Contract and the Program Management Services Agreement,
respectively, until such amounts are paid, generally one to two months after the
invoice date.

Total cash provided by operating activities and used in investing activities
as of December 31, 1999 was $78.6 million and $120.2 million, respectively. As
of December 31, 1999, cash on deposit with the collateral trustee or in escrow
had decreased to $134.1 million from $255.4 million at December 31, 1998,
primarily as a result of the repayment of a portion of the term loan facility
and payments to the contractors.

Total cash provided by operations and used in investing activities during
the year ended December 31, 1998 was $88.8 million and $186.1 million,
respectively.

Total cash provided by operating activities and used in investing activities
during the year ended December 31, 1997 was $285.2 million and $528.7 million,
respectively. Cash was also used to pay for $11.8 million of financing costs in
the year then ended. These expenditures were funded by equity capital calls of
$335.6 million and loans under the Old Credit Facility of $414.9 million, less
repayment of loans under the Old Credit Facility of $112.4 million, less the
increase in funds held by the Collateral Trustee of $377.7 million and less a
settlement payment of $3.0 million to Gulf Associates Telecommunications,
Limited. As of December 31, 1997, cash on deposit with the Collateral Trustee
pending future disbursements had increased to $425.9 million.

During the year ended December 31, 1996 total cash used by the Company in
operating activities was $12.1 million, cash payments for organization and
financing costs were $29.3 million and $329.9 million was expended on investing
activities, primarily for FLAG Europe-Asia cable system construction costs.
These cash payments were funded by equity capital calls of $110.5 million and
borrowings under the Old Credit Facility of $262.5 million, less the
$1.7 million increase in funds held by the Collateral Trustee.

In November and December 1997, the Company entered into interest rate
collars and treasury rate lock agreements with a total notional amount of
$400 million to hedge its exposure to interest rate movements occurring between
the date the hedges were entered into and the anticipated date of the closing of
the Company's issuance of the Senior Notes.

23
<PAGE>
ASSETS

Our major asset is the telecommunications capacity available for sale on the
cable system of $774 million and related fixed assets of $300 million. As a
result of the application of FASB Interpretation No. 43 noted above, sales on
certain parts of the cable system will not be able to satisfy the requirements
for sales type lease accounting. Accordingly the costs of these parts of the
system have been reclassified with effect from July 1, 1999 from capacity
available for sale to fixed assets and are being depreciated over their
remaining economic life. As noted earlier, we expect the greater part of our
future sales will preclude the application of sales type lease accounting.
Accordingly we have reclassified the remaining cost of the cable from capacity
available for sale to fixed assets during the first quarter of 2000. Our other
fixed assets consist primarily of office furniture, leasehold improvements,
computer equipment and motor vehicles.

ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a result of certain vendor contracts, the Company is exposed to foreign
currency risk, and as a result of its financing structure, to interest rate
risk.

CURRENCY RISK

The Company does not believe that it is exposed to significant risk from
movements in foreign currency exchange rates. All revenues from the disposition
of capacity and billings of standby maintenance and restoration services are
payable in Dollars. All contracts for the provision by third parties of
restoration are invoiced to the Company in Dollars. Certain vendor contracts for
the provision to the FLAG Europe-Asia cable system of operations and maintenance
services and local operating expenses of its overseas subsidiary companies are
payable in currencies other than Dollars. Management believes that these
exposures are not material to the financial position of the Company. Whenever
deemed appropriate, the Company may hedge its exposure to foreign currency
movements.

INTEREST RATE RISK

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

The Company also receives interest at floating rates on funds held by the
Collateral Trustee and in escrow. See "Liquidity and Capital Resources" above.

LONG-TERM DEBT

<TABLE>
<CAPTION>
PRINCIPAL COMPANY'S
PAYMENTS MATURITY AMOUNT FAIR VALUE OPTION TO
TYPE OF INSTRUMENT DUE DATE INTEREST RATE ($, MILLION) ($, MILLION) REDEEM
- ------------------ ------------- ------------ -------------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Senior Notes............... Semi-annually January 2008 Fixed 8 1/4% 430.0 395.6 Any time after
January 2003

Bank Credit Facility....... Quarterly January 2005 Floating LIBOR + 190 190.0 190.0 At any time
to 212.5 basis
points
</TABLE>

24
<PAGE>
INTEREST RATE SWAPS

<TABLE>
<CAPTION>
COUNTER-
NOTIONAL PARTY'S
PAYMENTS MATURITY RATE RATE AMOUNT FAIR VALUE OPTION TO
TYPE OF INSTRUMENT DUE DATE PAYABLE RECEIVABLE ($, MILLION) ($, MILLION) EXTEND UNTIL
- ------------------ --------- --------------- -------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pay fixed, receive floating...... Quarterly January 2000(1) 5.60% LIBOR 60.0 0.1 January 2001

Pay fixed, receive floating...... Quarterly July 2000 5.79% LIBOR 100.0 0.3 July 2001
</TABLE>

The LIBOR rate at December 31, 1999 was 6.00125%.

(1) This interest rate swap was not extended.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has recently issued Interpretation
No. 43, "Real Estate Sales, an interpretation of FASB Statement No. 66." This
Interpretation clarifies that sales of real estate with property improvements or
integral equipment that cannot be removed and used separately from the real
estate without incurring significant costs should be accounted for under FASB
Statement No. 66, "Accounting for Sales of Real Estate" ("FAS 66"). The
provisions of this Interpretation are effective for all sales of real estate
with property improvements or integral equipment entered into after June 30,
1999. The application of this statement resulted in a deferral of revenue for
certain capacity sales contracts that do not satisfy the requirements of FAS 66.
We expect the greater part of our future revenues will be under agreements that
will require us to recognize revenues over the term of the agreements. However,
to the extent that we enter into contracts in the future that will satisfy the
requirements for sales type lease accounting, we will recognize revenues without
deferral.

The interpretation and application of FASB Interpretation No. 43 and the
accounting for sales of capacity are evolving within the telecom industry. A
number of questions and issues are being taken to the accounting standard
setting boards and different accounting treatments may ultimately be approved,
which may change the timing and methods of recognition of revenues and the
related costs. We expect further clarification over the next few months but any
changes to the accounting treatment will have no impact on our cash flows.

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). Following the amendment made by SFAS No. 137, SFAS 133
is effective for periods beginning after June 15, 2000. Management is currently
assessing the impact of the adoption of SFAS 133 on the Company's financial
position and results of operations, which may be material.

ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.

The following table sets forth, as of December 31, 1999, certain information
and ages for each of the Company's directors and certain senior managers:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ---- -------- -----------------------------------------
<S> <C> <C>
Andres Bande............................. 55 Chairman and Chief Executive Officer
Steven Smith(1).......................... 35 Director
Stuart Rubin............................. 52 Assistant Secretary
James Campbell........................... 39 Chief Financial Officer and Resident
Representative
</TABLE>

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

(1) Mr. Smith resigned from the Company's Board of Directors in January 2000.

ANDRES BANDE. Mr. Bande has served as Chairman of the Board and Chief
Executive Officer of the Company since January 1998 and is the Chairman and
Chief Executive Officer of FLAG Telecom. Before joining the Company, Mr. Bande
was the President of Sprint International from 1996 to the beginning of

25
<PAGE>
1998. Prior to that, he was President of Ameritech International Corporation
from 1990 to 1996. From 1987 to 1990, Mr. Bande was Executive Vice President of
US West International. From 1976 to 1986, he was President of Teleconsult, an
international telecommunications consulting practice. He holds a law degree from
the University of Chile and a Master's degree in politics and international law
from Oxford University.

STEVEN SMITH. Mr. Smith served as our director until January 2000.
Mr. Smith is the Director of Strategic Planning for Bell Atlantic International
Telecommunications. He is responsible for overall planning, business
development, and strategy formulation for Bell Atlantic's international wireline
investments. Mr. Smith received a Bachelor's Degree with honors in Mechanical
Engineering Technology from the State University of New York at Binghamton and
an MBA with honors from the University of Rochester. Mr. Smith is a Chartered
Financial Analyst (CFA).

STUART RUBIN. Mr. Rubin has served as the General Counsel of the Company
since January 1996. Mr. Rubin is also the General Counsel and Assistant
Secretary of FLAG Telecom. Prior to joining the Company, Mr. Rubin spent over
20 years with the law firm of Coudert Brothers, as a partner for the last 12,
and two years with the U.S. Peace Corps in Malaysia. As an international lawyer,
Mr. Rubin worked extensively in Southeast Asia, the U.S., and England,
specializing in cross border financial transactions, joint ventures and other
commercial transactions. Mr. Rubin holds a J.D. degree from Columbia University
School of Law and a Bachelor of Arts degree in Political Science from Union
College.

JAMES CAMPBELL. Mr. Campbell has served as Director of Finance and
Accounting for FLAG Limited since December 1995. Prior to joining the Company,
Mr. Campbell was Chief Financial Officer of BDC Limited of Hamilton Bermuda for
three years. Mr. Campbell started his career at Cooper's and Lybrand. He joined
Hill and Company in 1989 and subsequently spent two years with Cineplex
Corporation. He is a Chartered Accountant and holds a Business Management degree
with a major in Finance from Ryerson Institute in Toronto Canada.

ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.

For the year ended December 31, 1999, the aggregate compensation of all
members of the Board of Directors and executive officers of the Company was
approximately $2.3 million.

The Company set up the 1998 Long-Term Incentive Plan (the "Plan") in 1998.
This was adopted by FLAG Telecom during 1999. All employees of the Company can
participate in the Plan. The purpose of the Plan is to allow us and FLAG Telecom
to attract, retain and reward officers, employees, consultants and certain other
individuals and to compensate them in a way that provides additional incentives
and enables such individuals to increase their ownership interests. Individual
awards under the Plan may take the form of:

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

- stock appreciation rights ("SARs");

- restricted or deferred stock;

- dividend equivalents;

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

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

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

26
<PAGE>
The maximum number of common shares that may be subject to awards under the
Plan may not exceed 6,763,791.

The Plan may be amended by the Board of Directors of FLAG Telecom. The
number and kind of shares reserved or deliverable under the Plan and the number
and kind of shares subject to outstanding awards are subject to adjustment in
the event of stock splits, stock dividends and other extraordinary corporate
events.

ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.

There are no options or other rights to purchase the Company's securities.

ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.

The Company and certain of the shareholders or affiliates of FLAG Telecom
have entered into agreements for the development, construction, operation,
financing and marketing of the FLAG Europe-Asia cable system. The following
paragraphs are a summary of the material provisions of certain of these
agreements and are qualified in their entirety by reference to the actual
agreements, copies of which are available from the Company.

PROGRAM MANAGEMENT SERVICES AGREEMENT

Under the terms of the Program Management Services Agreement, Bell Atlantic
Network Systems, one of FLAG Telecom's shareholders, managed all aspects of the
planning and construction of the FLAG Europe-Asia cable system including the
regulatory aspects, physical layout, development of specifications, evaluation
of contract bids, negotiation of the construction and maintenance agreement and
supplemental arrangements, development of restoration plans, development of an
operations and maintenance plan, development of a quality assurance plan and
management of the actual construction and installation of the FLAG Europe-Asia
cable system. The Company, in consideration of such services, agreed to
reimburse Bell Atlantic Network Systems for all costs and out-of-pocket expenses
incurred in connection with performing such services, plus a fee equal to 16% of
payroll costs and certain outside contractor and consultant costs. In May 1998,
the Company entered into a Termination and Release Agreement providing for the
termination of the program management services provided by Bell Atlantic Network
Systems. The total payments made under these agreements to settle all
outstanding liabilities were $70 million.

MARKETING SERVICES AGREEMENT

The Company and Bell Atlantic Network Systems entered into a Marketing
Services Agreement pursuant to which Bell Atlantic Network Systems was
responsible for marketing the assignable capacity of the FLAG Europe-Asia cable
system. Bell Atlantic Network Systems was appointed the exclusive sales agent
for the Company throughout the world and bore all marketing expenses and costs
it incurred in connection with these marketing services. The Company agreed to
pay commissions at the rate of 4% of commitments obtained prior to July 3, 1995
and 3% of the commitments obtained thereafter. From inception through
September 1999, the Company incurred commissions and other costs in the amount
of $18.4 million. In May 1998, under a Marketing Transition Agreement, the
Company and Bell Atlantic Network Systems agreed to terminate the Marketing
Services Agreement. Under the Marketing Transition Agreement, the Company agreed
to pay certain closing down expenses, certain commissions in connection with
their pre-termination activities, and up to $3 million in commissions resulting
from certain post-termination sales. In this regard, the Company incurred
$0.5 million in closing down expenses, $15.9 million related to commissions in
connection with pre-termination sales activity and $2 million in connection with
post-termination sales activity. No further commissions are due in relation to
post-termination sales activity. As at September 30, 1999, $1.7 million of the
above remained unpaid and fully accrued by the Company. Also, under the
Marketing Transition Agreement, the Company agreed to pay a 50% commission in
the event that Bell Atlantic Network Systems or an affiliate secures the sale of
four whole DS3s on the FLAG Europe-Asia cable system. No such sales have
occurred to date.

