On December 9, 1999, Empresa Hondurena de Telecommunicaciones, S.A., based in Honduras, filed suit in Florida State Court in Broward County against TresCom and one of TresCom's wholly-owned subsidiaries, St. Thomas and San Juan Telephone Company, alleging that such entities failed to pay amounts due to plaintiff pursuant to contracts for the exchange of telecommunications traffic during the period from December 1996 through September 1998.  The Company acquired TresCom in June 1998 and TresCom is currently the Company's subsidiary. Plaintiff is seeking approximately $14 million in damages, plus legal fees and costs.  The Company filed an answer on January 25, 2000 and discovery has commenced.  The Company's ultimate legal and financial liability with respect to such legal proceeding cannot be estimated with any certainty at this time, while an adverse result for the full amount sought or some significant percentage thereof could have a material adverse effect on the Company’s financial results.  The Company intends to defend the case vigorously.  Management believes that this suit will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

The Company is subject to certain other claims and legal proceedings that arise in the ordinary course of its business activities.  Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be decided unfavorably to the Company.  Management believes that any aggregate liability that may ultimately result from the resolution of these matters will not have any material adverse effect on the financial condition or results of operations or cash flows of the Company.

In January 2001, the Company exchanged 8,308,258 shares of the Company’s common stock for the extinguishment of $129.6 million in principal amount of the 2000 Convertible Debentures and purchased $38.2 million of principal amount of its high yield debt and convertible debentures, prior to maturity, for $11.6 million in cash.  These transactions were accounted for as an extraordinary gain of $106.1 million, or $2.11 per basic and diluted share.  An income tax provision was not recorded primarily due to the estimated availability of Net Operating Loss Carryforwards expected at the end of the year.

During the three month period ended June 30, 2001, the Company purchased $244.8 million of principal amount of its high yield debt, prior to maturity, for $52.2 million in cash.  This was accounted for as an extraordinary gain of $185.7 million, or $3.54 per basic and diluted share.  An income tax provision was not recorded primarily due to the estimated availability of Net Operating Loss Carryforwards expected at the end of the year.

The debt securities purchased by the Company have not been cancelled.  These are held as treasury bonds and are recorded as a reduction of long-term obligations.

In July 2001, the Company purchased $141.3 million of principal amount of its high yield debt for $36.0 million in cash.  In particular, the Company purchased $34.4 million principal amount of the October 1999 Senior Notes for $8.9 million in cash, $41.2 million principal amount of the January 1999 Senior Notes for $10.4 million in cash, $30.0 million principal amount of the 1998 Senior Notes for $7.6 million in cash, and $35.7 million principal amount of the 1997 Senior Notes for $9.1 million in cash.  This will be accounted for as an extraordinary gain of approximately $101.4 million during the three months ended September 30, 2001.

In July 2001, the Company consummated a transaction financing accounts receivables of its wholly-owned Canadian subsidiary, Primus Canada, with Textron Financial Canada Limited, an affiliate of RFC Capital Corporation, for cash proceeds of up to approximately $20 million depending upon the level of customer receivables.

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

Overview

Primus is a global facilities-based Total Service Provider offering bundled voice, data, Internet, DSL, e-commerce, Web hosting, enhanced application, VoIP, virtual private network (VPN) and other value-added services to business and residential retail customers and other carriers located in the United States, Canada, Brazil, the United Kingdom, continental Europe, Australia, India and Japan. The Company seeks to capitalize on the increasing demand for high-quality international communications services, which is being driven by the globalization of the world’s economies, the worldwide trend toward telecommunications deregulation and the growth of global data and Internet traffic. The Company provides services over its network, which consists of (i) 23 carrier-grade switches, including 19 international gateway switches in the United States, Australia, Canada, France, Germany, Japan, Puerto Rico and the United Kingdom and four domestic switches in Australia; (ii) more than 300 points of presence (POPs) and Internet access nodes in additional markets within our principal service regions; (iii) both owned and leased transmission capacity on undersea and land-based fiber optic cable systems; and (iv) an international satellite earth station located in London, together with the capacity the Company leases on an Intelsat satellite. Utilizing this network, along with resale arrangements and foreign carrier agreements, the Company provides service to approximately 2.2 million customers.

