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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2004

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from
 to

Commission file number: 000-27127

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iBasis, Inc.

(Exact name of registrant as specified in its charter)

Delaware

04-3332534(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)


20 Second Avenue, Burlington, MA 01803(Address of principal executive offices, including zip code)

(781) 505-7500(Registrant's telephone number, including area code)

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

Securities
registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value per share

(Title of Class)

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

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

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

The aggregate market value of the registrant's common stock, $0.001 par value per share ("Common Stock"), held by non-affiliates of the registrant as of
June 30, 2004 was approximately $67,208,881 based on 39,534,636 shares held by such non-affiliates at the closing price of a share of Common Stock of $1.70 as reported on the
OTC Bulletin Board on such date. Affiliates of the Company (defined as officers, directors and owners of 10 percent or more of the outstanding share of Common Stock) owned
7,121,231 shares of Common Stock outstanding on such date. The number of outstanding shares of Common Stock of the Company on February 28, 2005 was 65,178,753.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on
May 26, 2005, are incorporated by reference into Part III hereof. With the exception of the portions of such Proxy Statement expressly incorporated into this Annual Report on
Form 10-K by reference, such Proxy Statement shall not be deemed filed as part of this Annual Report on Form 10-K.



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iBASIS, INC.

FORM 10-K
For the Year Ended December 31, 2004



Table of Contents

PagePART IItem 1.

Business

3Item 2.

Properties

14Item 3.

Legal Proceedings

15Item 4.

Submission of Matters to a Vote of Security Holders

16PART IIItem 5.

Market for the Registrant's Common Equity and Related Stockholder Matters, and Issuer Purchases of Securities

16Item 6.

Selected Financial Data

17Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

18Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

46Item 8.

Financial Statements and Supplementary Data

47Item 9A.

Controls and Procedures

87Item 9B.

Other Information

87PART IIIItem 10.

Directors and Executive Officers of the Registrant

88Item 11.

Executive Compensation

88Item 12.

Security Ownership of Certain Beneficial Owners and Management

88Item 13.

Certain Relationships and Related Transactions

88Item 14.

Principal Accountant Fees and Services

88PART IVItem 15.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

89Signatures

96


This annual report on Form 10-K and the documents incorporated by reference contain forward-looking statements based on current expectations, estimates and
projections about iBasis' industry and management's beliefs and assumptions. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will," and "would" or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain
projections of future results of operations, financial position, and cash flows or state other "forward-looking" information. The important factors listed in the section captioned "Risk Factors," as
well as any cautionary language in this annual report, provide examples of risks, uncertainties and events that may cause the actual results to differ materially from the expectations described in
these forward-looking statements. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this annual report could have an adverse effect on the
business, results of operations and financial position of iBasis.

Any forward-looking statements in this annual report are not guarantees of future performance, and actual results, developments and business decisions may differ from those
envisaged by these forward-looking statements, possibly materially. iBasis disclaims any duty to update any forward-looking statements, even if new information becomes available or other events occur
in the future.

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PART I

Item 1.Business

Company Overview

We are a leading provider of international communications services and a provider of retail prepaid calling services. Our business consists of our Voice-Over-Internet-Protocol
("VoIP") trading business, in which we connect buyers and sellers of international telecommunications services, and our retail services business. In the VoIP trading business we receive voice traffic
from buyersoriginating carriers who are interconnected to our network via VoIP or traditional TDM connections, and we route that traffic over the Internet to sellerslocal
carriers in the destination countries with whom we have established termination agreements. We use proprietary, patent-pending technology to automate the selection of routes and termination partners
based on a variety of performance, quality, and business metrics. We offer this international call completion service on a wholesale basis to carriers, telephony resellers and other service providers
worldwide and have termination agreements with local service providers in North America, Europe, Asia, the Middle East, Latin America, Africa and Australia.

