FLAG TELECOM HOLDINGS LTD, F-1/A, 2000-02-08

FLAG TELECOM HOLDINGS LTD
F-1/A, 2000-02-08
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 2000

REGISTRATION NO. 333-94899
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

AMENDMENT NO. 2
TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
------------------------

FLAG TELECOM HOLDINGS LIMITED

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
BERMUDA 4813 NOT REQUIRED
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>

<TABLE>
<S> <C>
EMPORIUM BUILDING FLAG TELECOM USA LTD.
69 FRONT STREET 570 LEXINGTON AVENUE
HAMILTON HM12, BERMUDA NEW YORK, NEW YORK 10020
(441) 296-0909 (212) 319-2121
(Address, including zip code, and telephone (Name and address, including zip code, and
number, including area code, of registrant's telephone number, including area code, of agent
principal executive offices) for service)
</TABLE>

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

COPIES TO:

<TABLE>
<S> <C>
DAVID W. POLLAK, ESQ. ALAN L. BELLER, ESQ.
MORGAN, LEWIS & BOCKIUS LLP DAVID LOPEZ, ESQ.
101 PARK AVENUE CLEARY, GOTTLIEB, STEEN & HAMILTON
NEW YORK, NEW YORK 10178 ONE LIBERTY PLAZA
(212) 309-6058 NEW YORK, NEW YORK 10006
FAX: (212) 309-6273 (212) 225-2000
FAX: (212) 225-3999
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE(2) OFFERING PRICE(1)(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Shares, par value $.0006 per share... 36,432,000 $24.00 $874,368,000 $230,834
</TABLE>

(1) Includes shares to be sold upon exercise of the underwriters' over-allotment
option. See "Underwriting."

(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 of Regulation C under the Securities Act of 1933, as amended.

(3) Of this amount, $176,331 was previously paid by the registrant.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. WE MAY NOT SELL
THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED OR LEGAL.
<PAGE>

SUBJECT TO COMPLETION, DATED FEBRUARY 7, 2000

P R O S P E C T U S

[LOGO]

31,680,000 SHARES

FLAG TELECOM HOLDINGS LIMITED

COMMON STOCK

$ PER SHARE
---------

We are offering 26,380,000 newly-issued common shares and the shareholders
listed on page 63 of this prospectus are offering 5,300,000 of our common shares
to the public. We will not receive any proceeds from common shares sold by the
selling shareholders.

A syndicate of U.S. underwriters will offer of these shares in the
U.S. and Canada, and a syndicate of international underwriters will offer the
remaining shares outside the U.S. and Canada.

No public market currently exists for our common shares. We have applied to
have our common shares approved for listing on the Nasdaq National Market under
the symbol "FTHL" and on the London Stock Exchange under the symbol "FTL." We
estimate that the initial public offering price will be between $22.00 and
$24.00 per share.

We and certain of the selling shareholders have granted the underwriters a
30-day option to purchase a maximum of 4,752,000 additional shares to cover any
over-allotments of shares.

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

INVESTING IN OUR COMMON SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 6.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to FLAG Telecom (before expenses).................. $ $
Proceeds to the selling shareholders (before expenses)...... $ $
</TABLE>

The underwriters expect to deliver the common shares to purchasers on or
about , 2000.
--------------
SALOMON SMITH BARNEY
DEUTSCHE BANC ALEX. BROWN
GOLDMAN, SACHS & CO.

2
<PAGE>
MORGAN STANLEY DEAN WITTER
WARBURG DILLON READ LLC

, 2000.

3
<PAGE>
[INSERT MAP OF WORLD SHOWING EXISTING AND PLANNED NETWORK]
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 6
USE OF PROCEEDS............................................. 15
DIVIDEND POLICY............................................. 16
DILUTION.................................................... 16
CAPITALIZATION.............................................. 17
SELECTED CONSOLIDATED FINANCIAL DATA........................ 18
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION................ 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 24
BUSINESS.................................................... 37
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES........... 56
MANAGEMENT.................................................. 57
PRINCIPAL AND SELLING SHAREHOLDERS.......................... 63
CERTAIN TRANSACTIONS........................................ 64
DESCRIPTION OF CAPITAL STOCK................................ 67
SHARES ELIGIBLE FOR FUTURE SALE............................. 71
TAX CONSIDERATIONS.......................................... 73
UNDERWRITING................................................ 78
LEGAL MATTERS............................................... 80
EXPERTS..................................................... 80
AVAILABLE INFORMATION....................................... 81
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
</TABLE>

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY JURISDICTION WHERE AN OFFER IS NOT
PERMITTED.

UNTIL , 2000 ALL DEALERS THAT BUY, SELL OR TRADE THE COMMON SHARES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

------------------------
<PAGE>
PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS SOME INFORMATION FROM THIS PROSPECTUS. IT MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS
OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE
RISK FACTORS AND THE FINANCIAL STATEMENTS. IN THIS PROSPECTUS, REFERENCES TO:
(1) "FLAG LIMITED" REFER TO FLAG LIMITED, A BERMUDA COMPANY WHICH IS OUR WHOLLY
OWNED SUBSIDIARY, AND (2) "FLAG ATLANTIC LIMITED" REFER TO FLAG ATLANTIC
LIMITED, A BERMUDA COMPANY IN WHICH WE HOLD A 50% OWNERSHIP INTEREST. THIS
PROSPECTUS CONTAINS SOME MARKS, TRADEMARKS AND TRADE NAMES OF FLAG TELECOM
HOLDINGS LIMITED, INCLUDING OUR NAME AND LOGO. UNLESS OTHERWISE INDICATED,
INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION AND GIVES EFFECT TO A REVERSE STOCK SPLIT OF
6:1 BEING CONSUMMATED IN CONNECTION WITH THIS OFFERING.

FLAG TELECOM

We are a global carriers' carrier that develops and offers a broad range of
innovative telecommunications products and services to licensed international
carriers, Internet service providers and other telecommunications companies. We
have an established customer base of approximately 90 customers, many of which
are among the world's leading telecommunications and Internet companies. Our
customers include 17 of the top 20 international carriers based on traffic
volume which, together, accounted for approximately 48% of our sales to date. We
believe we have succeeded in attracting this customer base primarily as the
result of the diversity, flexibility and high quality of our product and service
offerings. Our goal is to establish FLAG Telecom as the leading global carriers'
carrier by offering a wide range of cost-effective capacity use options and
wholesale products and services across our global network. We also plan to
develop an extensive range of innovative products and services which will use a
state-of-the-art Internet Protocol-based network infrastructure.

THE FLAG TELECOM NETWORK

Our network, the FLAG Telecom network, currently consists of:

- the FLAG Europe-Asia cable system, which is the world's longest
independent, privately-owned digital fiberoptic undersea cable system with
a length of 28,000 kilometers;

- the FLAG Atlantic-1 cable system, which we are currently constructing
through a 50/50 joint venture with GTS TransAtlantic and which, when
completed, will connect London and Paris to New York and will have
potential capacity 15 times the maximum capacity of the most advanced
cable system in service on the Atlantic route today; and

- terrestrial connections between our landing stations in the United Kingdom
and Spain to the city centers of London and Madrid and intra-European
connections from London to Paris, Brussels, Frankfurt, Amsterdam, Berlin,
Zurich, Milan and several other major European metropolitan areas which we
have acquired the right to obtain through contractual arrangements with
other facilities-based bandwidth capacity providers.

Where economically feasible, we expect to extend the FLAG Telecom network to
additional countries by developing new cable systems, building extensions from
our existing cable systems or by building additional terrestrial capacity. Where
rapid access to a market is required or where it is not economically feasible to
expand our network on our own, we may enter into arrangements with other parties
to develop network extensions or to acquire rights to use their existing
networks. We may also consider acquiring companies with networks that complement
our own.
<PAGE>
OUR CORPORATE STRUCTURE

We were formed in February 1999 to serve as the holding company for the FLAG
Telecom group of companies, as part of the restructuring of a group of companies
originally organized in 1993. Our corporate structure, without giving effect to
this offering, is as set forth below. For clarity, we have included only our
principal companies in the following chart.

[LOGO]

We are a Bermuda company. Our corporate offices are located at Emporium
Building, 69 Front Street, Hamilton HM12, Bermuda. Our telephone number is
(441) 296-0909. Our web sites are http://www.flagtelecom.com and
http://www.flagatlantic.com. None of the information on our web sites is a part
of this prospectus.

2
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common shares offered by(1):

FLAG Telecom............................. 26,380,000 shares

The Selling Shareholders................. 5,300,000 shares

Total.................................. 31,680,000 shares

Common shares to be outstanding after this
offering................................... 132,346,056 shares(1)(2)

Use of proceeds.............................. We intend to use the net proceeds of this
offering (1) to repay indebtedness under FLAG
Limited's existing credit facility, (2) to
fund (or to set aside funds for) our existing
obligation to contribute capital to FLAG
Atlantic Limited and (3) to fund additional
expansions of the FLAG Telecom network, the
development of additional wholesale and
bundled product and service offerings and for
working capital and general corporate
purposes. We will not receive any proceeds
from the sale of shares by the selling
shareholders in this offering.

Proposed Nasdaq National Market symbol....... FTHL

Proposed London Stock Exchange Symbol........ FTL
</TABLE>

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

(1) Excludes up to 1,584,000 additional common shares subject to the portion of
the over-allotment option we have granted to the underwriters.

(2) Excludes 6,763,791 common shares which are reserved for issuance under our
stock option plan. Options to purchase 4,156,040 common shares under our
stock option plan were outstanding or had been approved for grant at
January 31, 2000.

3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND NOTES)

The following table presents summary consolidated statements of operations and
balance sheet data of FLAG Telecom and FLAG Limited for the periods indicated.
The financial data for the periods ended December 31, 1996, 1997 and 1998 and
for the period from January 1, 1999 to February 26, 1999 has been derived from
FLAG Limited's audited consolidated financial statements included elsewhere in
this prospectus. The financial data as of September 30, 1999 and for the period
from incorporation to September 30, 1999 has been derived from FLAG Telecom's
audited interim consolidated financial statements included elsewhere in this
prospectus. Operating results for the period from incorporation to
September 30, 1999 are not necessarily indicative of the results that may be
expected for the full year ended December 31, 1999.

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

<TABLE>
<CAPTION>
FLAG LIMITED FLAG TELECOM
----------------------------------------------------------- ----------------
PERIOD FROM PERIOD FROM
YEAR ENDED AS OF DECEMBER 31, JANUARY 1, 1999 INCORPORATION
--------------------------------------- TO TO SEPTEMBER 30,
1996(1) 1997 1998 FEBRUARY 26, 1999 1999
------------- ---------- ---------- ----------------- ----------------
(AS RESTATED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Capacity sales, net of
discounts....................... $ -- $ 335,982 $ 182,935 $ 25,554 $ 89,223
Standby maintenance and
restoration revenue............. -- 4,011 25,313 4,458 28,760
---------- ---------- ---------- ---------- ----------
-- 339,993 208,248 30,012 117,983
---------- ---------- ---------- ---------- ----------
Sales and other operating
expenses:
Cost of capacity sold............. -- 196,190 101,288 8,294 43,799
Operations and maintenance(5)..... -- 4,600 37,931 5,114 17,419
Sales and marketing(5)............ 316 6,598 10,680 637 8,085
General and
administrative(2)(5)............ 12,345 30,339 21,674 2,870 12,788
Depreciation and amortization..... 121 276 844 233 5,220
---------- ---------- ---------- ---------- ----------
12,782 238,003 172,417 17,148 87,311
---------- ---------- ---------- ---------- ----------
Operating income (loss)........... (12,782) 101,990 35,831 12,864 30,672
---------- ---------- ---------- ---------- ----------
Interest expense.................. -- 20,193 61,128 9,758 31,264
Interest income................... 2,408 6,637 14,875 1,825 4,924
---------- ---------- ---------- ---------- ----------
Income (loss) before minority
interest and income taxes....... (10,374) 88,434 (10,422) 4,931 4,332
Minority interest................. -- -- -- -- 1,919
Provision for income taxes........ -- 8,991 1,260 171 1,098
---------- ---------- ---------- ---------- ----------
Net income (loss) before
extraordinary item.............. (10,374) 79,443 (11,682) 4,760 1,315
Extraordinary item(3)............. -- -- (59,839) -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)................. (10,374) 79,443 (71,521) 4,760 1,315
Cumulative pay-in-kind preferred
dividends....................... 14,410 16,324 1,508 -- --
---------- ---------- ---------- ---------- ----------
Redemption premium and write-off
of discount on preferred
shares(4)....................... -- -- 8,500 -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to
common shareholders............. $ (24,784) $ 63,119 $ (81,529) $ 4,760 $ 1,315
========== ========== ========== ========== ==========
</TABLE>

4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND NOTES)

<TABLE>
<CAPTION>
FLAG LIMITED
-------------------------------------------------------- FLAG TELECOM
AS OF DECEMBER 31, ------------------
------------------------------------ AS OF AS OF
1996 1997 1998 FEBRUARY 26, 1999 SEPTEMBER 30, 1999
---------- ---------- ---------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:

Total assets..................... 774,447 1,886,937 1,475,766 1,435,369 1,363,904
Shareholders' equity............. 142,297 541,029 458,796 463,734 309,866
</TABLE>

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

(1) FLAG Limited restated its 1996 financial statements, as originally issued in
March 1997, to give effect to a $3.1 million discount on FLAG Limited's
issuance of 3,075,816 shares of preferred stock in 1995. For the year ended
December 31, 1996, this restatement had no effect on net loss, but increased
net loss applicable to common shareholders by $0.55 million.

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

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

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

(5) Included in operating expenses for FLAG Telecom are the following non-cash
compensation expenses: $1,204 in operations and maintenance expenses; $750
in sales and marketing expenses; and $1,510 in general and administrative
expenses.

5
<PAGE>
RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE PURCHASING
OUR COMMON SHARES. OUR MATERIAL RISKS AND UNCERTAINTIES ARE DESCRIBED BELOW. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED, THE TRADING PRICE
OF OUR COMMON SHARES COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.

RISKS RELATED TO OUR BUSINESS

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

We are at an early stage in the construction of the FLAG Atlantic-1 cable
system and the introduction of a variety of new telecommunications products and
services, such as managed bandwidth services and Internet point-to-point
services. In order to transition from a business primarily involved in the
operation of an undersea cable network with a target market consisting mainly of
large operators to one that also operates the FLAG Atlantic-1 cable system and
markets new products and services to an expanded target market (including
resellers and Internet service providers), we must undergo substantial changes
in our operations. These changes are expected to be a significant challenge to
our managerial, administrative, marketing and operational resources. We are in
the process of developing the management, marketing and operational capabilities
and financial and accounting systems and controls necessary for this transition.
We cannot assure you that we will succeed in developing all or any of these
capabilities.

BECAUSE ACHIEVEMENT OF OUR BUSINESS OBJECTIVES DEPENDS UPON THE SUCCESSFUL
COMPLETION OF THE FLAG ATLANTIC-1 CABLE SYSTEM, WE MUST COMPLETE THE FLAG
ATLANTIC-1 CABLE SYSTEM WITHIN BUDGET AND ON TIME.

We have embarked upon an aggressive plan to build the FLAG Atlantic-1 cable
system, with GTS TransAtlantic, our joint venture partner. We cannot guarantee
completion of the FLAG Atlantic-1 cable system in the time planned, within
budget, or at all. Successful completion of the FLAG Atlantic-1 cable system
will be affected by a variety of factors, many of which we cannot control,
including:

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

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

- timely performance by our contractors;

- technical performance of the fiber and equipment used in the FLAG
Atlantic-1 cable system;

- our ability to attract and retain qualified personnel;

- effective management of our relationship with GTS TransAtlantic; and

- GTS TransAtlantic's successful design and development of the terrestrial
portion of the FLAG Atlantic-1 cable system.

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

6
<PAGE>
BECAUSE THE SUCCESS OF FLAG ATLANTIC LIMITED DEPENDS UPON THE EFFORTS OF GTS
TRANSATLANTIC AND THE SUCCESSFUL MANAGEMENT OF OUR RELATIONSHIP WITH THEM, WE
CANNOT ASSURE THE SUCCESS OF THE FLAG ATLANTIC-1 PROJECT.

Under the FLAG Atlantic Limited Shareholders Agreement, GTS TransAtlantic
has agreed to manage the construction (or acquisition), installation, operation
and maintenance of most of the terrestrial portion of the FLAG Atlantic-1 cable
system. While GTS TransAtlantic has significant experience in the development of
terrestrial telecommunications systems, we cannot assure you that it will
perform its obligations under the shareholders agreement in a timely fashion, or
at all.

We will need to maintain a cooperative relationship with GTS TransAtlantic,
since we share management and control of FLAG Atlantic Limited with it. Under
the shareholders agreement, disagreements concerning operational matters,
including the selection of suppliers, and pricing issues may be referred to
independent experts for binding determination, while deadlocks concerning other
matters may be referred to binding arbitration under the rules of the
International Chamber of Commerce. Despite these dispute resolution mechanisms,
failure to maintain a cooperative relationship with GTS TransAtlantic could
hamper FLAG Atlantic Limited's operations.

BECAUSE GTS TRANSATLANTIC AND WE MAY ACQUIRE CAPACITY ON THE FLAG ATLANTIC-1
CABLE SYSTEM FOR OUR OWN ACCOUNT AND RESELL THIS CAPACITY FOR OUR SOLE RISK AND
BENEFIT, WE MAY NOT BENEFIT FROM GTS TRANSATLANTIC'S MARKETING EFFORTS AND MAY
FIND OURSELVES IN DIRECT COMPETITION WITH IT.

Under the FLAG Atlantic Limited Shareholders Agreement, we and GTS
TransAtlantic are both entitled to acquire capacity on the FLAG Atlantic-1 cable
system for own account, to bundle this capacity with our respective other
products, and to sell these bundled products for our own account. Because GTS
TransAtlantic has acquired a significant amount of capacity on the FLAG
Atlantic-1 cable system for its own account, it may concentrate its marketing
efforts on making sales from its inventory, rather than sales on behalf of FLAG
Atlantic Limited. While FLAG Atlantic Limited will benefit directly from amounts
paid by GTS TransAtlantic to purchase capacity for its inventory, neither FLAG
Atlantic Limited nor we will otherwise benefit from the sales GTS TransAtlantic
makes out of its inventory. If GTS TransAtlantic elects to focus its marketing
efforts on making sales from its inventory, then the success of our investment
in FLAG Atlantic Limited will solely depend on our own marketing efforts.
Depending on the type of products which GTS TransAtlantic elects to sell, this
may also place us in direct competition with it. In such event, we may actually
be harmed by GTS TransAtlantic's marketing efforts.

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

The operation of our systems requires the coordination and integration of
sophisticated and highly specialized hardware and software technologies and
equipment located throughout the world. We cannot assure you that, even if built
to specifications, our systems will function as expected in a cost-effective
manner.

In addition, our business plan calls for the use of state-of-the-art
technology which is currently under development. In particular, the FLAG
Atlantic-1 cable system is designed to employ technology currently under
development by Alcatel Submarine Networks. While Alcatel Submarine Networks has
successfully tested this technology, this technology has not yet been
successfully deployed. Failure to deploy this technology on time could have a
material adverse effect on FLAG Atlantic Limited's operations and on our
financial results.

Our business plan also calls for the upgrade of capacity on the FLAG
Europe-Asia cable system by adding wavelength division multiplexing equipment.
We have received technical evaluations from potential suppliers indicating that
such upgrades can be achieved. However, we cannot assure you that these upgrades
can be successfully implemented. Failure to achieve these upgrades could
materially impact the amount of capacity which we will be able to sell, and the
types of services that we will be able to offer.

7
<PAGE>
BECAUSE WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD IMPAIR OUR ABILITY TO
RAISE OR GENERATE REQUIRED CAPITAL AND LIMIT OUR OPERATING FLEXIBILITY, WE MAY
BE MORE VULNERABLE TO CHANGES IN OUR BUSINESS OR THE ECONOMY.

Upon completion of this offering and a contemplated amendment to FLAG
Limited's existing credit facility and after we pay related expenses, we
estimate that we will have approximately $580 million of long-term debt
consisting of the $150 million outstanding under the credit facility and
$430 million of 8 1/4% Senior Notes issued by FLAG Limited. In addition, FLAG
Atlantic Limited has borrowed approximately $62 million under its credit
facility. Under the contemplated amendment, we would be required to utilize the
proceeds of this offering to repay up to $25 million of the outstanding
indebtedness under FLAG Limited's existing credit facility. FLAG Atlantic
Holdings Limited is also obligated to contribute $100 million in equity to the
FLAG Atlantic-1 joint venture no later than October 31, 2000; we will set aside
some of the proceeds from this offering to fund that obligation.

We cannot assure you that the conditions for the amendment can be fulfilled.
In the event we do not complete the amendment by the completion of this offering
we would be required, under the current terms of the FLAG Limited credit
facility, to utilize up to $175 million of the net proceeds of this offering to
repay the facility, which is approximately the entire outstanding amount of the
term loans under this facility.

Our substantial indebtedness may have important consequences for us,
including the following:

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

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

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

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

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

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

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

We may need to upgrade, expand or adapt the components of the FLAG
Europe-Asia cable system and the FLAG Atlantic-1 cable system in the future to
respond to the following:

- demand for greater transmission capacity;

- changes in our customers' service requirements;

- technological advances; and

- government regulation.

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

IF WE FAIL TO MAINTAIN COOPERATIVE RELATIONSHIPS WITH OUR LANDING PARTIES,
OUR OPERATIONS MAY BE IMPAIRED.

We depend upon fifteen different landing parties to provide access to the
origination and termination points for the FLAG Europe-Asia cable system. Our
ability to offer city-to-city services is dependent on our landing parties'
willingness to provide cost-effective terrestrial services, and/or to

8
<PAGE>
agree to connect other terrestrial networks to the FLAG Europe-Asia cable
system. Each of these landing parties has entered into a construction and
maintenance agreement with us and some of our customers under which each of the
landing parties commits to provide access, to charge reasonable and uniform
rates to all customers accessing the FLAG Europe-Asia cable system through the
landing party's landing station and to maintain the terrestrial portion of the
FLAG Europe-Asia cable system in the landing party's country. Despite these
commitments, we cannot assure you that the landing parties will perform their
contractual obligations or that there will not be political events or changes in
relation to the landing parties which have adverse effects on us.

In addition, the construction and maintenance agreement restricts our
ability to install further equipment into cable landing facilities without the
consent of our landing parties. While none of our landing parties has ever
withheld its consent, we cannot assure you that we will be able to obtain the
consent of our landing parties to proposed future modifications of our landing
facilities that may be advantageous to us or necessary to operate the FLAG
Europe-Asia cable system.

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

We believe Internet Protocol is emerging as the platform of choice for the
next generation of communication networks. Therefore, as part of our business
strategy, we have developed and are developing products and services which
target the specific needs of Internet service providers. However, wide-scale
interest in and use of the Internet for commerce and by individuals is a recent
phenomenon. This growth may not continue. If continued acceptance and growth of
the Internet does not occur, demand for telecommunication services may decline
generally, with our products and services tailored to Internet service providers
being particularly affected, and our business and financial performance will
suffer.

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

We derive substantially all of our revenues from international operations.
We have substantial physical assets in several jurisdictions along the FLAG
Europe-Asia cable route and expect to have substantial physical assets along the
FLAG Atlantic-1 cable route. International operations are subject to political,
economic and other uncertainties, including, risk of war, revolution,
expropriation, renegotiation or modification of existing contracts, labor
disputes and other uncertainties arising out of foreign government sovereignty
over our international operations. Some regions of the world along our routes
have a history of political and economic instability. This instability could
result in new governments or the adoption of new policies that are hostile to
foreign investment.

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

We invoice all capacity sales and maintenance charges in U.S. dollars;
however, most of our customers and many of our prospective customers derive
their revenues in currencies other than U.S. dollars. The obligations of
customers with substantial revenues in foreign currencies may be subject to
unpredictable and indeterminate increases in the event that such currencies
devalue relative to the U.S. dollar. Furthermore, such customers may become
subject to exchange control regulations restricting the conversion of their
revenue currencies into U.S. dollars. In such event, the affected customers may
not be able to pay us in U.S. dollars.

In addition, we derive, and expect to continue to derive, a significant
portion of our revenues from customers located throughout Asia. As a result of
the recent currency and economic crisis in the region, including the imposition
of exchange controls, we may experience collection delays or

9
<PAGE>
nonpayment and we have experienced, and may continue to experience, deferrals of
capacity purchases from our Asian customers.

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

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

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

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

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

We believe that a critical component for our success will be the attraction
and retention of qualified professional and technical personnel. We expect
further growth in the number of our personnel, particularly in connection with
the FLAG Atlantic-1 cable system and the new wholesale services we are offering.
We face significant competition in the attraction and retention of personnel who
possess the technical skill sets and regional expertise that we seek. If we lose
key personnel or qualified technical staff, or are unable to recruit qualified
personnel, our ability to manage the day-to-day aspects of our complex network
will be weakened.

IF OUR SYSTEMS PROVE NOT TO BE YEAR 2000 COMPLIANT, WE MAY INCUR UNEXPECTED
EXPENSES AND DELAYS IN PAYMENT FOR OUR SERVICES AND IN OUR ABILITY TO CONDUCT
NORMAL OPERATIONS.

The Year 2000 problem arises from the fact that many computer programs
indicate the year by only two digits, rather than four. As a result, computer
systems and software in a wide variety of industries may produce some erroneous
results or fail unless they have been modified or upgraded to process date
information correctly. Prior to December 31, 1999, we conducted an investigation
into Year 2000 compliance covering all network equipment and financial systems
used to provide services to our customers, network operations support systems
used to support the operations of our network, and all administrative support
systems. As of the date of this prospectus, we have not encountered Year 2000
related problems. We continue to monitor developments in this area. We believe
our most significant Year 2000 risk lies with our landing parties, customers and
major suppliers. We have developed a contingency plan to minimize operational
problems if Year 2000 related problems arise. If our network equipment or
financial systems or those of our landing parties, customers and major

10
<PAGE>
suppliers are not Year 2000 compliant, we could experience unexpected expenses
and delays, including delays in our ability to conduct normal business
operations and to sell our products and services.

RISKS RELATED TO OUR INDUSTRY

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

Along the FLAG Europe-Asia cable route and the FLAG Atlantic-1 cable route,
we face competition and pricing pressure from existing cables, planned cables,
and satellite providers, including existing geosynchronous satellites and
low-earth orbit systems now under construction. As we expand our range of
available products and services, we expect to face competition from various
carriers offering comparable products and services.

Many of our competitors have, and some potential competitors are likely to
enjoy, substantial competitive advantages, including the following:

- greater name recognition;

- greater financial, technical, marketing and other resources;

- larger installed bases of customers; and

- well-established relationships with current and potential customers.

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

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

The telecommunications industry is subject to rapid and significant changes
in technology. If we do not replace or upgrade technology and equipment that
becomes obsolete, we will be unable to compete effectively because we will not
be able to meet the expectations of our customers. Additionally, in recent
years, the useful economic life of telecommunications equipment has declined
significantly. Although we believe that, for the foreseeable future,
technological changes will not materially affect the use of our fiberoptic
system, we cannot predict the effect of technological changes on our business.
The FLAG Europe-Asia cable system has a warranted design life of 25 years and
the FLAG Atlantic-1 cable system will have a warranted design life of 25 years;
however, we cannot assure you that technological developments will not render
the infrastructure and technologies in which we invest obsolete before we can
adequately utilize them. The failure of the FLAG Europe-Asia cable system or the
FLAG Atlantic-1 cable system to achieve their warranted design life could have a
material adverse effect on us.

RISKS RELATED TO THIS OFFERING

EVEN AFTER THIS OFFERING OWNERSHIP OF OUR COMMON SHARES WILL REMAIN
RELATIVELY CONCENTRATED, WHICH MAY MAKE OUR COMMON SHARES LESS LIQUID AND
DEPRESS THEIR MARKET PRICE.

After this offering, our officers, directors and existing shareholders will
together own (or have the right to acquire upon the exercise of options granted
under our stock option plan) approximately 76% of our outstanding common shares,
or approximately 74% if the underwriters exercise their over-allotment option in
full. Moreover, a small number of shareholders will own a majority of our common
shares enabling those shareholders, if they act together, to retain significant
influence over the composition of our management and any matters requiring
shareholder approval, including the election

11
<PAGE>

of members of the Board of Directors. This concentration of ownership also may
have the effect of delaying or preventing a change in control of FLAG Telecom
and may make our shares less liquid. This lack of liquidity could depress the
market price of our common shares.

THE ABILITY OF CERTAIN SHAREHOLDERS TO APPOINT MEMBERS OF OUR BOARD OF
DIRECTORS AND CERTAIN PROVISIONS IN OUR BY-LAWS MAY LIMIT OUR ABILITY TO ENTER
INTO CERTAIN TRANSACTIONS.

Our By-laws provide that a shareholder is entitled to elect one member of
our Board of Directors for each 9% of our issued and outstanding common shares
that it holds. Consequently, Bell Atlantic will be entitled to appoint three of
our ten directors. In addition, Bell Atlantic and Rathburn Limited are each
entitled to elect one member of our Board of Directors as long as they hold any
common shares. In addition, our By-laws provide that certain actions required to
be approved by our Board of Directors must be approved by two-thirds of the
votes present and entitled to be cast at a properly convened meeting of our
Board of Directors. This voting requirement may limit our ability to take
certain actions, even if such actions would be deemed beneficial by a simple
majority of our Board.

ANTI-TAKEOVER PROVISIONS COULD MAKE A THIRD-PARTY ACQUISITION OF US
DIFFICULT AND COULD PREVENT OR DELAY A TRANSACTION INVOLVING A CHANGE OF
CONTROL, EVEN IF SUCH A TRANSACTION WOULD BE BENEFICIAL TO OUR SHAREHOLDERS.

Our By-laws provide for a classified Board of Directors and contain fair
price provisions. These provisions may have the effect of delaying or preventing
changes of control of the management of our company, even if such transactions
would have significant benefits to our shareholders. As a result, these
provisions could limit the price some investors might be willing to pay for our
common shares in the future.

FUTURE SALES OF OUR COMMON SHARES MAY DEPRESS OUR STOCK PRICE.

If our existing shareholders sell a large number of shares, or if we issue a
large number of our common shares in connection with future acquisitions,
financings, or other circumstances, the market price of our common shares could
decline significantly. Moreover, the perception in the public market that these
shareholders might sell common shares could depress the market price of the
common shares. Immediately after this offering, the public market for our common
shares will include only the 31,680,000 shares that are being sold in this
offering (or 36,432,000 shares if the underwriters exercise their over-allotment
option in full). At that time, there will be an additional 100,666,056 common
shares outstanding. After the offering, we intend to initially register over
6,763,791 common shares which are reserved for issuance under our long term
incentive plan. Once we register these shares, they can be sold in the public
market upon issuance, subject to restrictions under the securities laws
applicable to resales by affiliates. In addition, we may decide to register
additional common shares under the Securities Act after the closing of this
offering for use by us as consideration for future acquisitions. If we so
decide, upon such registration and issuance, these shares generally will be
freely tradable, unless the resale thereof is contractually restricted or unless
the holders thereof are subject to the restrictions on resale provided under the
Securities Act. We will not be able to issue the shares, however, without
Salomon Smith Barney Inc.'s consent during the 180 days after the date of this
prospectus. See "Shares Eligible for Future Sale."