The Company’s net revenue is derived from carrying a mix of business, residential and carrier long distance traffic, data and Internet traffic and in the United States, Canada, Brazil, United Kingdom, continental Europe, Australia, India and Japan, and also from the provision of both local and cellular services in selected markets.  Long distance net revenue is earned based on the number of minutes billable and is recorded upon completion of a call, adjusted for sales allowance.  The Company generally prices its services at a savings compared to the major carriers operating in its principal service regions.  The Company expects to generate net revenue from internal growth through sales and marketing efforts focused on customers with significant international long distance usage, including small- and medium-sized businesses, multinational corporations, ethnic residential customers and other telecommunications carriers and resellers.

Cost of revenue is comprised primarily of costs incurred from other domestic and foreign telecommunications carriers to originate, transport and terminate calls.  The majority of the Company’s cost of revenue is variable, based upon the number of minutes of use, with transmission and termination costs being the Company’s most significant expense.  As the Company increases the portion of traffic transmitted over its leased or owned facilities, cost of revenue increasingly will be comprised of fixed costs.

Although the Company’s functional currency is the United States dollar, a significant portion of the Company’s net revenue is derived from its sales and operations outside the United States.  In the future, the Company expects to continue to derive a significant portion of its net revenue and incur a significant portion of its operating costs from outside of the United States; therefore, changes in foreign currency exchange rates have had and may continue to have a significant, and potentially adverse, effect on the Company’s results of operations.  The Company historically has not engaged in hedging transactions and does not currently contemplate engaging in hedging transactions to mitigate foreign exchange risks.

Other Operating Data

The following information for the three and six months ended June 30, 2001 and 2000 (in thousands) is provided for informational purposes and should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto contained elsewhere herein and the Consolidated Financial Statements presented with the Company’s most recently filed Form 10-K.

Results of operations for the three months ended June 30, 2001 as compared to the three months ended June 30, 2000.

Net revenue decreased $29.0 million or 10% to $271.1 million for the three months ended June 30, 2001, from $300.1 million for the three months ended June 30, 2000.

Cost of revenue decreased $20.2 million from $215.3 million for the three months ended June 30, 2000 to $195.1 million for the three months ended June 30, 2001.  As a percentage of net revenue, the cost of revenue increased by 30 basis points from 71.7% to 72.0%.  The decrease in the cost of revenue is primarily attributable to the decrease in net revenue, which is partially offset by the addition of expense from acquired operations including CTE, InterNeXt and A-Tel.

Selling, general and administrative expenses decreased $4.6 million to $78.8 million, or 29.1% of net revenue, for the three months ended June 30, 2001 from $83.4 million, or 27.8% of net revenue, for the three months ended June 30, 2000.  The decrease is attributable to a cost savings in salaries and benefits resulting from a 22% workforce reduction of full-time employees since December 31, 2000, and a reduction in advertising and marketing expenses.  The decrease is partially offset by severance pay and employee termination costs of approximately $3.0 million incurred during the three month period ended June 30, 2001.  The impact of the Company’s retail acquisitions of CTE, InterNeXt and A-Tel also offset the total decline in expenses.

Depreciation and amortization expense increased by $9.9 million to $37.0 million for the three months ended June 30, 2001 from $27.1 million for the three months ended June 30, 2000.  The increase is associated with increased amortization expense related to intangible assets arising from the Company's 2000 acquisitions and with increased depreciation expense related to capital expenditures for fiber optic cable, switching, data center and other network equipment being placed into service.

Interest expense decreased by $4.0 million from $33.3 million for the three months ended June 30, 2000 to $29.3 million for the three months ended June 30, 2001.  The decrease is primarily attributed to $7.5 million in interest saved from the principal reduction of the Company’s high yield debt and convertible debentures.  The decrease is partially offset by interest expense associated with new vendor financing and interest related to the $50 million 9¼% Hewlett-Packard convertible debt.

Interest and other income (expense) decreased to an expense of $0.5 million for the three months ended June 30, 2001 from income of $8.1 million for the three months ended June 30, 2000.  The decrease is primarily attributed to a loss associated with disposals during the three month period ended June 30, 2001 and a lower cash balance during the three months ended June 30, 2001.

Gain on early extinguishment of debt for the three months ended June 30, 2001 was $185.7 million.  This gain resulted from the Company’s purchase of $244.8 million in principal amount of high-yield debt, prior to maturity, for $63.9 million in cash.  An income tax provision was not recorded primarily due to the estimated availability of Net Operating Loss Carryforwards expected at the end of the year.