27
<PAGE>
CONSTRUCTION CONTRACT

Under the Company's previous credit facility, in order to obtain political
risk insurance through the Ministry of International Trade and Industry of
Japan, the Company named Marubeni, one of FLAG Telecom's indirect beneficial
shareholders, as a nominal contractor under the construction contract. The
construction contract provided that payments for substantially all of the goods
and services that were sourced from outside of the United States were to be
remitted through Marubeni to the relevant contractor. The Company made no
payments to Marubeni in connection with its acting as nominal contractor.

PREVIOUS CREDIT FACILITY

Marubeni was the administrative agent for Tranche B of the Company's
previous credit facility and was paid a customary agency fee. The Company has
retired all amounts outstanding under this credit facility, including the
Tranche B indebtedness. From inception to March 31, 1998, $15.5 million in fees
were paid to Marubeni.

CONTINGENT SPONSOR SUPPORT AGREEMENTS

As a condition to obtaining the Company's previous credit facility, certain
of the Company's then-existing shareholders entered into Contingent Sponsor
Support Agreements to provide up to $500 million of additional equity
contributions in the event of certain defaults. The Company's previous credit
facility has been repaid, which benefitted the affected shareholders by
releasing them from their contingent obligations under the Contingent Sponsor
Support Agreements.

EMPLOYEE SERVICES AGREEMENT

The Company has entered into an Employee Services Agreement with Bell
Atlantic Global Systems under which Bell Atlantic Global Systems has seconded
certain employees to the Company. As of September 1, 1999, two Bell Atlantic
Global Systems employees were seconded to the Company. The Company incurred
total costs of $217,000 for this service from February 27, 1999 to
September 30, 1999.

EXCHANGE AGREEMENT AND PLAN OF REORGANIZATION; TAX AGREEMENT

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

The initial transfer by Bell Atlantic Network Systems of some of its common
shares in the Company and the subsequent transfer by Bell Atlantic Network
Systems of its remaining shares in the Company are intended to be treated as
tax-free transactions for United States federal income tax purposes. Under a tax
agreement between FLAG Telecom and Bell Atlantic Network Systems, FLAG Telecom
agreed (1) to make customary representations that are designed to ensure that
each exchange is treated as a tax-free transaction and (2) not to dispose of any
shares in the Company or to permit the Company to dispose of substantially all
of its assets for a five-year period following the initial or any subsequent
exchange of shares. Any breach of this agreement would require FLAG Telecom to
indemnify Bell Atlantic and Bell Atlantic Network Systems against any resulting
United States federal, state or local tax consequences.

28
<PAGE>
PART II

ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.

Not applicable.

PART III

ITEM 15. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.

Not applicable.

PART IV

ITEM 17. FINANCIAL STATEMENTS.

The Company has responded to Item 18 in lieu of responding to this Item.

ITEM 18. FINANCIAL STATEMENTS.

Reference is made to pages F-1 through F-21 and Item 19.

ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.

(a) See page F-1 for a listing of the financial statements that are filed as
part of this Form 20-F.

(b) The following documents are filed as Exhibits to this Form 20-F:

1.1 Schedule 2 -- Allowance for Doubtful Accounts

29
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants (Arthur
Andersen)................................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and
December 31, 1998......................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Comprehensive Income for the
years ended December 31, 1999, 1998 and 1997.............. F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of FLAG Limited:

We have audited the accompanying consolidated balance sheets of FLAG Limited
(a Bermuda company) and subsidiaries as of December 31, 1999 and December 31,
1998, and the related consolidated statements of operations, comprehensive
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of FLAG Limited's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FLAG Limited and
subsidiaries as of December 31, 1999 and December 31, 1998, and the results of
their operations and their cash flows for each of the three years ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.

Arthur Andersen
Hamilton, Bermuda
March 29, 2000

F-2
<PAGE>
FLAG LIMITED

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 1999 AND 1998

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash...................................................... $ 1,213 $ 3,024
Accounts receivable, net of allowance for doubtful
accounts of $6,827(1998--$8,630)........................ 89,814 70,211
Due from affiliates and other receivables................. 950 206
Prepaid expenses and other assets......................... 1,433 2,673
----------- ----------
93,410 76,114
Accounts receivable......................................... -- 20,854
Funds held by collateral trustee............................ 134,066 255,366
Construction in progress.................................... -- 11,494
Capacity available for sale................................. 774,366 1,095,099
Capitalized financing costs, net of accumulated amortization
of $3,142 (1998--$1,498).................................. 10,708 12,352
Fixed assets, net........................................... 295,977 4,487
----------- ----------
$ 1,308,527 $1,475,766
=========== ==========
LIABILITIES:
CURRENT LIABILITIES:
Accrued construction costs................................ $ 52,411 $ 146,165
Accrued liabilities....................................... 27,409 33,214
Accounts payable.......................................... 4,980 6,018
Income taxes payable...................................... 3,767 6,453
Due to affiliate.......................................... 3,252 1,843
Deferred revenue.......................................... 44,345 39,121
----------- ----------
136,164 232,814
8 1/4% Senior Notes, due 2008, net of unamortized discount
of $4,730 (1998--$5,321).................................. 425,270 424,679
Long-term debt.............................................. 190,000 271,500
Deferred revenue and other.................................. 100,724 84,415
Deferred taxes.............................................. 3,973 3,562
----------- ----------
856,131 1,016,970
----------- ----------
SHAREHOLDERS' EQUITY:
Class A common shares, $.0001 par value................... -- 13
Class B common shares, $.0001 par value................... 64 57
Additional paid-in capital................................ 512,695 504,381
Foreign currency translation adjustment................... (680) (704)
Accumulated deficit....................................... (59,683) (44,951)
----------- ----------
452,396 458,796
----------- ----------
$ 1,308,527 $1,475,766
=========== ==========
</TABLE>