Approximately 98% of the 100,666,056 additional shares to be held by our
existing shareholders after this offering are subject to lock-up agreements with
the representatives of the underwriters, pursuant to which most of our existing
shareholders have agreed not to offer, sell, contract to sell, grant any option
to purchase or otherwise dispose of any of these shares within the 180-day
period following the date of this prospectus. When the 180-day lock-up period
expires, or earlier with the

12
<PAGE>
consent of Salomon Smith Barney Inc., the owners of these shares will be able to
sell them in the public market, subject to limitations of the securities laws.

BECAUSE THE PRICE YOU PAY FOR OUR SHARES EXCEEDS THE AVERAGE PRICE PAID BY
OUR EXISTING SHAREHOLDERS, YOU WILL BE IMMEDIATELY AND SUBSTANTIALLY DILUTED.

If you purchase our common shares in this offering, you will experience
immediate and substantial dilution of $15.12 per share, based upon an estimated
initial public offering price of $23.00 per share (the mid-point of the
estimated offering range), because the price you pay will be substantially
greater than the net tangible book value per share of $7.88 for the shares you
acquire. This dilution is due in large part to the fact that our prior investors
paid an average price of $5.05 per share when they purchased their common
shares, which is substantially less than the initial public offering price.

BECAUSE OUR COMMON SHARES HAVE NEVER BEEN PUBLICLY TRADED, WE CANNOT PREDICT
THE EXTENT TO WHICH A MARKET WILL DEVELOP FOR OUR COMMON SHARES, HOW VOLATILE
THAT MARKET WILL BE OR THE EFFECT THAT SUCH EVENTS MAY HAVE ON THE VALUE OF THE
COMMON SHARES YOU PURCHASE IN THIS OFFERING.

Prior to this offering, there has been no market for our common shares. The
initial public offering price of our common shares will be determined by
negotiations between ourselves and the representatives for the underwriters. The
price of our common shares after this offering may fluctuate widely. The reasons
for such fluctuations may include the business community's perception of our
prospects and of the telecommunications industry in general. Differences between
our actual operating results and those expected by investors and analysts and
changes in analysts' recommendations or projections could also affect the price
of our common shares. Other factors potentially causing volatility in the price
for our common shares may include changes in general economic or market
conditions and broad market fluctuations, particularly those affecting the
prices of the common shares of companies engaged in businesses similar or
related to our business. We have applied to include our common shares for
quotation on the Nasdaq National Market and for listing on the London Stock
Exchange. Such inclusion or listing does not, however, guarantee that an active
and liquid trading market for our common shares will develop.

BECAUSE OF THE CONSTRAINTS IMPOSED BY OUR FINANCING ARRANGEMENTS, WE DO NOT
ANTICIPATE PAYING CASH DIVIDENDS IN THE FORESEEABLE FUTURE.

We do not anticipate paying cash dividends in the foreseeable future. Our
ability to pay dividends is limited by certain of our debt instruments.

SINCE MOST OF OUR ASSETS ARE LOCATED OUTSIDE OF THE UNITED STATES, IT MAY BE
DIFFICULT TO BRING AND ENFORCE SUITS AGAINST US.

We are incorporated in Bermuda. Most of our directors and officers are not
residents of the United States. All or a substantial portion of the assets of
those directors and officers are or may be located outside of the United States.
In addition, a substantial portion of our assets are located outside of the
United States. As a result, it may be difficult for our shareholders to serve
notice of a lawsuit on us or our non-U.S. directors and officers within the
United States. Because most of our assets are located outside of the United
States, it may be difficult for our shareholders to enforce in the United States
judgments of United States courts. Appleby Spurling & Kempe, our counsel in
Bermuda, has advised us that there is some doubt as to the enforcement in
Bermuda, in original actions or in actions for enforcement of judgments of
United States courts, of liabilities predicated upon U.S. federal securities
laws.

BECAUSE WE ARE AT AN EARLY STAGE IN THE DEVELOPMENT OF OUR NETWORK, OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS.

We are at an early stage in the development and expansion of our products
and services. Accordingly, all statements in this prospectus that are not
clearly historical in nature are forward-looking. Discussions containing
forward-looking statements are found in the material set forth under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition

13
<PAGE>
and Results of Operations" and "Business," as well as in this prospectus
generally. When used in this prospectus, the words "anticipate," "believe,"
"expect," "estimate" and similar expressions are generally intended to identify
forward-looking statements. Examples of forward-looking statements include the
statements concerning our operations, prospects, size and growth of world
telecommunications traffic, size and growth of addressable market, technological
and customer support capabilities, pricing, new product and services
development, potential expansions to our network, potential customers and
liquidity and working capital needs, estimated demand forecast, and information
concerning characteristics of competing systems. These forward-looking
statements are inherently predictive and speculative and we cannot assure you
that any of such statements will prove to be correct. Actual results and
developments may be materially different from those expressed or implied by such
statements. You should carefully review the other risk factors set forth in this
section of this prospectus for a discussion of factors which could result in any
of such forward-looking statements proving to be inaccurate.

14
<PAGE>
USE OF PROCEEDS

If we sell the common shares offered through this prospectus at a public
offering price of $23.00 per share (the mid-point of the estimated offering
range), we estimate that we will receive net proceeds from the sale of the
common shares offered by FLAG Telecom, after deducting underwriting discounts
and commissions and estimated offering expenses, of $571.9 million, or $606.4
million if the underwriters exercise their over-allotment option in full. FLAG
Telecom will not receive any proceeds from the sale of common shares in this
offering by the selling shareholders.

We intend to use the net proceeds from this offering as follows:

- assuming we can implement the amendment described below to FLAG Limited's
credit facility on or prior to the completion of this offering, to repay
$25 million outstanding under this facility and otherwise to repay up to
$175 million outstanding under this facility; and

- to fund (or to set aside funds for) our existing obligation to contribute
approximately $100 million in capital to FLAG Atlantic Limited.

We intend to use the remainder of the net proceeds:

- to fund additional expansions of the FLAG Telecom network, including
possible additional undersea cables such as a trans-Pacific cable, and to
develop additional wholesale and bundled product and service offerings;
and

- for working capital and general corporate purposes.

We have not determined how much of the remainder of the net proceeds we will
use for each of the purposes identified above. We are presently in the
preliminary stages of evaluating various network expansion projects and cannot
assure you that we will proceed with any of those projects or that we will use
any of the proceeds of this offering in connection with those projects should we
decide to proceed with them.

The occurrence of unforeseen events or changed business conditions could
cause us to use the proceeds of this offering in a manner other than as
described in this prospectus.

FLAG Limited's existing credit facility provides for borrowing capacity of
up to $370 million, of which approximately $190 million was outstanding as of
January 1, 2000. The existing credit facility consists of a seven year
$320 million term loan facility and a seven year $50 million revolving credit
facility, each bearing interest at a rate of 190 to 212.5 basis points over
LIBOR. At January 1, 2000, all outstanding indebtedness under this credit
facility was outstanding under the term loan facility. On January 14, 2000, we
received an indication of willingness from Dresdner Kleinwort Benson and
Barclays Capital, as co-arrangers, to modify FLAG Limited's existing credit
facility to consist of a $150 million, six-year term loan facility and a $10
million, revolving credit facility. Under the terms of this proposal, these
facilities would 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 FLAG Limited's credit rating. In connection with this
amendment, FLAG Limited would be required to pay fees and expenses to the
co-arrangers totalling approximately $3.5 million. The commitments of the co-
arrangers would also be subject to satisfaction of various conditions, including
successful completion of business, engineering and legal due diligence, receipt
of internal credit approvals, conclusion of definitive documentation, successful
completion of this offering and no material adverse changes to FLAG Limited or
to the financial markets generally. The borrowings from FLAG Limited's existing
credit facility were applied, together with the proceeds from FLAG Limited's
issuance of the 8 1/4% Senior Notes:

- to secure payments to contractors in connection with the construction of
the FLAG Europe-Asia cable system;

- to repay $615 million of indebtedness under FLAG Limited's prior credit
facility;

- to redeem all outstanding shares of preferred stock issued by FLAG
Limited; and

- for general corporate purposes.

15
<PAGE>
DIVIDEND POLICY

We have never declared or paid any dividends on our common shares. Our Board
of Directors currently intends to retain any earnings for use in the operation
and expansion of our business and does not anticipate paying any dividends on
the common shares for the foreseeable future. In the event we change our policy
on the payment of dividends, declarations will be subject to the discretion of
our Board of Directors. Our Board of Directors will take into account such
matters as general business conditions, our financial results, capital
requirements, contractual, legal and regulatory restrictions on the payment of
dividends by us to our shareholders or by our subsidiaries to us and such other
factors as our Board of Directors may deem relevant.

DILUTION

The net tangible book value of our common shares as of September 30, 1999,
after giving effect to the shares which were issued on January 4, 2000 to Bell
Atlantic in connection with the exchange of its remaining stock in FLAG Limited,
was $470 million, or $4.44 per share. Net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the common shares outstanding as of September 30, 1999. After giving effect
to our sale of 26,380,000 common shares offered by FLAG Telecom through this
prospectus at an estimated initial public offering price of $23.00 per share
(the mid-point of the estimated offering range) and application of the estimated
net proceeds therefrom, and after deducting the underwriting discounts and
estimated offering expenses payable by us, our net tangible book value as
adjusted as of September 30, 1999 would have been $1,042 million, or $7.88 per
share. This represents an immediate increase in net tangible book value as
adjusted of $3.44 per share to existing shareholders, and an immediate dilution
in net tangible book value as adjusted of $15.12 per share to new investors
purchasing common shares in this offering.

The following table illustrates the per share dilution as described above:

<TABLE>
<S> <C> <C>
Estimated initial public offering price...... $ 23.00
Net tangible book value before this
offering............................... $ 4.44
Increase attributable to new investors in
this offering.......................... 3.44
-----------------------
Net tangible book value as adjusted after
this offering.............................. 7.88
-----------------------
Dilution to new investors.................... $ 15.12
=======================
</TABLE>

The following table summarizes, on a pro forma basis, as of September 30,
1999, the number of common shares purchased in this offering, the aggregate cash
consideration paid and the average price per share paid by existing shareholders
for common shares and by new investors purchasing common shares in this
offering:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ -------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 105,966,056 80% $ 535,309,829 47% $ 5.05
New investors....................... 26,380,000 20% 606,740,000 53% $23.00
------------ --- -------------- ---
Total............................. 132,346,056 100% $1,142,049,829 100% $ 8.63
============ === ============== ===
</TABLE>

These calculations do not include shares reserved for issuance upon the
exercise of stock options.

16
<PAGE>
CAPITALIZATION

The following table sets forth the actual capitalization of FLAG Telecom at
September 30, 1999 and the capitalization of FLAG Telecom at September 30, 1999,
as adjusted. You should read this table in conjunction with FLAG Telecom's
consolidated financial statements and notes which are included elsewhere in this
prospectus. For purposes of this table, the "As Adjusted" column gives effect to
the sale of the common shares offered in this prospectus at an estimated initial
public offering price of $23.00 per share (the mid-point of the estimated
offering range) and the application of estimated net proceeds, after deducting
underwriting discounts and commissions and estimated offering expenses. The "As
Adjusted" column also gives effect to the proposed amendment to FLAG Limited's
existing credit facility described herein but does not give effect to the
January 4, 2000 exchange by Bell Atlantic of its common shares in FLAG Limited
for our common shares.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
---------------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash........................................................ $ 2,836 $ 549,722
Current portion of long-term obligations.................... -- --

Long-term obligations, net:
8 1/4% Senior Notes due 2008............................ $ 425,122 $ 425,122
Other long-term debt........................................ 223,000 198,000
Minority interest........................................... 160,562 160,562
Shareholders' equity:
Common shares 189,833,333 shares authorized; 69,709,935
issued and outstanding actual; 300,000,000 shares
authorized; 96,089,935 shares issued and outstanding
as adjusted........................................... 7 10
Other shareholders' equity.............................. 308,547 880,444
---------- ----------
Foreign currency translation adjustment................. (3) (3)
Retained earnings....................................... 1,315 1,315
---------- ----------
Total shareholders' equity.................................. 309,866 881,766
---------- ----------
Total capitalization........................................ $1,118,550 $1,665,450
========== ==========
</TABLE>

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

(1) In the event that FLAG Limited does not amend its existing credit facility
on or prior to completion of this offering in accordance with the terms of a
proposal it has received from two of its existing lenders, other long-term
debt will be $48 million and cash will be $244.7 million.

17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND NOTES)

The following table presents selected consolidated statements of operations
and balance sheet data of FLAG Telecom and FLAG Limited for the periods
indicated. The financial data for the periods ended December 31, 1996, 1997 and
1998 and for the period from January 1, 1999 to February 26, 1999 has been
derived from FLAG Limited's audited consolidated financial statements included
elsewhere in this prospectus. The financial data as of September 30, 1999 and
for the period from incorporation to September 30, 1999 has been derived from
FLAG Telecom's audited interim consolidated financial statements included
elsewhere in this prospectus. Operating results for the period from
incorporation to September 30, 1999 are not necessarily indicative of the
results that may be expected for the full year ended December 31, 1999.

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

18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND NOTES)

<TABLE>
<CAPTION>
FLAG
FLAG LIMITED TELECOM
------------------------------------------------------------------------------------ -------------
PERIOD FROM PERIOD FROM
JANUARY 1, INCORPORATION
YEAR ENDED AS OF DECEMBER 31, 1999 TO TO
--------------------------------------------------------------------- FEBRUARY 26, SEPTEMBER 30,
1994(1) 1995(2) 1996(3) 1997 1998 1999 1999
------------- ------------- ------------- --------- --------- ------------ -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Capacity sales, net of
discounts................ $ -- $ -- $ -- $ 335,982 $ 182,935 $ 25,554 $ 89,223
Standby maintenance and
restoration revenue...... -- -- -- 4,011 25,313 4,458 28,760
-------- -------- --------- --------- --------- --------- ---------
-- -- -- 339,993 208,248 30,012 117,983
-------- -------- --------- --------- --------- --------- ---------
Sales and other operating
expenses:
Cost of capacity sold...... -- -- -- 196,190 101,288 8,294 43,799
Operations and
maintenance(8)........... -- -- -- 4,600 37,931 5,114 17,419
Sales and marketing(8)..... -- 10,253 316 6,598 10,680 637 8,085
General and
administrative(4)(8)..... 6,621 10,178 12,345 30,339 21,674 2,870 12,788
Depreciation and
amortization............. 278 381 121 276 844 233 5,220
-------- -------- --------- --------- --------- --------- ---------
6,899 20,813 12,782 238,003 172,417 17,148 87,311
-------- -------- --------- --------- --------- --------- ---------
Operating income (loss).... (6,899) (20,813) (12,782) 101,990 35,831 12,864 30,672
-------- -------- --------- --------- --------- --------- ---------
Interest expense........... -- -- -- 20,193 61,128 9,758 31,264
Interest income............ 110 439 2,408 6,637 14,875 1,825 4,924
Gulf settlement(1)......... (7,600) -- -- -- -- -- --
-------- -------- --------- --------- --------- --------- ---------
Income (loss) before
minority interest and
income taxes............. (14,389) (20,374) (10,374) 88,434 (10,422) 4,931 4,332
Minority interest.......... -- -- -- -- -- -- 1,919
Provision for income
taxes.................... -- -- -- 8,991 1,260 171 1,098
-------- -------- --------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item....... (14,389) (20,374) (10,374) 79,443 (11,682) 4,760 1,315
Extraordinary item(5)...... -- -- -- -- (59,839) -- --
-------- -------- --------- --------- --------- --------- ---------
Net income (loss).......... (14,389) (20,374) (10,374) 79,443 (71,521) 4,760 1,315
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............. $(14,389) $(22,161) $ (24,784) $ 63,119 $ (81,529) $ 4,760 $ 1,315
======== ======== ========= ========= ========= ========= =========
Net income (loss) per
share(7)
Class A.................. $ (0.01) $ (0.02) $ (0.02) $ 0.05 $ (0.07) $ 0.01 $ --
Class B.................. $ (0.19) $ (0.30) $ (0.13) $ 0.14 $ (0.13) $ -- $ 0.02

STATEMENT OF CASH FLOW
DATA:
Cash flow from
operating activities..... -- (14,155) (12,103) 285,156 88,831 (23,104) 62,113
Cash flow from
financing activities..... -- 84,206 342,011 245,677 97,818 21,230 41,453
Cash flow from
investing activities..... -- (70,635) (329,886) (528,653) (186,144) 601 (102,636)
</TABLE>

19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND NOTES)

<TABLE>
<CAPTION>
FLAG
FLAG LIMITED TELECOM
--------------------------------------------------------------------------------------- -------------
AS OF DECEMBER 31, AS OF AS OF
------------------------------------------------------------------------ FEBRUARY 26, SEPTEMBER 30,
1994(1) 1995(2) 1996(3) 1997 1998 1999 1999
------------- ------------- ------------- ----------- ---------- ------------ -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.......... $ 3,529 $ 3,106 $ 3,759 $ 96,677 $ 76,114 $ 73,941 $ 129,596
Funds held by collateral
trustee............... -- 46,537 48,194 425,905 255,366 219,136 144,183
Construction in
progress.............. 31,355 167,281 647,805 389 11,494 18,471 --
Capacity available for
sale.................. -- -- -- 1,208,948 1,095,099 1,086,435 870,181
Total assets............ 38,328 286,476 774,447 1,836,937 1,475,766 1,453,369 1,363,904
Current liabilities..... 16,550 74,453 206,486 370,555 232,814 203,226 130,385
Senior notes............ -- -- -- -- 424,679 424,777 425,122
Long-term debt.......... -- 50,000 312,543 615,087 271,500 256,500 223,000
Minority interest....... -- -- -- -- 160,562
Deferred revenue........ -- -- -- 176,221 84,415 83,570 111,318
Preferred Stock(6)...... -- 98,711 113,121 129,445 -- -- --
Shareholders' equity:
Common shares, $.0001
par value............. -- -- -- -- -- 64 7
Class A common shares,
$.0001 par value.... 13 13 13 13 13 -- --
Class B common shares,
$.0001 par value.... 3 9 22 57 57 -- --
Other shareholders'
equity(6)............. 43,887 99,098 195,135 514,389 504,381 504,387 308,547
Foreign currency
translation
adjustment............ -- -- -- -- (704) (526) (3)
Retained earnings
(accumulated
deficit).............. (22,125) (42,499) (52,873) 26,570 (44,951) (40,191) 1,315
Shareholders' equity.... $ 21,788 $ 56,621 $ 142,297 $ 541,029 $ 458,796 $ 463,734 $ 309,866
======== ======== ========= =========== ========= =========== ==========
</TABLE>

- ------------------------
(1) FLAG Limited restated its 1994 and subsequent financial statements to
reflect the $7.6 million portion of a $9.0 million payable to Gulf
Associates Telecommunications Limited under a settlement agreement as an
expense, as this amount primarily related to Gulf's 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 or 1998.

(2) FLAG Limited restated its 1995 financial statements, as originally issued in
March 1997, to give effect to a $3.1 million discount on FLAG Limited's
issuance of 3,075,816 shares of preferred stock in 1995. For the year ended
December 31, 1995, this restatement had no effect on net loss, increased net
loss applicable to common shareholders by $0.07 million, and had no effect
on basic and diluted loss per common share for Class A and Class B.

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

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

20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND NOTES)

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

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

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

(8) Included in operating expenses for FLAG Telecom are the following non-cash
compensation expenses: $1,204 in operations and maintenance expenses; $750
in sales and marketing expenses; $1,510 in general and administrative
expenses.

21
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following table presents the pro forma consolidated balance sheet of
FLAG Telecom as of September 30, 1999. This pro forma consolidated balance sheet
has been prepared after giving effect to the sale of the common shares offered
by FLAG Telecom in this prospectus at an estimated initial public offering price
of $23.00 per share (the mid-point of the estimated offering range) and the
application of the estimated net proceeds from this offering, as if this
offering had occurred on September 30, 1999.

On the assumption that the offering occurred on February 27, 1999, the only
effect on the pro forma consolidated statement of operations would be a
reduction in interest expense. For the period ended September 30, 1999, the
interest expense would have decreased by 1.1 million on a pro forma basis. There
is no effect on the taxation charge as a result of this reduction in interest
for both these periods.

The pro forma net income per share would have been $0.03.

22
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 1999

(EXPRESSED IN THOUSANDS, EXCEPT FOR NOTE)

(UNAUDITED)

<TABLE>
<CAPTION>
FLAG TELECOM
PRO FORMA
ACTUAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ----------
<S> <C> <C> <C>
Assets:
Current assets:
Cash................................................ $ 2,836 $571,886 $ 574,722
(25,000) (25,000)
Accounts receivable................................. 116,854 -- 116,854
Due from affiliates................................. 5,000 -- 5,000
Prepaid expenses and other assets................... 4,906 -- 4,906
---------- -------- ----------
129,596 -- 676,482
Funds held by collateral trustee or in escrow......... 144,183 -- 144,183
Capacity available for sale........................... 870,181 -- 870,181
Other assets.......................................... 219,944 -- 219,944
---------- -------- ----------
$1,363,904 $546,886 $1,910,790
========== ======== ==========

Liabilities:
Current liabilities:
Accrued construction costs.......................... $ 75,604 $ -- $ 75,604
Accrued liabilities................................. 27,519 -- 27,519
Deferred revenue.................................... 17,635 -- 17,635
Other current liabilities........................... 9,627 -- 9,627
---------- -------- ----------
130,385 -- 130,385

8 1/4% senior notes, due 2008......................... 425,122 -- 425,122
Long-term debt........................................ 223,000 (25,000) 198,000
Deferred revenue and other............................ 111,318 -- 111,318
Deferred taxes........................................ 3,651 -- 3,651
---------- -------- ----------
893,476 -- 868,476

Minority Interest....................................... 160,562 -- 160,562

Shareholders' Equity.................................... 309,866 571,886 881,732
---------- -------- ----------
$1,363,904 $546,886 $1,910,790
========== ======== ==========
</TABLE>

Note:

(1) The pro forma financial data gives effect to the sale of common shares
offered by FLAG Telecom in this prospectus as if this event occurred on
September 30, 1999. Concurrent with the sale of the common shares, FLAG
Telecom will apply the proceeds to repay $25 million outstanding under FLAG
Limited's credit facility (up to $175 million, in the event that FLAG
Limited does not amend its existing credit facility on or prior to
completion of this offering in accordance with the terms of a proposal it
has received from two of its existing lenders).

(2) The pro forma financial data does not give effect to the January 4, 2000
exchange by Bell Atlantic of its common shares in FLAG Limited for our
common shares.

23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YOU SHOULD READ THIS DISCUSSION IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO AND OTHER FINANCIAL INFORMATION INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS, INCLUDING THOSE SET FORTH IN "RISK FACTORS" AND THE MATTERS SET
FORTH IN THIS PROSPECTUS GENERALLY.

FLAG TELECOM GROUP OF COMPANIES

FLAG Telecom was formed in February 1999 to be the parent company for the
FLAG Telecom group of companies. The principal companies which comprise the FLAG
Telecom group of companies are FLAG Limited, FLAG Atlantic Limited and FLAG
Wholesale Services Limited. Pursuant to a restructuring on February 26, 1999,
FLAG Limited became our 66% owned subsidiary and the other companies then
comprising the FLAG Telecom group of companies became our wholly owned
subsidiaries, other than FLAG Atlantic Limited in which we have a 50% ownership
interest. On January 4, 2000, we acquired the remaining 34% ownership interest
in FLAG Limited and FLAG Limited became our wholly owned subsidiary. The
financial information presented in this prospectus comprises the consolidated
results of FLAG Limited for the accounting periods to February 26, 1999 and the
FLAG Telecom consolidated results for the period from incorporation to
September 30, 1999.

REVENUE RECOGNITION

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.

As a result of extending our range of products and services, we expect a
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 continue to 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, the magnitude of these transactions has
been increasing such that they are likely to become more than

24
<PAGE>
incidental. When this is the case, we will 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 September 30, 1999, we had an allowance of $7.5 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.

ACCOUNTING FOR THE CAPITAL COSTS OF THE FLAG TELECOM NETWORK

We capitalize direct and indirect expenditures incurred in connection with
the construction of the FLAG Telecom network. When a system is ready for
commercial service we transfer such expenditures to capacity available for sale
and charge a proportion of these expenditures to cost of sales as we recognize
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
from capacity available for sale to fixed assets and are being depreciated over
their remaining useful life.

When we start to provide contracts on particular segments which are to be
accounted for as service contracts, we will reclassify the cost of that
particular segment from capacity available for sale to fixed assets and
depreciate the cost over the remaining useful life. The construction costs of
the FLAG Atlantic-1 cable system will be amortized over its economic life from
the date it is ready for commercial service or will be written off as cost of
sales against revenues from transactions whose terms satisfy the requirements of
sales-type lease accounting. Capital costs associated with development of the
other elements of the FLAG Telecom network will be amortized over their
respective economic lives.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1998

ADJUSTED CONSOLIDATED RESULTS

The table below shows the significant income statement amounts, in
thousands, for the nine-month period ended September 30, 1999, being a
combination of the results of FLAG Limited for the period from January 1, 1999
to February 26, 1999 and the results of FLAG Telecom for the period from
incorporation to September 30, 1999. These results have been adjusted to
eliminate minority interests

25
<PAGE>
in order to enable a better comparison with the results for the nine-month
period ended September 30, 1998. These adjustments will not be reflected in our
current and future financial statements.

<TABLE>
<CAPTION>
ADJUSTED
NINE MONTHS
ENDED
SEPTEMBER 30,
1999
--------------
<S> <C>
Revenue:
Capacity sales.............................................. $114,777
Standby maintenance and restoration revenues................ 33,218
--------
$147,995

Sales and other operating costs:
Cost of capacity sold....................................... $ 52,093
Operations and maintenance (including non-cash compensation
expense of $1,204)........................................ 22,533
Sales and marketing (including non-cash compensation expense
of $750).................................................. 8,722
General and administrative (including non-cash compensation
expense of $1,510)........................................ 15,658
Depreciation and amortization............................... 5,452
Interest expense............................................ 41,022
Interest income............................................. 6,749
--------
Income before income taxes.................................. $ 9,264

Provision for taxes......................................... 1,269
</TABLE>

REVENUES

We recognized total revenue during the nine months ended September 30, 1999
of $148.0 million compared to $155.6 million in total revenue for the nine
months ended September 30, 1998.

We recognized revenue from the sale of capacity of $114.8 million for the
nine months ended September 30, 1999 compared to $137.0 million during the nine
months ended September 30, 1998. The reduction in revenue is primarily
attributable to our recognizing less revenue during the period as the result of
our adoption of FASB Interpretation No. 43 with effect from July 1, 1999. As of
September 30, 1999, we had entered into sales transactions with 90 international
telecommunication carriers and internet service providers compared to 75 as of
September 30, 1998.

We recognized revenue from standby maintenance and restoration services of
$33.2 million for the nine months ended September 30, 1999 compared to
$18.6 million for the nine months ended September 30, 1998. The increase of
$14.6 million for the nine months ended September 30, 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 nine months ended September 30, 1999, we recorded $52.1 million in
respect of the cost of capacity sold compared to $71.9 million recorded in the
nine months ended September 30, 1998. The decrease in the cost of capacity sold
in the nine months ended September 30, 1999 is primarily a result of lower
revenue recognized from capacity sales combined with sales of capacity on
segments having a

26
<PAGE>
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 nine months ended September 30, 1998.

During the nine months ended September 30, 1999, we incurred $22.5 million
in operations and maintenance costs compared to $28.8 million for the nine
months ended September 30, 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 nine months ended September 30, 1999, we incurred $8.7 million in
sales and marketing costs compared to $8.3 million incurred during the nine
months ended September 30, 1998. Sales and marketing costs are comprised of all
sales and marketing activities that are directly undertaken by us.

During the nine months ended September 30, 1999, we incurred $15.7 million
of general and administrative expenses compared to $17.8 million during the nine
months ended September 30, 1998. The decrease in general and administrative
costs in the nine months ended September 30, 1999, is largely due to a recovery
of certain accounts receivable previously provided for combined with a reduction
in costs associated with our transition from a development stage company to an
operating company which were incurred in the nine month period ended
September 30, 1998.

Costs for the nine months ended September 30, 1999 noted above include
charges in respect of awards under our long term incentive plan. These charges
are required under US accounting standards and are purely accounting charges
having no effect on cash flows.

Depreciation expense for the nine months ended September 30, 1999 was
$5.5 million compared to $0.5 million for the nine months ended September 30,
1998. The increase of $4.9 million is primarily a result of us adopting FASB
Interpretation No. 43 with effect 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 FLAG Europe-Asia
cable system was wholly accounted for as capacity available for sale for which
no depreciation was recorded but which was expensed as cost of capacity sold as
revenues were recognized.

INTEREST EXPENSE AND INTEREST INCOME

Interest expense on borrowings decreased from $46.9 million for the nine
months ended September 30, 1998 to $41.0 million for the nine months ended
September 30, 1999. The decrease in interest expense of $5.9 million is
attributable to a reduction in long term debt facility from $276.4 million as at
September 30, 1998 to $223.0 million as at September 30, 1999 combined with a
$1.7 million reduction in amortized financing costs and a reduction in interest
rates over the same period.

During the nine months ended September 30, 1999 we capitalized $1.3 million
of interest costs as a component of construction in progress.

We earned interest income of $6.7 million during the nine months ended
September 30, 1999 compared to $11.7 million earned during the nine months ended
September 30, 1998. Interest was earned on cash balances and short term
investments held by the collateral trustee for FLAG Limited's credit facility or
in escrow arising from ongoing business operations.

27
<PAGE>
PROVISION FOR TAXES

The provision for taxes was $1.3 million for the nine months ended
September 30, 1999 compared to $1.5 million for the nine months ended
September 30, 1998. The tax provisions for these periods 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 route
where we are deemed to have a taxable presence or are otherwise subject to tax.
At the present time, no income, profit, capital or capital gains taxes are
levied in Bermuda. In the event that such taxes are levied, we have received an
undertaking from the Bermuda Government exempting us from all such taxes until
March 28, 2016.

EXTRAORDINARY ITEM

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

In addition, in connection with the refinancing in January 1998, FLAG
Limited redeemed its outstanding preferred stock at a redemption price of 105%
of the liquidation preference. We reflected the $8.5 million excess of the
redemption value over the carrying value of the preferred stock on the date of
the redemption as a decrease in additional paid-in capital in the nine-month
period ended September 30, 1998. There were no costs of this nature recorded in
the nine-month period ended September 30, 1999.

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

REVENUES

We recognized total revenue during the year ended December 31, 1998 of
$208.2 million compared to $340.0 million in total revenue for the year ended
December 31, 1997.

We recognized revenue from the sale of capacity of $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 of the FLAG Europe-Asia
cable system, 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 we recognized $316 million as revenue. As
of December 31, 1998, we had entered into sales transactions with 80
international telecommunication carriers compared to 66 as of December 31, 1997.

We recognized revenue from standby maintenance fees of $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 $21.3 million in 1998 is due to our recognizing
12 months of standby maintenance revenue in 1998 compared to only three months
in 1997 as a result of our commencing operations in October 1997. We 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. We had no revenues in respect of
restoration services in 1997.

OPERATING EXPENSES

For the year ended December 31, 1998, we recorded $101.3 million in respect
of the cost of capacity sold compared to $196.2 million recorded in 1997. The
gross profit margin on capacity sales of

28
<PAGE>
44.60% for the year ended December 31, 1998 compares to a gross profit margin 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 profit margin
experienced in 1997 compared to 1998.

In connection with certain sales, we entered into price protection
arrangements entitling the relevant customers to capacity credits if we lower
our list prices prior to December 31, 1999. For periods during which we lower
our prices, we record a provision for cost of sales based on the estimated cost
value of the additional capacity granted. No adjustment was made to our list
prices in 1998, and accordingly no such provision was recorded in the year ended
December 31, 1998. Based on declines in our listed prices through December 31,
1997, we recorded a provision for cost of sales of approximately $28.9 million,
which was included in the total cost of sales of $196.2 million recorded in the
year ended December 31, 1997.