Our
retail services business was launched during the third quarter of 2003, with the introduction of our retail prepaid calling cards which are marketed through distributors primarily to ethnic
communities within major metropolitan markets in the U.S.. Our retail prepaid calling card business leverages our existing international VoIP network and termination agreements and has the potential
to deliver higher margins than those typically achieved in the wholesale trading business. In addition, the retail prepaid calling card business typically has a faster cash collection cycle than the
trading business. Beginning in the second quarter of 2004, we created a new reportable business segment, retail prepaid calling card services and other enhanced services ("Retail"), in addition to our
wholesale international
communications trading services ("Trading"). Since the second quarter of 2004, revenue from our Retail business has exceeded 10% of our total net revenue. In September 2004, we launched a
prepaid calling service, Pingo, offered directly to consumers through an eCommerce web interface, which we have included in our Retail business segment. Revenues from our Pingo services
were not material in 2004.

We
have a history of operating losses and, as of December 31, 2004, our accumulated deficit was $429.7 million and our stockholders' deficit was $23.9 million and we used
$7.2 million in cash from operations in 2004. These results are primarily attributable to the expenditures necessary to build our network and develop and expand our market.

Beginning
in 2001, we took a series of actions to reduce operating expenses, restructure operations, reduce outstanding debt and provide additional liquidity. Such actions included:



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We
continue to expand our market share in international wholesale VoIP services by expanding our customer base and by introducing cost-effective solutions for our customers to interconnect
with our network. During the first quarter of 2004, we introduced our DirectVoIP service which eliminates the need for certain switches for our customers to interconnect to our network, thus reducing
capital equipment costs for both iBasis and our customers. More recently we expanded the DirectVoIP offering with DirectVoIP Broadband, which addresses interconnection requirements that are specific
to the growing consumer VoIP market, which we believe offers significant growth potential for us.

In
the Retail services business, our strategy is to continue to increase our retail traffic through the deployment of our prepaid calling services, which leverage our international VoIP network with
our real time back office systems, and have the potential to deliver higher margins and improve cash flow. In addition, we continue to increase the traffic we terminate to mobile phones, which
generally delivers higher average revenue per minute and margins than typical fixed-line traffic.

We
believe both business segments will benefit from our recently launched PremiumCertified international routing product. PremiumCertified is designed to enhance our ability to compete
for retail international traffic from existing customers as well as from mobile operators and emerging consumer VoIP providers. PremiumCertified features routes to more than 500 destinations that are
actively monitored and managed to deliver a level of quality that is equal to or exceeds the highest industry benchmarks for retail quality.

Our
plans include:



We
were incorporated as a Delaware corporation in 1996. Our principal executive offices are located at 20 Second Avenue, in Burlington, Massachusetts and our telephone number is
(781) 505-7500.

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Industry Overview

Market Overview.The international voice and fax traffic market is estimated by industry researchers TeleGeography to be worth more than US
$60 billion. We believe that this market will grow as countries around the world continue to deregulate their telecommunication markets, prices fall and underlying trends in migration and
economic integration drive fundamental demand. We believe there are three major industry trends that will drive continued growth in the wholesale trading of international voice traffic. These trends
involve the migration of voice traffic:



In
most cases, the international traffic is moving to carriers that do not have extensive international networks and are dependent on wholesale providers like iBasis to provide effective international
service for their retail customers.

Global
deregulation combined with rapid technological advances has enabled the emergence of many new communications service providers in dozens of local markets. In their efforts to remain
competitive, national carriers are focusing their capital spending on "last-mile" services such as fixed-line, wireless, and cable, which account for the most of their
revenues. Consequently, communications service providers are looking for ways to expand their ability to serve all of their customers' telecoms needs, while simultaneously reducing the cost of
providing international services. Increasingly, the world's carriers are seeking to outsource international voice traffic to efficient Voice over Internet Protocol or VoIP networks, such as The iBasis
Network, whose inherently lower infrastructure and transport costs can help improve a carrier's competitiveness and bottom line, without compromising service quality.