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

F-3
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

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

<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Capacity sales, net of discounts.................... $ 120,269 $ 182,935 $ 335,982
Standby maintenance and restoration revenue......... 40,188 25,313 4,011
----------- ----------- -----------
160,457 208,248 339,993

SALES AND OTHER OPERATING EXPENSES:
Cost of capacity sold............................... 49,643 101,288 196,190
Operations and maintenance (including non-cash
compensation expense of $2,647 1998 and
1997--nil)........................................ 30,482 37,931 4,600
Sales and marketing (including non-cash compensation
expense of $1,534 1998 and 1997--nil)............. 11,998 10,680 6,598
General and administrative (including non-cash
compensation expense of $4,127 1998 and
1997--nil)........................................ 25,537 21,674 30,339
Depreciation and amortization....................... 10,949 844 276
----------- ----------- -----------
128,609 172,417 238,003

OPERATING INCOME...................................... 31,848 35,831 101,990

INTEREST EXPENSE...................................... 54,409 61,128 20,193
INTEREST INCOME....................................... 8,992 14,875 6,637
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES..................... (13,569) (10,422) 88,434
PROVISION FOR INCOME TAXES............................ 1,163 1,260 8,991
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............... (14,732) (11,682) 79,443
EXTRAORDINARY ITEM.................................... -- 59,839 --
----------- ----------- -----------
NET INCOME (LOSS)..................................... (14,732) (71,521) 79,443
CUMULATIVE PAY-IN-KIND PREFERRED DIVIDENDS............ -- 1,508 16,324

REDEMPTION PREMIUM AND WRITE OFF OF DISCOUNT ON
PREFERRED SHARES.................................... -- 8,500 --
----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS... $ (14,732) $ (81,529) $ 63,119
=========== =========== ===========
Basic and diluted net income (loss) per common
share--Class A...................................... $ -- $ (0.07) $ 0.05
Basic and diluted net income (loss) per common
share--Class B...................................... $ (0.02) $ (0.13) $ 0.14
=========== =========== ===========
Weighted average common shares outstanding--Class A... -- 132,000,000 132,000,000
Weighted average common shares outstanding--Class B... 635,796,338 565,858,741 396,890,512
</TABLE>

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

F-4
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET INCOME (LOSS)........................................... $(14,732) $(81,529) $63,119
Foreign currency translation adjustment..................... 24 (704) --
-------- -------- -------
COMPREHENSIVE INCOME (LOSS)................................. $(14,708) $(82,233) $63,119
======== ======== =======
</TABLE>

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

F-5
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT NUMBERS OF SHARES)
<TABLE>
<CAPTION>
CLASS A CLASS B FOREIGN
COMMON SHARES COMMON SHARES ADDITIONAL CURRENCY
----------------------- ---------------------- PAID-IN STOCK TRANSACTION
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENT
------------ -------- ----------- -------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 132,000,000 13 215,465,946 22 195,135 -- --
------------ --- ----------- --- -------- -------- -----
Preferred share dividends
and accretion.......... -- -- -- -- (16,324) -- --
Issuance of Class B
shares for Cash........ -- -- 335,612,492 34 335,579 -- --
Issuance of Class B
shares to preferred
shareholders........... -- -- 14,780,303 1 (1) -- --
1997 net income.......... -- -- -- -- -- -- --
Balance, December 31,
1997................... 132,000,000 13 565,858,741 57 514,389 -- --
Preferred share dividends
and accretion.......... -- -- -- -- (1,508) -- --
Premium on redemption of
preferred shares....... -- -- -- -- (6,641) -- --
Write-off of unamortized
discount on issuance of
preferred shares....... -- -- -- -- (1,859) -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (704)
1998 net loss applicable
to common
shareholders........... -- -- -- -- -- -- --
------------ --- ----------- --- -------- -------- -----
Balance, December 31,
1998................... 132,000,000 13 565,858,741 57 504,381 -- (704)
------------ --- ----------- --- -------- -------- -----
Conversion of Class A
shares into Class B
shares
Class A shares
retired............ (132,000,000) (13) -- -- 13 -- --
Class B shares
issued............. -- -- 69,937,597 7 (7) -- --
Stock compensation
accrued................ -- -- -- -- 17,277 (17,277) --
Stock compensation
current year change.... -- -- -- -- -- 8,308 --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- 24
1999 net loss applicable
to common
shareholders........... -- -- -- -- -- -- --
Balance, December 31,
1999................... -- -- 635,796,338 $64 $521,664 $ (8,969) $(680)
============ === =========== === ======== ======== =====

<CAPTION>
RETAINED
EARNINGS TOTAL
(ACCUMULATED SHAREHOLDERS'
DEFICIT) EQUITY
------------ -------------
<S> <C> <C>
Balance, December 31,
1996................... (52,873) 142,297
-------- --------
Preferred share dividends
and accretion.......... -- (16,324)
Issuance of Class B
shares for Cash........ -- 335,613
Issuance of Class B
shares to preferred
shareholders........... -- --
1997 net income.......... 79,443 79,443
Balance, December 31,
1997................... 26,570 541,029
Preferred share dividends
and accretion.......... 1,508 --
Premium on redemption of
preferred shares....... 6,641 --
Write-off of unamortized
discount on issuance of
preferred shares....... 1,859 --
Foreign currency
translation
adjustment............. -- (704)
1998 net loss applicable
to common
shareholders........... (81,529) (81,529)
-------- --------
Balance, December 31,
1998................... (44,951) 458,796
-------- --------
Conversion of Class A
shares into Class B
shares
Class A shares
retired............ -- --
Class B shares
issued............. -- --
Stock compensation
accrued................ -- --
Stock compensation
current year change.... -- 8,308
Foreign currency
translation
adjustment............. -- 24
1999 net loss applicable
to common
shareholders........... (14,732) (14,732)
Balance, December 31,
1999................... $(59,683) $452,396
======== ========
</TABLE>