During the year ended December 31, 1998 we 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 maintenance under
maintenance zone agreements, as well as salaries and overhead 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. We did not incur
maintenance costs during construction. 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. We entered into four zone agreements. We
have also entered into a bilateral agreement for maintenance of the area from
the Red Sea to a point near the southern tip of India to facilitate more rapid
repairs than would be possible under one of our maintenance zone agreements.

During the year ended December 31, 1998, we recognized $10.7 million in
sales and marketing costs 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 our suppliers and
Bell Atlantic Network Systems, plus costs associated with sales and marketing
activities.

In May 1998, we and Bell Atlantic Network Systems agreed to terminate a
Marketing Services Agreement which appointed them as FLAG Limited's exclusive
sales agent throughout the world. We expense sales commissions that we incurred
under the marketing and services agreement prior to its termination at the time
we recognize the related revenue.

General and administrative expenses decreased from $30.3 million for the
year ended December 31, 1997 to $21.7 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 our transition
from a development stage company to an operating company.

INTEREST EXPENSE AND INTEREST INCOME

During the year ended December 31, 1998 we incurred $61.1 million in
interest expense on borrowings compared to $20.2 million incurred during the
period from provisional system acceptance of the FLAG Europe-Asia cable system
to December 31, 1997. Prior to provisional system acceptance, we capitalized
interest costs as a component of construction in progress. We incurred
$42.5 million in interest costs in 1997 prior to provisional system acceptance,
out of total interest payments that year of $62.7 million.

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<PAGE>
We earned interest income of $14.9 million during the year ended
December 31, 1998 compared to $6.6 million earned during the year December 31,
1997. In 1998, we earned interest on cash balances and short-term investments
held by the collateral trustee for FLAG Limited's existing credit facility or in
escrow arising from ongoing business operations. 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
of the FLAG Europe-Asia cable system 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 route where we are deemed to have a taxable
presence or are otherwise subject to tax. At the present time, no income,
profit, capital or capital gains taxes are levied in Bermuda. In the event that
such taxes are levied, we have received an undertaking from the Bermuda
Government exempting us from all such taxes until March 28, 2016. 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 we do not have a taxable presence.

EXTRAORDINARY ITEM

In connection with the refinancing that took place on January 30, 1998, we
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 our initial project refinancing.

In addition, in connection with the refinancing of FLAG Limited's original
credit facility, we redeemed preferred shares at a redemption price of 105% of
the liquidation preference. We reflected the excess of the redemption value over
the carrying value of the preferred shares on the date of the redemption of
$8.5 million as a decrease in additional paid-in capital.

NET LOSS AND NET LOSS APPLICABLE TO COMMON SHAREHOLDERS

For the year ended December 31, 1998 we 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 primarily
attributable to the results for the year ending December 31, 1997, including
$316 million of revenue recognized from sales of capacity entered into prior to
our commencing operations resulting in 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 as discussed above offset by
an $8.2 million increase in interest income and a $7.7 million reduction in tax
expense further contributed to the net loss for the year ended December 31,
1998.

The net loss applicable to common shareholders for the year ended
December 31, 1998 was $81.5 million compared to 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 FLAG Limited's 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 FLAG Limited's 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.

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<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996

REVENUES

We recognized no revenues prior to October 8, 1997, the date of provisional
system acceptance for the FLAG Europe-Asia cable system. As of December 31,
1997, we had recognized $336.0 million of revenues and had entered into capacity
sales agreements with 66 international telecommunications carriers. Under the
construction and maintenance agreement, customers are responsible for, among
other things, standby maintenance fees. Through December 31, 1997, we recognized
standby maintenance revenues of $4.0 million.

In addition, we entered into capacity credit agreements pursuant to which
customers commit to acquire capacity at a future date. As of December 31, 1997,
we had recorded deferred revenues of approximately $96.8 million related to
signed capacity credit agreements, of which we received in cash or recorded as a
current receivable approximately $59.1 million and we recorded as long-term
accounts receivable approximately $37.7 million.

In exchange for construction costs incurred, we granted approximately
$88.0 million in credits for future capacity acquisition, $77.7 million of which
remained unutilized and was recorded as deferred revenues as of December 31,
1997.

We will recognize capacity credits as revenue in the period the credits are
utilized (when the purchasers notify us regarding the circuits they are
activating and become responsible for standby maintenance fees as owners of the
capacity). Deferred revenues also include approximately $14.0 million of amounts
invoiced for standby maintenance which are applicable to future periods.

OPERATING EXPENSES

For the year ended December 31, 1997, we recorded $196.2 million of cost of
sales on capacity sale revenues of $336.0 million, resulting in a gross profit
margin on capacity sales of 41.6%. We did not recognize sales or costs of sales
in 1996. The $196.2 million of cost of sales recorded in 1997 includes
$28.9 million related to price protection credits discussed below and
$167.3 million related to costs of capacity sold in 1997.

Because capacity sales recognized as revenues in 1997 were generally sold at
a higher price per unit than the price per unit we expect to realize in the
future, we have recognized a higher cost of sales per unit in 1997 than we
expect to recognize in the future based on management's current best estimate
and third party market forecasts of capacity sales.

In connection with some sales, we have entered into price protection
arrangements entitling the relevant customers to capacity credits if we lower
our list prices prior to December 31, 1999. In the period we lower our list
prices, we record a provision for cost of sales based on the number of
additional units of capacity granted. Based on declines in our listed prices
through December 31, 1997, we recorded a provision for cost of sales of
approximately $28.9 million, which was included in the total cost of sales
recorded in 1997.

During the period from provisional system acceptance of the FLAG Europe-Asia
cable system until December 31, 1997, we also recognized $4.6 million in
operations and maintenance costs relating primarily to the provision of standby
maintenance costs under maintenance zone agreements. Of this amount,
approximately $4.0 million was recoverable from customers.

Sales and marketing expenses increased from $0.3 million for the year ended
December 31, 1996 to $6.6 million for the year ended December 31, 1997. Sales
and marketing expenses in 1997 consisted primarily of $3.1 million of
commissions on sales paid or payable to Bell Atlantic Network Systems and
$3.5 million of commission payable to an unrelated party. In 1995 and 1996, we
expensed a total of $10.6 million of commissions ($10.3 million of that in 1995)
representing commissions incurred for

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<PAGE>
purchase commitments obtained prior to July 3, 1995 which were not contingent
upon reaching provisional system acceptance. The purchase commitments obtained
prior to July 3, 1995 are included in the capacity sales recognized as revenues
in 1997. Accordingly, we incurred a total of $17.2 million of commissions
through December 31, 1997, representing approximately 5% of revenues of
$336.0 million recognized through December 31, 1997.

General and administrative expenses increased from $12.3 million in 1996 to
$30.3 million in 1997. Most of the increase was due to a $9.1 million provision
for doubtful accounts, a $4.0 million increase in salaries, wages and benefits
reflecting our staffing up for operations and a $2.1 million increase in
recruiting and other professional services costs.

INTEREST EXPENSE AND INTEREST INCOME

Until provisional system acceptance of the FLAG Europe-Asia cable system, we
capitalized interest costs as a component of construction in progress. Of total
interest incurred of $62.7 million in 1997, we incurred $42.5 million prior to
provisional system acceptance and capitalized this amount as a component of
construction in progress. The remaining $20.2 million of interest incurred in
1997 was reflected as interest expense in the statement of operations and was
incurred after provisional system acceptance.

We earned interest income of $6.6 million during the year ended
December 31, 1997 compared to $2.4 million for the year ended December 31, 1996.
Interest income was derived primarily from the short-term investment of our cash
held by the collateral trustee. Since all available funds not held by the
collateral trustee were not needed to fund construction costs and operating
expenses, we maintained minimal cash balances. Funds held by the collateral
trustee increased from $48.2 million as of December 31, 1996 to $425.9 million
as of December 31, 1997 primarily resulting from a lender requirement to deposit
capacity sale proceeds received in the fourth quarter of 1997 into the
collateral trust account.

PROVISION FOR TAXES

The provision for taxes of $9.0 million recorded in the 1997 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 route where we are deemed to have a taxable
presence or are otherwise subject to tax.

NET INCOME (LOSS) AND NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS

Net income increased to $79.4 million for the year ended December 31, 1997
compared to a loss of $10.4 million for the year ended December 31, 1996, an
increase of $89.8 million. This increase was attributable to an increase in
operating income of $114.8 million due to the sale of capacity as discussed
above and the increase in interest income of $4.2 million, offset by
$20.2 million in interest expense and the $9.0 million provision for taxes
discussed above.

The preferred stock issued by FLAG Limited accrued pay-in-kind dividends at
the rate of 13% for the first three years. All dividends recorded during the
relevant period were pay-in-kind dividends. Net income (loss) applicable to
common shareholders increased from a loss of $24.8 million for the year ended
December 31, 1996 to income of $63.1 million for the year ended December 31,
1997, reflecting the $89.8 million increase in net income, offset by an increase
in pay-in-kind dividends of $1.9 million.

Basic and diluted income (loss) per Class A common share increased from a
loss per share of ($0.02) in 1996 to income per share of $0.05 in 1997,
reflecting the increase in net income applicable to FLAG Limited's common
shareholders. Basic and diluted income (loss) per Class B common share increased
from a loss per share of ($0.13) in 1996 to income per share of $0.14 in 1997,
reflecting the

32
<PAGE>
increase in net income applicable to FLAG Limited's common shareholders and an
increase in the weighted average Class B common shares outstanding during the
period from 164,445,547 shares to 396,890,512 shares.

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, FLAG Limited 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 $370.0 million of bank credit facilities and
$430.0 million of 8 1/4% Senior Notes maturing January 30, 2008.

Upon consummation of the refinancing on January 30, 1998, we wrote off the
remaining amount of unamortized capitalized financing costs related to the prior
credit facility of $59.8 million as a component of the loss on refinancing in
the statement of operations. Also in connection with the refinancing, we
recorded a reduction to additional paid-in capital of $8.5 million representing
the excess of the $139.5 million paid to redeem the preferred stock over the
$131.0 million carrying value of the preferred stock on the date of redemption.

The FLAG Limited bank credit facilities include a seven year $320.0 million
term loan facility and a $50.0 million revolving credit facility. On
January 30, 1998, FLAG Limited borrowed $320.0 million under the term loan
facility. During the year ended December 31, 1998, we repaid $48.5 million of
the term loan facility. During the nine months ended September 30, 1999, we
repaid a further $48.5 million, resulting in a balance remaining of
$223.0 million as of September 30, 1999.

Borrowings under the existing FLAG Limited bank credit facility bear
interest at LIBOR plus 190 to 212.5 basis points. At the end of March 1998, we
entered into two interest rate swap agreements to manage our exposure to
interest rate fluctuations on the bank credit facility. Under the swap
agreements, we pay a fixed rate of 5.6% on a notional amount of $60.0 million
and a fixed rate of 5.79% on a notional amount of $100.0 million and the
counterparty pays the floating rate based on LIBOR. The swap agreements
terminate in January and July 2000 respectively, unless extended an additional
one year and six months respectively at the option of the counterparty.

We recognize the net cash amount received or paid on interest rate hedging
instruments as an adjustment to interest cost on the related debt.

On January 14, 2000, we received an indication of willingness from Dresdner
Kleinwort Benson and Barclays Capital, as co-arrangers, to modify FLAG Limited's
existing credit facility to consist of a $150 million six year term loan
facility and a $10 million revolving credit facility. Under the terms of this
proposal, these facilities would 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 FLAG Limited's credit rating, and
amortization of the remaining balance of the term loan facility would not begin
until the second half of 2001.

FLAG Limited desires to enter into such an amendment in order to (1) waive
the requirement that it use the proceeds of this offering to pay more than
$25 million of FLAG Limited's long-term indebtedness (under the existing terms
of this facility, FLAG Limited would be required to pay up to $175 million of
its long-term indebtedness with the proceeds of this offering), (2) modify its
existing covenant restrictions, thereby affording it greater operating
flexibility and (3) obtain a more favorable amortization schedule.

In connection with this amendment, FLAG Limited would be required to pay
fees and expenses to the co-arrangers totalling approximately $3.5 million. We
expect the commitments of the co-arrangers to be subject to satisfaction of
various conditions, including successful completion of business, engineering and
legal due diligence, receipt of internal credit approvals, conclusion of
definitive

33
<PAGE>
documentation, successful completion of this offering and no material adverse
changes to FLAG Limited or to the finanical markets generally.

FLAG Atlantic Limited has financed the $1.1 billion in construction costs
for the FLAG Atlantic-1 cable system through a $600 million bank financing,
$100 million in capital contributions from each of its shareholders and presales
in excess of $750 million. The financing consists of a $575 million
construction/term loan facility and a $25 million revolving credit facility.
These facilities have a term of 7.5 years. FLAG Atlantic Limited does not
anticipate that it will need to draw down the full amount available under the
bank financing.

The loans under these facilities bear interest at LIBOR plus 125 basis
points for that portion of the loans (not to exceed 50% of the outstanding
loans) which are backed by investment grade receivables and LIBOR plus 300 basis
points for the balance of the loans. Commitment fees accrue on the undrawn
balance of the loans at between 37.5 basis points and 75 basis points.

The bank facility is secured by an assignment of all of FLAG Atlantic
Limited's assets, a pledge of all of the stock in FLAG Atlantic Limited and a
commitment by each of its shareholders to contribute $100 million in equity. The
loan agreement contains customary provisions for non-recourse project financings
regarding restrictions on additional indebtedness, the payment of dividends and
other distributions, additional investments and sales of assets.

We intend to finance future operations through proceeds from this offering,
revenues generated from the sale or lease of capacity, revenues generated from
our wholesale product offerings and bundled services, revenues from billings of
standby maintenance charges and restoration services, investment income on cash
and investment balances, borrowings under our existing credit facilities and
vendor financing. FLAG Telecom or its subsidiaries may also make additional debt
or equity offerings, subject to market conditions.

We are in the preliminary stages of evaluating and developing a plan for a
new cable project under the Pacific Ocean. We would arrange the financing of
this project through a new subsidiary. As currently conceived, our equity
contribution could be funded in part from the net proceeds of this offering (or
in full if the amendments to the FLAG Limited credit facility are effected
concurrently with this offering). Funding for this project would also be
required from both project financing debt and presales by the subsidiary. Our
evaluation and development work are expected to continue through the next six
months. We cannot assure you that this project will proceed. The Company is
evaluating various other projects and may need additional funds in order to
proceed. The impact of this project, or any other projects, on our liquidity and
financing needs will depend on the scope of the project and the actual
arrangements we make for financing and ownership.

As of September 30, 1999 and December 31, 1998, we had working capital
deficits of $0.8 million and $156.7 million, respectively. The working capital
deficit was 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.

Total cash provided by operating activities and used in investing activities
as of September 30, 1999 was $62.1 million and $102.6 million, respectively. As
of September 30, 1999, cash on deposit with the collateral trustee or in escrow
had decreased to $144.2 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 nine months ended September 30, 1998 was $63.1 million and $182.4 million,
respectively. Cash on deposit with the collateral trustee or in escrow at
September 30, 1998 was $240.9 million.

34
<PAGE>
ASSETS

Our major asset is the telecommunications capacity available for sale on the
FLAG Europe-Asia cable system of $870 million and related fixed assets of
$205 million. As a result of the application of FASB Interpretation No. 43 noted
above, sales on certain parts of the FLAG Europe-Asia 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. Our other fixed assets consist
primarily of office furniture, leasehold improvements, computer equipment and
motor vehicles.

INFLATION

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

IMPACT OF YEAR 2000

Some computer systems or software used by many companies may be unable to
distinguish 21st century dates from 20th century dates. As a result computer
systems and software used by some companies in a wide variety of industries will
produce some erroneous results or fail unless they have been modified or
upgraded to process date information correctly. Prior to December 31, 1999, we
conducted an inventory and issue assessment of the Year 2000 issue for our
computer systems, communications equipment and other potentially date-sensitive
equipment to identify the systems and equipment, if any, that could be affected
by the Year 2000 issue. We obtained certificates of Year 2000 compliance from
our major suppliers for the equipment used in our systems. The live FLAG
Europe-Asia cable system certification was achieved in the third quarter of
1999.

As of the date of this prospectus, we have not encountered Year 2000 related
problems. We continue to monitor developments in this area. In assessing our
exposure to Year 2000 issues, we believe our biggest risks lie with our landing
parties, customers and major suppliers. If these landing parties, customers or
major suppliers experience Year 2000 related problems, we could experience
unanticipated expenses and delays, including delays in our ability to conduct
normal business operations and sell our products and services. We believe,
however, that in the most likely worst case scenario, the effects of Year 2000
issues on our operations would be brief and small relative to our overall
operations. Our costs to date associated with the Year 2000 issue have not
exceeded $1 million, which we have paid out of internally generated funds. If
our landing parties, customers or major suppliers experience Year 2000 related
problems, we will put in place our contingency plan to address operations and
financial disruptions to FLAG Telecom which could be caused by their
non-compliance. This plan includes the following components:

- An increase in staffing at the FLAG Telecom network operations centers;

- Requesting that our landing parties staff the landing stations; and

- Having a task force ready to support both the FLAG Telecom network
operations centers and our landing parties in the landing stations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

CURRENCY RISK. We do not believe that we are 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 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 and local operating expenses of our subsidiary companies
are payable in currencies other than U.S. dollars. Management believes that
these exposures are not material to our financial position. Whenever deemed
appropriate, we may hedge our exposure to foreign currency movements.

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

LONG-TERM DEBT AS OF SEPTEMBER 30, 1999

<TABLE>
<CAPTION>
PRINCIPAL
PRINCIPAL AMOUNT FAIR VALUE FLAG OPTION
TYPE OF INSTRUMENT PAYMENTS DUE MATURITY DATE INTEREST RATE ($, MILLION) ($, MILLION) TO REDEEM
- ------------------ ------------- ------------- ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Senior Notes......... Semi- January Fixed 8 1/4% 430.0 375.2 Any time after
annually 2008 January 2003
FLAG Limited Credit
Facility........... Quarterly January Floating 223.0 223.0 At any time
2005 three-month
LIBOR + 190
to 212.5
basis points
</TABLE>

INTEREST RATE SWAPS AS OF SEPTEMBER 30, 1999

<TABLE>
<CAPTION>
NOTIONAL COUNTER-PARTY'S
RATE AMOUNT FAIR VALUE OPTION TO
TYPE OF INSTRUMENT PAYMENTS DUE MATURITY DATE RATE PAYABLE RECEIVABLE ($, MILLION) ($, MILLION) EXTEND UNTIL
- ------------------ ------------- ------------- ------------ ---------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pay fixed, receive
floating........... Quarterly January 2000 5.6% three- 60.0 0.1 January 2001
month
LIBOR
Pay fixed, receive
floating........... Quarterly July 2000 5.79% three- 100.0 0.0 January 2001
month
LIBOR
</TABLE>

The three-month LIBOR rate at September 30, 1999 was 6.08%.

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.
To the extent that we enter into contracts in the future that will satisfy the
requirements for sales type lease accounting, we will continue to recognize
revenues without deferral.

The interpretation and application of FASB Interpretation No. 43 and also
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 the 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.

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<PAGE>
BUSINESS

GENERAL

We are a global carriers' carrier that develops and offers a broad range of
innovative telecommunications products and services to licensed international
carriers, Internet service providers and other telecommunications companies. Our
network, the FLAG Telecom network, is currently comprised of (1) the FLAG
Europe-Asia cable system, which is the world's longest independent,
privately-owned digital fiberoptic undersea cable system, (2) the FLAG
Atlantic-1 cable system, which we are currently constructing and, when
completed, will connect London and Paris to New York and (3) terrestrial
connections between our landing stations in the United Kingdom and Spain to the
city centers of London and Madrid and intra-European connections from London to
Paris, Brussels, Frankfurt, Amsterdam, Berlin, Zurich, Milan and several other
major European metropolitan areas, which we have acquired the right to obtain
through contractual arrangements with other facilities-based bandwidth capacity
providers. We have an established customer base of approximately 90 customers,
many of which are the world's leading telecommunications and Internet companies.
Our customers include 17 of the top 20 international carriers based on traffic
volume which, together, accounted for approximately 48% of our sales to date. We
believe we have succeeded in attracting this customer base primarily as the
result of the diversity, flexibility and high quality of our product and service
offerings.

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 complete. We placed the FLAG Europe-Asia cable system in
commercial service on November 22, 1997 with an initial group of 62 customers.

FLAG Atlantic Limited has contracted with Alcatel Submarine Networks for the
construction of the subsea portion of a new 12,000 kilometer trans-Atlantic
digital fiberoptic cable system called FLAG Atlantic-1. The FLAG Atlantic-1
cable system will use a six fiber pair configuration with 10 gigabit per second
technology and up to a maximum of 40 wavelengths of light per fiber. The FLAG
Atlantic-1 cable system is designed to have an initial fully redundant capacity
of at least 160 gigabits per second, with potential for future upgrade to 2.4
terabits of fully redundant capacity, more than 15 times the maximum capacity of
the most advanced cable in service on the Atlantic route today. By "redundant
capacity" we mean that there will be two cables, each with the indicated
capacity configured as a self-healing ring. We have designed FLAG Atlantic-1 so
that if one of the cables fails, we can re-route traffic to the other cable in
order to avoid any service failure. One cable will span from Porthcurno in the
United Kingdom to the north shore of Long Island, New York, and the other cable
will be routed from northern France to the south shore of Long Island. The
system's European landing points will be connected to city centers in London and
Paris. The European city centers will be connected to one another via a fiber
ring including two English Channel crossings. The landing points in Long Island
will connect to two telecommunication centers in New York City, which will also
connect to each other via a fiber ring. The system's design is intended to
permit seamless interconnection with the FLAG Europe-Asia cable system (via the
landing station in Porthcurno) and with a range of existing European
city-to-city networks in London and Paris. The FLAG Atlantic-1 cable system will
use company owned landing stations and city-center connection points. Alcatel
Submarine Networks has contracted to

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deliver the first loop of the subsea portion of FLAG Atlantic-1 in operational
service by March 31, 2001 and to complete the full loop system by June 30, 2001.
We expect FLAG Atlantic-1's initial capacity of at least 160 gigabits to cost
approximately $1.1 billion to complete. We are constructing FLAG Atlantic-1
under a 50/50 joint venture between FLAG Atlantic Holdings Limited, our
subsidiary, and GTS TransAtlantic Holdings Limited, a subsidiary of Global
Telesystems Group, Inc.

We intend to extend the reach of the FLAG Telecom network. Where
economically feasible, we expect to extend our network to additional countries
by developing new cable systems, building extensions from our existing cable
systems or by building additional terrestrial capacity. Where rapid access to a
market is required or where it is not economically feasible to expand our
network on our own, we may enter into arrangements with third parties to develop
network extensions or to acquire rights to use their existing networks. We may
also consider acquiring companies with networks that complement our own. We are
in the preliminary stages of evaluating and developing a plan for a new
trans-Pacific cable project that would link the telecommunications markets of
the United States and Japan. Our evaluation and development work are expected to
continue through the next few months. We cannot assure you, however, that we
will determine to pursue the construction of a trans-Pacific cable system.

We maintain the FLAG Telecom network through our network operations centers
in Fujairah, U.A.E. and a location near Heathrow, United Kingdom. These
operations centers provide for system-wide surveillance, maintenance and circuit
activation 24 hours a day, 365 days per year.

We are developing an extensive range of innovative products and services
which will use a state-of-the-art Internet Protocol-based network infrastructure
and are designed to meet the needs of a wide range of licensed international
carriers, Internet service providers and other telecommunications companies. Our
product and service offerings consist of four principal groups:

- Traditional Carrier Services. Our traditional carrier service offerings
include "lifetime of system" right-of-use products, with which operators
have traditionally built their networks, and services designed to assist
carriers in managing their network capacity needs in a flexible way, such
as through our global portability program which permits carriers to move
purchased bandwidth around the FLAG Europe-Asia cable system on an as
needed basis.

- FLAG Atlantic-1 Services. Our FLAG Atlantic-1 services include packages
structured to provide staged delivery of capacity over a period of several
years; optical wavelength services, which are designed to support the next
generation of IP networks by eliminating the need to route traffic through
slower intermediate protocol layers and switches; and fiber pair services,
which are designed to meet the needs of major global carriers that require
substantial amounts of bandwidth at low unit costs. Because the FLAG
Atlantic-1 cable system is still under construction, we are selling the
FLAG Atlantic-1 services on a future delivery basis.

- Wholesale Services. Our wholesale service offerings will include managed
bandwidth services through which customers can lease international
connectivity for one, three or five year terms on a city-to-city or
customer site-to-customer site basis; IP point-to-point services designed
for private use by customers running such applications as voice-over-IP
services; and IP transit services which provide a connection to the
Internet. We recently introduced our first wholesale service, a managed
bandwidth service on the London-to-Madrid route. We expect to extend these
service offerings to other service routes during the next 12 to
18 months.

- Bundled Services. Our bundled services are designed to maximize the
combined benefits of the FLAG Europe-Asia cable system and the FLAG
Atlantic-1 cable system by offering services that combine the two systems
and allow us to package our own network capacity with that of other
providers to extend our network reach. One of our initial bundled products
is "Middle East Direct" which will provide direct connectivity from Middle
Eastern markets to the United States. We have also introduced European
leased capacity services which extend our connectivity into

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key European cities. We are actively evaluating opportunities to add
additional services to our wholesale and bundled service offerings.

OUR MARKET OPPORTUNITY

We developed and are enhancing the FLAG Telecom network and our 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 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 licensed international

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telecommunications operators worldwide, representing a 184% increase since July
1995. In addition, further telecom privatization is expected 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 the FLAG Telecom
network, 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.

OUR BUSINESS STRATEGY

Our goal is to establish FLAG Telecom as the leading global carriers'
carrier by offering a wide range of cost-effective, capacity use options and
wholesale products and services across our own global network. The principal
elements of our business strategy to achieve these objectives include:

PURSUING A FLEXIBLE APPROACH TO DEVELOPING OUR NETWORK. We have adopted a
flexible approach to the development and expansion of the FLAG Telecom network.
We developed the FLAG Europe-Asia cable system independently, and have joined
with GTS TransAtlantic to construct the FLAG Atlantic-1 cable system. We have
also established alliances with other facilities-based bandwidth capacity
providers that provide us with intra-European connectivity to many of the
largest cities in Europe. We expect that the strong regional ties of our
marketing and sales team will greatly enhance our ability to identify
appropriate opportunities for, and to enter into, other such strategic
alliances. We believe that this flexible approach allows us to benefit from the
strengths of our partners, while also reducing the capital expenditures required
to develop the leading global carriers' carrier network. It also increases the
speed with which we can add new destinations to our network. In the future, we
intend to remain flexible as we seek additional opportunities to expand our
network. We will consider further opportunities for the development of
infrastructure ourselves, for the lease or acquisition of existing
infrastructure from third parties and for the provision of additional services.
We may also consider the acquisition of other companies with networks
complementary to our own. We believe that our approach will enable us to

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<PAGE>
expand our network more rapidly than if we were to adopt a build-only strategy,
and to focus on increasing the types and quality of services we offer.

- BUILDING-OUT OUR OWN INFRASTRUCTURE WHEN ECONOMICALLY ATTRACTIVE. As part
of our network expansion strategy, we intend to leverage our experience
in constructing the FLAG Europe-Asia cable system on time and within
budget to build out our network infrastructure to reach as many of the
world's major business destinations as possible when economically
advantageous opportunities exist to do so. We believe owning network
infrastructure offers significant competitive advantages in the global
carriers' carrier market because it (1) secures end-to-end control of
both capacity and cost structure and (2) provides access to low unit
costs. Through our FLAG Europe-Asia cable system, which is the largest
independent privately-owned digital fiberoptic undersea cable system in
the world with approximately 28,000 kilometers of operational fiber, we
have 16 operational landings in 13 countries. Upon completion of our
12,000 kilometer FLAG Atlantic-1 cable system, we will be able to offer
highly reliable, low unit cost city-to-city links between London and
Paris and New York. In 1999, we added two new landing stations, in Saudi
Arabia and Jordan, to our FLAG Telecom network. We also intend to add
additional countries to the FLAG Telecom network over time.

- OFFERING CITY-TO-CITY CONNECTIVITY. We will pursue multiple approaches to
obtaining city-to-city connectivity to increase the attractiveness of the
FLAG Telecom network and to meet increasing customer demand for
connectivity into the cities our customers and prospective customers
serve. We expect to acquire and package terrestrial capacity we obtain
from third parties. We intend to acquire dark fiber capacity on cables
laid by third parties. We also intend to build our own terrestrial
networks in key markets as they deregulate and when cost-effective
opportunities exist. We have designed the FLAG Atlantic-1 cable system
with a city-to-city architecture using terrestrial capacity which FLAG
Atlantic Limited will own and operate. In connection with our
introduction of managed bandwidth services on our London-to-Madrid route,
we have entered into arrangements to lease terrestrial capacity in the
United Kingdom and Spain. We also have entered into collaborative
arrangements with facilities-based managed bandwidth capacity providers
pursuant to which we have acquired access to intra-European capacity and
connectivity. Through this combined approach, we expect to be able to
provide our customers with international city-to-city connectivity
through the FLAG Telecom network at prices significantly lower than if
such customers had attempted to gain connectivity by separately
purchasing required terrestrial capacity.

PROVIDING A DIVERSE SET OF WHOLESALE AND BUNDLED PRODUCTS AND SERVICES TO
MEET THE NEEDS OF OUR CUSTOMERS. We intend to capitalize on the expanding
customer base for telecommunications services resulting from deregulation and
technological advances. We have developed and intend to introduce a diverse set
of traditional carrier, wholesale and bundled products and services designed to
meet the varying needs of a wide range of established and emerging
telecommunications carriers and Internet service providers. Our traditional
carrier service offerings include "lifetime of system" right-of-use products,
with which operators have traditionally built their networks, and services
designed to assist carriers in managing their network capacity needs in a
flexible way, such as through our global portability program which permits
carriers to move purchased bandwidth around the FLAG Europe-Asia cable system on
an as needed basis. We are offering purchasers of capacity on the FLAG
Atlantic-1 cable system a range of staged capacity delivery options and optical
wavelength services. In the area of wholesale services, we initially will offer
our customers managed bandwidth services which will permit them to lease
international connectivity for one, three or five year terms on a fully
redundant, point-to-point basis. This connectivity can be offered either
city-to-city, between our existing points of presence, or from customer
site-to-customer site. We currently offer these services on our London-to-Madrid
route and expect to extend these service offerings to other service routes
during the next 12 to 18 months. We will also offer point-to-point IP services
using high-speed routers and IP transit services to provide a connection to the
Internet. As part of our bundled service offerings, we

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<PAGE>
expect to bundle capacity between the FLAG Europe-Asia cable system and the FLAG
Atlantic-1 cable system to provide, for example, connections between the Middle
East and the United States. We also intend to continue to evaluate opportunities
to develop additional value added services within our wholesale product and
service offerings.

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

EMPLOYING A FLEXIBLE AND COMPREHENSIVE FINANCING PLAN. We intend to
continue to follow the flexible and successful approach to financing our
infrastructure extension and product development that we have employed in
connection with the FLAG Europe-Asia cable system and the FLAG Atlantic-1 cable
system. We financed the construction of the FLAG Europe-Asia cable system on a
project finance basis through borrowings and equity contributions. We also are
financing the construction of the FLAG Atlantic-1 cable system on a project
finance basis, in collaboration with our joint venture partner, through
borrowings under FLAG Atlantic Limited's existing credit facility, equity
contributions to be made by us and our joint venture partner and advance
capacity sales, in excess of $750 million of which have already been committed.
We expect that a significant portion of our wholesale product development
initiatives will be vendor financed. We anticipate that other extensions of our
infrastructure will be financed on a project finance basis and we may partner
with regional service providers in connection with some of these projects.