The Mainstreaming of VoIP.Although the consumer adoption of VoIP services is a recent development, iBasis has been transmitting VoIP calls
for many of the world's largest carriers for several years. Managing quality of service at the core of the network, which iBasis pioneered and mastered, has allowed phone-to-phone calls to be
transmitted over the Internet with quality nearly indistinguishable from that of traditional voice networks. Enabled by the quality of VoIP service from providers like iBasis, international VoIP
traffic has grown rapidly. According to industry analyst, TeleGeography, international VoIP traffic grew from 10.1 billion minutes in 2001, to 17.9 billion in 2002, to
21.9 billion in 2003 and is forecast to reach 30 billion minutes in 2004.

Unlike
fixed-line telecommunication networks and managed IP networks, the Internet has many potential points of congestion where information, in the form of data packets, can be delayed or
dropped. For non-real time communications, such as email, a slight delay in the receipt of a message is not significant. However, for real-time communications, such as
telephone calls, the result of a delay in transmitting the call, or losing the call altogether, is significant. To minimize the risk of delays, or losing calls, over the Internet, we utilize complex
and proprietary performance monitoring and call routing technology to ensure consistently high call completion and voice quality. We have developed patent-pending quality management technology that
enables us to deliver call completion rates and average call durations (the standard metrics carriers use for measuring quality) that we believe are consistently equal to or better than those achieved
by traditional fixed-line carriers.

VoIP's
principal benefits are:



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Outsourcing VoIP services.Given the advantages, many carriers have begun to carry some portion of their voice traffic over IP networks.
Despite the move by some large carriers to develop their own international VoIP infrastructures, carriers have been more interested in outsourcing international traffic to providers such as iBasis.
The reasons for the preference to outsource international traffic include:



Retail Services

Our Retail services primarily consist of our prepaid calling card services and Pingo, our direct retail calling service. Leveraging our VoIP network and back-office systems,
including a prepaid rating and billing platform we sold as a hosted service, we launched our retail prepaid calling card business in the U.S. in the third quarter of
2003.We sell our retail prepaid calling cards through established distributors to retail outlets in major metropolitan markets across the U.S. We have
established a

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dedicated
operation to sell and service our prepaid retail calling card services. Typically, retail prepaid calling cards deliver gross margins that are higher than in the Trading business.

In
September 2004, we launched Pingo, our retail calling services offered directly to consumers through our eCommerce web interface. Pingo customers in the Unites States use credit cards to
purchase calling time over the iBasis Network by selecting a pre-set amount. Customers are provided with a toll-free access number, account number and personal identification
number to access the service. Pingo's enhanced features include access to on-line call and billing history, PINpassANI recognition, and
automatic recharging to maintain a balance in the customer's Pingo account. These features are designed to increase the customer's convenience and loyalty to the service. For financial information
regarding our Retail business segment, see Note 3, Business Segment and Geographic Information, to our Consolidated Financial Statements.

VoIP Trading Services

Our VoIP trading service enables carriers and other communications service providers to outsource international voice and fax traffic, substantially lowering their transport
and service support costs, without compromising quality. Our carrier customers access The iBasis Network, our international VoIP network, by establishing an interconnection through one of our
"Internet Central Offices" or "ICOs". ICOs are strategically located in major telecommunications hubs in the U.S., Asia, and Europe. Calls are transported over the Internet and terminated at "Internet
Branch Offices" or "IBOs" generally managed by our terminating partners. In this way, our originating customers receive a single point of interconnection to a global network of termination points
without the burden of managing the international network logistics and interconnection agreements on the far end. Likewise, our partners, who sell us termination capacity in their countries, receive a
substantial source of traffic revenue
without having to negotiate individual agreements and interconnections with originating carriers. Our services provide the following key benefits to our customers:

High Quality Call Completion.Our network, monitoring and management technologies enable us to complete international voice and fax calls
with quality comparable to that of traditional circuit-switched voice networks. This high quality is reflected in the fact that carriers choose to provide our VoIP services to their retail customers
undifferentiated from their traditional services. We achieve high quality over the Internet through a variety of controls and technologies. At our 24x7, expert-staffed global Network Operations
Centers (NOCs) in Burlington, Massachusetts, USA and Hong Kong, we are able to monitor our carrier customers' voice traffic and automatically select optimal routing choices according to real time
performance data. Using our patent-pending Assured Quality Routing® and PathEngine technology, we dynamically route customers' traffic over multiple Internet backbones,
completing calls on our partners' phone networks in destination countries.