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

F-6
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) applicable to common shareholders......... $(14,732) $(81,529) $ 63,119
-------- -------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Pay-in-kind preferred dividends......................... -- 1,508 16,324
Amortization of financing costs......................... 1,644 3,427 6,082
Provision for doubtful accounts......................... 1,803 (424) 9,054
Depreciation............................................ 10,949 844 276
Deferred taxes.......................................... 439 (1,038) 4,600
Preferred share redemption premium...................... -- 8,500 --
Loss on debt refinancing................................ -- 59,839 --
Senior debt discount.................................... 591 591 --
Stock compensation...................................... 8,308
Add (deduct) net changes in operating assets and
liabilities:
Accounts receivable................................. (578) 42,500 (142,179)
Due from affiliates and other receivables........... (744) 484 (371)
Prepaid expenses and other assets................... 1,187 (272) 735
Capacity available for sale......................... 56,127 113,849 196,190
Accounts payable and accrued liabilities............ (6,654) 12,250 26,335
Income taxes payable................................ (2,633) 2,062 4,391
Due to affiliate.................................... 1,409 (4,049) (4,179)
Deferred revenue.................................... 21,533 (69,711) 104,779
-------- -------- ---------
Net cash provided by operating activities....... 78,649 88,831 285,156
CASH FLOWS FROM FINANCING ACTIVITIES:
Organization and financing costs incurred............... -- (13,769) (11,769)
Proceeds from long-term debt............................ -- 320,000 414,914
Proceeds from 8 1/4% Senior Notes....................... -- 424,088 --
Repayment of long-term debt............................. (81,500) (663,587) (112,370)
Capital contributions--common shares.................... -- -- 335,613
Redemption of preferred shares.......................... -- (139,453) --
Gulf settlement payment................................. -- -- (3,000)
Decrease (increase) in funds held by collateral
trustee................................................ 121,300 170,539 (377,711)
-------- -------- ---------
Net cash provided by financing activities....... 39,800 97,818 245,677
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction of network assets............ (122,770) (181,998) (527,808)
Disposal (purchase) of fixed assets, net................ 2,538 (4,146) (845)
-------- -------- ---------
Net cash used in investing activities........... (120,232) (186,144) (528,653)
NET (DECREASE) INCREASE IN CASH............................. (1,783) 505 2,180
Effect of foreign currency movements.................... (28) 29 --
CASH, beginning of year..................................... 3,024 2,490 310
-------- -------- ---------
CASH, end of year........................................... $ 1,213 $ 3,024 $ 2,490
======== ======== =========
SUPPLEMENTAL INFORMATION ON NON-CASH OPERATING ACTIVITIES:
Decrease in capacity available for sale................. $ 68,127 $ 25,054 $ --
Decrease in accrued construction costs.................. (12,000) -- --
-------- -------- ---------
Cost of capacity sold................................... $ 56,127 $ 25,054 $ --
-------- -------- ---------
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Increase in construction in progress.................... $ 41,016 $ 11,105 $ 757,722
Increase in deferred revenue for capacity credits....... -- -- (88,000)
Decrease (increase) in accrued liabilities and
construction costs..................................... 81,754 170,893 (123,964)
Amortization of capitalized financing costs............. -- -- (17,950)
-------- -------- ---------
Cash paid for construction.............................. $122,770 $181,998 $ 527,808
-------- -------- ---------
SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid............................................... $ 52,379 $ 42,810 $ 58,286
-------- -------- ---------
Interest capitalised........................................ $ 1,281 $ -- $ --
======== ======== =========
</TABLE>

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

F-7
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

1. BACKGROUND

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

On February 26, 1999, the Company was part of a reorganization whereby FLAG
Telecom Holdings Limited ("FTHL"), a Bermuda company, became the holding company
for the FLAG Telecom group of companies. Pursuant to this reorganization, all of
the Class A common shares of the Company were converted to Class B common shares
and the shareholders of the Company transferred to FTHL 418,259,688 Class B
common shares in exchange for an equal number of shares in FTHL. As a result of
this reorganization, FTHL held 65.79% of the share capital of the Company with
the balance of 34.21% being held by Bell Atlantic Network Systems Company. On
January 4, 2000, Bell Atlantic exchanged its remaining holding in the Company
for shares in FLAG Telecom Holdings Limited (see Note 13).

2. SIGNIFICANT ACCOUNTING POLICIES

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

The significant accounting policies are summarized as follows:

a) Basis of Consolidation

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

b) Revenue Recognition

Capacity contracts are accounted for as leases. For contracts that satisfy
sales type lease accounting, revenues are recognised upon the date the risks and
rewards of ownership are transferred to the purchaser, which is the date the
capacity is made available for activation and the customer becomes responsible
for maintenance charges. As a result of the issue of Interpretation 43 "Real
Estate Sales, an Interpretation of FASB Statement No. 66", capacity contracts
entered into after June 30, 1999 must satisfy the additional requirements for
sales of real estate to qualify for sales type lease accounting.

F-8
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capacity contracts that do not qualify for sales type lease accounting are
accounted for as operating leases and revenue is recognised over the term of the
lease. Until June 30, 1999 revenues from operating lease transactions were
considered incidental and recorded as a reduction of the capacity available for
sale.

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

Because substantially all receivables under agreements qualifying as
sales-type leases are receivable within 75 days of the date the risks and
rewards of ownership are transferred to the customer, the accounts receivable
balance in the accompanying balance sheets, representing the gross future
minimum lease payments due, approximates the present value of future minimum
lease payments. Amounts billed to customers for maintenance and repair services
are invoiced separately from capacity lease payments. There are no guaranteed or
unguaranteed residual values accruing to the benefit of the Company.

In exchange for construction costs incurred, the Company had granted credits
to suppliers toward future capacity. In addition, certain customers have
committed to purchase capacity at a future date under signed capacity credit
agreements. Such amounts received or receivable under these agreements and the
capacity credits granted to suppliers are recorded as deferred revenue until the
date the credits are utilized, at which time the deferred revenue is recognized
as earned. Amounts receivable under these capacity agreements are reflected
within accounts receivable in the accompanying balance sheets. Deferred revenue
also includes amounts invoiced for standby maintenance which are applicable to
future periods.

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

c) Cost of Sales

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

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

d) Commissions

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

F-9
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
e) Capacity Available for Sale and Construction in Progress

Capacity available for sale is recorded at the lower of cost or fair value
less cost to sell and is charged to cost of sales as capacity is sold. Until
contracts are entered into that preclude sales type lease accounting for a
particular segment, the cost of such segment will remain in capacity available
for sale. Construction in progress is transferred to capacity available for sale
at the date it is completed and placed into commercial operation if the capacity
contracts on the particular segment will satisfy sales type lease accounting
rules. Construction in progress relating to other segments is transferred to
fixed assets and depreciated over its remaining economic life. 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, costs related to program management, costs for
the route surveys, interest and other costs necessary for developing the cable
system.