OUR PRODUCTS AND SERVICES

We offer a variety of traditional telecommunications capacity products and
services to our existing 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.

TRADITIONAL CARRIER SERVICES. Through the FLAG Europe-Asia cable system, 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. Once FLAG Atlantic-1 begins
commercial operations, our customers will also be able to connect to the points
of presence which FLAG Atlantic-1 is scheduled to maintain in New York, London
and Paris. We have already begun selling capacity on the FLAG Atlantic-1 cable
system, with service expected to commence in the first quarter of 2001. If a
customer requires connectivity between any of our landing points (or points of
presence) and a market not currently on the FLAG Europe-Asia cable system, we
can often arrange connectivity by bundling our network capacity with other
systems. We recently entered into an agreement with a facilities-based bandwidth
capacity provider that allows our customers to connect to city-center locations
in London, Paris, Brussels, Frankfurt, Amsterdam, Berlin, Zurich, Milan and
several other major European metropolitan areas.

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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 in a flexible
way. 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.

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.

FLAG ATLANTIC-1 SERVICES. With an upgradeable capacity of up to 2.4
terabits on a fully redundant basis, the FLAG Atlantic-1 cable system is
designed to have the highest maximum capacity of any transoceanic system ever
constructed. The range of products offered on the FLAG Atlantic-1 cable system
is intended to take advantage of this high capacity. We offer packages of
circuits with delivery staged over time; this allows our customers' capacity to
grow in time with anticipated demand growth. We also offer optical wavelength
services which are designed to support the trend in Internet architecture
towards connecting traffic transmitted on one fiberoptic system to another
fiberoptic system through high speed routers directly over fiber (which is
sometimes referred to as IP over DWDM). This eliminates the need to route the
traffic through slower intermediate protocol layers and switches. This product
is designed to appeal to top tier Internet service providers, as well as
established carriers. We believe that the FLAG Atlantic-1 cable system will be
the first submarine cable network in the world to offer optical wavelength
services. We are also marketing, and have sold, fiber pair services to major
global carriers that seek substantial amounts of bandwidth capacity at low unit
costs. By acquiring all of the capacity on a fiber pair, a customer can obtain
up to 800 gigabits per second (structured as 2 X 400 gigabits per second) of
capacity.

WHOLESALE SERVICES. We have designed our wholesale services with a focus on
the needs of resellers, Internet service providers, systems integrators and
emerging carriers. Our goal is to develop IP capabilities that allow
connectivity on a city-to-city basis. Presently, we are providing managed
bandwidth services between London and Madrid. We intend to provide these
services, as well as IP services between additional major cities (including
Tokyo and New York), over the next 12 to 18 months. Our managed bandwidth
services offer our customers fully protected, point-to-point connectivity
between our own city-center points of presence or from customer site-to-customer
site. We offer service level guarantees as a part of this product. Our IP
point-to-point services are similar to the managed bandwidth services, except
that we will provide the interface through our own high-speed routers. This
product is designed for use by customers that use voice-over-IP services, which
require service quality that is higher than that which typically is possible
over the Internet. Our IP transit services provide high speed connections to the
Internet. We are also evaluating opportunities to launch additional wholesale
services in the next 12 to 24 months. Among the possible services we are
considering is a voice-over-IP service.

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BUNDLED SERVICES. Our bundled services are designed to maximize the
combined benefits of the FLAG Europe-Asia cable system and the FLAG Atlantic-1
cable system by offering services that combine the two systems and allow us to
package our own network capacity with that of other providers to extend our
network reach. One of our initial bundled products is "Middle East Direct" which
will provide direct connectivity from Middle Eastern markets to the United
States. We have also introduced European leased capacity which extends our
connectivity into key European cities.

We offer transmission capacity on the various portions of the FLAG Telecom
network in the units listed below:

<TABLE>
<CAPTION>
AVAILABILITY
TRANSMISSION -----------------------------------------------------------------------------
PRODUCT SPEED EUROPE-ASIA CABLE EUROPEAN TERRESTRIAL CONNECTIONS FLAG ATLANTIC-1 CABLE*
- ------- ------------ ----------------- -------------------------------- ----------------------
<S> <C> <C> <C> <C>
E1 2 Mbps X X
DS3 45 Mbps X X
STM-1 155 Mbps X X X
STM-4 620 Mbps X X X
STM-16 2.5 Gbps X
STM-64 10 Gbps X
Optical wavelength 10 Gbps X
Fiber Pair 10-400 Gbps X
</TABLE>

(*) Currently available for future delivery only.

OUR 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
network 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 have established a global organization with coverage in most
of the world's largest telecommunications markets. We have regional sales and
customer support offices in the Americas (New York), Europe (London), the Middle
East (United Arab Emirates) and Asia/Pacific (Hong Kong) and local sales and
customer support offices in Spain, India, China and Japan. 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 Telecom network, 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 predictability in 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

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long haul circuits at various intermediate points on our network. 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 system and have built similar features into the design of our
FLAG Atlantic-1 cable system. 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 the FLAG Atlantic-1 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 24-hour basis through the FLAG Telecom network 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 Telecom network 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 and those of GTS Transatlantic, our joint venture partner in
the FLAG Atlantic-1 cable system, which will co-market products and services for
the FLAG Atlantic-1 cable system, 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.

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THE FLAG TELECOM NETWORK

We have adopted a flexible approach to the development and expansion of the
FLAG Telecom network. We developed the FLAG Europe-Asia cable system
independently and have joined with GTS TransAtlantic to construct the FLAG
Atlantic-1 cable system. We have also established alliances with other
facilities-based bandwidth capacity providers that provide us with
intra-European connectivity to many of the largest cities in Europe. We believe
that our approach allows us to benefit from the strengths of our partners, while
also reducing the capital expenditures required to develop the leading global
carriers' carrier network. In the future, we intend to remain flexible as we
seek additional opportunities to expand our network. Our present plans call for
the establishment of additional points of presence in major metropolitan areas,
as well as the addition of IP network capabilities that will allow us to offer
high value-added services. We are in the preliminary stages of evaluating and
developing a plan for a new trans-Pacific cable project that would link the
telecommunications markets of the United States and Japan. Our evaluation and
development work are expected to continue through the next few months. We cannot
assure you, however, that we will determine to pursue the construction of a
trans-Pacific cable system. We will consider further opportunities for the
development of infrastructure ourselves, for the lease or acquisition of
existing infrastructure from third parties and for the provision of additional
services. We believe that our flexible approach will significantly facilitate
our efforts to expand our existing network into the leading global private
carriers' carrier network. In contrast to some of our competitors which are
attempting to develop their global networks exclusively on an independent basis,
we believe that our approach will enable us to expand our network more rapidly
and to focus on increasing the types and quality of services we offer.

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 FLAG Limited, 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 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.

46
<PAGE>
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:

<TABLE>
<CAPTION>
COUNTRY LANDING PARTY
- ------- -------------
<S> <C>
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 FLAG Limited.
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 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

47
<PAGE>
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. At
September 30, 1999, there were 75 signatories to the construction and
maintenance agreement.

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 Telecom network operations center in Fujairah, U.A.E.,
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 Telecom network 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 Telecom network operations center, which is an innovation
in system maintenance of undersea cables, and the hardware and software
installed by FLAG Telecom provide a higher standard of service and continuity
than can be met by other international cable systems. Given the importance of
redundancy within the telecommunications industry, we established a backup FLAG
Telecom network 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 have arranged with Sea MeWe3 (SMW3) for restoration with
respect to the link from Italy to 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,

48
<PAGE>
and the customers accepting restoration capacity must share and reimburse us for
the associated charges.

THE FLAG ATLANTIC-1 JOINT VENTURE

We are developing the FLAG Atlantic-1 cable system under a 50/50 joint
venture between GTS TransAtlantic and FLAG Atlantic Holdings. GTS TransAtlantic
is a subsidiary of Global Telesystems Group, Inc. FLAG Atlantic Limited will
not have its own staff for project management in the development stage or for
marketing and operations after completion. Instead, the joint venture is
designed to capitalize on each of its shareholders' strengths by dividing the
responsibility for managing FLAG Atlantic Limited's activities between FLAG
Atlantic Holdings and GTS TransAtlantic.

RESPONSIBILITIES OF FLAG ATLANTIC HOLDINGS. Under the Further Restated
Shareholders Agreement between FLAG Atlantic Holdings and GTS TransAtlantic,
FLAG Atlantic Holdings is responsible for managing the construction and
implementation of the subsea portion of the FLAG Atlantic-1 cable system,
arranging project financing for the project, providing accounting and
administrative services and, jointly with GTS TransAtlantic, marketing FLAG
Atlantic-1's capacity. Following construction, FLAG Atlantic Holdings will also
be responsible for monitoring, maintaining and operating the FLAG Atlantic-1
cable system through our FLAG Telecom network operations center at a location
near Heathrow, United Kingdom. In carrying out these responsibilities, FLAG
Atlantic Holdings successfully arranged for the $600 million financing under the
FLAG Atlantic Limited credit agreement. FLAG Atlantic Holdings was responsible
for negotiating the construction contract for the subsea portion of the FLAG
Atlantic-1 cable system with Alcatel Submarine Networks. Alcatel Submarine
Networks has undertaken to deliver the first loop of the subsea portion of the
project in operational service by no later than March 31, 2001. Failure to
deliver the system by that time may trigger liquidated damages, the payment of
which is to be supported by a bank letter of credit and a performance guarantee
provided by Alcatel S.A., Alcatel Submarine Networks' parent company.

RESPONSIBILITIES OF GTS TRANSATLANTIC. Under the Further Restated
Shareholders Agreement, GTS TransAtlantic is responsible for managing the
construction (or acquisition), installation, operation and maintenance of the
majority of the terrestrial element of the FLAG Atlantic-1 cable system. GTS
TransAtlantic will provide a fully operational back-up network operations center
in addition to its existing facility in Hoeilaart, Belgium. GTS TransAtlantic is
also responsible, jointly with FLAG Atlantic Holdings, for marketing FLAG
Atlantic-1's capacity.

MANAGEMENT OF THE JOINT VENTURE. Control of FLAG Atlantic Limited is evenly
shared between GTS TransAtlantic and FLAG Atlantic Holdings. FLAG Atlantic
Limited is governed by a board of directors consisting of 14 directors, half of
whom are selected by each shareholder. Except as provided in the following
sentences, all board decisions must be supported by a majority of FLAG Atlantic
Limited's directors who are present at a board meeting, including at least two
directors nominated by each shareholder. In the case of litigation between FLAG
Atlantic Limited and a shareholder, however, the directors nominated by the
affected shareholder do not have voting rights. In addition, the Further
Restated Shareholders Agreement provides that certain decisions, such as new
share issues, capital calls, changes to the business plan, and approvals of new
shareholders, must be approved directly by both shareholders. As a result of the
foregoing, each shareholder maintains significant influence over FLAG Atlantic
Limited's operations, activities and strategy, since virtually all actions by
FLAG Atlantic Limited require the endorsement of both shareholders directly or,
where no shareholder approval is required, by at least two directors nominated
by each shareholder. Under the Further Restated Shareholders Agreement,
disagreements concerning operational matters (including the selection of
suppliers) and pricing issues may be referred to independent experts for binding
determination, while deadlocks concerning other matters may be referred to
binding arbitration under the rules of the International Chamber of Commerce.

49
<PAGE>
TRANSFER OF SHARES. Under the Further Restated Shareholders Agreement, the
transfer of shares to unaffiliated parties is restricted. In such instances, the
non-transferring shareholder enjoys a right of first refusal to acquire the
other shareholder's shares in FLAG Atlantic Limited.

FINANCING. As of December 31, 1999, FLAG Atlantic Limited had incurred
$77 million of construction related expenses which have been funded with
$15 million of proceeds from pre-sales and $62 million of construction loans
provided under a credit facility arranged by Barclays Bank plc under a credit
agreement among FLAG Atlantic Limited, Barclays, as administrative agent, and
the lenders party thereto. An additional $513 million of construction loans and
$25 million of revolving loans remain available to be drawn under this credit
facility. The construction loans convert to term loans once the FLAG Atlantic-1
cable system is ready for service (and certain other conditions are satisfied),
with quarterly principal installments and a final maturity date of April 30,
2007. The revolving credit facility is available to be drawn through
April 2006, and must be repaid by April 30, 2007. This senior debt has been
provided on a project finance basis, with recourse limited to a pledge of the
shares in FLAG Atlantic Limited, a security interest over all of the contract
rights and other assets of FLAG Atlantic Limited and its subsidiaries, a
commitment by each of FLAG Atlantic Holdings and GTS TransAtlantic to provide a
$100 million capital contribution no later than October 31, 2000 (which, in the
case of FLAG Atlantic Holdings, will be financed with a portion of the proceeds
from this offering which will be segregated for these purposes), and a
commitment by each of FLAG Atlantic Holdings and GTS TransAtlantic to purchase
(or arrange for the purchase of) capacity from FLAG Atlantic-1, the proceeds of
which are to be used to fund a portion of FLAG Atlantic Limited's construction
costs. FLAG Atlantic Holdings has fulfilled this commitment by arranging for the
purchase of over $100 million in capacity by various entities. GTS TransAtlantic
has also agreed to purchase capacity from FLAG Atlantic Limited. In the event
that the FLAG Atlantic-1 cable system does not go into service by December 31,
2001, some of FLAG Atlantic Limited's customers may cancel their existing
contracts for the purchase of capacity.

CABLE DESIGN. The FLAG Atlantic-1 cable system will use a six fiber pair
configuration using multiple wavelengths, each with a capacity of 10 gigabits
per second up to a maximum of 40 wavelengths per fiber. The FLAG Atlantic-1
cable system is designed to have an initial fully redundant capacity of at least
160 gigabits per second, with potential for future upgrade to 2.4 terabits of
redundant capacity, more than 15 times the maximum capacity of the most advanced
cable in service on the Atlantic route today. The system will consist of a
self-healing ring comprised of two trans-Atlantic cables, one spanning from
Porthcurno in the United Kingdom to the north shore of Long Island, New York,
the other from northern France to the south shore of Long Island. The system's
European landing points will be connected to city centers in London and Paris.
The European city centers will be connected to one another via a fiber ring
including two English Channel crossings. The landing points in Long Island will
connect to two telecommunication centers in New York City, which will connect to
each other via a fiber ring. The system's design is intended to permit seamless
interconnection with the FLAG Europe-Asia cable system (via the landing station
in Porthcurno) and with other existing European city-to-city networks in London
and Paris. The FLAG Atlantic-1 cable system will use company owned landing
stations and city center connection points. Alcatel Submarine Networks has
contracted to complete fully the cable system by June 30, 2001. The FLAG
Atlantic-1 cable system will be controlled by the FLAG Telecom network
operations center in the United Kingdom which will be responsible for
system-wide surveillance, proactive maintenance, coordination of maintenance and
repair operations, circuit activation, assignment and configuration of the
transmission equipment and general network administration such as legal and
billing. The network operations centers of GTS TransAtlantic located in
Hoeilaart and Brussels will provide back-up maintenance and repair services to
the FLAG Atlantic-1 cable system and will manage the terrestrial DWDM equipment
for the system.

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<PAGE>
TERRESTRIAL CONNECTIONS

In connection with our introduction of managed bandwidth services on our
London-to-Madrid route, we have entered into arrangements to lease terrestrial
capacity in the United Kingdom and Spain. In order to extend the reach of the
FLAG Telecom network, we have entered into arrangements with other
telecommunications services providers to bundle our network capacity with their
systems. We recently entered into an agreement with a facilities-based bandwidth
capacity provider that allows our customers to connect to city-center locations
in London, Paris, Brussels, Frankfurt, Amsterdam, Berlin, Zurich, Milan and
several other major European metropolitan areas.

MARKETING AND SALES

We market our network capacity and telecommunications products and services
globally through a sales force of 29 people located in the following offices:

- regional sales offices in the United States (New York), the United Kingdom
(London), United Arab Emirates (Dubai) and China (Hong Kong);

- local sales offices in Spain (Madrid), India (Delhi), China (Beijing) and
Japan (Tokyo); and

- representatives in Belgium, Greece, Hungary, Italy and Singapore.

Each of our sales offices is led by a team of senior sales representatives
or advisors who are based locally in the region. Our marketing and sales team
has extensive experience in the telecommunications industry and the carriers'
carrier sector and has very strong ties to the regions in which our offices are
located. Prior to joining us, members of our marketing and sales team held key
management positions within organizations such as Global One, Sprint
International, Ameritech International, IBM Corporation, MCI International
(Japan) Co., Ltd., Telstra, Palestine Telecom Corporation (PALTEL), Emirates
Telecommunications Corporation (Etisalat), o.tel.o Communications/Vebacom,
British Telecom and Singapore Telecom. Our marketing and sales representatives
each have an average of 19 years of telecom experience.

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

We reinforce our brand visibility through a variety of marketing campaigns,
participation in key industry and user group conferences, such as the Pacific
Telecom Conference and the International Telecommunications Union global telecom
conferences, speaking engagements, press conferences, promotional campaigns and
end-user awareness programs. In addition, we intend to sponsor customer forums
on a regional and global basis to meet with customers and to have customers meet
with each other.

We are committed to an ongoing market review in order to determine the
alternative costs and structures available to carriers and other
telecommunications companies for capacity and products and services competitive
to FLAG Telecom with a view to price adjustments and incentive discounts which
will attract carriers and other telecommunications companies to the FLAG Telecom
network.

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

OUR 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 six key markets:

- global services;

- trans-Atlantic services;

- intra-European services;

- Middle Eastern services;

- Asia/Pacific regional transit services; and

- Europe-Asia long haul services.

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

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<PAGE>
Ocean. Level 3 has made investments in a trans-Pacific cable system (US-Japan)
in addition to its own facilities.

Over time, as we develop our wholesale services offerings, we expect to
compete with major global telecommunications operators such as MCI WorldCom and
British Telecom/AT&T. These companies primarily focus on offering services to
multinational corporations, although they also offer carriers' carrier services.
Such companies often participate in consortium cable projects, as well as in
private network systems, such as those we own and operate. We also expect to
face competition from carriers' carriers and incumbent regional
telecommunications providers with respect to our wholesale service offerings.

TRANS-ATLANTIC SERVICES COMPETITORS

We believe our key competitors in the trans-Atlantic services market are as
follows:

- TAT-14--This loop cable system is a consortium system cable sponsored by
British Telecom, AT&T and other incumbent telecommunications operators in
the United States and Europe. It has a maximum design capacity of 640
gigabits per second. TAT-14 provides services on a coast-to-coast basis.
It does not presently provide city-to-city services.

- LEVEL 3 COMMUNICATIONS--Level 3 Communications is building a single cable
system based on IP only technology, running at 1.28 terabits per second.
The system provides city-to-city service.

- GLOBAL CROSSING AC-1 AND AC-2--AC-1 is a loop system across the Atlantic.
AC-1 runs at 80 gigabits per second and may subsequently be upgraded to
160 gigabits per second. AC-1 is fully operational. AC-2 is a proposed
2.56 terabits per second single cable system that, due to its increased
capacity over AC-1, would only partially restore on AC-1. AC-2 is at an
early stage of development.

- HIBERNIA--This is a proposed 1.92 terabits per second system which is
sponsored by Worldwide Fiber, a subsidiary of Ledcor Industries, a
Canadian mining company. Worldwide Fiber principally offers dark fiber
connectivity on terrestrial networks on a carriers' carrier basis in the
North American markets.

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

53
<PAGE>
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.

- 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.

We will be required to obtain numerous permits in connection with the FLAG
Atlantic-1 cable system. These permits include:

US LANDING LICENSE. Under the Act Relating to the Landing and Operation of
Submarine Cables in the United States of May 27, 1921 (Cable Landing Act), all
submarine cable systems that connect to the United States must obtain a landing
license granted by the President of the United States. Presidential authority
for such licenses has been delegated to the Federal Communications Commission
(FCC). FLAG Atlantic Limited obtained its landing license to land and operate a
private fiber optic submarine cable extending between the United States and the
United Kingdom and France on October 1, 1999.

UK PUBLIC TELECOMMUNICATIONS OPERATOR LICENSE. In November 1999, FLAG
Atlantic Limited received a UK Public Telecommunications Operator License
permitting it to operate a telecommunications network in the United Kingdom.

FRENCH ARTICLE L33.1 LICENSE. FLAG Atlantic Limited must obtain this
license in order to build and operate a telecommunications network in France.
FLAG Atlantic Limited submitted an application in July 1999 and anticipates a
license being awarded by September 2000.

FLAG Atlantic Limited will be required to obtain a substantial number of
other permits, mostly relating to local permission to land at the specific
landing sites chosen and local permissions to build

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<PAGE>
those segments of FLAG Atlantic-l's terrestrial networks that cannot be obtained
on dark fiber leases. FLAG Atlantic Limited is in discussions with all the
relevant entities regarding these permits.

In addition, because we intend to offer wholesale services on a city-to-city
basis, we will be required to acquire operator and other licenses and submit
notifications in the various jurisdictions in which we intend to offer such
services.

Consistent with the cable landing license issued by the FCC, we plan to
operate the FLAG Atlantic-1 cable system on a private or non-common carrier
basis. Once the FLAG Atlantic-1 cable system becomes operational, we will be
required to pay annnual regulatory fees to the FCC based on certain
international circuits sold on the FLAG Atlantic-1 cable system. In addition, if
we offer trans-Atlantic services to or from the United States on a common
carrier basis we will be subject to additional regulatory and licensing
requirements.

As a result of the January 4, 2000 exchange by Bell Atlantic of its common
shares in FLAG Limited for our common shares, we will be deemed an affiliate of
Bell Atlantic under the Communications Act of 1934, as amended. As an affiliate
of Bell Atlantic, we may be subject to increased regulation by the FCC.

Specifically, under Section 271 of the Communications Act, neither Bell
Atlantic nor any of its affiliates may provide or market long distance
telecommunications services originating in a state (in-region state) in which
Bell Atlantic is an incumbent provider of local telephone service until the FCC
approves an application of Bell Atlantic to provide long distance services
originating in that state. Once constructed, the FLAG Atlantic-1 cable system
will carry trans-Atlantic long distance traffic that originates in New York,
which is a Bell Atlantic in-region state. Bell Atlantic has obtained the
necessary regulatory approval from the FCC to provide long distance services
originating in New York, effective as of January 3, 2000. As an affiliate of
Bell Atlantic, we will be subject to additional regulatory prohibitions on the
provision and marketing of trans-Atlantic services via the FLAG Atlantic-1 cable
system to prospective cutomers located in the in-region states for which
Bell-Atlantic has not obtained necessary regulatory approvals.

PROPERTIES

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 (10,500 square feet and 2,000 square feet for the backup
network operations center), New York City (2,000 square feet), Bangkok (900
square feet), Hong Kong (2,000 square feet), Dubai (8,500 square feet),
Fujairah, U.A.E. (5,300 square feet for the network operations center), Delhi
(220 square feet), Beijing (650 square feet) and Tokyo (50 square feet).

EMPLOYEES

At January 1, 2000, we had approximately 109 full-time employees. We intend
to hire additional personnel as we begin commercial operations of the FLAG
Atlantic-1 cable system and roll-out new wholesale product and service
offerings. None of our employees are represented by a union or covered by a
collective bargaining agreement. We believe that our relations with our
employees are good. In connection with the construction and maintenance of the
FLAG Atlantic-1 cable system, we will use third party contractors, some of whose
employees may be represented by unions or covered by collective bargaining
agreements.

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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 our financial
condition, results of operations or cash flows.

EXCHANGE CONTROLS

Under Bermuda law, there are currently no restrictions on the export or
import of capital, including foreign exchange controls, or that affect the
remittance of dividends, interest or other payments to nonresident holders of
our common shares.

SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES

We are a Bermuda company. Most of our directors and officers, and some of
the experts named in this prospectus, are not residents of the United States.
All or a substantial portion of our assets and the assets of these persons are
or may be located outside the United States. As a result, it may not be possible
for investors to effect service of process within the United States upon these
persons or to enforce against them judgments obtained in the United States
courts. We have been advised by our legal counsel in Bermuda, Appleby,
Spurling & Kempe, that there is doubt as to the enforcement in Bermuda, in
original actions or in actions for enforcement of judgments of United States
courts, of liabilities predicated upon U.S. federal securities laws (including
civil liabilities under such laws), although Bermuda courts will enforce foreign
judgments for liquidated amounts in civil matters subject to certain conditions
and exceptions.

We have expressly submitted to the jurisdiction of the U.S. federal and New
York state courts sitting in the City of New York for the purpose of any suit,
action or proceeding arising out of this offering, and we have appointed FLAG
Telecom USA Ltd. to accept service of process in any such action.

THIS PROSPECTUS HAS BEEN FILED WITH THE REGISTRAR OF COMPANIES IN BERMUDA
PURSUANT TO PART III OF THE COMPANIES ACT, 1981 OF BERMUDA AND THE BERMUDA
MONETARY AUTHORITY (BMA) HAS GIVEN ITS CONSENT TO THE ISSUE AND TRANSFER OF UP
TO 30,360,000 COMMON SHARES. IN ACCEPTING THIS PROSPECTUS FOR FILING, THE
REGISTRAR OF COMPANIES ACCEPTS NO RESPONSIBILITY FOR THE FINANCIAL SOUNDNESS OF
ANY PROPOSALS OR FOR THE CORRECTNESS OF ANY STATEMENTS MADE OR OPINIONS
EXPRESSED WITH REGARD TO THEM. APPROVALS OR PERMISSIONS RECEIVED FROM THE BMA DO
NOT CONSTITUTE A GUARANTEE BY THE BMA AS TO OUR PERFORMANCE OR OUR
CREDITWORTHINESS. AS A RESULT, IN GIVING SUCH APPROVALS OR PERMISSIONS, THE BMA
SHALL NOT BE LIABLE FOR OUR PERFORMANCE OR OUR DEFAULT OR FOR THE CORRECTNESS OF
ANY OPINIONS OR STATEMENTS EXPRESSED IN THIS PROSPECTUS.

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MANAGEMENT

The following table sets forth, as of January 1, 2000, information for each
of our directors and executive officers:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Andres Bande......................... 55 Chairman and Chief Executive Officer
Edward McCormack..................... 44 Chief Financial Officer and Director
Stuart Rubin......................... 52 General Counsel and Assistant Secretary
Michael Fitzpatrick.................. 50 Director
Abdul Latif Ghurab................... 57 Director(1)
Edward J. McQuaid.................... 44 Director Nominee(2)
Adnan Omar........................... 47 Director
Daniel Petri......................... 51 Director
Philip Seskin........................ 36 Director Nominee(2)
Umberto Silvestri.................... 67 Director
Jonathan Solomon..................... 60 Director
Dr. Lim Lek Suan..................... 50 Director(1)
Fumio Uehara......................... 49 Director(1)
Dr. Vallobh Vimolvanich.............. 58 Director
</TABLE>

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

(1) Resigned with effect from the closing of this offering.

(2) Appointment as a director will become effective upon the closing of this
offering.

At our first annual general meeting after this offering, we intend to
implement a staggered Board of Directors comprised of ten persons. At that
meeting, the term of each of our directors will expire and, at each annual
general meeting thereafter, the term of approximately one-third of our directors
will expire.

ANDRES BANDE. Mr. Bande has served as Chairman of the Board and Chief
Executive Officer since January 1998. Before joining us, Mr. Bande was the
President of Sprint International from 1996 to the beginning of 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 Telecomsult, an
international telecommunications consulting practice. Mr. Bande holds a law
degree from the University of Chile and a Master's degree in politics and
international law from Oxford University.

EDWARD MCCORMACK. Mr. McCormack has been a member of the Board since
October 1999 and has served as the Chief Financial Officer since February 1996.
Prior to that time, Mr. McCormack spent seventeen years with Bechtel, an
engineering and construction company. His final position was based in London as
Chief Financial Officer of Bechtel Europe, Africa, Middle East and South West
Asia. Prior to then, he had assignments at their San Francisco headquarters and
in Saudi Arabia. Mr. McCormack holds a Bachelor of Commerce degree from
University College in Galway, Ireland.

STUART RUBIN. Mr. Rubin has served as the General Counsel since
January 1996. Prior to joining us, Mr. Rubin spent over twenty years with the
law firm of Coudert Brothers, as a partner for the last twelve, 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.

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MICHAEL FITZPATRICK. Mr. Fitzpatrick has been a member of our Board since
January 2000. Mr. Fitzpatrick is Chairman of the Board, President and Chief
Executive Officer of E-TEK Dynamics, Inc., a fiber optic manufacturer.
Mr. Fitzpatrick was previously President and Chief Executive Officer of Pacific
Telesis Enterprises, where he had responsibilities for the exploration and
development of new emerging technology products and services and for the
following Pacific Bell subsidiaries: Yellow Pages, Payphones, Voicemail, Mobile
Services (PCS) and Video and Internet Media. Additionally, Mr. Fitzpatrick had
responsibilities for corporate marketing and advertising for all of Pacific Bell
and Pacific Telesis. Mr. Fitzpatrick joined Pacific Bell in September 1993 as
Executive Vice President. In January 1994, he became Executive Vice President,
Marketing and Sales and managed approximately 15,000 employees. Prior to joining
Pacific Bell, Mr. Fitzpatrick served as President and Chief Executive Officer of
Network Systems Corporation, a public company specializing in high speed data
communications between computers and local area networks. Mr. Fitzpatrick
currently serves as a director of NorthPoint Communications Group, Inc., a
national provider of local data network services and Adva Optical Networking, a
worldwide optical networking solutions provider located in Germany.

ABDUL LATIF GHURAB. Mr. Ghurab was a director of FLAG Limited from April
1994 until the corporate restructuring in February 1999 and has since been a
member of our Board. Mr. Ghurab is also the shareholder representative for
Dallah Albaraka Group. Mr. Ghurab is the Chairman of the South East Asia Holding
Company (Singapore) and the Transport Sector Board of Dallah Albaraka. He is
involved in various business sectors in the Banking & Investment Sector.
Mr. Ghurab is the Chairman of the Board of Directors of Albaraka Turkish Finance
House "Turkey" and Board Member of Albaraka Investment & Development Company,
Saudi Arabia and Chairman of BASAFOJAGU Co. He is involved in the Transport
Sector as the Chairman of Al-Jazirah Transport Holding Company "Saudi Arabia"
and Chairman of the Board of Directors of Dallah Haj Transport Co.--Saudi
Arabia. In the Insurance Sector he is the Managing Director of Islamic Arab
Insurance Company--IAIC--(E.C.U.) and Director General Islamic Insurance &
Reinsurance Co. (IIRCO), Saudi Arabia and a Board Member of B.E.S.T. Reinsurance
Co. Mr. Ghurab received a Bachelor of Science in Geology and a Master of Arts
degree in Geography from Saint Louis University.

EDWARD MCQUAID. Mr. McQuaid will become our director upon the closing of
this offering. Mr. McQuaid is a Bell Atlantic Corporation director nominee.
Mr. McQuaid is an Executive Director in charge of financial planning and
analysis for Bell Atlantic Corporation. Mr. McQuaid is responsible for
establishing Bell Atlantic Corporation's portfolio financial targets and
coordinating the development of integrated five-year business plans. He also
supervises the International Wireline Controller and ensures compliance with all
regulatory rules related to transactions between Bell Atlantic Corporation
subsidiaries. Since joining Bell Atlantic Corporation in July 1977, Mr. McQuaid
has held various positions of increasing responsibility in a variety of
financial disciplines. Mr. McQuaid is a Certified Management Accountant and has
over 22 years of financial experience in the telecommunications industry.