Cost Effective Services.Our call transport costs are lower because packet switching is more efficient than traditional circuit-switching.
Because we use the Internet, rather than a private IP network, to deliver international voice traffic, we have greater infrastructure flexibility and lower capital costs than service providers that
employ dedicated point-to-point connections. VoIP equipment is less costly and has lower facilities costs (due to its smaller physical footprint) than equivalent capacity
circuit-switched equipment. We offer an open, scalable architecture that enables carriers and communications service providers to connect within a short period of time and without investment or
technical expertise. An additional advantage derives from our ability to bypass many of the international tariffs or settlement rates associated with some international traffic carried over
circuit-switched voice networks, which produces additional cost savings. Our Retail servicesprepaid calling cards and Pingobuild upon the underlying iBasis network and
systems and gives us opportunities to capture retail traffic directly from consumers, which may provide us higher margins than traffic we receive through other carriers.

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For
financial information regarding our Trading business segment, see Note 3, Business Segment and Geographic Information, to our Consolidated Financial Statements.

The iBasis Network

iBasis transported approximately 5 billion minutes of traffic over the iBasis Network in 2004, a volume of traffic that would position iBasis among the ten largest
carriers of international traffic in the world, based on global traffic statistics contained in the industry analyst publication TeleGeography 2005. As of December 31, 2004, we had Points of
Presencegenerally referred to as
POPsin 108 countries. POPs designate points where the iBasis network is directly connected to local telephone networks for call origination or termination. In fact, we are capable of
connecting to local networks in many more countries through our relationships with other carriers. These routes are commonly referred to as "off-net" routes and are utilized opportunistically when
pricing is favorable.

The
iBasis Network is based on a technologically advanced switchless architecture, leveraging proven hardware from industry leaders such as Cisco Systems, as well as patent-pending iBasis software for
quality management and advanced routing. Our Assured Quality Routing® and PathEngine technology enable ongoing monitoring of network performance and automatic selection of
best quality routes based on near real-time performance data. The switchless architecture provides us with significant savings in operational costs and capital expense by eliminating the
need for costly telecommunications switches and other equipment and connectivity in central offices. It also has enabled us to simplify provisioning, real-time route monitoring, and
network management by decreasing the number of network components involved in carrying a call. The result for our customers is higher voice quality, call completion and call duration.

The
iBasis Network consists of four principal elements:



Internet Central Offices and Internet Branch Offices.Our customers interconnect with our network, at their cost, by connecting dedicated
voice circuits from their facilities to one of our ICOs, which are strategically located in Frankfurt, Hong Kong, London, Los Angeles, New York, Paris, and Tokyo. Alternatively, our customers may
elect to install an iBasis IBO at their facilities. ICOs and IBOs receive calls directly from a local carrier's switched network. VoIP gateways in each ICO or IBO
digitize, compress and packetize voice and fax calls and then transmit them over the Internet. At the destination, another ICO or IBO reverses the process and the call is switched back from the
Internet to a local carrier's circuit-switched network in the destination country. Increasingly, customers are investing in VoIP equipment and connecting to us via IP interconnections. As this trend
progresses, our already asset-effective business model gains further strength, as iBasis no longer bears all the cost of converting calls between traditional voice network and the Internet and
dedicated physical circuit-switched interconnects are eliminated altogether.

The Internet.We use the Internet to transmit the substantial majority of our voice and fax traffic because of its global coverage, low
cost and flexible connectivity. As a result, we have avoided the expense and delay of deploying and maintaining a private, dedicated network of fiber and cable connections. In addition, because we do
not have fixed, point-to-point connections, we can adapt to

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changes
in international traffic flows rapidly and at minimal cost. We effectively address the challenges of using the Internet for high quality, real-time voice communications by:



Assured Quality Routing.We have deployed a proprietary patent-pending system of toolscollectively known as, Assured Quality
Routing to maintain high quality service over the Internet. AQR optimizes the quality of calls placed over The iBasis Network by integrating quality parameters into routing decisions. These parameters
include measures of quality that are of direct importance to carriers including call duration, call completion and post-dial delay as well as underlying determinants of successful data
transmission, namely packet loss, jitter and latency. Utilizing data collected in near real-time by our PathEngine performance reporting technology, AQR automatically reroutes traffic in
anticipation of quality dropping below specific thresholds, sending subsequent calls through another Internet path, to an alternative terminating IP partner or to a circuit-switched backup vendor if
necessary.