Costs of the network relating to capacity contracts accounted for as
operating leases are treated as fixed assets and depreciated over the remaining
economic life of the cable system.

f) Capitalized Financing Costs

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

g) Fixed Assets

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

<TABLE>
<S> <C>
Computer equipment.................................... 33 1/3% per annum
Fixtures and fittings................................. 20% per annum
Leasehold improvement................................. Remaining lease term
Motor vehicles........................................ 20% per annum
Network assets........................................ 6 2/3% per annum
</TABLE>

h) Interest Rate Derivatives

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

For interest rate derivatives to qualify for hedge accounting, the debt
instrument being hedged must expose the Company to interest rate risk and, at
the inception of the derivative instrument and throughout the period the
derivative is held, there must be a high correlation of changes in the market
value of the derivative and interest expense of the hedged item. Under hedge
accounting, net interest payments due to or from the counterparties are recorded
as an increase or reduction in interest expense.

F-10
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

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

i) Translation of Foreign Currencies

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

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

j) Long Term Incentive Plan

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

k) Income Taxes

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

l) Net Income (Loss) per Common Share

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

m) Impairment of Long-Lived Assets

The Company 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,

F-11
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
an impairment loss measured by the difference between the discounted cash flows
and the carrying value of long-lived assets would be recognized by the Group.

n) Pending Accounting Standards

3. FIXED ASSETS

Fixed assets consist of the following:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Office furniture............................................ $ 629 $1,231
Leasehold improvements...................................... 224 2,326
Computer equipment.......................................... 1,084 1,582
Motor vehicles.............................................. 286 267
Network assets.............................................. 304,703 --
-------- ------
306,926 5,406
Less--Accumulated depreciation.............................. (10,949) (919)
-------- ------
Net book value.............................................. $295,977 $4,487
-------- ------
</TABLE>

As a result of the application of FIN 43, sales on certain parts of the
cable system will not be able to satisfy the requirements for sales type lease
accounting. Accordingly the costs of these parts of the system have been
reclassified with effect from July 1, 1999 from capacity available for sale to
fixed assets and are being depreciated over their remaining useful economic life
of 15 years. An additional $90,000 was reclassified from Capacity Available for
Sale to Fixed Assets during the six months ended December 31, 1999.

4. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Bank credit facility.................................... 190,000 271,500
8 1/4% Senior Notes, due 2008, net of unamortized
discount of $4,878 (1998--$5,321)..................... 425,270 424,679
-------- --------
$615,270 $696,179
======== ========
</TABLE>

F-12
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

4. LONG-TERM DEBT (CONTINUED)
On January 30, 1998, the Company completed a refinancing which consisted of
$370,000 of bank credit facilities under the New Credit Facility and $430,000 of
the Senior Notes. Proceeds received under the Senior Notes were $424,088, net of
a $5,912 discount. The Senior Notes are not secured by any asset of the Company.
Accordingly, they are effectively subordinated to any secured obligation arising
from the New Credit Facility. Interest incurred on the Senior Notes is paid
quarterly.

The bank credit facilities include a seven-year $320,000 term loan facility
and a $50,000 revolving credit facility. The Company's borrowings under the
credit facility at December 31, 1999 are $190,000. Under the term loan and
revolving credit facilities, borrowings bear interest at LIBOR plus 190 to 212.5
basis points and are secured by a pledge of substantially all of the Company's
assets and revenues, other than the Company's physical assets.

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

The collateral trustee maintains certain accounts in accordance with the
terms of the Credit Facility. The collateral trustee has a security interest in
these accounts.

As at December 31, 1999, contractual maturities of debt are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
2000........................................................ --
2001........................................................ --
2002........................................................ --
2003........................................................ 58,080
2004........................................................ 105,600
Thereafter.................................................. 26,320
-------
</TABLE>

The above bank credit facility was amended on February 16, 2000. The
contractual maturities of the new facility over the next five years are as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
2000........................................................ --
2001........................................................ 5,625
2002........................................................ 22,500
2003........................................................ 28,125
2004........................................................ 35,625
Thereafter.................................................. 35,625
------
</TABLE>

F-13
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

5. PREFERRED SHARES

On January 30, 1998, the Company completed a refinancing which resulted in
the redemption of all the Preferred Shares. In addition, the Company paid a
premium of $6,641 to redeem the Preferred Shares, which, together with the
write-off of the remaining $1,859 of discount related to the Preferred Shares,
was charged to additional paid-in capital during 1998. The shares had a par
value of $.0001 per share and a liquidation value of $100 per share. The
following number of shares were issued and outstanding:

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

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

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

The preferred shareholders were issued 3,075,816 Class B common shares when
they purchased the Preferred Shares. The Class B common shares had a fair value
of $1 and therefore $3,076 was assigned to the Class B common shares issued and
recorded as a discount on the Preferred Shares issued. The discount was being
amortized over the term of the Preferred Shares and the amortization is included
in cumulative pay-in-kind preferred dividends in the accompanying statements of
operations. During the years ended December 31, 1998 and 1997 the Board of
Directors declared Preferred Share pay-in-kind dividends resulting in the issue
of 21,701 and 156,885 additional shares, respectively, of Preferred Shares. In
addition, as of December 31, 1997, the Company accrued approximately $708 for
additional pay-in-kind dividends for the period from December 16, 1997 to
December 31, 1997.

6. SHAREHOLDERS' EQUITY

a) Class A Common Shares

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

As of December 31, 1998 and 1997 132,000,000 Class A common shares were
issued and outstanding.

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

F-14
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

6. SHAREHOLDERS' EQUITY (CONTINUED)
b) Class B Common Shares

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

<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Shares outstanding................................. 635,796,338 565,858,741 565,858,741
Share capital...................................... $ 64 $ 57 $ 57
</TABLE>

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

During the year ended December 31, 1997, the Company issued, in exchange for
cash consideration, 335,612,492 of the Class B common shares. The proceeds of
the 1997 issue were used in funding the construction of the cable system. There
were no issues of Class B common shares during 1998. All Class B common shares
were funded at $1 per share.