ADNAN OMAR. Mr. Omar was a director of FLAG Limited from April 1994 until
the corporate restructuring in February 1999 and has since been a member of our
Board. Mr. Omar is the Executive Director of Al-Jazirah Holding Company, which
is fully owned by Dallah Albaraka Group. Mr. Omar also serves on the board of
directors of BASAFOJAGU Co., Al-Sham Shipping Co. Syria, Dallah Transport Co.
Saudi Arabia, Dallah Pilgrimage Transport Co., and Dallah Lebanon Tourism &
Transport Co. Prior to joining Dallah Albaraka Group, Mr. Omar spent over
12 years in construction management and planning of large infrastructure
projects. Mr. Omar received a Bachelor of Science degree in Civil Engineering
from Southampton University in the United Kingdom.

DANIEL PETRI. Mr. Petri was FLAG Limited's acting Chairman and Chief
Executive Officer from June 1997 to January 1998. Mr. Petri was a director of
FLAG Limited from September 1995 until the corporate restructuring in February
1999 and has since been a member of our Board. Mr. Petri is a

58
<PAGE>
shareholder representative for Bell Atlantic. Mr. Petri is President of Bell
Atlantic International Telecommunications and of Bell Atlantic Network Systems.
Over the past 25 years with NYNEX and most recently Bell Atlantic, Mr. Petri has
held many key positions including Vice President and General Manager, Customer
Services, Central New York, Vice President and General Manager of Midtown
Manhattan, and Managing Director of Worldwide Operations. Mr. Petri received a
Bachelor of Science degree in Mechanical Engineering from Rutgers University and
a Master of Science degree in Management Science from Long Island University. He
has also completed management programs in General Management, Finance, and
Marketing at the Columbia University Graduate School of Business.

PHILIP SESKIN. Mr. Seskin will become our director upon the closing of this
offering. Mr. Seskin is a Bell Atlantic Corporation director nominee.
Mr. Seskin is currently the Vice President-Strategy & Corporate Development for
Bell Atlantic Corporation. He is responsible for strategic business initiatives,
as well as merger and acquisition activity worldwide. Since joining Bell
Atlantic Corporation in 1987, Mr. Seskin has been involved in numerous major
mergers, acquisitions and joint ventures, including the formation of Bell
Atlantic Nynex Mobile, Cable & Wireless Communications and the merger of Bell
Atlantic and Nynex.

UMBERTO SILVESTRI. Mr. Silvestri has been a member of the Board since
October 1999. Mr. Silvestri is Chairman of STET International Netherlands and
formerly was the Chief Executive Officer of STET and Chairman of Telecom Italia.
Mr. Silvestri also sits on the Board of Meie Assicuratrice and was previously a
member of the Board of the Italian Banking Association, Italtel, Sirti, CSELT
(Telecom Italia Group Laboratories) and was Vice Chairman of ELSAG--Elettronica
S Giorgio--Genoa.

JONATHAN SOLOMON. Mr. Solomon has been a member of the Board since October
1999. Mr. Solomon currently serves on the Boards of Millicom International
Cellular, THUS, the new name for Scottish Telecom and Societe Europeene de
Communications. Until 1997, Mr. Solomon was Executive Director, Strategy and
Corporate Business Development at Cable & Wireless plc and non-Executive
Director of Hong Kong Telecom, IDC Japan, Nakhodka and Sakhalin Telecom Russia
and Tele2 in Sweden.

DR. LIM LEK SUAN. Dr. Lim has been a member of the Board since
February 1999 and is the shareholder representative of The Asian Infrastructure
Fund. He is a director and co-head of Telecommunications Sector of Asian
Infrastructure Fund Advisers Limited. He is also a director of Bayan
Telecommunications Holdings Corporation and a Commissioner of PT Excelcomindo
Pratama. Dr. Lim has spent more than 20 years in the finance, utilities and
engineering industry. He holds a Ph.D. degree in Electrical Engineering from
Loughborough University of Technology, England and a first class honors degree
in Electrical Engineering from the University of Malaya, Malaysia.

FUMIO UEHARA. Mr. Uehara was a director of FLAG Limited from January 1998
until the corporate restructuring in February 1999 and has since been a member
of our Board. Mr. Uehara is the shareholder representative for Marubeni Telecom
Development Ltd. Mr. Uehara is President of Marubeni Telecom Development Ltd.
and also General Manager of the Telecom & Information Network Dept. of Marubeni
Corporation. Mr. Uehara has spent over 25 years in planning and management of
telecommunications infrastructure projects. Mr. Uehara received a Bachelor of
Commercial Science degree from Hitotsubashi University in Japan.

DR. VALLOBH VIMOLVANICH. Dr. Vallobh was a director of FLAG Limited from
July 1995 until the corporate restructuring in February 1999 and has since been
a member of our Board. Dr. Vallobh is the shareholder representative of K.I.N.
(Thailand) Co. Ltd. Dr. Vallobh is Chairman of Telecom Holding Co., Ltd. and
Vice Chairman of Telecom Asia Corporation PCL. Dr. Vallobh holds a Master of
Science and a Ph.D. degree in Electrical Engineering from the University of
California and a Bachelor of Engineering degree in Electrical Engineering from
Chulalongkorn University.

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<PAGE>
KEY MANAGEMENT.

LARRY BAUTISTA. Mr. Bautista has served as Vice President-Finance and
Treasurer since December 1995. Prior to joining us, Mr. Bautista spent over six
years in various finance and treasury positions at NYNEX. He structured,
negotiated and closed several financings for FLAG Telecom, including the
non-recourse debt of the FLAG Atlantic-1 cable system and the refinancing of the
FLAG Europe-Asia cable system. Mr. Bautista has an M.B.A. degree with honors
from Fordham University and a Bachelor of Science degree in Management
Engineering from Ateneo de Manila University in the Philippines.

ANDREW EVANS. Mr. Evans has served as Vice President of Strategy and
Marketing since April 1998. Mr. Evans started his career with British Telecom in
1982, subsequently becoming an Executive Engineer and leading the development of
BT's real-time network traffic management systems. In 1990, he joined
McKinsey & Company as a Senior Telecommunications Specialist. Mr. Evans holds an
MA in Engineering and Electrical Sciences with First Class Honors from the
University of Cambridge, England, and an MBA with High Distinction (Baker
Scholar) from the Harvard Business School.

PETER MARTINS DA SILVA. Mr. Martins joined us in September 1999 as Vice
President of Business Development. As Vice President of Sprint's Latin American
operations, Mr. Martins led their winning bid to acquire Brazil's second long
distance carrier license and subsequently directed the set-up of the new company
to exploit the license. Previously, as Vice President of Business Development
for Ameritech International, Mr. Martins led the Ameritech consortium's winning
bid for Belgacom, and held responsibility for Ameritech's privatization efforts
in the Czech Republic, Ireland and Portugal, as well as being involved in the
privatization of MATAV, the Hungarian PTT. Mr. Martins majored in Economics at
the University of California at Berkeley and holds an MBA in international
business from the Harvard Business School.

DR. EBERHARD PLATTFAUT. Dr. Plattfaut has served as Vice President of
Europe based in London since July 1998. Dr. Plattfaut was a director with
o.tel.o Communications/Vebacom, where he held a number of management positions
in sales, marketing and strategy. Previously he was a senior manager with
McKinsey & Company, where he was responsible for client projects in the
telecom/IT area, as well as sales, marketing and strategy projects across
industries with a focus on European franchises. Dr. Plattfaut is a Fulbright
Scholar and has studied business, mechanical engineering and computer sciences.
Dr. Plattfaut received his MBA from the University of Southern California and
his Doctorate from the University of Erlangen.

OWEN BEST. Mr. Best has served as Vice President of Asia Pacific based in
Hong Kong since June 1998. Prior to joining us, Mr. Best was Vice President of
Telstra Japan and Regional Director for Telstra Korea. He has over 17 years
experience in the telecommunications industry, working extensively in the Asia
Pacific region in various technical and operational positions with Telecom
Australia and Telecom International. Mr. Best received his Bachelor's of
Engineering (Electronics/Communications) and his MBA from the University of
Queensland.

SORAYA TARRANT. Ms. Tarrant has served as Vice President of Americas based
in New York since March 1999. Ms. Tarrant was employed by Global One where over
an 11-year period she served in several key management positions including
Director of Carrier Services Sales, Director of Global Data Services and most
recently, as Director of Global Internet Solutions. Previously, she was with
Cable & Wireless Hong Kong serving major multinational clients. Ms. Tarrant
holds a Bachelor's of Science degree in Electronic Communications from the
University of Salford in Manchester, and a postgraduate degree in
Telecommunications Systems from the University of Aston in Birmingham, U.K.

WALID IRSHAID. Mr. Irshaid has served as Vice President of Middle East
based in Dubai since July 1998. Mr. Irshaid was the Director General of
Palestine Telecom Corporation, the emerging

60
<PAGE>
telecom service provider in Palestine. Mr. Irshaid's experience in the Middle
East was acquired from his previous 17-year assignment with the Emirates
Telecommunications Corporation as Corporate Manager. Mr. Irshaid was actively
involved in the deployment and development of several major projects and key
services within the Middle Eastern region, including cellular, data, value added
services and multimedia.

DR. CHIA CHOON WEI. Dr. Chia joined us in August 1998 as Senior Advisor
(Asia Pacific) based in Singapore. He was most recently Chief Executive Officer,
International Investments of Hutchison Telecom International Limited from
April 1997 to the end of June 1998. He has 27 years telecommunication
experience, first with British Telecom and then with Singapore Telecom, where he
spent twenty-two years. In his last position there, he was Vice President,
International Network Services. Dr. Chia holds a Ph.D. in Electrical Engineering
(Control Systems), and an M.Sc. and a B.Sc. (Engineering) from Imperial College,
London University.

WILSON WANG. Mr. Wang joined us in February 1999 as our resident
representative in China. He was Senior Vice President and China General Manager
of Sprint International from June 1997 to November 1998. Prior to that, he was
Senior VP and China General Manager of Ameritech International from
October 1994 to June 1997. Mr. Wang holds a BA from National Taiwan University
and an MBA from University of Washington.

KIMIAKI UENO. Mr. Ueno joined us in July 1999 as Vice President for Japan
based in Tokyo. Before joining the Company, Mr. Ueno was Representative
Director & Chief Executive of MCI International (Japan) Co., Ltd. from 1991 to
March, 1999 and Director of Marketing/Technical Support for MCI International
(Japan) Co., Ltd. from 1988 to 1991. Prior to that, Mr. Ueno was Assistant
General Manager of General Administration of Mitsui & Co., (U.S.A.) Inc. from
1982 to 1988.

ADOLFO CASTILLA. Mr. Castilla joined us in June 1998 as our resident
representative in Spain and special advisor for Southern European Countries.
Previously, he was Sprint International's General Manager in Spain, and a member
of the Steering Committee of Lince, the third Spanish fixed license winner.
Prior to this, he was a member of the steering committee of the OPERA
consortium, and also the Airtel steering committee, a consortium he helped
create for Ameritech. Mr. Castilla has also been the General Manager of Roland
Berger in Spain, and worked for 8 years at the Telefonica Group of companies.

SAMIH KAWAR. Mr. Kawar is Vice President Construction and Operations and
joined the FLAG Europe-Asia Cable system project in 1995. Prior to joining us
and for more than 17 years, Mr. Kawar worked in development/project management
of various international projects and management control systems. Mr. Kawar has
a degree in Engineering from the American University of Beirut.

FRANK DENNISTON. Mr. Denniston is our Chief Technical Officer. Previously,
he was Vice President and Chief Engineer of Bell Atlantic Global Systems
Company, where he served as Project Manager for the construction of the FLAG
Europe-Asia cable system. With over 38 years experience, Mr. Denniston has
served in various technical and operations positions with NYNEX, AT&T and the
New York Telephone Company. Mr. Denniston holds a Bachelor's and a Master's
degree in Electrical Engineering from Rensselaer Polytechnic Institute.

JOHN DRAHEIM. Mr. Draheim has served as Project Manager of the FLAG
Atlantic-1 cable system project since January 1999. Prior to this, Mr. Draheim
was Vice President of Operations at Ameritech International during which time he
also served as General Manager and a member of the Board of Directors of
Ameritech's joint venture in China, and Executive Director of the MATAV. Before
joining us, Mr. Draheim spent 35 years in the telecommunications industry,
having served in various technical, operations and management positions at
Ameritech, Bellcore, AT&T and the Ohio Bell Telephone

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Company. Mr. Draheim holds a Bachelor's Degree in Electrical Engineering from
Valparaiso University and a Master's Degree in Management from Pace University.

COMMITTEES OF THE BOARD

In connection with this offering, we have established an Audit Committee,
all of the members of which will be non-employee directors. The Audit Committee
will be responsible for recommending to the Board of Directors the engagement of
our independent auditors and reviewing with our independent auditors the conduct
and results of the audits, our internal accounting controls, audit practices and
the professional services furnished by our independent auditors.

We also currently have a Compensation Committee. Among other
responsibilities, our Compensation Committee reviews and approves all
compensation agreements for our officers and administers our long term incentive
plan.

COMPENSATION

For the year ended December 31, 1998, the aggregate compensation of all
members of our Board of Directors and all of our executive officers was
approximately $3.5 million. We anticipate that compensation levels in the future
will be greater than they have been to date.

LONG-TERM INCENTIVE PLAN

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

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

- stock appreciation rights ("SARs");

- restricted or deferred stock;

- dividend equivalents;

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

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

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

The 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 without the consent of our
shareholders, except that any amendment, although effective when made, will be
subject to shareholder approval if required by any Federal or state law or
regulation or by the rules of any stock exchange or automated quotation system
on which our common shares may then be listed or quoted. The number and kind of
shares reserved or deliverable under the Plan and the number and kind of shares
subject to outstanding awards are subject to adjustment in the event of stock
splits, stock dividends and other extraordinary corporate events. Following
completion of this offering, we intend to file a registration statement on Form
S-8 to register the issuance of our common shares under the Plan.

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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth information known to FLAG Telecom with
respect to the beneficial ownership of our common shares as of January 31, 2000
by: (1) each shareholder known by us to be the beneficial owner of our common
shares and (2) all of our executive officers and directors as a group. Except as
otherwise noted below, each of the shareholders identified in the table has sole
voting and investment power over the shares it beneficially owns.

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
--------------------------------------------------- --------------------------------
NAME OF BENEFICIAL OWNER BEFORE OFFERING SOLD IN OFFERING AFTER OFFERING BEFORE OFFERING AFTER OFFERING
- ------------------------ --------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Bell Atlantic
Corporation (1).................. 39,922,276 0 39,922,276 36.99% 29.73%
Dallah Albaraka Holding Company
(2).............................. 21,910,694 1,120,537 20,790,157 20.30% 15.48%
Telecom Asia Corporation Public
Co. Ltd. (3)..................... 18,130,114 2,968,865 15,161,249 16.80% 11.29%
Marubeni Corporation (4)........... 10,124,612 517,784 9,606,828 9.38% 7.15%
The Asian Infrastructure Fund
(5).............................. 9,065,057 463,597 8,601,460 8.40% 6.40%
General Electric Capital
Corporation (6).................. 2,744,415 140,353 2,604,062 2.55% 1.94%
Abdul Latif Omar Ghurab (7)........ 411,415 21,040 390,375 0.38% 0.29%
Abdul Aziz Abdullah Kamel (7)...... 411,415 21,040 390,375 0.38% 0.29%
AT&T Capital Corporation (8)....... 914,805 46,784 868,021 0.85% 0.65%
Reja Sabet (9)..................... 932,501 0 932,501 0.86% 0.69%
Hormoz Sabet (9)................... 932,501 0 932,501 0.86% 0.69%
Spinconsult SA (9)................. 466,251 0 466,251 0.43% 0.35%
All directors and executive
officers as a group (14 persons)
(10)............................. 1,957,707 0 1,957,707 1.81% 1.46%
Total.............................. 107,923,763 5,300,000 102,623,763 100.00% 76.41%
</TABLE>

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

(1) Bell Atlantic Corporation is the ultimate parent of a wholly owned
subsidiary, Bell Atlantic Network Systems Company, which directly owns our
shares. The business address of the direct owner is: Bell Atlantic Network
Systems Company, 4 West Red Oak Lane, White Plains, NY 10604, U.S.A.

(2) Dallah Albaraka Holding Company is the parent of a wholly-owned subsidiary,
Rathburn Limited, which directly owns our shares. The business address of
the direct owner is: Rathburn Limited, Abbott Building, Main Street,
P.O. Box 3186, Road Town, Tortola, BVI.

(3) Telecom Asia Corporation Public Co. Ltd. is the ultimate parent of a wholly
owned subsidiary, K.I.N. (Thailand) Co., Ltd., which directly owns our
shares. The business address of the direct owner is: K.I.N. (Thailand) Co.,
Ltd., c/o Telecom Holdings Company Limited, 30th Floor, Telecom Tower, 18
Ratchadaphisak Road, Huai Khwang, Bangkok 10310, Thailand. Bell Atlantic
holds approximately 19% of the shares of Telecom Asia Corporation Public Co.
Ltd.

(4) Marubeni Corporation is the ultimate parent of a wholly owned subsidiary,
Marubeni Telecom Development Limited, which directly owns our shares. The
business address of the direct owner is: Marubeni Telecom Development
Limited, Cedar House, 41 Cedar Avenue, Hamilton HM 12, Bermuda.

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

(6) General Electric Capital Corporation is the ultimate parent of an indirect
wholly owned subsidiary, GE Capital Project Finance VI Ltd., which directly
owns our shares. The business address of the

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direct owner, GE Capital Project Finance VI Ltd., is Clarendon House, Church
Street West, Hamilton HMCX, Bermuda.

(7) Rathburn Limited previously owned the identified shares. Rathburn Limited
transferred these shares to Mr. Ghurab and Mr. Kamel in early January 2000.
The address for these shareholders is c/o Dallah Albaraka Group, P.O. Box
430, Dallah Tower, Palestine Road, Jeddah 21411, Saudi Arabia.

(8) The business address of AT&T Capital Corporation is: 44 Whippany Road,
Morristown, NJ 07926, U.S.A.

(9) Gulf Associates Communications, Limited previously owned the identified
shares. Gulf Associates distributed these shares to Spinconsult, Reja Sabet
and Hormoz Sabet in the second quarter of 1999. The address for these
shareholders is 30 Rockefeller Plaza, New York, NY 10012.

(10) The beneficial share ownership of our directors and executive officers as a
group consists solely of shares that may be acquired within sixty days of
the date of this prospectus by exercising options. Those shares are also
deemed to be outstanding for purposes of calculating the percentage
ownership of these persons.

CERTAIN TRANSACTIONS

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

PROGRAM MANAGEMENT SERVICES AGREEMENT

Under the terms of the Program Management Services Agreement, Bell Atlantic
Network Systems, one of our 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. FLAG
Limited, 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, FLAG Limited
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 $70.0 million.

MARKETING SERVICES AGREEMENT

FLAG Limited 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 FLAG Limited throughout the world and bore all marketing expenses and costs
it incurred in connection with these marketing services. FLAG Limited agreed to
pay commissions at the rate of 4% of commitments obtained prior to July 3, 1995
and 3% of the commitments obtained thereafter. From inception through September
1999, FLAG Limited incurred commissions and other costs in the amount of
$18.4 million. In May 1998, under a Marketing Transition Agreement, FLAG Limited
and Bell Atlantic Network Systems agreed to terminate the Marketing Services
Agreement.

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Under the Marketing Transition Agreement, FLAG Limited agreed to pay certain
closing down expenses, certain commissions in connection with their
pre-termination activities, and up to $3.0 million in commissions resulting from
certain post-termination sales. In this regard, FLAG Limited incurred
$0.5 million in closing down expenses, $15.9 million related to commissions in
connection with pre-termination sales activity and $2.0 million in connection
with post-termination sales activity. No further commissions are due in relation
to post-termination sales activity. As at September 30, 1999, $1.7 million of
the above remained unpaid and fully accrued by FLAG Limited. Also, under the
Marketing Transition Agreement, FLAG Limited agreed to pay a 50% commission in
the event that Bell Atlantic Network Systems or an affiliate secures the sale of
four whole DS3s on the FLAG Europe-Asia cable system. No such sales have
occurred to date.

CONSTRUCTION CONTRACT

Under FLAG Limited's previous credit facility, in order to obtain political
risk insurance through the Ministry of International Trade and Industry of
Japan, FLAG Limited named Marubeni, one of our 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. FLAG Limited 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 FLAG Limited's
previous credit facility and was paid a customary agency fee. FLAG Limited 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 FLAG Limited's previous credit facility, certain
of FLAG Limited'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. FLAG Limited'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

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

CAPACITY PURCHASE AGREEMENTS

Bell Atlantic has agreed to purchase $15 million of capacity on the FLAG
Atlantic-1 cable system under a Capacity Purchase Agreement. GTE has agreed to
purchase $7.5 million of capacity on the FLAG Atlantic-1 cable system pursuant
to a separate Capacity Purchase Agreement. On June 27, 1998, Bell Atlantic
Corporation and GTE Corporation entered into an Agreement and Plan of Merger.

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PRIMARY SUPPLIER AGREEMENT

We recently entered into a Primary Supplier Agreement with Bell Atlantic
Global Systems under which Bell Atlantic Global Systems has agreed to purchase
from us 50% of the undersea facilities based communications capacity in any
fiber optic cable needed by Bell Atlantic Global Systems or certain of its
affiliates in each of the four calendar years beginning on January 1, 2000. The
purchase of capacity may be on the FLAG Europe-Asia cable system, the FLAG
Atlantic-1 cable system or any additional system constructed or acquired in the
future and may be effected by executing Capacity Purchase Agreements with us or
any of our affiliates.

EXCHANGE AGREEMENT AND PLAN OF REORGANIZATION; TAX AGREEMENT

On February 26, 1999, FLAG Limited's shareholders other than Bell Atlantic
Network Systems exchanged all their common shares in FLAG Limited for common
shares in FLAG Telecom. Bell Atlantic Network Systems, however, exchanged only a
limited portion of its common shares in FLAG Limited for 3,666,155 common shares
in FLAG Telecom. At the same time, Bell Atlantic Network Systems and FLAG
Telecom entered into an Exchange Agreement and Plan of Reorganization providing
that Bell Atlantic Network Systems' remaining common shares in FLAG Limited
would be exchanged for common shares in FLAG Telecom in the event that, prior to
February 26, 2002, Bell Atlantic received certain regulatory approvals from the
Federal Communications Commission allowing Bell Atlantic to offer long distance
service. Effective January 4, 2000, Bell Atlantic Network Systems exchanged the
remaining 36,256,121 common shares it held in FLAG Limited 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 FLAG Limited and the subsequent transfer by Bell Atlantic Network
Systems of its remaining shares in FLAG Limited are intended to be treated as
tax-free transactions for United States federal income tax purposes. Under a tax
agreement between FLAG Telecom and Bell Atlantic Network Systems, 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 FLAG Limited or to permit FLAG Limited to dispose of substantially all
of its assets for a five-year period following the initial or any subsequent
exchange of shares. 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.

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DESCRIPTION OF CAPITAL STOCK

Immediately following the completion of this offering, our authorized
capital stock will consist of 300,000,000 common shares, par value $.0006 per
share. Upon completion of this offering, there will be 132,346,056 outstanding
common shares and outstanding options to purchase 4,156,040 common shares.

COMMON SHARES

The holders of common shares are entitled to receive dividends out of assets
legally available for such purposes at times and in amounts as our Board of
Directors may from time-to-time determine. Each shareholder is entitled to one
vote for each common share held on all matters submitted to a vote of
shareholders. Cumulative voting for the election of directors is not provided
for in our Memorandum of Association or By-laws, which means that the holders of
a majority of the shares voted can elect all of the directors then standing for
election (subject to the rights of certain shareholders to appoint directors, as
described below). After this offering, we will have a staggered Board of
Directors, with one-third of our directors being selected each year. The common
shares are not entitled to preemptive rights and are not subject to conversion
or redemption. Upon the occurrence of a liquidation, dissolution or winding-up,
the holders of common shares would be entitled to share ratably in the
distribution of all of our assets remaining available for distribution after
satisfaction of all our liabilities.

OPTIONS

As of January 31, 2000, (1) options to purchase a total of 4,156,040 common
shares were outstanding or had been approved and (2) up to 2,607,751 additional
common shares may be subject to options granted in the future under our option
plan. All of the options are subject to standard anti-dilution provisions.

BERMUDA LAW

We are an exempted company organized under the Companies Act 1981 of
Bermuda. The rights of our shareholders, including those persons who will become
shareholders in connection with this offering, are governed by Bermuda law and
our Memorandum of Association and By-laws. The Companies Act 1981 of Bermuda
differs in some material respects from laws generally applicable to United
States corporations and their shareholders. The following is a summary of the
material provisions of Bermuda law and our organizational documents.

DIVIDENDS. Under Bermuda law, a company may pay dividends that are declared
from time to time by its board of directors unless there are reasonable grounds
for believing that the company is or would, after the payment, be unable to pay
its liabilities as they become due or that the realizable value of its assets
would thereby be less than the aggregate of its liabilities and issued share
capital and share premium accounts.

VOTING RIGHTS. Under Bermuda law, except as otherwise provided in the
Companies Act 1981 of Bermuda or our By-laws, questions brought before a general
meeting of shareholders are decided by a majority vote of shareholders present
at the meeting. Our By-laws provide that, subject to the provisions of the
Companies Act 1981 of Bermuda, any question proposed for the consideration of
the shareholders will be decided by a simple majority of the votes cast, on a
show of hands, with each shareholder present (and each person holding proxies
for any shareholder) entitled to one vote for each common share held by the
shareholder, except for increases to the size of our Board of Directors, which
requires the approval of two-thirds of the votes cast.

RIGHTS IN LIQUIDATION. Under Bermuda law, in the event of liquidation or
winding up of a company, after satisfaction in full of all claims of creditors
and subject to the preferential rights

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accorded to any series of preferred shares, the proceeds of the liquidation or
winding up are distributed PRO RATA among the holders of the company's common
shares.

MEETINGS OF SHAREHOLDERS. Under Bermuda law, a company is required to
convene at least one general shareholders' meeting each calendar year. Bermuda
law provides that a special general meeting may be called by the board of
directors and must be called upon the request of shareholders holding not less
than 10% of the paid-up capital of the company carrying the right to vote.
Bermuda law also requires that shareholders be given at least 5 days' advance
notice of a general meeting but the accidental omission to give notice to any
person does not invalidate the proceedings at a meeting. Under our By-laws, we
must give each shareholder at least 20 days' notice of the annual general
meeting and of any special general meeting.

Under Bermuda law, the number of shareholders constituting a quorum at any
general meeting of shareholders is determined by the By-laws of a company. Our
By-laws provide that the presence in person or by proxy of the holders of more
than 50.1% of our issued common shares constitutes a quorum.

ACCESS TO BOOKS AND RECORDS AND DISSEMINATION OF INFORMATION. Members of
the general public have the right to inspect the public documents of a company
available at the office of the Registrar of Companies in Bermuda. These
documents include a company's Certificate of Incorporation, its Memorandum of
Association (including its objects and powers) and any alteration to its
Memorandum of Association. The shareholders have the additional right to inspect
the by-laws of the company, minutes of general meetings and the company's
audited financial statements, which must be presented at the annual general
meeting. The register of shareholders of a company is also open to inspection by
shareholders without charge and by members of the general public on the payment
of a fee. A company is required to maintain its share register in Bermuda but
may, subject to the provisions of Bermuda law, establish a branch register
outside Bermuda. We maintain a share register in Hamilton, Bermuda. A company is
required to keep at its registered office a register of its directors and
officers which is open for inspection for not less than 2 hours each day by
members of the public without charge. Bermuda law does not, however, provide a
general right for shareholders to inspect or obtain copies of any other
corporate records.

ELECTION OR REMOVAL OF DIRECTORS. Under Bermuda law and our By-laws,
directors are elected or appointed at the annual general meeting and serve until
re-elected or re-appointed or until their successors are elected or appointed,
unless they are earlier removed or resign. Following the consummation of this
offering, we will have a staggered Board of Directors. At the first annual
general meeting after this offering, all current directors will be required to
resign and, at every subsequent annual general meeting, one-third of the
directors will be required to resign. Our By-laws provide that a shareholder is
entitled to elect one member of our Board of Directors for each 9% of our issued
and outstanding common shares held by that shareholder. Consequently, Bell
Atlantic will be entitled to appoint three of our directors. Two of our
shareholders, Bell Atlantic and Rathburn Limited, are each entitled to elect one
member of our Board of Directors as long as they hold any common shares.

Under Bermuda law and our By-laws, a director may be removed at a special
general meeting of shareholders specifically called for that purpose, provided
the director is served with at least 14 days' notice. The director has a right
to be heard at that meeting. Any vacancy created by the removal of a director at
a special general meeting may be filled at that meeting by the election of
another director in his or her place or, in the absence of any such election, by
the board of directors.

BOARD ACTIONS. Our By-laws provide that certain actions required to be
approved by our Board of Directors must be approved by two-thirds of the votes
present and entitled to be cast at a properly convened meeting of our Board of
Directors.

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AMENDMENT OF MEMORANDUM OF ASSOCIATION AND BY-LAWS. Bermuda law provides
that the Memorandum of Association of a company may be amended by a resolution
passed at a general meeting of shareholders of which due notice has been given.
An amendment to the Memorandum of Association, other than an amendment which
alters or reduces a company's share capital as provided in the Companies Act
1981 of Bermuda, also requires the approval of the Bermuda Minister of Finance,
who may grant or withhold approval at his discretion. Our By-laws may be amended
by the Board of Directors, generally, if the amendment is approved by a vote of
two-thirds of the votes cast by our directors and, with respect to some
provisions of our By-laws, three-quarters of the votes cast by our directors,
and by our shareholders by a resolution passed by a majority of votes cast at a
general meeting.

Under Bermuda law, the holders of an aggregate of no less than 20% in par
value of a company's issued share capital or any class of issued share capital
have the right to apply to the Bermuda Court for an annulment of any amendment
of the Memorandum of Association adopted by shareholders at any general meeting,
other than an amendment which alters or reduces a company's share capital as
provided in the Companies Act 1981 of Bermuda. Where such an application is
made, the amendment becomes effective only to the extent that it is confirmed by
the Bermuda Court. An application for the annulment of an amendment of the
Memorandum of Association must be made within 21 days after the date on which
the resolution altering the company's memorandum is passed and may be made on
behalf of the persons entitled to make the application by one or more of their
number as they may appoint in writing for the purpose. No such application may
be made by persons voting in favor of the amendment.

APPRAISAL RIGHTS AND SHAREHOLDER SUITS. Under Bermuda law, in the event of
an amalgamation of two Bermuda companies, a shareholder who is not satisfied
that fair value has been paid for his stock may apply to the Bermuda Court to
appraise the fair value of his shares. The amalgamation of a company with
another company requires the amalgamation agreement to be approved by the board
of directors and, except where the amalgamation is between a holding company and
one or more of its wholly owned subsidiaries or between two or more wholly owned
subsidiaries, by meetings of the holders of shares of each company and of each
class of such shares. Under Bermuda law, an amalgamation also requires the
consent of the Bermuda Minister of Finance, who may grant or withhold such
consent at his discretion.

Class actions and derivative actions are generally not available to
shareholders under Bermuda law. The Bermuda Court, however, would ordinarily be
expected to permit a shareholder to commence an action in the name of a company
to remedy a wrong done to the company where the act complained of is alleged to
be beyond the corporate power of the company or is illegal or would result in
the violation of the company's Memorandum of Association or by-laws. Further
consideration would be given by the Bermuda Court to acts that are alleged to
constitute a fraud against the minority shareholders or, for instance, where an
act requires the approval of a greater percentage of the company's shareholders
than that which actually approved it.