Results of operations for the six months ended June 30, 2001 as compared to the six months ended June 30, 2000.

Net revenue decreased $37.0 million or 6% to $551.1 million for the six months ended June 30, 2001, from $588.1 million for the six months ended June 30, 2000.

Cost of revenue decreased $19.3 million from $422.7 million for the six months ended June 30, 2000 to $403.4 million, for the six months ended June 30, 2001.  As a percentage of net revenue, the cost of revenue increased by 130 basis points from 71.9% to 73.2%.  The decrease in the cost of revenue is primarily attributed to the decrease in net revenue.

Selling, general and administrative expenses increased $1.1 million from $162.6 million, or 27.7% of net revenue, for the six months ended June 30, 2000 to $163.7 million, or 29.7% of net revenue, for the six months ended June 30, 2001.  The increase is primarily attributable to severance pay and employee termination costs of approximately $4.1 million incurred during the six month period ended June 30, 2001 and the impact of the Company’s 2000 retail acquisitions which include LCR, CTE, InterNeXt, A-Tel and Bekko.

Depreciation and amortization expense increased by $24.3 million from $49.2 million for the six months ended June 30, 2000 to $73.5 million for the six months ended June 30, 2001.  The increase is associated with increased amortization expense related to intangible assets arising from the Company's 2000 acquisitions and with increased depreciation expense related to capital expenditures for fiber optic cable, switching, data center and other network equipment being placed into service.  The increase is also attributed to the approximately $2 million write-off of goodwill for the Company’s Web design acquisitions and the write-off of software costs in the six months ended June 30, 2001.

Interest expense decreased from $63.3 million for the six months ended June 30, 2000 to $60.5 million for the six months ended June 30, 2001.  The decrease was driven by interest saved from the principal reduction of the Company’s high yield debt and convertible debentures.  The decrease is partially offset by the $300 million 5 ¾% Convertible Subordinated Debentures due 2007 (“2000 Convertible Debentures”) issued in February 2000, $50 million 9¼% Hewlett-Packard convertible debt received in March and October 2000 and additional vendor financing.

Interest and other income (expense) decreased to an expense of $12.0 million for the six months ended June 30, 2001 from income of $15.7 million for the six months ended June 30, 2000.  The decrease is primarily associated with the $15.0 million write-off of the Company’s investment in Pilot Network Services because it became permanently impaired in March 2001.  The decrease is also attributed to disposals during the six month period ended June 30, 2001 and the lower cash balance during the six months ended June 30, 2001.

Gain on early extinguishment of debt for the six months ended June 30, 2001 was $291.8 million.  This gain resulted from the Company’s exchange of 8,308,258 shares of the Company’s common stock for the extinguishment of $129.6 million in principal amount of the 2000 Convertible Debentures and purchase of $283.0 million in principal amount of high-yield debt, prior to maturity, for $63.9 million in cash.  An income tax provision was not recorded primarily due to the estimated availability of Net Operating Loss Carryforwards expected at the end of the year.

Liquidity and Capital Resources

The Company's liquidity requirements arise from cash used in operating activities, purchases of network equipment including switches, related transmission equipment and international and domestic fiber optic cable transmission capacity, satellite earth stations and satellite transmission capacity, interest and principal payments on outstanding indebtedness, and acquisitions of and strategic investments in businesses.  The Company has financed its growth to date through public offerings, private placements of debt, equity securities, bank debt, vendor financing and capital lease financing.

Net cash used by operating activities was $120.0 million for the six months ended June 30, 2001 as compared to net cash used by operating activities of $89.6 million for the six months ended June 30, 2000.  The increase in operating cash used was caused by a decline in gross margin for the six months ended June 30, 2001 (before non-cash charges) as compared to the six months ended June 30, 2000.  Also contributing was $4.1 million of employee termination and severance costs incurred since December 31, 2000.  Additionally, interest income for the six months ended June 30, 2001 was $9.2 million less than the interest income for the six months ended June 30, 2000.  Operating cash was also used to reduce accounts payable, accrued interconnection costs and accrued expense balances to bring major vendors closer to contract payment terms.