7. STOCK OPTIONS

In March, 1998, the Company adopted a Long-Term Incentive Plan under which
the Company may grant up to 25,237,831 shares of common stock to eligible
members of staff. During 1999, the Plan was adopted by the Company's parent
company, FLAG Telecom Holdings Limited, and the maximum number of options that
could be granted under the plan was increased to 40,582,746. Generally, options
granted under this plan vest and are exercisable over periods up to 4 years,
subject to meeting certain qualifying criteria. All options vest no later than
eight years and expire ten years after the date of grant. The options can vest,
and are exercisable, earlier on the commencement of an initial public offering
of equity in the Company. As at December 31, 1998 and December 31, 1999 the
total number of options granted were 14,146,236 and 24,566,394 respectively. No
options had vested by December 31, 1999.

Had the compensation for the Company's Long Term Incentive Plan been
determined in accordance with SFAS 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1999
--------
<S> <C>
Net loss attributable to common shareholders
--as reported............................................. (14,732)
--pro forma............................................... (25,065)
Loss per share
--as reported............................................. (0.02)
--pro forma............................................... (0.04)
</TABLE>

F-15
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

7. STOCK OPTIONS (CONTINUED)
The effects of applying SFAS 123 for disclosing compensation cost may not be
representative of the effects on reported net income for future years.

The weighted average fair value of options granted during 1998 and 1999 was
$3.64 and $13.15 per share respectively. The fair value of each option grant is
estimated on the date of grant using the Black Scholes option-pricing model
using the following weighted average assumptions.

<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Dividend yield.............................................. 0.0% 0.0%
Expected volatility......................................... 0.59 0.59
Risk-free interest rate..................................... 5.8% 5.8%
Expected lives of the options............................... 5.0 years 5.0 years
</TABLE>

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

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

<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ------------------------- -------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
-------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) before
extraordinary item......... -- $(14,732) $(21,847) $(21,847) $63,119 $63,119
Extraordinary item........... -- -- $(59,839) $(59,839) -- --
Net income (loss)............ -- $(14,732) $(81,529) $(81,529) $63,119 $63,119
Percentage entitlement....... -- 100% 11% 89% 11% 89%
Net income (loss) per class
before extraordinary
item....................... -- $(14,732) $ (2,403) $(19,444) $ 6,943 $56,176
Extraordinary item........... -- -- $ (6,582) $(53,257) -- --
Net income (loss) per
class...................... -- $(14,732) $ (8,968) $(72,561) $ 6,943 $56,176
Number of shares............. -- 635,796,338 132,000,000 565,858,741 132,000,000 396,890,512
Income (loss) per share
before extraordinary
item....................... -- $ (0.02) $ (0.02) $ (0.03) $ 0.05 $ 0.14
Extraordinary item per
share...................... -- -- $ (0.05) $ (0.10) -- --
Net income (loss) per
share...................... -- $ (0.02) $ (0.07) $ (0.13) $ 0.05 $ 0.14
</TABLE>

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

The stock options granted during 1998, discussed in Note 7, did not have a
dilutive effect on 1999 net income per common share or 1998 net loss per common
share.

F-16
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31,1999, 1998 AND 1997

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

9. FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and fair values of the
Company's financial instruments as of December 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Funds held by Collateral
Trustee...................... -- $134,066 $134,066 -- $255,366 $255,366 -- $425,905 $425,909
8 1/4% Senior Notes............ $430,000 $425,270 $395,600 $430,000 $424,679 $419,250 -- -- --
Long-term debt................. -- $190,000 $190,000 -- $271,500 $271,500 -- $615,087 $615,087
Interest rate swaps............ $160,000 -- $ 370 $160,000 -- $ 2,621 -- -- --
Interest rate collar
agreement.................... -- -- -- -- -- -- $300,000 -- $ (1,613)
Treasury rate lock agreement... -- -- -- -- -- -- $100,000 -- $ (1,260)
</TABLE>

The notional amounts of interest rate derivatives do not represent amounts
exchanged by the parties and, thus, are not a measure of the Company'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.

The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments but does not expect
any counterparties to fail to meet their obligations. The Company deals only
with highly rated counterparties.

<TABLE>
<S> <C>
Funds held by Collateral Trustee..... The carrying amount is a reasonable estimate of fair value
as the balance includes amounts held in banks and time
deposits with a short-term maturity.

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 the relevant
date.

Long-term debt....................... The carrying amount of the long term debt is the proceeds
drawn on the New Credit Facility. 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 swaps.................. The interest rate swap agreements are "zero cost" meaning
that the cost of acquiring the agreement is embedded in the
interest rate spread. As such, the agreement does not have
a carrying value. The fair value is estimated using an
option pricing model and values the changes in interest
rates since inception, and the potential for future changes
over the remaining term.

Interest rate collar agreement....... The interest rate collar agreement is "zero cost" meaning
that the cost of acquiring the agreement is embedded in the
interest rate spread. As such, the agreement does not have
a carrying value. The fair value is estimated using an
option pricing model and essentially values the potential
for change in interest rates during the remaining term.
</TABLE>

F-17
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31,1999, 1998 AND 1997

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

9. FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<S> <C>
Treasury rate lock agreement......... The treasury rate lock agreement is "zero cost" meaning
that the cost of acquiring the agreement is embedded in the
price spread. As such, the agreement does not have a
carrying value. The fair value is estimated using an option
pricing model and essentially values the potential for
change in interest rates during the remaining term.
</TABLE>

At the end of March 1998, the Company entered into two interest rate swap
agreements to manage the Company's exposure to interest rate fluctuations on the
$370,000 bank credit facility undertaken on January 30, 1998 (the "New Credit
Facility"). Under the swap agreements, the Company pays a fixed rate of 5.60% on
a notional amount of $60,000, a fixed rate of 5.79% on a notional amount of
$100,000, and the counterparty pays the floating rate based on LIBOR. The swap
agreements terminate in January and July 2000, respectively, unless extended by
an additional one year and six months, respectively, at the option of the
counterparty. The swap agreement which terminated in January 2000 has not been
extended.