When the affairs of a company are being conducted in a manner oppressive or
prejudicial to the interests of some part of the shareholders, one or more
shareholders may apply to the Bermuda Court for an order regulating the
company's conduct of affairs in the future or compelling the purchase of the
stock by any shareholder, by other shareholders or by the company.

TRANSFER AGENT AND REGISTRAR

American Stock Transfer & Trust Company will serve as transfer agent and
registrar for the common shares.

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LISTING

We have applied to have the common shares included for quotation on the
Nasdaq National Market under the symbol "FTHL"and for listing on the London
Stock Exchange under the symbol "FTL." The LSE shares will be quoted on SEAQI in
pounds sterling and settlement will take place through Morgan Guaranty Trust
Company of New York, Brussels office, as operator of the Euroclear System and
Clearstream Banking S.A. (formerly Cedelbank) in pounds sterling. The Nasdaq
shares will be quoted on Nasdaq in U.S. dollars and settlement will take place
through The Depository Trust Company in U.S. dollars. The LSE shares may be
exchanged for Nasdaq shares, and vice versa, through the applicable procedures
of the relevant clearing agency.

REGISTRATION RIGHTS

We have previously granted to AT&T Capital Corporation and GE Capital
Project Finance VI Ltd. certain piggy-back registration rights which allow them
to register for resale the common shares held by them whenever we propose, on
behalf of us or third parties, to register the issuance of common shares. AT&T
Capital Corporation and GE Capital Project Finance VI Ltd. have elected to
exercise these rights in connection with this offering. AT&T Capital Corporation
and GE Capital Project Finance VI Ltd. may also become parties to the
Registration Rights Agreement described below.

We have also previously granted to some of our executive officers piggy-back
registration rights with respect to common shares issuable to such officers upon
the exercise of options granted under our long-term incentive plan.

We have entered into a Registration Rights Agreement, which will become
effective upon completion of this offering, with our existing shareholders
pursuant to which, subject to various restrictions and limitations stated
therein, we will provide to these stockholders a number of demand and piggy-back
registration rights.

The piggyback registration rights allow the shareholders to register the
common shares issued or issuable to them whenever we propose to register any
securities for our own or another's account under the Securities Act for a
public offering, other than:

- any shelf registration of common shares to be used as consideration for
acquisitions of additional businesses; and

- registrations relating to employee incentive plans.

The shareholders will also have the right, on 13 occasions in the aggregate,
to require that we register under the Securities Act any or all of the common
shares issued or issuable to them. None of these registrations may be demanded
within the first six months after the closing of this offering. The demand and
piggyback registration rights apply to the shareholders and to any transferee of
shares held by a shareholder who agrees to be bound by the terms of the
Registration Rights Agreement.

We have agreed to pay all costs of the demand and piggyback registrations,
other than underwriting discounts and commissions. All of these registration
rights are subject to conditions and limitations, including (1) the right of
underwriters of an offering to limit the number of shares included in that
registration and (2) our right not to effect more than one demand registration
within any six month period and within 90 days after the effective date of any
registration statement for the offering of our securities.

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SHARES ELIGIBLE FOR FUTURE SALE

After this offering, we will have outstanding 132,346,056 common shares, or
133,930,056 shares if the underwriters exercise their over-allotment option in
full. Of these shares, the 31,680,000 shares that we and the selling
shareholders expect to sell in this offering, or 36,432,000 shares if the
underwriters exercise their over-allotment option in full, will be freely
tradable in the public market without restriction under the Securities Act,
unless these shares are held by our "affiliates," as that term is defined in
Rule 144 under the Securities Act.

The remaining 100,666,056 common shares (or 97,498,056 shares if the
underwriters exercise their over-allotment option in full, in each case
exclusive of shares issuable to our directors and officers upon exercise of
options granted under our long term incentive plan) that will be outstanding
after this offering will be restricted shares. We issued and sold the restricted
shares in private transactions in reliance on exemptions from registration under
the Securities Act. Restricted shares may be sold in the public market only if
they are registered under the Securities Act, or if they qualify for an
exemption from registration including pursuant to Rule 144 or 701 or in an
offshore transaction pursuant to Regulation S under the Securities Act. On the
date of the expiration of the lock-up agreements, all of the remaining
100,666,056 shares will be eligible for sale, subject to holding period, volume,
manner of sale and other limitations under Rule 144.

Under lock-up agreements with the underwriters, all of the executive
officers, directors and most of our shareholders, who following this offering
will collectively hold approximately 98% of our outstanding restricted shares,
have agreed not to offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of any of these shares for a period of 180 days from the
date of this prospectus. We also have entered into an agreement with the
underwriters that we will not offer, sell or otherwise dispose of common shares
for a period of 180 days from the date of this prospectus other than upon
exercise of currently outstanding options or warrants or upon the issuance of
options to employees, consultants and directors under our stock option plan.
These agreements are subject to certain exceptions described in "Underwriting"
and may be waived in writing by Salomon Smith Barney Inc.

Following the expiration of these lock-up periods, some of the shares issued
upon exercise of options we granted prior to the date of this prospectus will
also be available for sale in the public market pursuant to Rule 701 under the
Securities Act. Rule 701 permits resales of these shares in reliance upon
Rule 144 under the Securities Act, but without compliance with some of its
restrictions, including the holding-period requirement, imposed under Rule 144.
Under Rule 144, beginning 90 days after the date of this prospectus, a person
who has beneficially owned restricted shares for at least one year would be
entitled to sell in any three-month period that number of common shares up to
the greater of:

- 1% of the then-outstanding common shares, or approximately 1,323,460
shares immediately after this offering, assuming no exercise of the
underwriters' over-allotment option and

- the average weekly trading volume of the common shares during the four
calendar weeks preceding the filing of a Form 144 with respect to this
sale.

Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who has not been an affiliate of ours during the
preceding 90 days and who has beneficially owned the restricted shares for at
least two years is entitled to sell them without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.

After the completion of this offering, we intend to file a registration
statement under the Securities Act to register all shares issuable on exercise
of stock options or other awards granted or to be granted under our long term
incentive plan. After this registration statement becomes effective, and subject
to

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some of the restrictions under Rule 144, those shares will be freely saleable in
the public market immediately following exercise of these options.

In addition, we may decide to register additional common shares under the
Securities Act after the closing of this offering for use by us as consideration
for future acquisitions. Upon such registration and issuance, these shares
generally will be freely tradable, unless the resale thereof is contractually
restricted or unless the holders thereof are subject to the restrictions on
resale provided under the Securities Act. We will not be able to issue the
shares, however, without Salomon Smith Barney Inc.'s consent during the 180 days
after the date of this prospectus.

There has been no public market for the common shares prior to this offering
and we cannot assure you that an active public market for the common shares will
develop or be sustained after completion of this offering. Sales of substantial
amounts of the common shares, or the perception that these sales could occur,
could adversely affect the prevailing market price of the common shares and
could impair our ability to raise capital or effect acquisitions through the
issuance of common shares.

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TAX CONSIDERATIONS

TAXATION OF FLAG TELECOM

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

BERMUDA TAX CONSIDERATIONS

Under current Bermuda law, we are not subject to tax on income or capital
gains. Furthermore, we have obtained from the Minister of Finance of Bermuda,
under the Exempted Undertakings Tax Protection Act 1966, an undertaking that, in
the event that Bermuda enacts any legislation imposing tax computed on profits
or income or computed on any capital asset, gain or appreciation, or any tax in
the nature of estate duty or inheritance tax, then the imposition of such tax
will not be applicable to us or to any of our operations, or to the shares,
capital or common stock of FLAG Telecom, until March 28, 2016. This undertaking
does not, however, prevent the imposition of property taxes on any company
owning real property or leasehold interests in Bermuda. We pay an annual
government fee on our authorized share capital and share premium, which for 1999
is $1,695.

UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

FLAG Telecom and its non-United States subsidiaries will be subject to
United States federal income tax at regular corporate rates, and possibly to
United States branch profits tax, on any income that is effectively connected
with the conduct of a trade or business within the United States, and will be
required to file federal income tax returns with respect to that income. We
intend to conduct our operations so as to minimize the amount of
effectively-connected income. However, no assurance can be given that the
Internal Revenue Service (IRS) will agree with the positions that we take in
this regard. Our United States subsidiaries will be subject to United States
federal income tax on their worldwide income regardless of its source, subject
to reduction by allowable foreign tax credits, and distributions that our United
States subsidiaries make to FLAG Telecom or to our non-United States
subsidiaries generally will be subject to United States withholding tax.

TAXATION OF SHAREHOLDERS

BERMUDA TAX CONSIDERATIONS

Under current Bermuda law, no income, withholding or other taxes or stamp or
other duties are imposed upon the issue, transfer or sale of the common shares
or on any payments made on the common shares. See "Taxation of FLAG
Telecom--Bermuda Tax Considerations" for a description of the undertaking on
taxes that we obtained from the Minister of Finance of Bermuda.

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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of the material United States federal income tax
considerations arising from the acquisition, ownership and disposition of the
common shares by a United States holder. A United States holder is:

- an individual citizen or resident of the United States;

- a corporation created or organized in or under the laws of the United
States or any of its political subdivisions; or

- an estate or trust the income of which is subject to United States federal
income taxation regardless of its source.

This summary deals only with common shares that are held as a capital asset
by a United States holder, and does not address tax considerations applicable to
United States holders that may be subject to special tax rules, including:

- dealers or traders in securities or currencies;

- financial institutions or other United States holders that treat income in
respect of the common shares as financial services income;

- insurance companies;

- tax-exempt entities;

- United States holders that hold the common shares as a part of a straddle
or conversion transaction or other arrangement involving more than one
position;

- United States holders that own, or are deemed for United States tax
purposes to own, 10% or more of the total combined voting power of all
classes of our voting stock;

- United States holders that have a principal place of business or "tax
home" outside the United States; or

- United States holders whose "functional currency" is not the United States
dollar.

The discussion below is based upon the provisions of the United States
Internal Revenue Code of 1986, as amended, and regulations, rulings and judicial
decisions thereunder as of the date of this prospectus; any such authority may
be repealed, revoked or modified, perhaps with retroactive effect, so as to
result in federal income tax consequences different from those discussed below.

BECAUSE UNITED STATES TAX CONSEQUENCES MAY DIFFER FROM ONE HOLDER TO THE
NEXT, THE DISCUSSION SET OUT BELOW DOES NOT PURPORT TO DESCRIBE ALL OF THE TAX
CONSIDERATIONS THAT MAY BE RELEVANT TO YOU AND YOUR PARTICULAR SITUATION.
ACCORDINGLY, YOU ARE ADVISED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE UNITED
STATES FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF INVESTING IN THE
COMMON SHARES. THE STATEMENTS OF UNITED STATES TAX LAW SET OUT BELOW ARE BASED
ON THE LAWS AND INTERPRETATIONS IN FORCE AS OF THE DATE OF THIS PROSPECTUS, AND
ARE SUBJECT TO ANY CHANGES OCCURRING AFTER THAT DATE.

We believe, and the discussion below therefore assumes, that FLAG Telecom
and its non-United States subsidiaries are not and will not become foreign
personal holding companies for United States federal income tax purposes.

DISTRIBUTIONS

Subject to the discussion below under "Passive Foreign Investment Company
Considerations," distributions that we make with respect to the common shares,
other than distributions in liquidation and distributions in redemption of stock
that are treated as exchanges, will be taxed to United States

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holders as ordinary dividend income to the extent that the distributions do not
exceed the current and accumulated earnings and profits of FLAG Telecom.
Distributions, if any, in excess of the current and accumulated earnings and
profits of FLAG Telecom will constitute a nontaxable return of capital to a
United States holder and will be applied against and reduce the United States
holder's tax basis in the common shares. To the extent that distributions in
excess of FLAG Telecom's current and accumulated earnings and profits exceed the
tax basis of the United States holder in its common shares, the excess generally
will be treated as capital gain.

Dividends that we pay generally will constitute portfolio income for
purposes of the limitation on the use of passive activity losses, and,
therefore, generally may not be offset by passive activity losses, and as
investment income for purposes of the limitation on the deduction of investment
interest expense. Dividends that we pay will not be eligible for the dividends
received deduction generally allowed to United States corporations under
Section 243 of the Internal Revenue Code.

For United States foreign tax credit purposes, if at least 50% of our stock
by voting power or by value is owned, directly, indirectly or by attribution, by
United States persons, then, subject to the limitation described below, a
portion of the dividends that we pay in each taxable year will be treated as
United States-source income, depending in general upon the ratio for that
taxable year of our United States-source earnings and profits to our total
earnings and profits. The remaining portion of our dividends (all of our
dividends, if we do not meet the 50% test described above) will be treated as
foreign-source income and generally will be treated as passive income, subject
to the separate foreign tax credit limitation for passive income. However, if,
in any taxable year, we have earnings and profits and less than 10% of those
earnings and profits are from United States sources, then, in general, dividends
that we pay from our earnings and profits for that taxable year will be treated
entirely as foreign-source income.

SALE OR EXCHANGE

Subject to the discussion below under "Passive Foreign Investment Company
Considerations," upon a sale or exchange of common shares to a person other than
FLAG Telecom, a United States holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale or exchange and
the United States holder's adjusted tax basis in the common shares. Any gain or
loss recognized will be capital gain or loss and will be long-term capital gain
or loss if the United States holder has held the common shares for more than one
year.

Gain realized by a United States holder on the sale or exchange of the
common shares generally will be treated as United States-source gain, and, under
recently-promulgated Treasury regulations, loss realized by a United States
holder on the sale or exchange of the common shares generally will be treated as
United States-source loss, for United States foreign tax credit purposes.

PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS

PFIC CLASSIFICATION

Special and adverse United States tax rules apply to a United States holder
that holds an interest in a passive foreign investment company (PFIC). In
general, a PFIC is any non-United States corporation, if (1) 75% or more of the
gross income of the corporation for the taxable year is passive income (the PFIC
income test) or (2) the average percentage of assets held by the corporation
during the taxable year that produce passive income or that are held for the
production of passive income is at least 50% (the PFIC asset test). In applying
the PFIC income test and the PFIC asset test, a corporation that owns, directly
or indirectly, at least 25% by value of the stock of a second corporation must
take into account its proportionate share of the second corporation's income and
assets.

75
<PAGE>
If a corporation is classified as a PFIC for any year during which a United
States person is a shareholder, then the corporation generally will continue to
be treated as a PFIC with respect to that shareholder in all succeeding years,
regardless of whether the corporation continues to meet the PFIC income test or
the PFIC asset test, subject to elections to recognize gain that may be
available to the shareholder.

Although we are engaged through our subsidiaries in the conduct of a
substantial and active business of selling and leasing telecommunications
capacity, it is possible that we could be treated as a PFIC, if, in any taxable
year, (1) a sufficient portion of our income or assets is considered to be
passive under the PFIC provisions or (2) we hold a relatively large amount of
passive assets such as cash and marketable securities, including cash derived
from our issuance of common shares. Based on our operations to date and current
projections concerning the composition of our income and assets, we do not
believe that we will be treated as a PFIC for our taxable year ending
December 31, 1999 or for any future year. However, this conclusion is based in
part on our current projections and expectations as to our future business
activity, and also is based in part on interpretations of existing law that we
believe are reasonable, but that have not been approved by any taxing authority.
Accordingly, we can provide no assurance that we will not be treated as a PFIC
for our taxable year ending December 31, 1999 or for any future taxable year.

CONSEQUENCES OF PFIC STATUS

If we are treated as a PFIC for any taxable year during which a United
States holder holds our common shares, then, subject to the discussion of the
qualified electing fund (QEF) and mark-to-market rules below, the United States
holder will be subject to a special and adverse tax regime (1) in respect of
gains realized on the sale or other disposition of our common shares and (2) in
respect of distributions on our common shares to the extent that those
distributions are treated as excess distributions. The adverse tax consequences
include taxation of such gain or excess distribution at ordinary income tax
rates and payment of an interest charge on tax that is deemed to have been
deferred with respect to such gain or excess distribution. An excess
distribution generally includes dividends or other distributions received from a
PFIC in any taxable year of a United States holder to the extent that the amount
of those distributions exceeds 125% of the average distributions made by the
PFIC during a specified base period.

In some circumstances, a United States holder may avoid the unfavorable
consequences of the PFIC rules by making a QEF election with respect to FLAG
Telecom. A QEF election effectively would require an electing United States
holder to include in income currently its pro rata share of the ordinary
earnings and net capital gain of FLAG Telecom. However, a United States holder
cannot elect QEF status with respect to FLAG Telecom unless we comply with
certain reporting requirements and we cannot assure that we will provide the
required information.

A United States holder that holds "marketable" stock in a PFIC may, in lieu
of making a QEF election, avoid some of the unfavorable consequences of the PFIC
rules by electing to mark the PFIC stock to market as of the close of each
taxable year. Under recently-promulgated regulations, the common shares will be
treated as marketable stock for a calendar year if the common shares are traded
on the NASDAQ National Market, in other than de minimis quantities, on at least
15 days during each calendar quarter of the year. A United States holder that
makes the mark-to-market election generally will be required to include in
income each year as ordinary income an amount equal to the increase in value of
our common shares for that year, regardless of whether the United States holder
actually sells the common shares. The United States holder generally will be
allowed a deduction for the decrease in value of our common shares for the
taxable year, to the extent of the amount of gain previously included in income
under the mark-to-market rules (reduced by prior deductions under the
mark-to-market rules). Any gain from the actual sale of the PFIC stock will be

76
<PAGE>
treated as ordinary income, and any loss will be treated as ordinary loss to the
extent of net mark-to-market gains previously included in income.

You are urged to consult your own tax advisor regarding the possible
classification of FLAG Telecom as a PFIC, as well as the potential tax
consequences arising from the ownership and disposition, directly or indirectly,
of interests in a PFIC.

BACKUP WITHHOLDING TAX

Backup withholding tax at a rate of 31% may apply to payments of dividends
and to certain payments of proceeds from the sale or other disposition of the
common shares within the United States by a non-corporate United States holder,
if the holder fails to furnish a correct taxpayer identification number or
otherwise fails to comply with applicable requirements of the backup withholding
tax rules. Backup withholding tax is not an additional tax and may be credited
against a United States holder's United States federal income tax liability,
provided that correct information is provided to the IRS.

77
<PAGE>
UNDERWRITING

The global offering consists of (1) an offering of an aggregate of
common shares in the United States and Canada and (2) an offering of an
aggregate of common shares outside the United States and Canada. Salomon
Smith Barney Inc. is the global coordinator and sole bookrunner of the global
offering.

Subject to the terms and conditions stated in the U.S. underwriting
agreement dated the date hereof, each U.S. underwriter named below has severally
agreed to purchase, and FLAG Telecom and the selling shareholders have agreed to
sell to such underwriter, the number of shares set forth opposite the name of
such underwriter.

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ----------
<S> <C>
Salomon Smith Barney Inc. ..................................
Deutsche Bank Securities Inc................................
Goldman, Sachs & Co. .......................................
Morgan Stanley & Co. Incorporated...........................
Warburg Dillon Read LLC.....................................
----------
Total...................................................
==========
</TABLE>

The U.S. underwriting agreement provides that the obligations of the several
U.S. underwriters to purchase the shares included in this offering are subject
to approval of certain legal matters by counsel and to certain other conditions.
The U.S. underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.

The U.S. underwriters, for whom Salomon Smith Barney Inc., Deutsche Bank
Securities Inc., Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated and
Warburg Dillon Read LLC are acting as U.S. representatives, propose to offer
some of the shares directly to the public at the public offering price set forth
on the cover page of this prospectus and some of the shares to certain dealers
at the public offering price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share on sales to certain other dealers. If all
of the shares are not sold at the initial offering price, the representatives
may change the public offering price and the other selling terms.

FLAG Telecom and certain of the selling shareholders have granted to the
U.S. underwriters an option, exercisable for 30 days from the date of this
prospectus, to purchase up to additional common shares at the public
offering price less the underwriting discount. Two thirds of the common shares
subject to the over-allotment option shall be sold by the selling shareholders
and one third of the common shares subject to the over-allotment option shall be
sold by FLAG Telecom for its own account upon any exercise of the over-allotment
option by the underwriters. The U.S. underwriters may exercise such option
solely for the purpose of covering over-allotments, if any, in connection with
this offering. To the extent such option is exercised, each U.S. underwriter
will be obligated, subject to certain conditions, to purchase a number of
additional shares approximately proportionate to such underwriter's initial
purchase commitment.

FLAG Telecom and the selling shareholders have also entered into an
underwriting agreement with a syndicate of international underwriters providing
for the concurrent offer and sale of common shares outside the United
States and Canada. The offering price and aggregate underwriting discounts and
commissions per share for the U.S. offering and the international offering are
identical. In addition, the U.S. and international offerings are each
conditioned upon the closing of the other.

The U.S. and international underwriters have entered into an agreement in
which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer common

78
<PAGE>
shares. The U.S. and international underwriters have also agreed that they may
sell common shares between their respective underwriting syndicates.

FLAG Telecom, its officers and directors and certain shareholders (including
the selling shareholders) have agreed that, for a period of 180 days from the
date of this prospectus, they will not, without the prior written consent of
Salomon Smith Barney Inc., dispose of or hedge any common shares of FLAG Telecom
or any securities convertible into or exchangeable for common shares. Salomon
Smith Barney Inc. in its sole discretion may release any of the securities
subject to these lock-up agreements at any time without notice. These lock-up
agreements do not apply to issuances by FLAG Telecom of shares under certain
employee incentive programs, the filing of a shelf registration statement by
FLAG Telecom with respect to shares to be issued as acquisition currency, or
dispositions of shares by the selling shareholders pursuant to a merger or
tender offer on terms available to shareholders generally.

Prior to this offering, there has been no public market for the common
shares. Consequently, the initial public offering price for the shares will be
determined by negotiations among FLAG, the selling shareholders, and the
representatives. Among the factors considered in determining the initial public
offering price will be FLAG Telecom's record of operations, its current
financial condition, its future prospects, its markets, the economic conditions
in and future prospects for the industry in which FLAG Telecom competes, its
management, and currently prevailing general conditions in the equity securities
markets, including current market valuations of publicly traded companies
considered comparable to FLAG Telecom. There can be no assurance, however, that
the prices at which the shares will sell in the public market after this
offering will not be lower than the price at which they are sold by the
underwriters or that an active trading market in the common shares will develop
and continue after this offering.

FLAG Telecom has applied to have the common shares included for quotation on
the Nasdaq National Market under the symbol "FTHL" and listed on the London
Stock Exchange under the symbol "FTL".

The following table shows the underwriting discounts and commissions to be
paid to the U.S. underwriters by FLAG Telecom and the selling shareholders in
connection with this offering. These amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase additional common
shares. The underwriters will pay their expenses out of these amounts.

<TABLE>
<CAPTION>
PAID BY SELLING
PAID BY FLAG TELECOM SHAREHOLDERS
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per share...................................... $ $ $ $
Total.......................................... $ $ $ $
</TABLE>

FLAG Telecom estimates that the total expenses of this offering will be
approximately $3 million.

In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell common shares in the open market. These
transactions may include over-allotment, syndicate covering transactions and
stabilizing transactions. Over-allotment involves syndicate sales of common
shares in excess of the number of shares to be purchased by the underwriters in
the offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the common shares in the open market after the
distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of certain bids or purchases of common shares
made for the purpose of preventing or retarding a decline in the market price of
the common shares while the offering is in progress.

The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate

79
<PAGE>
short positions or making stabilizing purchases, repurchases shares originally
sold by that syndicate member.

Any of these activities may cause the price of the common shares to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the Nasdaq
National Market, on the London Stock Exchange, in the over-the-counter market or
otherwise and, if commenced, may be discontinued at any time.

The underwriting agreements require the underwriters to pay for the shares
in U.S. dollars. However, investors will pay for the shares issued in a form
eligible for trading on the London Stock Exchange in pounds sterling. Salomon
Brothers International Limited will convert pounds sterling that the
international underwriters receive into U.S. dollars at an exchange rate of
$ to L1. This rate includes a customary commission.

The representatives have performed certain investment banking and advisory
services for FLAG Telecom from time to time for which it has received customary
fees and expenses. The representative may, from time to time, engage in
transactions with and perform services for FLAG Telecom in the ordinary course
of its business.

FLAG Telecom and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make in respect of any of those liabilities.

LEGAL MATTERS

The validity of the issuance of the common shares offered in this
prospectus, the matter of enforcement of judgments in Bermuda and Bermuda tax
consequences will be passed on by Appleby, Spurling & Kempe, Hamilton, Bermuda,
counsel to FLAG Telecom. United States legal matters related to this offering,
including matters of United States law, will be passed upon for FLAG Telecom by
Morgan, Lewis & Bockius LLP, New York, New York and for the underwriters by
Cleary, Gottlieb, Steen & Hamilton, New York, New York.

EXPERTS

The financial statements and schedules of FLAG Telecom Holdings Limited for
the period from incorporation to September 30, 1999 and FLAG Limited for the
period from January 1, 1999 to February 26, 1999 and for the the years ended
December 31, 1998, 1997 and 1996 included in this prospectus and elsewhere in
the registration statement have been audited by Arthur Andersen & Co.,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance the authority of said firm as
experts in giving said reports.

80
<PAGE>
AVAILABLE INFORMATION

FLAG Telecom has filed with the Securities and Exchange Commission a
registration statement on Form F-1 under the Securities Act of 1933 with respect
to the common shares offered in this prospectus. This prospectus, which forms a
part of the registration statement, does not contain all the information in the
registration statement. Certain portions of the registration statement contain
exhibits and schedules which have been omitted from this prospectus as permitted
by the rules and regulations of the Securities and Exchange Commission. For
further information about us and our common shares offered in this prospectus,
we refer you to the registration statement and to its exhibits and schedules.
You may inspect the registration statement, including all its exhibits and
schedules, without charge at the principal office of the Securities and Exchange
Commission located at 450 Fifth Street, N.W., Washington, DC 20549, and at the
following regional offices of the Securities and Exchange Commission: Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and
7 World Trade Center, 13th Floor, New York, New York 10048. You may obtain
copies of this material from the Public Reference Section of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Room 1204, Washington, DC 20549,
at prescribed rates. In addition, we have applied for listing on the Nasdaq
National Market. You may inspect reports and other information concerning FLAG
Telecom at the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, DC.

Upon completion of this offering, we will be subject to informational
requirements of some U.S. federal securities laws and, therefore, we will be
required or have agreed to file periodic reports and other information with the
Securities and Exchange Commission, except as described below. As a foreign
private issuer, FLAG Telecom is exempt from the rules under the Securities
Exchange Act of 1934 prescribing the furnishing and content of proxy statements.
Additionally, our officers, directors and principal shareholders are exempt from
the reporting and short-swing profit recovery provisions contained in
Section 16 of the Securities Exchange Act of 1934. In addition, under the
Securities Exchange Act of 1934, we are not required to publish financial
statements as frequently, as promptly or containing the same information as
United States companies. However, we have agreed to provide our shareholders
with reports on Form 10-Q and 10-K and to comply with the United States proxy
rules. In addition, we will furnish to holders of common shares annual reports
in English containing consolidated financial statements, prepared in accordance
with U.S. GAAP, examined by our independent public auditors and including their
report thereon. We also will make available quarterly reports containing
condensed unaudited financial information for the first three fiscal quarters of
each year, prepared in accordance with U.S. GAAP. We will generally furnish
annual reports within 90 days after the end of each fiscal year, and make
available quarterly reports within 45 days after the end of each of the first
three fiscal quarters of each year. We will also provide the holders of common
shares with notice of meetings of holders of common shares.

The Securities and Exchange Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The address of the Securities and Exchange Commission's web-site is
http://www.sec.gov.

81
<PAGE>
FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
FLAG Telecom Holdings Limited
Report of Independent Public Accountants (Arthur
Andersen)................................................. F-2
Consolidated Balance Sheet as of September 30, 1999
(audited)................................................. F-3
Consolidated Statement of Operations for the period from
incorporation to September 30, 1999 (audited)............. F-4
Consolidated Statement of Comprehensive Income for the
period from incorporation to September 30, 1999
(audited)................................................. F-5
Consolidated Statement of Shareholders' Equity for the
period from incorporation to September 30, 1999........... F-6
Consolidated Statement of Cash Flows for the period from
incorporation to September 30, 1999 (audited)............. F-7
Notes to Consolidated Financial Statements.................. F-8

FLAG Limited
Report of Independent Public Accountants (Arthur
Andersen)................................................. F-21
Consolidated Balance Sheets as of February 26, 1999 and
December 31, 1998 and 1997 (audited)...................... F-22
Consolidated Statements of Operations for the period from
January 1, 1999 to February 26, 1999 and the years ended
December 31, 1998, 1997 and 1996 (audited)................ F-23
Consolidated Statements of Comprehensive Income for the
period from January 1, 1999 to February 26, 1999 and the
years ended December 31, 1998, 1997 and 1996 (audited).... F-24
Consolidated Statements of Shareholders' Equity for the
period from January 1, 1999 to February 26, 1999 and the
years ended December 31, 1998, 1997 and 1996 (audited).... F-25
Consolidated Statements of Cash Flows for the period from
January 1, 1999 to February 26, 1999 and the years ended
December 31, 1998, 1997 and 1996 (audited)................ F-26
Notes to Consolidated Financial Statements.................. F-28
Consolidated Statement of Operations for the nine-month
period ended September 30, 1998 (unaudited)............... F-45
Consolidated Statement of Cash Flows for the nine-month
period ended September 30, 1998 (unaudited)............... F-46
Notes to Consolidated Financial Information for the
nine-month period ended September 30, 1998................ F-47
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of FLAG Telecom Holdings Limited:

We have audited the accompanying consolidated balance sheet of FLAG Telecom
Holdings Limited (a Bermuda company) and subsidiaries (the "Group") as of
September 30, 1999, and the related consolidated statement of operations,
comprehensive income, shareholders' equity and cash flows for the period from
incorporation to September 30, 1999. These financial statements are the
responsibility of FLAG Telecom Holdings Limited's management. Our responsibility
is to express an opinion on these financial statements based on our audit.

We conducted our audit 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 consolidated financial position of FLAG Telecom
Holdings Limited and subsidiaries as of September 30, 1999, and the consolidated
results of their operations and their cash flows for the period from
incorporation to September 30, 1999, in conformity with accounting principles
generally accepted in the United States.