Net cash used by investing activities was $62.9 million for the six months ended June 30, 2001 compared to net cash used by investing activities of $146.1 million for the six months ended June 30, 2000.  Net cash used by investing activities during the six months ended June 30, 2001 included $62.0 million of capital expenditures primarily for the expansion of the Company’s global network as compared to $92.4 million during the six months ended June 30, 2001.  Additionally, during the six month period ended June 30, 2000, $51.4 million of cash was used to acquire Shore.Net, Infinity, Citrus, Bekko, DIPL, Global Sales, InterNeXt, A-Tel and CTE; cash was also used to purchase $15.0 million of marketable securities of Pilot Network Services during the six month period ended June 30, 2000.

Net cash used by financing activities was $60.6 million for the six months ended June 30, 2001 as compared to net cash provided by financing activities of $313.3 million for the six months ended June 30, 2000.  During the six months ended June 30, 2001, cash used by financing activities was $63.9 million for the purchase of certain of the Company’s debt securities, $7.1 million of payments on capital leases, vendor financing and other long-term obligations, offset by $10.0 million in cash received from Inktomi Corporation in exchange for 2,862,254 shares of the Company’s common stock.  Cash provided by financing activities for the six months ended June 30, 2000 resulted primarily from $290.0 million of net proceeds from the sale of the February 2000 Debentures, as well as $25.0 million from the Hewlett-Packard investment, partially offset by $3.9 million of payments on capital leases and other long-term obligations.

In July 2001, the Company purchased $141.3 million of principal amount of its high yield debt for $36.0 million in cash.  In particular, the Company purchased $34.4 million principal amount of the October 1999 Senior Notes for $8.9 million in cash, $41.2 million principal amount of the January 1999 Senior Notes for $10.4 million in cash, $30.0 million principal amount of the 1998 Senior Notes for $7.6 million in cash, and $35.7 million principal amount of the 1997 Senior Notes for $9.1 million in cash.

The Company believes that its existing cash and available capital lease and vendor financing (subject to the limitations in the Indentures related to the Company's senior notes and convertible debentures) will be sufficient to fund the Company's operating losses, debt service requirements, capital expenditures, acquisitions and other cash needs for its operations into the early first quarter of 2002.  The Company is continually evaluating the expansion of its service offerings and plans to make further investments in and enhancements to its switches and distribution channels in order to expand its service offerings.  In order to fund these additional cash requirements, the Company anticipates that it will be required to raise additional financing from public or private equity or debt sources.  However, the Company may also be required to reduce its expansion and capital expenditures in the event it cannot raise additional capital when needed.  In that event, the Company may not be able to service its debt or other obligations and could be required to seek relief from such obligations.  Additionally, if the Company's plans or assumptions change, including those with respect to the development of the network and the level of the Company's operations and operating cash flow, if its assumptions prove inaccurate, if it consummates additional investments or acquisitions, if it experiences unexpected costs or competitive pressures, or if existing cash and any other borrowings prove to be insufficient, the Company may be required to seek additional capital sooner than expected.

The Company presently has no binding commitment or binding agreement with respect to any material acquisition, joint venture or strategic investment.  However, from time to time, the Company may be party to one or more non-binding letters of intent regarding material acquisitions which, if consummated, may be paid for with cash or through the issuance of a significant number of shares of the Company's common stock. The Company and/or its subsidiaries will evaluate on a continuing basis the most efficient use of the Company's capital, including investment in the Company's network and systems, lines of business, potential acquisitions, and, depending upon market conditions, purchasing, refinancing or otherwise retiring certain of the Company's outstanding debt and/or equity securities in the open market or by other means to the extent permitted by its existing covenant restrictions.