Global Network Operations Centers.We manage our network and implement AQR through our network operations centers (NOCs). iBasis NOCs use
leading network management tools from Hewlett-Packard and a number of other vendors, which are integrated with our AQR systems to enable us to monitor, test and diagnose all components of The iBasis
Network. NOCs in Burlington, Massachusetts and Hong Kong are staffed by network and traffic engineers to provide expert coverage 7 days a week, 24 hours a day, 365 days of the
year, and are equipped with:



Research and Development

Our research and development activities are primarily focused on developing, improving and expanding The iBasis Network and increasing the efficiency of our interconnections
with buyers and sellers of telecommunications services. These activities include the development of specific tools for our networks, such as our patent-pending Assured Quality Routing and PathEngine
technologies, as well as specialized interconnection technologies like our DirectVoIP Broadband service, which is designed to meet the needs of emerging providers of consumer VoIP
services. In addition, our engineering personnel contribute to the support and operation of our global network operations centers, which oversee and coordinate the operation of our ICO's and IBO's.
Research and development expenses were $13.8 million, $13.4 million and $17.8 million for 2004, 2003 and 2002, respectively.

Markets and Customers

Our VoIP Trading customer base can be segregated by size into Tier 1, Tier 2 and Tier 3 carriers. Generally, Tier 1 carriers are large domestic and international carriers, such
as AT&T, MCI, Sprint, Cable & Wireless, and certain government-affiliated or privatized dominant carriers, such as the Chinese telecommunications carrier China United Telecom (Unicom). Tier 1
carriers generally have annual revenues in excess of $2 billion. Tier 2 carriers have revenues generally in the range of $750 million to $2 billion, but have fewer direct
operating agreements with other carriers and fewer international facilities. Tier 3 carriers are typically switch-based resellers with revenues of less than $750 million. Recently, fast-growing
providers of consumer VoIP services have emerged as a new type

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of
carrier with distinct requirements. iBasis is well positioned to capture market share in this new market.

A
significant portion of traffic carried over The iBasis Network is from Tier 1 carriers. In 2004, Tier 1 carriers, the world's largest and most demanding carriers, accounted for 44 percent of
our traffic. The ability to provide quality call completion consistently acceptable to Tier 1 carriers is of vital importance because these carriers control the vast majority of the world's retail
traffic. Tier 1 carriers will continue to be a main area of focus for our sales force. The proportion of our traffic that originates from Tier 1 carriers in the future will be impacted by the growth
or our Retail services business. Traffic that comes to iBasis directly from consumers, through our Retail services business, has grown dramatically since the launch of our retail prepaid calling cards
in September 2003.

The
proportion of our traffic originating from outside of the United States was 43% of total revenue and 42% of total traffic in 2004. Non-U.S. origination generally produces higher
margins than US-originated traffic. As of December 31, 2004, iBasis provided services to approximately 290 carriers worldwide. One carrier accounted for more than 10% of revenue in
2004, 2003 and 2002. For further discussion of our revenues related to significant customers and customers in other countries and other geographic information, refer to Notes 2 and 3 to our
consolidated financial statements.

In
countries where we terminate our traffic, we have established relationships with local service providers that have strong local market expertise and relationships. Some of our overseas partners are
very large, well-established national carriers. Others are emerging competitive carriers or Internet Service Providers (ISPs) who are able to provide the interconnection necessary to
terminate minutes for us in their country.