Arthur Andersen & Co.
Hamilton, Bermuda
January 17, 2000

F-2
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 1999

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1999
----------
<S> <C>
ASSETS:
Current assets:
Cash...................................................... $ 2,836
Accounts receivable, net of allowance for doubtful
accounts of $7,454...................................... 116,854
Due from affiliate........................................ 5,000
Prepaid expenses and other assets......................... 4,906
----------
129,596

Funds held by collateral trustee............................ 144,183
Capacity available for sale................................. 870,181
Capitalized financing costs, net of accumulated amortization
of $2,731................................................. 11,119
Fixed assets, net........................................... 208,825
----------
$1,363,904
==========

LIABILITIES:
Current liabilities:
Accrued construction costs................................ $ 75,604
Accrued liabilities....................................... 27,519
Accounts payable.......................................... 5,116
Income taxes payable...................................... 4,511
Deferred revenue and other.................................. 17,635
----------
130,385

8 1/4% Senior Notes, due 2008, net of unamortized discount
of $4,878................................................. 425,122
Long-term debt.............................................. 223,000
Deferred revenue and other.................................. 111,318
Deferred taxes.............................................. 3,651
----------
893,476

MINORITY INTEREST........................................... 160,562

SHAREHOLDERS' EQUITY:
Common shares, $.0006 par value............................. 7
Other shareholders' equity.................................. 308,547
Foreign currency translation adjustment..................... (3)
Retained earnings........................................... 1,315
----------
309,866
----------
$1,363,904
==========
</TABLE>

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

F-3
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

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

<TABLE>
<CAPTION>
1999
------------
<S> <C>
REVENUES:
Capacity sales, net of discounts.......................... $ 89,223
Standby maintenance and restoration revenue............... 28,760
------------
117,983
SALES AND OTHER OPERATING EXPENSES:
Cost of capacity sold..................................... 43,799
Operations and maintenance (including non-cash
compensation expense of $1,204)......................... 17,419
Sales and marketing (including non-cash compensation
expense of $750)........................................ 8,085
General and administrative (including non-cash
compensation expense of $1,510)......................... 12,788
Depreciation and amortization............................. 5,220
------------
87,311

OPERATING INCOME............................................ 30,672
INTEREST EXPENSE............................................ 31,264
INTEREST INCOME............................................. 4,924
------------
INCOME BEFORE MINORITY INTEREST AND INCOME TAXES............ 4,332
MINORITY INTEREST........................................... 1,919
------------
INCOME BEFORE INCOME TAXES.................................. 2,413
PROVISION FOR INCOME TAXES.................................. 1,098
------------
NET INCOME.................................................. $ 1,315
============

Basic and diluted income per common share................... $ 0.02
Weighted average common shares outstanding.................. 69,709,935
</TABLE>

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

F-4
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

(EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
1999
--------
<S> <C>
NET INCOME.................................................. $1,315
Foreign currency translation adjustment..................... (3)
------
COMPREHENSIVE INCOME........................................ $1,312
------
</TABLE>

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

F-5
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

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

<TABLE>
<CAPTION>
FOREIGN
COMMON SHARES ADDITIONAL CURRENCY TOTAL
---------------------- PAID-IN STOCK RETAINED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS ADJUSTMENT EQUITY
----------- -------- ---------- ------------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Opening Balance.......... -- $-- $ -- $ -- $ -- $ -- $ --
Issuance of shares in
exchange for shares in
FLAG Limited........... 69,709,935 7 305,083 -- -- -- 305,090
Stock compensation
accrued................ -- -- 17,239 (17,239) -- -- --
Stock compensation
current year charge.... -- -- -- 3,464 -- -- 3,464
Foreign currency
translation
adjustment............. -- -- -- -- -- (3) (3)
Net income for period.... -- -- -- -- 1,315 -- 1,315
----------- --- -------- -------- ------ ----- --------
Balance, September 30,
1999................... 69,709,935 $ 7 $322,322 $(13,775) $1,315 $ (3) $309,866
=========== === ======== ======== ====== ===== ========
</TABLE>

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

F-6
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

(EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
1999
---------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income applicable to common shareholders................ $ 1,315
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest......................................... 1,919
Amortization of financing costs........................... 959
Provision for doubtful accounts........................... 1,176
Accretion of discount on 8 1/4% senior notes.............. 345
Stock compensation........................................ 3,464
Depreciation and amortization............................. 5,220
Deferred taxes............................................ 304
Add (deduct) net changes in operating assets and
liabilities:
Accounts receivable..................................... (28,681)
Due from affiliate...................................... (5,000)
Prepaid expenses and other assets....................... (1,333)
Capacity available for sale............................. 49,389
Accounts payable and accrued liabilities................ 9,701
Income taxes payable.................................... (2,064)
Due to affiliate........................................ (1,175)
Deferred revenue and other.............................. 26,574
---------
Net cash provided by operating activities............. 62,113
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt................................. (33,500)
Decrease in funds held by collateral trustee................ 74,953
---------
Net cash provided by financing activities............. $ 41,453
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction.................................. (101,365)
Purchase of fixed assets.................................... (1,271)
---------
Net cash used in investing activities................. (102,636)
NET DECREASE IN CASH........................................ 930
Effect of foreign currency movements........................ (10)
CASH, beginning of period................................... 1,916
---------
CASH, end of year........................................... $ 2,836
=========
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Decrease in capacity available for sale..................... $ 60,389
Decrease in accrued construction costs...................... (11,000)
---------
Cost of capacity sold....................................... $ 49,389
=========
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Increase in construction in progress........................ $ 34,039
Decrease in accrued construction costs...................... 67,326
---------
Cash paid for construction in progress...................... $ 101,365
=========
SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW
INFORMATION:
Interest expense for period................................. $ 31,264
Amortization of financing costs............................. (1,304)
Decrease (increase) in accrued interest payable............. (4,170)
---------
Interest paid............................................... $ 25,790
=========
Interest capitalized........................................ $ 1,281
=========
</TABLE>

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

F-7
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

1. BACKGROUND

FLAG Telecom was incorporated on February 3, 1999 to serve as the holding
company for the FLAG Telecom group of companies. On February 26, 1999, FLAG
Telecom acquired approximately 65.79% of FLAG Limited by exchanging 69,709,935
shares of FLAG Limited common stock for the same number of shares of FLAG
Telecom common stock. The minority shareholder of FLAG Limited exchanged its
remaining holding in FLAG Limited for shares in FLAG Telecom on January 4, 2000
such that on that date FLAG Limited became a wholly owned subsidiary of FLAG
Telecom. This acquisition has been accounted for as a recapitalization such that
no goodwill arises and assets and liabilities are reflected at carryover basis.

The results of the operations of FLAG Limited have been included in the
consolidated results of FLAG Telecom's operations since the date of acquisition.

FLAG Limited 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 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 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 its route. FLAG Limited 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.

FLAG Telecom also has an indirect 50% interest in FLAG Atlantic Limited via
FLAG Atlantic Holdings Limited, a wholly-owned subsidiary. FLAG Atlantic Limited
is a joint venture company set up to build, own and operate a transatlantic
fiberoptic cable system connecting the United States, United Kingdom and France.
Global Telesystem Group, Inc. owns the other 50% interest in the venture. The
transatlantic cable system will be designed to carry voice, high-speed data and
video traffic. The FLAG Atlantic system is expected to be ready for service in
the first quarter of 2001.

2. SIGNIFICANT ACCOUNTING POLICIES

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

F-8
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 FLAG
Telecom and its subsidiary companies after eliminating intercompany transactions
and balances. Investments in which FLAG Telecom has an investment of 20%-50% or
investments in which FLAG Telecom can assert significant influence, but does not
control, are accounted for under the equity method.

b) Revenue Recognition

Capacity contracts are accounted for as leases. For contracts that satisfy
sales type lease accounting, revenues are recognized upon the date the risks and
rewards of ownership are transferred to the purchaser, which is the date the
capacity is made available for activation and the customer becomes responsible
for maintenance charges. As a result of the issue of Interpretation 43 "Real
Estate Sales, an interpretation of FASB Statement No. 66", ("FIN 43") 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.

Capacity contracts that do not qualify for sales type lease accounting are
accounted for as operating leases and revenue is recognized over the term of the
lease. 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 Group.

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

For certain customers, FLAG Limited has granted price protection credits
entitling them to additional capacity if FLAG Limited lowers its prices prior to
December 31, 1999. In the period that it

F-9
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

becomes probable that FLAG Limited will lower its list prices, FLAG Limited
records a provision for expected cost of sales for the additional units of
capacity granted.

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

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 capacity of the
cable system is upgraded in the future to increase the units of capacity
available for sale. Changes in management's estimate of total expected revenues
over the life of the cable system will result in adjustments to the calculations
of cost of sales. These adjustments will be recorded on a prospective basis over
future periods commencing with the period management revises its estimate.

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 network.

d) Commissions

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

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, and other costs necessary for developing the cable system.

F-10
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

f) Capitalized Financing Costs

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

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

At the end of March 1998, FLAG Limited entered into two interest rate swap
agreements to manage its 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, FLAG Limited pays a fixed rate of 5.60% on a notional
amount of $60,000 and a fixed rate of 5.79% on a notional amount of $100,000 and
the counterparty pays the floating rate based on LIBOR. The swap agreements
terminate in January and July 2000, respectively, unless extended by an
additional one year and six months, respectively, at the option of the
counterparty.

The 8 1/4% Senior Notes arising on the refinancing undertaken on
January 30, 1998 (the "Senior Notes") accrue interest at the rate of 8 1/4% per
annum paid semi-annually on January 30 and July 30 of each year, commencing on
July 30, 1998 (see Note 4. "Long-term Debt"). Interest is expensed as it
accrues. The Senior Notes are redeemable at FLAG Limited'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, FLAG Limited 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 FLAG Limited has excess cash flow,
as defined, for any fiscal year commencing in 2001, FLAG Limited 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 FLAG Limited 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.

F-11
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

For interest rate derivatives to qualify for hedge accounting, the debt
instrument being hedged must expose the Group 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 deduction in interest expense.

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 No. 123), the Company has chosen
to account for employee stock options under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25), and, accordingly,
recognizes compensation expense for stock option grants to the extent that the
estimated fair value of the stock exceeds the exercise price of the option at
the measurement date. The compensation expense is charged against operations
ratably 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
using enacted tax rates. 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 per Common Share

Basic net income per common share is based on dividing net income applicable
to common shareholders by the weighted average number of common shares
outstanding in the period. Diluted net

F-12
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

income per common share is computed by dividing net income by the weighted
average number of common shares and common share equivalents outstanding during
the period.

m) Impairment of Long-Lived Assets

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

n) Pending Accounting Standards

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 No.
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.

o) Reverse Stock Split

The accompanying consolidated financial statements have been retroactively
restated to give effect to a reverse stock split of 6:1.

3. FIXED ASSETS

Fixed assets consist of the following:

<TABLE>
<CAPTION>
1999
-------------
<S> <C>
Fixtures and fittings....................................... $ 1,403
Leasehold improvements...................................... 2,621
Computer equipment.......................................... 2,328
Motor vehicles.............................................. 286
Network assets.............................................. 208,376
-------------
215,014

Less--Accumulated depreciation.............................. (6,189)
-------------
Net book value.............................................. $ 208,825
=============
</TABLE>

As a result of the application of FIN 43, sales on certain parts of the FLAG
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.

F-13
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

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

4. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
1999
----
<S> <C>
Bank credit facility........................................ $223,000
8 1/4% Senior Notes, due 2008, net of unamortized discount
of $4,878................................................. $425,122
</TABLE>

On January 30, 1998, FLAG Limited 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 Group.
Accordingly, they are effectively subordinated to any secured obligation arising
from the New Credit Facility.

The existing bank credit facilities include a seven-year $320,000 term loan
facility and a $50,000 revolving credit facility. Total Group borrowings under
the credit facility at September 30, 1999 are $223,000. 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 FLAG Limited's
assets and revenues, other than FLAG Limited's physical assets.

The New Credit Facility and the indenture under which the Senior Notes were
issued impose certain operating and financial restrictions on FLAG Limited. Such
restrictions will affect, and in many respects significantly limit or prohibit,
among other things, the ability of FLAG Limited 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 FLAG
Limited to effect future financings, make needed capital expenditures, withstand
a future downturn in FLAG Limited'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 FLAG Limited's credit facility. The collateral trustee has a security
interest in these accounts.

Contractual maturities of the Group's indebtedness over the next five years
are as follows:

<TABLE>
<S> <C>
Year ended December 31,
1999.................................................... $ --
2000.................................................... --
2001.................................................... --
2002.................................................... --
2003.................................................... 91,080
--------
$ 91,080
========
</TABLE>

F-14
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

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

5. SHAREHOLDERS' EQUITY

The authorized common share capital of FLAG Telecom consists of 189,833,333
shares with a par value of $.0006 per share. The following number of shares were
issued and outstanding at September 30, 1999.

<TABLE>
<CAPTION>
1999
----
<S> <C>
Shares outstanding.......................................... 69,709,935
Share capital............................................... $ 7
</TABLE>

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

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

6. STOCK OPTIONS

In March, 1998, the Group adopted a Long-Term Incentive Plan under which
options may be granted on up to 6,763,791 shares of common stock to eligible
members of staff. Generally, options granted under this plan vest and are
exercisable on the third and fourth anniversaries of their grant, subject to
meeting certain qualifying criteria. All options vest no later than eight years
and expire ten years after the date of grant. The options can vest, and are
exercisable earlier on the commencement of an initial public offering of equity.

F-15
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

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

6. STOCK OPTIONS (CONTINUED)

The following summarizes stock option activity under this plan:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance December 31, 1997......................... -- $ --
Granted........................................... 2,357,706 6.42
Forfeited......................................... -- --
Exercised......................................... -- --
----------

Balance December 31, 1998......................... 2,357,706 6.42
Granted........................................... 1,614,167 6.42
Forfeited......................................... -- --
Exercised......................................... -- --
----------

Balance September 30, 1999........................ 3,971,873 $6.42
==========
</TABLE>

All options during 1998 and 1999 were granted at an exercise price of $6.42
per share. At December 31, 1998 and September 30, 1999 no options had vested.

The weighted average fair value of options granted during 1998 and 1999 was
$3.66 and $3.60 per share respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in 1998 and 1999: risk-free interest
rates ranging from 5.1% to 5.8%; expected lives of 5.0 years; expected dividend
yield of zero percent; and expected volatility of 59%.

During the period ended September 30, 1999 the Company recorded additional
shareholders capital of $17,239 relating to awards under the Long Term Incentive
Plan. During the period the Company recorded an expense of $3,464. Expected
future charges in respect of these stock options are as follows:

Had compensation cost for these grants been determined consistent with Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," the Group's net income and net income per share would have been
reduced to the following amounts:

<TABLE>
<S> <C>
Net income 1999
-----
As reported.............................................. 1,315
Pro forma............................................... 3,757
Basic and diluted income per share
As reported............................................. 0.02
Pro forma............................................... 0.05
</TABLE>

F-16
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

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

6. STOCK OPTIONS (CONTINUED)

The weighted average remaining contractual life of all options is 9.0 years. The
effects of applying SFAS 123 for disclosing compensation cost may not be
representative of the effects on reported income for future years.

7. BASIC AND DILUTED INCOME PER COMMON SHARE

<TABLE>
<CAPTION>
1999
------------
<S> <C>
Net income.................................................. $ 1,315
Number of shares............................................ 69,709,935
Income per share............................................ $ 0.02
</TABLE>

The stock options granted during the year ended December 31, 1998 and during
the period from February 27, 1999 to September 30, 1999 discussed in Note 5 did
not have a dilutive effect on income per share for the period from incorporation
to September 30, 1999.

The right granted to Bell Atlantic Network Systems to exchange common shares
in FLAG Limited for common shares in FLAG Telecom, as discussed in Note 5 did
not have a dilutive effect on income per share for the period from incorporation
to September 30, 1999.

8. FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and fair values of the
Group's financial instruments as of September 30, 1999:

<TABLE>
<CAPTION>
1999
NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE
-------- -------- -----
<S> <C> <C> <C>
Funds held by Collateral Trustee................. -- 144,183 144,183
8 1/4% Senior Notes.............................. 430,000 425,122 375,175
Long-term debt................................... -- 223,000 223,000
Interest rate swaps.............................. 160,000 -- (37)
</TABLE>

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

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.
</TABLE>

F-17
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

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

8. FINANCIAL INSTRUMENTS (CONTINUED)

<TABLE>
<S> <C>
8 1/4% Senior Notes.................. The carrying amount of the 8 1/4% Senior Notes is the net
proceeds of the Senior Notes issue. The fair value is based
on the market price of the Senior Notes at September 30,
1999.

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 swaps 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 implied
yield curve and values the changes in interest rates since
inception, and the potential for future changes over the
remaining term.
</TABLE>

9. 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, FLAG Telecom and all
its subsidiaries registered in Bermuda have received an undertaking from the
Bermuda Government exempting them from all such taxes until March 28, 2016.

The provision for income taxes reflected in the accompanying statement of
operations consists of taxes incurred on income derived from capacity sales and
standby maintenance revenues from customers in certain jurisdictions along the
FLAG Europe-Asia cable system where FLAG Limited 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
----
<S> <C>
Current..................................................... 794
Deferred.................................................... 304
------
$1,098
</TABLE>

F-18
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

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

9. 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
provision for deferred tax comprises the following:

<TABLE>
<CAPTION>
1999
----
<S> <C>
Capacity sales revenues deferred for tax purposes........... $ 16,250
Deferred commissions for tax purposes....................... (1,851)
Future depreciation for tax purposes........................ (8,204)
Tax losses carried forward.................................. (2,012)
Other....................................................... (532)
--------
$ 3,651
</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.

10. RELATED PARTY TRANSACTIONS

In May 1998, FLAG Limited entered into an Employee Services Agreement with
Bell Atlantic Global Systems ("BAGS") pursuant to which BAGS seconds certain
employees to FLAG Limited. The total cost incurred for this service during the
period from February 27, 1999 to September 30, 1999 was $217. These costs have
been expensed in the accompanying statements of operations.

11. COMMITMENTS AND CONTINGENCIES

As of September 30, 1999, FLAG Limited was committed under supply contracts
for the FLAG Europe-Asia cable system for final payments totalling $75,604
representing funds withheld pending the completion of certain outstanding items
under the supply contracts. Provision has been made in full in the Group's
financial statements to cover the anticipated final payments.

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

F-19
<PAGE>
FLAG TELECOM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999

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

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

FLAG Limited has entered into lease agreements for the rental of office
space. Estimated future minimum rental payments under the leases are as follows:

<TABLE>
<S> <C> <C>
Remainder of 1999.......................................... $289
2000....................................................... 824
2001....................................................... 537
2002....................................................... 549
2003....................................................... 549
Thereafter................................................. 2,910
</TABLE>

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

<TABLE>
<S> <C>
Remainder of 1999........................................... $ 5,608
2000........................................................ 24,546
2001........................................................ 25,105
2002........................................................ 25,197
2003........................................................ 8,820
Thereafter.................................................. 35,280
</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 Group is subject to legal proceedings and claims in the ordinary course
of business. Based on consultations with legal counsel, management does not
believe that any of these proceedings or claims will have a material effect on
the Group's financial position or results of operations.

F-20
<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 February 26, 1999, and December 31,
1998 and 1997, and the related consolidated statements of operations,
comprehensive income, shareholders' equity and cash flows for the period from
January 1, 1999 to February 26, 1999 and for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of FLAG Limited's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FLAG Limited and
subsidiaries as of February 26, 1999, and December 31, 1998 and 1997, and the
results of their operations and their cash flows for the period from
January 1, 1999 to February 26, 1999 and for each of the three years in the
period ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States.

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

F-21
<PAGE>
FLAG LIMITED

CONSOLIDATED BALANCE SHEETS

AS OF FEBRUARY 26, 1999 AND DECEMBER 31, 1998 AND 1997

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash................................................... $ 1,916 $ 3,024 $ 2,490
Accounts receivable, net of allowance for doubtful
accounts of $8,630, $8,630 and $9,054................ 68,501 70,211 91,102
Due from affiliates and other receivables.............. -- 206 690
Prepaid expenses and other assets...................... 3,524 2,673 2,395
---------- ---------- ----------
73,941 76,114 96,677
Accounts receivable...................................... 20,854 20,854 42,023
Funds held by collateral trustee......................... 219,136 255,366 425,905
Construction in progress................................. 18,471 11,494 389
Capacity available for sale.............................. 1,086,435 1,095,099 1,208,948
Capitalized financing costs, net of accumulated
amortization of $1,498, $1,498 and $52,669............. 12,078 12,352 61,848
Fixed assets, net........................................ 4,454 4,487 1,147
---------- ---------- ----------
$1,435,369 $1,475,766 $1,836,937
========== ========== ==========

LIABILITIES:
Current liabilities:
Accrued construction costs............................. $ 153,930 $ 146,165 $ 317,058
Accrued liabilities.................................... 15,151 33,214 21,394
Accounts payable....................................... 7,541 6,018 5,262
Income taxes payable................................... 6,620 6,453 4,391
Due to affiliate....................................... 1,175 1,843 5,892
Deferred revenue....................................... 18,809 39,121 16,558
---------- ---------- ----------
203,226 232,814 370,555
8 1/4% Senior Notes, due 2008, net of unamortized
discount of $5,321, $5,321, $nil....................... 424,777 424,679 --
Long-term debt........................................... 256,500 271,500 615,087
Deferred revenue and other............................... 83,570 84,415 176,221
Deferred taxes........................................... 3,562 3,562 4,600
---------- ---------- ----------
971,635 1,016,970 1,166,463
COMMITMENTS AND CONTINGENCIES
PREFERRED SHARES:
Series A, $100 liquidation value, net of unamortized
discount of $nil, $nil and $1,905.................... -- -- 129,445

SHAREHOLDERS' EQUITY:
Class A common shares, $.0001 par value................ -- 13 13
Class B common shares, $.0001 par value................ 64 57 57
Additional paid-in capital............................. 504,387 504,381 514,389
Foreign currency translation adjustment................ (526) (704) --
Retained (deficit) earnings............................ (40,191) (44,951) 26,570
---------- ---------- ----------
463,734 458,796 541,029
---------- ---------- ----------
$1,435,369 $1,475,766 $1,836,937
========== ========== ==========
</TABLE>

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

F-22
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

<TABLE>
<CAPTION>
1996
1999 1998 1997 (AS RESTATED)
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Capacity sales, net of discounts........ $ 25,554 $ 182,935 $ 335,982 --
Standby maintenance and restoration
revenue............................... 4,458 25,313 4,011 --
----------- ----------- ----------- -----------
30,012 208,248 339,993 --
SALES AND OTHER OPERATING EXPENSES:
Cost of capacity sold................... 8,294 101,288 196,190 --
Operations and maintenance.............. 5,114 37,931 4,600 --
Sales and marketing..................... 637 10,680 6,598 316
General and administrative.............. 2,870 21,674 30,339 12,345
Depreciation and amortization........... 233 844 276 121
----------- ----------- ----------- -----------
17,148 172,417 238,003 12,782

OPERATING INCOME (LOSS)................... 12,864 35,831 101,990 (12,782)
INTEREST EXPENSE.......................... 9,758 61,128 20,193 --
INTEREST INCOME........................... 1,825 14,875 6,637 2,408
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES......... 4,931 (10,422) 88,434 (10,374)
PROVISION FOR INCOME TAXES................ 171 1,260 8,991 --
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM... 4,760 (11,682) 79,443 (10,374)
EXTRAORDINARY ITEM........................ -- 59,839 -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS)......................... 4,760 (71,521) 79,443 (10,374)
CUMULATIVE PAY-IN-KIND PREFERRED
DIVIDENDS............................... -- 1,508 16,324 14,410
REDEMPTION PREMIUM AND WRITE OFF OF
DISCOUNT ON PREFERRED SHARES............ -- 8,500 -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS............................ $ 4,760 $ (81,529) $ 63,119 $ (24,784)
=========== =========== =========== ===========
Basic and diluted net income (loss) per
common share--Class A................... $ 0.00 $ (0.07) $ 0.05 $ (0.02)
=========== =========== =========== ===========
Basic and diluted net income (loss) per
common share--Class B................... $ 0.01 $ (0.13) $ 0.14 $ (0.13)
=========== =========== =========== ===========
Weighted average common shares
outstanding--Class A.................... -- 132,000,000 132,000,000 132,000,000
Weighted average common shares
outstanding--Class B.................... 635,796,338 565,858,741 396,890,512 164,445,547
</TABLE>

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

F-23
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
1996
1999 1998 1997 (AS RESTATED)
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
NET INCOME (LOSS)..................................... $4,760 $(81,529) $63,119 $(24,784)
Foreign currency translation adjustment............... 178 (704) -- --
------ -------- ------- --------
COMPREHENSIVE INCOME (LOSS)........................... $4,938 $(82,233) $63,119 $(24,784)
====== ======== ======= ========
</TABLE>

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

F-24
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT NUMBERS OF SHARES)
<TABLE>
<CAPTION>
CLASS A CLASS B FOREIGN RETAINED
COMMON SHARES COMMON SHARES ADDITIONAL CURRENCY EARNINGS
----------------------- ---------------------- PAID-IN TRANSLATION (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT)
------------ -------- ----------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995... 132,000,000 $13 92,366,742 $9 $99,098 $-- $(42,499)
Preferred share dividends and
accretion.................. -- -- -- -- (14,410) -- 14,410
Issuance of Class B shares
for cash................... -- -- 119,000,000 12 110,448 -- --
Issuance of Class B shares to
preferred shareholders..... -- -- 4,099,204 1 (1) -- --
1996 net loss applicable to
common shareholders........ -- -- -- -- -- -- (24,784)
------------ --- ----------- --- -------- -------- --------
Balance, December 31, 1996... 132,000,000 13 215,465,946 22 195,135 -- (52,873)
Preferred share dividends and
accretion.................. -- -- -- -- (16,324) -- 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 applicable to
common shareholders........ -- -- -- -- -- -- 63,119
------------ --- ----------- --- -------- -------- --------
Balance, December 31, 1997... 132,000,000 13 565,858,741 57 514,389 -- 26,570
Preferred share dividends and
accretion.................. -- -- -- -- (1,508) -- 1,508
Premium on redemption of
preferred shares........... -- -- -- -- (6,641) -- 6,641
Write-off of unamortized
discount on issuance of
preferred shares........... -- -- -- -- (1,859) -- 1,859
Foreign currency translation
adjustment................. -- -- -- -- -- (704) --
1998 net loss applicable to
common shareholders........ -- -- -- -- -- -- (81,529)
------------ --- ----------- --- -------- -------- --------
Balance, December 31, 1998... 132,000,000 13 565,858,741 57 504,381 (704) (44,951)

Conversion of Class A shares
into Class B shares

Class A shares
[retired]................ (132,000,000) (13) -- -- 13 -- $--
Class B shares issued.... -- -- 69,937,597 7 (7) -- --
Foreign currency translation
adjustment................. -- -- -- -- -- -- 178
1999 net income applicable to
common shareholders........ -- -- -- -- -- 4,760 --
------------ --- ----------- --- -------- -------- --------
Balance, February 26, 1999... -- $-- 635,796,338 $64 $504,387 $(40,191) $(528)
============ === =========== === ======== ======== ========

TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance, December 31, 1995... $56,621
Preferred share dividends and
accretion.................. --
Issuance of Class B shares
for cash................... 110,460
Issuance of Class B shares to
preferred shareholders..... --
1996 net loss applicable to
common shareholders........ (24,784)
--------
Balance, December 31, 1996... 142,297
Preferred share dividends and
accretion.................. --
Issuance of Class B shares
for cash................... 335,613
Issuance of Class B shares to
preferred shareholders..... --
1997 net income applicable to
common shareholders........ 63,119
--------
Balance, December 31, 1997... 541,029
Preferred share dividends and
accretion.................. --
Premium on redemption of
preferred shares........... --
Write-off of unamortized
discount on issuance of
preferred shares........... --
Foreign currency translation
adjustment................. (704)
1998 net loss applicable to
common shareholders........ (81,529)
--------
Balance, December 31, 1998... 458,796
Conversion of Class A shares
into Class B shares
Class A shares
[retired]................ --
Class B shares issued.... --
Foreign currency translation
adjustment................. 178
1999 net income applicable to
common shareholders........ 4,760
--------
Balance, February 26, 1999... $463,734
========
</TABLE>

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

F-25
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
1999 1998 1997 1996
-------- --------- --------- -------------
(AS RESTATED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) applicable to common shareholders......... $ 4,760 $ (81,529) $ 63,119 $ (24,784)
-------- --------- --------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Pay-in-kind preferred dividends......................... -- 1,508 16,324 14,410
Amortization of financing costs......................... 274 3,427 6,082 --
Provision for doubtful accounts......................... -- (424) 9,054 --
Depreciation............................................ 233 844 276 121
Deferred taxes.......................................... -- (1,038) 4,600 --
Preferred share redemption premium...................... -- 8,500 -- --
Loss on debt refinancing................................ -- 59,839 -- --
Senior debt discount.................................... 98 591 -- --
Add (deduct) net changes in operating assets and
liabilities:
Accounts receivable................................... 1,710 42,500 (142,179) --
Due from affiliates and other receivables............. -- 484 (371) (294)
Prepaid expenses and other assets..................... (645) (272) 735 (337)
Capacity available for sale........................... 8,664 113,849 196,190 --
Accounts payable and accrued liabilities.............. (16,541) 12,250 26,335 (236)
Income taxes payable.................................. 168 2,062 4,391 --
Due to affiliate...................................... (668) (4,049) (4,179) (983)
Deferred revenue...................................... (21,157) (69,711) 104,779 --
-------- --------- --------- ---------
Net cash (used in) provided by operating
activities........................................ (23,104) 88,831 285,156 (12,103)

CASH FLOWS FROM FINANCING ACTIVITIES:
Organization and financing costs incurred................. -- (13,769) (11,769) (29,335)
Proceeds from long-term debt.............................. -- 320,000 414,914 262,543
Proceeds from 8 1/4% Senior Notes......................... -- 424,088 -- --
Repayment of long-term debt............................... (15,000) (663,587) (112,370) --
Capital contributions--common shares...................... -- -- 335,613 110,460
Redemption of preferred shares............................ -- (139,453) -- --
Gulf settlement payment................................... -- -- (3,000) --
Decrease (increase) in funds held by collateral trustee... 36,230 170,539 (377,711) (1,657)
-------- --------- --------- ---------
Net cash provided by financing activities........... 21,230 97,818 245,677 342,011

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction in progress.................... 788 (181,998) (527,808) (329,372)
Purchase of fixed assets.................................. (200) (4,146) (845) (514)
-------- --------- --------- ---------
Net cash provided by (used in) investing
activities........................................ 588 (186,144) (528,653) (329,886)
NET (DECREASE) INCREASE IN CASH............................. (1,286) 505 2,180 22
Effect of foreign currency movements...................... 178 29 -- --
CASH, beginning of year..................................... 3,024 2,490 310 288
-------- --------- --------- ---------
CASH, end of year........................................... $ 1,916 $ 3,024 $ 2,490 $ 310
======== ========= ========= =========
</TABLE>

F-26
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
1999 1998 1997 1996
-------- --------- --------- -------------
(AS RESTATED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Costs (reimbursed) incurred for construction in
progress................................................ $ (788) $ 11,105 $ 757,722 $ 480,524
Increase in deferred revenue for capacity credits......... -- -- (88,000) --
Decrease (increase) in accrued liabilities................ -- 170,893 (123,964) (126,562)
Amortization of capitalized financing costs............... -- -- (17,950) (24,590)
-------- --------- --------- ---------
Cash paid for construction in progress.................... $ (788) $ 181,998 $ 527,808 $ 329,372
======== ========= ========= =========

SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid............................................... $ 22,668 $ 39,171 $ 58,286 $ 14,018
======== ========= ========= =========

Taxes paid.................................................. $ -- $ -- $ -- $ --
======== ========= ========= =========
</TABLE>

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

F-27
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(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 $1.55 billion to construct, and consists
of over 17,000 miles of fiberoptic cable.

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

2. SIGNIFICANT ACCOUNTING POLICIES

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

a) Basis of Consolidation

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

b) Sales and Cost of Sales Recognition

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

F-28
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

to customers for maintenance and repair services are invoiced separately from
capacity lease payments. There are no guaranteed or unguaranteed residual values
accruing to the benefit of the Company. The Company has no minimum lease
payments due in 1999 and no minimum lease payments for all subsequent years.

As of December 31, 1998, in exchange for construction costs incurred, the
Company had granted credits to suppliers toward future capacity. In addition,
certain customers have committed to purchase capacity at a future date under
signed capacity credit agreements. Such amounts received or receivable under
these agreements and the capacity credits granted to suppliers are recorded as
deferred revenue until the date the credits are utilized, at which time the
deferred revenue is recognized as earned. Amounts receivable under these
capacity agreements are reflected within accounts receivable in the accompanying
balance sheets. Deferred revenue also includes amounts invoiced for standby
maintenance which are applicable to future periods.