Special Note Regarding Forward Looking Statements

Statements in this Form 10-Q constitute “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such statements are based on current expectations, and are not strictly historical statements. Forward looking statements include without limitation:  statements set forth below under this heading regarding, among other things, the Company’s expectations of future sales, net revenue, gross profit, net income, cash flow, network development, traffic development, capital expenditures, selling, general and administrative expenses, service introductions and cash requirements; and statements set forth elsewhere herein concerning the Company's debt repurchase activities, the tax and accounting consequences of such debt repurchases, liquidity and debt service forecasts, management's plans, goals, expectations, guidance, objectives, strategy, and timing for future operations, product plans and performance, predictions or expectations of future growth, results or cash flow,  management's assessment of market factors, the availability of financing and future financial performance. Factors and risks, including certain of those described in greater detail in the captions below, that could cause actual results or circumstances to differ materially from those set forth or contemplated in forward looking statements include: changes in business conditions; changes in the telecommunications or Internet industry or the general economy or capital markets; DSL, Internet and telecom competition; changes in service offerings or business strategies; inability to lease space for data centers at commercially reasonable rates; difficulty in provisioning Voice over IP services; changes in the regulatory schemes and regulatory enforcement in the markets in which we operate; restrictions on our ability to follow certain strategies or complete certain transactions as a result of our capital structure or debt covenants; the possible inability to raise capital when needed, or at all; the inability to reduce debt significantly; risks associated with Primus's limited DSL, Internet and web-hosting experience and expertise, entry into developing markets, the possible inability to hire and/or retain qualified sales, technical and other personnel, particularly as we continue to attempt to grow our data-centric services, and managing rapid growth; and risks associated with international operations (including foreign currency translation risks); dependence on effective information systems; dependence on third parties to enable us to expand and manage our global network and operations; and dependence on the implementation and performance of Primus's global ATM+IP communications network. As such, actual results or circumstances may vary materially from such forward looking statements or expectations.  Readers are also cautioned not to place undue reliance on these forward-looking statements which speak only as of the date these statements were made. Primus is not necessarily obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  Factors, which could cause results to differ from expectations, include risks described in greater detail below associated with:

Liquidity Restrictions; Possible Inability to Obtain Necessary Financing. The Company believes that its existing cash and available capital lease and vendor financing (subject to the limitations in the Indentures related to the Company's senior notes) will be sufficient to fund the Company's operating losses, debt service requirements, capital expenditures, acquisitions and other cash needs into the early first quarter of 2002.  The Company is continually evaluating the expansion of its service offerings and plans to make further investments in and enhancements to its switches and distribution channels in order to expand its service offerings.  In order to fund these additional cash requirements, the Company anticipates that it will be required to raise additional financing from public or private equity or debt sources.  However, the Company may also be required to reduce its expansion and capital expenditures in the event it cannot raise additional capital when needed.  In that event, the Company may not be able to service its debt or other obligations and could be required to seek protection under the bankruptcy laws of the United States or other similar laws in other countries.  Additionally, if the Company's plans or assumptions change, including those with respect to the development of the network and the level of the Company's operations and operating cash flow, if its assumptions prove inaccurate, if it consummates additional investments or acquisitions, if it experiences unexpected costs or competitive pressures, or if existing cash and any other borrowings prove to be insufficient, the Company may be required to seek additional capital sooner than expected.

Substantial Indebtedness; Liquidity. The Company currently has substantial indebtedness and anticipates that it and its subsidiaries will incur additional indebtedness in the future.  The level of the Company's indebtedness (i) could make it more difficult for it to make payments of interest on its outstanding debt; (ii) could limit the ability of the Company to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes; (iii) requires that a substantial portion of the Company's cash flow from operations, if any, be dedicated to the payment of principal and interest on its indebtedness and other obligations and, accordingly, will not be available for use in its business; (iv) could limit its flexibility in planning for, or reacting to, changes in its business; (v) results in the Company being more highly leveraged than some of its competitors, which may place it at a competitive disadvantage; and (vi) will make it more vulnerable in the event of a downturn in its business.

Limited Operating History; Entry into Developing Markets. The Company was founded in February 1994, began generating revenue in March 1995.  The Company intends to enter additional markets or businesses, including establishing an Internet business, where the Company has limited or no operating experience.  Accordingly, the Company cannot provide assurance that its future operations will generate operating or net income or positive cash flow, and the Company's prospects must be considered in light of the risks, expenses, problems and delays inherent in establishing a new business in a rapidly changing industry.

Limited Operating History; Entry into Internet and data business. The Company has recently begun targeting businesses and residential customers for Internet and data services through its subsidiary iPRIMUS.com and other recently acquired ISPs.  The Company has been expanding and intends to continue to expand its offering of data and Internet services worldwide.  The Company anticipates offering a full-range of Internet protocol-based data and voice communications over the global broadband ATM+IP network which the Company has deployed. The Company has limited experience in the Internet and Web hosting business and cannot provide assurance that it will successfully establish or expand the business. Currently, the Company provides Internet services to business and residential customers in the United States, Australia, Canada, Japan, India, Brazil, Germany, France and Spain, and offers Internet transmission services in the Indian Ocean/Southeast Asia regions through its satellite earth station in London.