The 8 1/4% Senior Notes arising on the refinancing undertaken on
January 30, 1998 (the "Senior Notes") accrue interest at the rate of 8 1/4% per
annum paid semi-annually on January 30 and July 30 of each year, commencing on
July 30, 1998 (see Note 4. "Long-term Debt"). Interest is expensed as it
accrues. The Senior Notes are redeemable at the Company's option, in whole or in
part, at any time on or after January 30, 2003, at specified option prices. In
the event of any equity offering before January 31, 2001, the Company may use
all or a portion of the net proceeds therefrom to redeem up to 33 1/3% of the
original principal amount of the Senior Notes at a redemption price of 108.25%
plus accrued and unpaid interest. If the Company has excess cash flow, as
defined, for any fiscal year commencing in 2001, the Company is required,
subject to certain exceptions and limitations, to make an offer to purchase the
Senior Notes at specified prices. Upon a change in control, the noteholders may
require the Company to purchase all or any portion of the outstanding notes at a
price equal to 101% of the principal amount plus accrued but unpaid interest.

10. TAXES

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

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

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

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current............................................. $ 694 $2,281 $4,391
Deferred............................................ 469 (1,021) 4,600
$1,163 $1,260 $8,991
------ ------ ------
</TABLE>

F-18
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31,1999, 1998 AND 1997

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

10. TAXES (CONTINUED)
Deferred taxes arise principally because, for tax purposes, in certain
jurisdictions, revenues from capacity sales are deferred and recognized as
taxable income over the estimated life of the FLAG Europe-Asia cable system. The
components of deferred tax liabilities are the following:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Capacity sales revenues deferred for tax
purposes........................................ $17,066 $13,217 $7,145
Deferred commissions for tax purposes............. (1,851) (1,911) (197)
Future depreciation for tax purposes.............. (8,648) (5,797) (2,362)
Tax losses carried forward........................ (2,220) (1,479) --
Other............................................. (374) (468) 14
------- ------- ------
$ 3,973 $ 3,562 $4,600
</TABLE>

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

11. RELATED PARTY TRANSACTIONS

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

a) Program Management Services Agreement

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

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

b) Marketing Services Agreement

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

Effective May 21, 1998, under a Marketing Transition Agreement the Company
and BANS agreed to terminate the Marketing Services Agreement. Under the
Marketing Transition Agreement, the Company agreed to pay certain BANS' closing
down expenses and certain commissions in connection with their pre-termination
and post-termination activities. The Company will pay BANS (i) commissions
accrued under the Marketing Services Agreement but remaining unpaid and (ii) up
to $3,000 in commissions resulting from certain sales. Also under the Marketing
Transition Agreement the Company has agreed to

F-19
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31,1999, 1998 AND 1997

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

11. RELATED PARTY TRANSACTIONS (CONTINUED)
pay BANS or its affiliate a 50% commission where BANS or its affiliate secures
the sale of four whole DS-3s (which equates to 84 whole MIUs) on the FLAG
Europe-Asia cable system. The Company will accrue a liability for the
commissions in the period it becomes probable that BANS or its affiliate will
obtain the sales and that the amount of the commissions can be reasonably
estimated.

c) Employee Services Agreement

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

Total amounts incurred for the above services are as follows:

<TABLE>
<CAPTION>
PROGRAM MARKETING BUSINESS EMPLOYEE
MANAGEMENT SERVICES DEVELOPMENT SERVICES
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
1999.............................. -- -- -- $298
1998.............................. $ 2,823 $2,229 $662 $411
1997.............................. 12,000 3,098 436 --
</TABLE>

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

Marubeni Corporation, the administrative agent for the financing provided
under Tranche B, which was repaid in January 1998, is affiliated with Marubeni
Telecom Development Limited, a Shareholder of the Company. Under the terms of
the Agreement, Marubeni Corporation was entitled to certain arrangement and
commitment fees. Fees incurred payable to Marubeni Corporation for the years
ended December 31, 1998 and 1997 were $58 and $1,280, respectively. At the end
of each year, no amounts were payable. Interest in relation to financing
provided by Marubeni for the years ended December 31, 1998 and 1997 were $1,953
and $14,927, respectively, of which $nil and $579 were payable at the end of
each year, respectively.

The Company granted approximately $60,000 of capacity credits and $9,250 of
cash to an affiliate of a Shareholder of the Company in connection with the
construction of the FLAG Europe-Asia cable system in the year ended
December 31, 1997. The capacity credits were utilized during the year ended
December 31, 1998.

12. COMMITMENTS AND CONTINGENCIES

As of December 31, 1999, the Company was committed under supply contracts
for the cable system for final payments totalling $52,411, representing funds
withheld pending the completion of certain outstanding items under the
contracts. Provision has been made in the Company's financial statements to
cover the anticipated final payment.

F-20
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31,1999, 1998 AND 1997

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

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

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

<TABLE>
<S> <C>
2000........................................................ $222
2001........................................................ 7
2002........................................................ --
2003........................................................ --
Thereafter.................................................. --
</TABLE>

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

<TABLE>
<S> <C>
2000........................................................ $24,540
2001........................................................ 24,790
2002........................................................ 25,286
2003........................................................ 25,792
Thereafter.................................................. 108,428
</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 FLAG Europe-Asia cable system capacity sold at any point in time
and the number of other cable systems serviced under the agreement.

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

13. SUBSEQUENT EVENTS.

On January 4, 2000, the Company became a wholly owned subsidiary of FLAG
Telecom Holdings Limited, when the minority shareholder exchanged its remaining
shares in the Company for shares in FLAG Telecom Holdings Limited.

F-21
<PAGE>
SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
this Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.

<TABLE>
<S> <C> <C>
FLAG LIMITED
(Registant)

By: /s/ JAMES P. CAMPBELL
-----------------------------------------
James P. Campbell
CHIEF FINANCIAL OFFICER
Dated: March 30, 2000
</TABLE>

<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF EXHIBIT
- --------------------- ------------------------------------------------------------
<C> <S> <C>
1.1 Schedule 2 -- Allowance for Doubtful Accounts
</TABLE>

<PAGE>
SCHEDULE 2

<TABLE>
<CAPTION>
BALANCE CHARGE TO BALANCE
BEGINNING EFFECTS OF COSTS/ END OF
OF PERIOD ACQUISITIONS EXPENSE DEDUCTIONS PERIOD
--------- ------------ --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS

FLAG Limited........................... 1995 $ -- -- -- -- $ --

FLAG Limited........................... 1996 $ -- -- -- -- $ --

FLAG Limited........................... 1997 $ -- -- 9,054 -- $9,054

FLAG Limited........................... 1998 $9,054 -- 1,445 (1,869) $8,630

FLAG Limited........................... 1999 $8,630 -- -- (1,803) $6,827
</TABLE>