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

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

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

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

c) Commissions

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

F-29
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

d) Capacity Available for Sale and Construction in Progress

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

e) Capitalized Financing Costs

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

f) Fixed Assets

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

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

Fixed assets consist of the following

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Office furniture............................................ $1,265 $1,231
Leasehold improvements...................................... 2,371 2,326
Computer equipment.......................................... 1,703 1,582
Motor vehicles.............................................. 267 267
------ ------
5,606 5,406
Less--Accumulated depreciation.............................. (1,152) (919)
------ ------
Net book value.............................................. $4,454 $4,487
====== ======
</TABLE>

g) Interest Rate Derivatives

The Company uses derivative financial instruments for the purpose of
reducing its exposure to adverse fluctuations in interest rates. The Company
does not utilize derivative financial instruments for trading or other
speculative purposes. The counterparties to these instruments are major
financial

F-30
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

institutions with high credit quality. The Company is exposed to credit loss in
the event of nonperformance by these counterparties.

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

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

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

h) Translation of Foreign Currencies

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

F-31
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

of the opening net investments and results for the year are charged or credited
directly to the cumulative translation adjustment in shareholders' equity.

i) Stock Option Plan

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

j) Income Taxes

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

k) Net Income (Loss) per Common Share

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

l) Reclassifications/Restatements of 1996 Financial Statements

U.S. GAAP for entities subject to SEC regulations require that mandatorily
redeemable preferred shares be shown between total liabilities and shareholders'
equity in the balance sheet and that cumulative pay-in-kind dividends on the
Company's Preferred Shares be shown as an increase to the Company's net loss or
decrease to the Company's net income on the statement of operations to arrive at
net income (loss) applicable to common shareholders. As a company not previously
subject to SEC regulations, in its financial statements for the year ended
December 31, 1996, as issued in March 1997, the Company accounted for the
Preferred Shares as a component of shareholders' equity with cumulative
pay-in-kind dividends recorded as a reduction of additional paid-in capital
(given the accumulated deficit during the development stage). The Company has
restated its financial statements for the year ended December 31, 1996,
accordingly.

Upon issuance of the Company's Preferred Shares, the Company issued
3,075,816 Class B common shares to the preferred shareholders. The Company, in
its financial statements for the year ended December 31, 1996, as issued in
March 1997, had accounted for the Preferred Shares at the full amount of the
proceeds received and had recorded the Class B common shares at nil value. The
Company has now recorded the Preferred Shares at a discounted value equal to the
amount of

F-32
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

proceeds received less the fair value of the Class B common shares issued. The
fair value of the Class B common shares issued to the preferred shareholders was
deemed to be $3,076 based on $1 per Class B common share paid by other Class B
shareholders. This discount was being amortized over the term of the Preferred
Shares and was expensed in the statement of operations when the Preferred Shares
were redeemed. For the year ended December 31, 1996, this restatement had no
effect on net loss, increased net loss applicable to common shareholders by $550
and had no effect on basic and diluted loss per common share for Class A and
Class B.

The Company entered into a settlement agreement with Gulf Associates
Communications, Limited ("Gulf") in 1994. As a result of this settlement $9,000
was payable by the Company to Gulf of which $1,400 was reflected as a settlement
of loans payable, and the remaining $7,600 was reflected as a reduction in
additional paid-in capital in the year the payments became due. Under generally
accepted accounting principles, the Company should have expensed the $7,600 in
1994 as it was determined that the amount primarily related to Gulf's agreement
to discontinue arbitration proceedings and the accompanying financial statements
reflect this change. This restatement had no effect on net loss, net loss
applicable to common shareholders or basic or diluted net loss per common share
in 1996 or 1997. The effect of the restatement in the accompanying balance
sheets was to increase additional paid-in capital and decrease retained earnings
(increase accumulated deficit) by $7,600 as of December 31, 1997.

m) Pending Accounting Standards

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

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

F-33
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

3. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tranche A Facility.......................................... $ -- $ -- $306,380
Tranche B Facility.......................................... -- -- 308,707
Bank credit facility........................................ 256,500 271,500 --
8 1/4% Senior Notes, due 2008, net of unamortized discount
of $5,321................................................. 424,777 424,679 --
-------- -------- --------
$681,277 $696,179 $615,087
======== ======== ========
</TABLE>

On January 30, 1998, the Company completed the Refinancing which resulted in
the repayment of all $615,087 of outstanding borrowings under the Amended and
Restated Participation Agreement (the "Agreement") and the redemption of the
Preferred Shares. The Refinancing consisted of $370,000 of bank credit
facilities under the New Credit Facility and $430,000 of the Senior Notes. The
Company has registered the Senior Notes with the SEC. Proceeds received under
the Senior Notes were $424,088, net of a $5,912 underwriters' discount. This
discount is being amortised over the life of the notes. 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.

The bank credit facilities include a seven-year $320,000 term loan facility
and a $50,000 revolving credit facility. On January 30, 1998, the Company
borrowed $320,000 under the term loan facility. Total borrowings at
February 28, 1999 are $256,500. 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.

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

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.

F-34
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

3. LONG-TERM DEBT (CONTINUED)

Contractual maturities of debt are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------
<S> <C>
Remainder of 1999..................................... $ --
2000.................................................. --
2001.................................................. --
2002.................................................. 27,700
2003.................................................. 96,880
--------
$124,580
========
</TABLE>

4. PREFERRED SHARES

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

F-35
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

5. SHAREHOLDERS' EQUITY

a) Class A Common Shares

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

As of December 31, 1998 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.

b) Class B Common Shares

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

<TABLE>
<CAPTION>
1999 1998 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 FLAG Europe-Asia
cable system. There were no issues of Class B common shares during 1998. All
Class B common shares were funded at $1 per share.

6. STOCK OPTIONS

In March, 1998, the Company adopted a Long-Term Incentive Plan under which
the Company may grant up to 25,237,831 shares of common stock to eligible
members of staff. During the year ended December 31, 1998, options to purchase
14,146,239 Class B common shares were granted under the plan. No options were
granted under the plan from January 1, 1999 to February 26, 1999. Generally, the
options vest and are exercisable on the third and fourth anniversaries of their
grant, subject to meeting certain qualifying criteria. All options vest no later
than eight years and expire ten years after

F-36
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

6. STOCK OPTIONS (CONTINUED)

the date of grant. The options can vest, and are exercisable, earlier on the
commencement of an initial public offering of equity in the Company. All of the
options were granted at an exercise price of $1.07 per share. No options had
vested. Since the Company accounts for employee options in accordance with APB
No. 25, the Company has not recognized compensation expense with respect to the
options granted since the exercise price did not exceed management's estimated
fair value of the shares on the date of the grant (the measurement date).

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

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

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

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

<TABLE>
<CAPTION>
1998
---------
<S> <C>
Dividend yield.............................................. 0.0%
Expected volatility......................................... 0.59
Risk-free interest rate..................................... 6.0%
Expected lives of the options............................... 5.0 years
</TABLE>

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

F-37
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

7. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
1999 1998 1997 1996
---------------------- ------------------------- ------------------------- -----------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A
-------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) before
extraordinary item...... -- $4,760 $(21,847) $(21,847) $63,119 $63,119 $(24,784)
Extraordinary item........ -- -- $(59,839) $(59,839) -- -- --
Net income (loss)......... -- $4,760 $(81,529) $(81,529) $63,119 $63,119 $(24,784)
Percentage entitlement.... -- 100% 11% 89% 11% 89% 11%
Net income (loss) per
class before
extraordinary item...... -- $4,760 $(2,403) $(19,444) $6,943 $56,176 $(2,726)
Extraordinary item........ -- -- $(6,582) $(53,257) -- -- --
Net income (loss) per
class................... -- $4,760 $(8,968) $(72,561) $6,943 $56,176 $(2,726)
Number of shares.......... -- 635,796,333 132,000,000 565,858,741 132,000,000 396,890,512 132,000,000
Income (loss) per share
before extraordinary
item.................... -- $0.01 $(0.02) $(0.03) $0.05 $0.14 $(0.02)
Extraordinary item per
share................... -- -- $(0.05) $(0.10) -- -- --
Net income (loss) per
share................... -- $0.00 $(0.07) $(0.13) $0.05 $0.14 $(0.02)

<CAPTION>
1996
-----------
CLASS B
-----------
<S> <C>
Net income (loss) before
extraordinary item...... $(24,784)
Extraordinary item........ --
Net income (loss)......... $(24,784)
Percentage entitlement.... 89%
Net income (loss) per
class before
extraordinary item...... $(22,058)
Extraordinary item........ --
Net income (loss) per
class................... $(22,058)
Number of shares.......... 164,445,547
Income (loss) per share
before extraordinary
item.................... $(0.13)
Extraordinary item per
share................... --
Net income (loss) per
share................... $(0.13)
</TABLE>

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

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

8. FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and fair values of the
Company's financial instruments as of February 26, 1999 and December 31, 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...................... -- $219,136 $219,136 -- $255,366 $255,366 -- $425,905 $425,909
8 1/4% Senior Notes $430,000 $424,777 $407,425 $430,000 $424,679 $419,250 -- -- --
Long-term debt................. -- $256,500 $256,500 -- $271,500 $271,500 -- $615,087 $615,087
Interest rate swaps............ $160,000 -- (835) $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

F-38
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

8. FINANCIAL INSTRUMENTS (CONTINUED)

amounts exchanged are determined by reference to the notional amounts and the
other terms of the derivatives.

<TABLE>
<S> <C>
Funds held by Collateral The carrying amount is a reasonable estimate of fair value
Trustee....................... 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 swaps 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 The interest rate collar agreement is "zero cost" meaning
agreement..................... 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.

Treasury rate lock The treasury rate lock agreement is "zero cost" meaning that
agreement..................... 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 implied yield
curve and essentially values the potential for change in
interest rates during the remaining term.
</TABLE>

F-39
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

9. 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 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current....................................... $171 $2,281 $4,391 $--

Deferred...................................... -- (1,021) 4,600 --
---- ------ ------ ------

$171 $1,260 $8,991 $--
==== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
1999 1998 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Capacity sales revenues deferred for tax
purposes.............................. $13,217 $13,217 $7,145 $--

Deferred commissions for tax purposes... (1,911) (1,911) (197) --

Future depreciation for tax purposes.... (5,797) (5,797) (2,362) --

Tax losses carried forward.............. (1,479) (1,479) -- --

Other................................... (468) (451) 14 --
------- ------- ------- -------

$3,562 $3,579 $4,600 $--
======= ======= ======= =======
</TABLE>

F-40
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

10. 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 commissions resulting from certain sales. Also under the Marketing
Transition Agreement the Company has agreed to pay BANS or its affiliate a 50%
commission where BANS or its affiliate secures the sale of four whole DS-3s
(which equates to 84 whole MIUs) on the FLAG Europe-Asia cable system. The
Company will accrue a liability for the commissions in the period it becomes
probable that BANS or its affiliate will obtain the sales and that the amount of
the commissions can be reasonably estimated.

c) Employee Services Agreement

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

F-41
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

10. RELATED PARTY TRANSACTIONS (CONTINUED)

Total amounts incurred for the above services are as follows:

<TABLE>
<CAPTION>
PROGRAM MARKETING BUSINESS EMPLOYEE
MANAGEMENT SERVICES DEVELOPMENT SERVICES
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
1999.............................. -- -- -- $208

1998.............................. $2,823 $2,229 $662 $411

1997.............................. 12,000 3,098 436 --

1996.............................. 11,985 316 471 --
</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, 1997 and 1996, were $58, $1,280 and $2,240,
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, 1997 and 1996 were $1,953, $14,927 and $3,742, respectively, of which
$nil, $579 and $120 were payable at the end of each year, respectively.

Through March 1996, the Company paid consulting fees to Albaraka
International, an affiliate of Rathburn Limited, a Shareholder of the Company.
Fees paid to Albaraka International during 1996 were $80.

Until the third quarter of 1996, Tyco Submarine Systems Ltd. ("Tyco") was an
affiliate of AT&T Capital Corporation, a holder of Preferred Shares. During the
period in 1996 that Tyco was an affiliate of AT&T Capital Corporation, it was
paid $224,372.

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.

11. COMMITMENTS AND CONTINGENCIES

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

F-42
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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

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

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

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

<TABLE>
<S> <C>
Remainder of 1999........................................... $963

2000........................................................ 824

2001........................................................ 537

2002........................................................ 549

2003........................................................ 549

Thereafter.................................................. 2,910
</TABLE>

The Company is also committed to make quarterly payments under standby
maintenance agreements for the period commencing October 8, 1997 and continuing
through December 31, 2007. Estimated future payments under the standby
maintenance agreements are for the period February 27,

F-43
<PAGE>
FLAG LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

1999 to December 31, 1999 and for the years ended December 2000, 2001, 2002 and
2003 and thereafter are as follows:

<TABLE>
<S> <C>
Remainder of 1999........................................... $18,694

2000........................................................ 24,546

2001........................................................ 25,105

2002........................................................ 25,197

2003........................................................ 8,820

Thereafter.................................................. 35,280
</TABLE>

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

12. SUBSEQUENT EVENTS.

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

F-44
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
REVENUES:
Capacity sales, net of discounts.......................... $ 137,019
Standby maintenance revenue............................... 18,576
-----------
155,595
-----------
SALES AND OTHER OPERATING COSTS:
Cost of capacity sold..................................... 71,876
Operations and maintenance................................ 28,757
Sales and marketing....................................... 8,292
General and administrative................................ 17,759
Depreciation.............................................. 530
-----------
127,214
-----------
OPERATING INCOME (LOSS)..................................... 28,381

INTEREST EXPENSE............................................ 46,897

INTEREST INCOME............................................. 11,721
-----------

LOSS BEFORE INCOME TAXES.................................... (6,795)

PROVISION FOR INCOME TAXES.................................. 1,489
-----------

LOSS BEFORE EXTRAORDINARY ITEM.............................. (8,284)

EXTRAORDINARY ITEM--LOSS ON REFINANCING..................... 59,839

NET LOSS.................................................... (68,123)

CUMULATIVE PAY-IN-KIND PREFERRED DIVIDENDS.................. 1,508
-----------

REDEMPTION PREMIUM AND WRITE-OFF OF DISCOUNT ON PREFERRED
SHARES.................................................... 8,500
-----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS.................. $ (78,131)
===========
Basic and diluted loss per common share--Class A............ $ (0.07)
Basic and diluted loss per common share--Class B............ $ (0.12)

Weighted average common shares outstanding--Class A......... 132,000,000
Weighted average common shares outstanding--Class B......... 565,858,741
</TABLE>

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

F-45
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

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

<TABLE>
<CAPTION>
1998
---------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common shareholders................ $ (78,131)
Adjustments to reconcile net loss to net cash used in
operating activities:
Pay-in-kind preferred dividends......................... 1,508
Redemption premium and write-off of discount on
preferred shares...................................... 8,500
Amortization of financing costs......................... 2,976
Extraordinary item-loss on refinancing.................. 59,839
Provision for doubtful accounts......................... 1,445
Accretion of discount on 8 1/4% senior notes............ 443
Depreciation............................................ 530
Deferred taxes.......................................... 740
Add (deduct) net changes in assets and liabilities:
Accounts receivable, net.............................. 82,794
Due from affiliates and other receivables............. 511
Prepaid expenses and other assets..................... 690
Capacity available for sale........................... 72,861
Accounts payable and accrued liabilities.............. (549)
Income taxes payable.................................. 663
Due to affiliate...................................... 243
Deferred revenue...................................... (91,987)
---------
Net cash provided in operating activities........... 63,076
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs incurred.................................. (13,330)
Net proceeds from issuance of 8 1/4% senior notes......... 424,088
Proceeds from long-term debt.............................. 320,000
Repayment of long-term debt............................... (658,687)
Capital contributions--common shares...................... --
Redemption of preferred shares............................ (139,454)
Decrease in funds held by collateral trustee or in
escrow.................................................. 184,966
---------
Net cash provided by financing activities........... 117,584
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction in progress.................... (179,150)
Purchase of fixed assets, net............................. (3,212)
---------
Net cash used in investing activities............... (182,362)
---------
NET INCREASE (DECREASE) IN CASH............................. (1,702)

CASH, beginning of period................................... 2,490
---------
CASH, end of period......................................... $ 788
=========
</TABLE>

F-46
<PAGE>
FLAG LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

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

<TABLE>
<S> <C>
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Costs incurred for construction in progress............... $ 7,158
Decrease (Increase) in accrued construction costs......... 171,992
Amortization of capitalized financing costs............... --
--------
Cash paid for construction in progress.................... $179,150
========

SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid............................................. $ 33,616
</TABLE>

NOTES:

1. GENERAL

The interim consolidated financial statements presented herein have been
prepared on the basis of U.S. generally accepted accounting principles and
include the accounts of FLAG Limited and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated in consolidation. In
the opinion of management, the unaudited consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of the results of operations for the nine-month period ended
September 30, 1998 and the cash flows for the nine-month period ended
September 30, 1998. The results of operations for any interim period are not
necessarily indicative of results for the full year.

2. NET INCOME (LOSS) PER COMMON SHARE

FLAG Limited has adopted Statement of Accounting Standard No. 128, "Earnings
per Share," which requires dual presentation of basic and diluted earnings per
share. Basic net income (loss) per Class A common share and basic net income
(loss) per Class B common share are based on dividing net income (loss)
applicable to Class A and Class B shareholders by the weighted average number of
common shares and common share equivalents outstanding during the period.

F-47
<PAGE>
[COLLAGE OF PHOTOS OF
FLAG TELECOM FACILITIES
AND NETWORK OPERATIONS CENTER]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

26,400,000 SHARES

FLAG TELECOM HOLDINGS LIMITED

COMMON STOCK

[LOGO]

--------

P R O S P E C T U S
, 2000

---------

SALOMON SMITH BARNEY
DEUTSCHE BANC ALEX. BROWN
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
WARBURG DILLON READ LLC

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses (other than underwriting
compensation we expect to incur) in connection with this offering. All of these
amounts (except the SEC registration fee, the NASD filing fee and the London
Stock Exchange filing fee) are estimated.

<TABLE>
<S> <C>
SEC registration fee........................................ $176,331
NASDAQ listing fee.......................................... 95,000
NASD filing fee............................................. 30,000
Blue Sky fees and expenses.................................. 12,000
London Stock Exchange filing fee............................ *
Printing and Engraving Costs................................ *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ 880,000
Transfer Agent and Registrar fees and expenses.............. *
Miscellaneous............................................... *
--------
Total....................................................... $ *
========
</TABLE>

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

* To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Our By-Laws provide that our directors and officers and former directors and
officers shall be indemnified to the fullest extent permitted by The Companies
Act of Bermuda 1981, as amended from time to time, and provides for advances to
any indemnified director or officer of expenses in connection with actual
proceedings and claims arising out of their status as our director or officer.
We also maintain a directors' and officers' liability insurance policy on behalf
of our directors and officers.

Section 8 of the Underwriting Agreement to be filed as Exhibit 1 provides
that the underwriters named therein will indemnify and hold us harmless and each
of our directors, officers or controlling persons from and against certain
liabilities, including liabilities under the Securities Act. Section 8 of the
Underwriting Agreement also provides that these underwriters will contribute to
certain liabilities of these persons under the Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

We were formed on February 26, 1999 in connection with a reorganization of
the FLAG Telecom family of companies. As a result of this reorganization, we
became the parent holding company for the FLAG Telecom family of companies and
the owner of a 66% interest in FLAG Limited. Also as part of the reorganization,
pursuant to Share Transfer Forms and Subscription Forms which each of the
shareholders of FLAG Limited executed, the shareholders of FLAG Limited
transferred the number of

II-1
<PAGE>
common shares of FLAG Limited set forth below opposite their names, or
418,259,610 common shares in the aggregate, in consideration for a corresponding
number of our common shares.

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
FLAG
LIMITED
FLAG LIMITED SHAREHOLDERS TRANSFERRED
- ------------------------------------------------------------ -----------
<S> <C>
K.I.N. (Thailand) Company Limited........................... 108,780,684
Bell Atlantic Network Systems Company....................... 21,996,930
AT&T Capital Corporation.................................... 5,488,830
GE Capital Project Finance VI Ltd........................... 16,466,490
The Asian Infrastructure Fund............................... 54,390,342
Gulf Associates Communications, Limited..................... 13,987,518
Marubeni Telecom Development Limited........................ 60,747,672
Rathburn Limited............................................ 136,401,144
</TABLE>

On January 4, 2000 we issued 217,536,730 common shares to Bell Atlantic in
connection with its exchange of the shares held by Bell Atlantic in FLAG Limited
for our common shares. The share numbers set forth in the preceding discussion
do not reflect the reverse stock split of 6:1 we intend to effect in connection
with this offering.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
1 Form of Underwriting Agreement*

3.1 Memorandum of Association of FLAG Telecom**

3.2 By-laws of FLAG Telecom**

4.1 Form of share certificate

4.2 Letter to GE Capital Project Finance VI Ltd. from FLAG
Telecom regarding registration rights**

4.3 Letter to AT&T Capital Corporation from FLAG Telecom
regarding registration rights**

4.4 Grant of options to Andres Bande pursuant to the Long-Term
Incentive Plan of FLAG Telecom**

4.5 Grant of options to Edward McCormack pursuant to the
Long-Term Incentive Plan of FLAG Telecom**

4.6 Grant of options to Stuart Rubin pursuant to the Long-Term
Incentive Plan of FLAG Telecom**

4.7 Form of Registration Rights Agreement**

5 Opinion of Appleby, Spurling & Kempe**

10.1 Long-Term Incentive Plan of FLAG Telecom**
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.2 Credit Agreement, dated as of January 28, 1998, among FLAG
Limited, the Term Lenders thereto, the Revolving Lenders
thereto, Barclays Bank PLC and International Trust Company
of Bermuda Limited, including all amendments thereto**

10.3 Indenture for 8 1/4% Senior Notes Due 2008, dated as of
January 30, 1998, between FLAG Limited and IBJ Schroeders
Bank & Trust Company**

10.4 Further Restated Shareholders Agreement, dated 8 October
1999, between FLAG Atlantic Holdings Limited and GTS
TransAtlantic Holdings, Ltd.+**

10.5 Exchange Agreement and Plan of Reorganization, dated as of
February 26, 1999, between FLAG Telecom and Bell Atlantic
Network Systems Company**

10.6 Tax Agreement, dated as of February 26, 1999, among FLAG
Telecom, Bell Atlantic Corporation and Bell Atlantic
Network Systems Company**

10.7 Marketing Transition Agreement, dated as of May 14, 1998,
among FLAG Limited, Bell Atlantic Network Systems Company
and NYNEX Network Systems Company**

10.8 Employee Services Agreement, dated as of May 21, 1998,
between FLAG Limited and Bell Atlantic Global Systems
Company**

10.9 Construction and Maintenance Agreement, dated as of December
14, 1994, among FLAG Limited and each of the landing party
and other signatories**

10.10 Operations Contract for the FLAG Network Operations Center,
dated as of June 30, 1997, between FLAG Limited and
Emirates Telecommunications Corporation*

10.11 Credit Agreement dated as of October 8, 1999 among FLAG
Atlantic Limited, Barclays Bank plc, as the Administrative
Agent, Dresdner Bank AG, New York Branch, as the
Documentation Agent, Westdeutsche Landesbank Girozentrale,
New York Branch, as the Syndication Agent, Barclays Bank
plc and the other Lenders listed therein, as Lenders and
Barclays Capital, as the Lead Arranger+**

10.12 FLAG Atlantic Fibre Optic Cable System Contract, dated
20 September 1999, among FLAG Atlantic Limited, FLAG
Atlantic UK Limited, FLAG Atlantic USA Limited, FLAG
Atlantic France SARL, Alcatel Submarine Networks, Alcatel
Submarine Networks, Alcatel Submarine Networks Inc. and
Alcatel Submarine Networks Limited+**

10.13 Equity Contribution Agreement, dated as of October 8, 1999,
among FLAG Atlantic Limited, FLAG Atlantic Holdings
Limited and Barclays Bank plc, as Administrative Agent**

10.14 Equity Contribution Agreement, dated as of October 8, 1999,
among FLAG Atlantic Limited, GTS TransAtlantic Holdings,
Ltd. and Barclays Bank plc, as Administrative Agent**

10.15 Limited Guarantee Agreement, dated as of October 8, 1999,
made by FLAG Atlantic Holdings Limited in favor of
Barclays Bank plc, as Secured Party**

10.16 Shareholder Pledge Agreement, dated as of October 8, 1999,
among GTS TransAtlantic Holdings, Ltd., FLAG Atlantic
Holdings Limited and Barclays Bank plc, as Secured Party**
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.17 Capacity Right of Use Agreement dated 7 October, 1999 among
FLAG Atlantic Limited, FLAG Atlantic USA Limited and NYNEX
Long Distance Company, d/b/a Bell Atlantic Long
Distance+**

10.18 Capacity Right of Use Agreement dated 8 October, 1999 among
FLAG Atlantic Limited, FLAG Atlantic USA Limited, and
GTE+**

10.19 Fibre, Capacity and Facilities Purchase Agreement dated 8
October, 1999 among FLAG Atlantic Limited, FLAG Atlantic
USA Limited, and GTS Transatlantic Carrier Services
Limited+**

10.20 Capacity Right of Use Agreement dated 17 November, 1999
among FLAG Atlantic Limited, FLAG Atlantic USA Limited,
PSINetworks Company, PSINet Telecom Limited and
PSINetworks SARL+**

10.21 Indefeasible Right of Use Agreement dated 8 October, 1999
among FLAG Atlantic Limited, FLAG Atlantic USA Limited and
Teleglobe USA Inc.+**

10.22 South East Asia and Indian Ocean Cable Maintenance
Agreement, dated as of June 1, 1986, among FLAG Limited
and the other parties listed on Schedule A1 and
Supplemental Agreements thereto+**

10.23 Atlantic Cable and Maintenance Repair Agreement, dated as of
January 20, 1998, among FLAG Limited and the parties
identified in Schedule A attached thereto**

10.24 Mediterranean Cable Maintenance Agreement, dated January 1,
1999, among FLAG Limited and the other Signatories listed
on Schedule A1 thereto+**

10.25 ROV Service Agreement, dated as of January 1, 1999, among
FLAG Limited, France Cables et Radio, Elettra TLC S.p.A.
and the other entities identified on Schedule 1 thereto+**

10.26 SCARAB III and IV Users Agreement dated February 28, 1990
among FLAG Limited and those other parties listed**

10.27 Primary Supplier Agreement dated January 18, 2000 between
Bell Atlantic Global Systems Company and the Company**

13 Form 20-F filed as of April 13, 1999 (File No. 333-08456)
(Incorporated by reference)

21 List of subsidiaries of the Company**

23.1 Consent of Arthur Andersen & Co.

23.2 Consent of Appleby, Spurling & Kempe (filed as part of
Exhibit 5)**

23.3 Consent of Michael Fitzpatrick**

23.4 Consent of Edward J. McQuaid**

23.5 Consent of Philip Seskin**

24 Powers of Attorney (included on signature page)**
</TABLE>

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

* To be filed by amendment.

** Previously filed.

+ Confidential treatment has been requested with respect to portions of
this exhibit.

II-4
<PAGE>
(b) Financial Statement Schedules
2. Movements in Qualifying and Valuation Accounts.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes as follows:

(1) The undersigned will provide to the underwriters at the closing specified in
the Underwriting Agreement certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.

(2) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance on Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it is declared effective.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

(3) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.

II-5
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, FLAG Telecom
Holdings Limited has duly caused this Amendment No. 2 to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, the State of New York, on the 7th day of
February, 2000.

FLAG TELECOM HOLDINGS LIMITED

By: /s/ STUART RUBIN
---------------------------------------------------------------------------

Name: Stuart Rubin

Title: Assistant Secretary

POWERS OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Andres Bande, Edward McCormack and Stuart Rubin,
and each of them, with full power to act without the other, this person's true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Registration Statement, any and all amendments
(including post-effective amendments), any subsequent Registration Statements
pursuant to Rule 462 of the Securities Act of 1933, as amended, and any
amendments there and to file the same, with exhibits and schedules, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing necessary or
desirable to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

II-6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amended
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman and Chief Executive
------------------------------------------- Officer (Principal February 7, 2000
Andres Bande Executive Officer)

Chief Financial Officer
* (Principal Financial and
------------------------------------------- Accounting Officer) and February 7, 2000
Edward McCormack Director

/s/ STUART RUBIN General Counsel and
------------------------------------------- Assistant Secretary February 7, 2000
Stuart Rubin

* Director
------------------------------------------- February 7, 2000
Michael Fitzpatrick

* Director
------------------------------------------- February 7, 2000
Abdul Latif Ghurab

* Director
------------------------------------------- February 7, 2000
Adnan Omar

* Director
------------------------------------------- February 7, 2000
Daniel Petri

* Director
------------------------------------------- February 7, 2000
Umberto Silvestri

* Director
------------------------------------------- February 7, 2000
Jonathan Solomon

* Director
------------------------------------------- February 7, 2000
Dr. Lim Lek Suan

* Director
------------------------------------------- February 7, 2000
Fumio Uehara

* Director
------------------------------------------- February 7, 2000
Dr. Vallobh Vimolvanich
</TABLE>

*By: /s/ STUART RUBIN
- -------------------------------------------

Stuart Rubin,

as Attorney-in-fact

II-7

<PAGE>
EXHIBIT 4.1
FT
FLAG Telecom Holdings Limited
INCORPORATED UNDER THE LAWS OF BERMUDA

ORDINARY SHARES
PAR VALUE $0.0006

SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP G3529L 10 2
THIS CERTIFIES THAT

is the owner of

fully paid and non-assessable Ordinary Shares of the par value of $0.0006
each of

FLAG Telecom Holdings Limited

(the "Company") transferable on the books of the Company by the holder hereof
in person or by duly authorized attorney upon surrender of this Certificate
properly endorsed. No transfer of the security or any portion thereof
represented by this Certificate can be registered on the books of the Company
without production of this Certificate. This Certificate is not valid until
countersigned and registered by the Transfer Agent and Registrar. WITNESS the
facsimile seal of the Company and the facsimile signatures of its duly
authorized officers.

Dated

DIRECTOR CHAIRMAN

COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW
YORK, N.Y.) TRANSFER AGENT AND REGISTRAR BY: AUTHORIZED SIGNATURE

FLAG Telecom Holdings Limited

The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM -D
TEN ENT -D
JT TEN -D
as tenants in common
as tenants by the entireties
as joint tenants with right
of survivorship and not as tenants
in common
UNIF GIFT MIN ACT-D Custodian
(Cust)
(Minor) under Uniform Gifts to Minors Act
(State)

Additional abbreviations may also be used though not in the above list. For
value received, hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
Shares of the Ordinary Shares represented by the within Certificate, and do
hereby irrevocably constitute and appoint Attorney to transfer the said shares
on the books of the within named Company with full power of substitution in
the premises.
Dated
NOTICE:
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.

Signature(s) Guaranteed

THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.

KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE COMPANY WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE
ISSUANCE OF A REPLACEMENT CERTIFICATE.

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the inclusion in this registration statement on Form F-1 (File
No. 333-94899) of our report dated January 17, 2000 on our audit of the
consolidated financial statements of FLAG Telecom Holdings Limited, and our
report dated December 30, 1999 on our audits of the consolidated financial
statements of FLAG Limited. We also consent to the references to our firm under
the Caption "Experts".

/s/ Arthur Andersen & Co

Arthur Andersen & Co
Hamilton, Bermuda
February 7, 2000