The market for Internet connectivity and related services is extremely competitive. The Company's primary competitors include other ISPs that have a significant national or international presence.  Many of these carriers have substantially greater resources, capital and operational experience than the Company does.  The Company also expects it will experience increased competition from traditional telecommunications carriers that expand into the market for Internet services. In addition, the Company will require substantial additional capital to make investments in its Internet operations, and it may not be able to obtain that capital on favorable terms or at all.  The amount of such capital expenditures may exceed the amount of capital expenditures spent on the voice portion of its business going forward.

Further, even if the Company is able to establish and expand its Internet business, the Company will face numerous risks that may adversely affect the operations of its Internet business. These risks include:

Finally, the Company expects to incur operating losses and negative cash flow from its Internet and data business as the Company expands, builds out and upgrades this part of the business.  Any such losses and negative cash flow are expected to partially offset the expected positive cash flow generated by the voice business and effectively reduce the overall cash flow of the Company as a whole, although there can be no assurance that such positive cash flow will develop as anticipated or be sufficient to satisfy overall debt service and operating requirements.

Managing Rapid Growth. The Company's strategy of rapid growth has placed, and is expected to continue to place, a significant strain on the Company.  In order to manage its growth effectively, the Company must continue to implement and improve its operational and financial systems and controls, purchase and utilize additional transmission facilities, and expand, train and manage its employees, all within a rapidly-changing regulatory environment.  Inaccuracies in the Company's forecast of traffic could result in insufficient or excessive transmission facilities and disproportionate fixed expenses.

Historical and Future Operating Losses; Negative EBITDA; Net Losses. Since inception, the Company had cumulative negative cash flow from operating activities and cumulative negative EBITDA.  In addition, the Company incurred net losses since inception and has an accumulated deficit of approximately $269 million as of June 30, 2001.  The Company expects to continue to incur additional operating losses and negative cash flow as it expands its operations and continues to build-out and upgrade its network.  There can be no assurance that the Company's revenue will grow or be sustained in future periods or that it will be able to achieve or sustain profitability or positive cash flow from operations in any future period.

Acquisition and Strategic Investment Risks. Acquisitions, a key element in the Company's growth strategy, involve operational risks, including the possibility that an acquisition does not ultimately provide the benefits originally anticipated by management, while the Company continues to incur operating expenses to provide the services formerly provided by the acquired company, and financial risks including the incurrence of indebtedness by the Company in order to affect the acquisition and the consequent need to service that indebtedness.

Integration of Acquired Businesses. There can be no assurance that the Company will be successful in identifying attractive acquisition candidates, completing and financing additional acquisitions on favorable terms, or integrating the acquired business or assets into its own.  There may be difficulty in integrating the service offerings, distribution channels and networks gained through acquisitions with the Company's own.  Successful integration of operations and technologies requires the dedication of management and other personnel which may distract their attention from the day-to-day business, the development or acquisition of new technologies, and the pursuit of other business acquisition opportunities.

Intense Competition. The long distance telecommunications industry is intensely competitive and is significantly influenced by the marketing and pricing decisions of the larger industry participants. Competition in all of the Company's markets is likely to increase and, as deregulatory influences are experienced in markets outside the United States, competition in non-United States markets is likely to become similar to the intense competition in the United States.  Many of the Company's competitors are significantly larger and have substantially greater financial, technical and marketing resources and larger networks than the Company, a broader portfolio of service offerings, greater control over transmission lines, stronger name recognition and customer loyalty, as well as long-standing relationships with the Company's target customers.  In addition, many of the Company's competitors enjoy economies of scale that result in a lower cost structure for transmission and related costs which could cause significant pricing pressures within the industry.

Dependence on Transmission Facilities-Based Carriers. The Company's ability to maintain and expand its business is dependent upon whether the Company continues to maintain favorable relationships with the transmission facilities-based carriers to carry the Company's traffic.

International Operations. The Company has significant international operations.  In many international markets, the existing carrier will control access to the local networks, enjoy better brand recognition and brand and customer loyalty, and have significant operational economies, including a larger backbone network and correspondent agreements. Moreover, the existing carrier may take many months to allow competitors, including the Company, to interconnect to its switches within its territory.  There can be no assurance that the Company will be able to obtain the permits and operating licenses required for it to operate, obtain access to local transmission facilities or to market services in international markets. In addition, operating in international markets generally involves additional risks, including: unexpected changes in regulatory requirements, tariffs, customs, duties and other trade barriers; difficulties in staffing and managing foreign operations; problems in collecting accounts receivable; political risks; fluctuations in currency exchange rates; foreign exchange controls which restrict repatriation of funds; technology export and import restrictions; seasonal reductions in business activity.  With respect to currency exchange rate risks, adverse exchange rate developments have had a negative impact on recent operating results, and there can be no assurance that currency exchange rate conditions will improve.

Dependence on Effective Information Systems. The Company's management information systems must grow as the Company's business expands and are expected to change as new technological developments occur.   The financial systems in Europe must also be made compliant with the conversion to the Euro currency.  There can be no assurance that the Company will not encounter delays or cost-overruns or suffer adverse consequences in implementing new systems when required.

Industry Changes. The international telecommunications industry is changing rapidly due to deregulation, privatization, technological improvements, expansion of infrastructure and the globalization of the world's economies. In order to compete effectively, the Company must adjust its contemplated plan of development to meet changing market conditions.  The telecommunications industry is marked by the introduction of new product and service offerings and technological improvements.  The Company's profitability will depend on its ability to anticipate, assess and adapt to rapid technological changes and its ability to offer, on a timely and cost-effective basis, services that meet evolving industry standards.

Network Development; Migration of Traffic. The long-term success of the Company is dependent upon its ability to design, implement, operate, manage and maintain the network.  The Company could experience delays or cost overruns in the implementation of the network, or its ability to migrate traffic onto its network, which could have a material adverse effect on the Company.

Dependence on Key Personnel. The loss of the services of K. Paul Singh, the Company's Chairman and Chief Executive Officer, or the services of its other key personnel, or the inability of the Company to attract and retain additional key management, technical and sales personnel (for which competition is intense in the telecommunications industry), could have a material adverse effect upon the Company.

Government Regulation. The Company's operations are subject to constantly changing regulation. There can be no assurance that future regulatory changes will not have a material adverse effect on the Company, or that regulators or third parties will not raise material issues with regard to the Company's compliance or non-compliance with applicable regulations, any of which could have a material adverse effect upon the company.

Natural Disasters. Many of the geographic areas where the Company conducts its business may be affected by natural disasters, including hurricanes and tropical storms.  Hurricanes, tropical storms and other natural disasters could have material adverse effect on the business by damaging the network facilities or curtailing telephone traffic as a result of the effects of such events, such as destruction of homes and businesses.

ITEM 3.            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposures relate to changes in foreign currency exchange rates and to changes in interest rates.

Foreign currency — Although the Company’s functional currency is the United States dollar, a significant portion of the Company’s net revenue is derived from its sales and operations outside the United States.  In the future, the Company expects to continue to derive a significant portion of its net revenue and incur a significant portion of its operating costs outside the United States, and changes in exchange rates have had and may continue to have a significant, and potentially adverse effect on the Company’s results of operations.  For example, the Company estimates that the total adverse impact of foreign currency exchange rate changes from the six months ended June 30, 2000 reduced the reported revenue for the six months ended June 30, 2001 by approximately $39 million.  Due to the large percentage of the Company’s revenues derived outside of the United States, continuing strengthening of the United States dollar would continue to have an adverse impact on the company’s results of operations.  The operations of affiliates and subsidiaries in foreign countries have been funded with investments and other advances.  Due to the long-term nature of such investments and advances, the Company accounts for any adjustments resulting from translation as a charge or credit to “accumulated other comprehensive loss” within the stockholders’ equity section of the consolidated balance sheet.  The Company historically has not engaged in hedging transactions to mitigate foreign exchange risk.

Interest rates — We are currently not exposed to material future earnings or cash flow exposures from changes in interest rates on long-term debt obligations because a substantial majority of our long-term debt obligations are at fixed interest rates.  However, we are exposed to interest rate risk as additional financing may be required due to the large operating losses and capital expenditures associated with establishing and expanding our networks and facilities.  The interest rates that we will be able to obtain on additional financing, if any, will depend on market conditions at that time, and may differ from the rates we have secured on our current debt.  We do not currently anticipate entering into interest rate swaps and/or similar instruments.  The estimated fair value of the Company’s 2000 Convertible Debentures, 1999, 1998 and 1997 Senior Notes (carrying value of $697 million), based on quoted market prices, at June 30, 2001 was $149 million.

             Not applicable.

             (a)         Exhibits (see index after signatures)

             (b)        Reports on Form 8-K