Increasingly,
traffic flows are becoming reciprocalformerly distinct customers and suppliers are becoming "trading-partners"as deregulation and competition erode the
distinction between the business models of our customers and suppliers. We expect continued growth in both size and profitability as this trend progresses and we further consolidate our position as a
leading carrier that interconnects the world's local service providers.

Margins
on calls originating from outside the U.S. are generally higher than margins on calls originated from within the U.S. Deregulation and increased competition in the telecommunications industry
has caused prices for long distance telephone service to steadily decline, particularly in the U.S. As a wholesale provider of long distance telephone services, our margins in this business reflect
the effect of these lower prices. We attempt to offset the effect of these lower prices by negotiating lower costs from our call termination partners and by increasing the cost efficiency and
utilization of our network. We are implementing a strategy to leverage retail traffic originating from both our VoIP Trading customers and our own Retail services to drive higher margins than we
typically realize from our Trading services. With our prepaid calling cards and Pingo, we are able to charge per-minute rates that can exceed our wholesale long distance rates, as well as
generate revenue from fees typically associated with the use of prepaid calling cards. In addition, we have launched a premium product, PremiumCertified International Routing, designed to
deliver the highest level of quality, comparable to that of any retail carrier. The more than 500 certified routes in the PremiumCertified product are generally priced higher and offer higher margin
potential. PremiumCertified is marketed to all iBasis trading customers and used in the delivery of the prepaid calling card and Pingo services.

Sales and Marketing

Sales Strategy.Our sales efforts for the VoIP Trading business target both buyers of international minutes and sellers of termination
capacity-leading fixed line and wireless telecommunications carriers globally, as well as emerging providers of consumer VoIP services over broadband connections. Our sales force is composed of
experienced personnel with well-established relationships in the telecommunications industry, based in key markets worldwide and typically responsible for business

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development
in a small number of countries regionally. Our sales process often involves a test of our services by potential originating customers in which they route traffic over our network to a
particular country. Our experience to date has been that once a carrier has begun to use our network for a single country and finds our quality to be acceptable, the sales process for increasing the
volume of traffic they send to us and growing the number of destinations for which they use our network becomes incrementally easier. We also seek to establish and grow relationships with service
providers that can terminate the local leg of international calls. iBasis country managers actively pursue connections with capable, licensed termination partners in their regions. Our ability to
deliver a high volume of traffic, due to our interconnections with more than 280 carriers with international minutes, makes us an attractive potential partner for local service providers.

As
deregulation and competition push all local service providers to both originate and terminate as much traffic as possible on their local networks, iBasis will increasingly enjoy "reciprocal"
relationships with the providers with which we do business, further improving sales productivity.

We
have offices providing sales coverage in Europe, Africa, the Middle East, Latin America, the Caribbean, the Asia-Pacific region, and North America.

Marketing Strategy.In our VoIP Trading business, we seek to attract termination partners as well as customers and consequently address our
marketing efforts to both. Most retail origination is controlled by the largest (Tier 1) retail carriers. We believe that we have largely achieved our primary marketing objectives of awareness
and acceptance among much of this customer segment, as evidenced by our penetration of these carriers in the major developed regions of the world. We continue to reinforce our brand presence with this
segment to help increase our share of their international traffic. We also concentrate on state-owned carriers, known as PTTsin Asia and in developing economies generallywhom
we view as natural customers. While we increasingly expect our customers to also be our termination partners, local circumstances in many countries still are such that we look to partner with ISPs,
new Competitive Local Exchange Carriers (CLECs) and specialist termination providers. Unlike marketing to the well-known Tier 1 carriers, we actively identify and attract smaller
termination partners in many countries, many of which are start-ups formed specifically to terminate international traffic. Our marketing plan includes public relations activity, outreach
with industry analysts and the trade press, participation in industry trade shows and conferences, targeted mailings and a comprehensive Website, and regular communications with our existing customer
base.

Our
sales and marketing strategy for our Retail services business differs for the disposable prepaid calling card business and the Pingo eCommerce business. For the calling card business, we are
focused on four areas:



In
developing our own calling card brands, in addition to supporting established brands of our distributors, we are building presence of select brands in multiple markets across multiple distributors.
These brands leverage a common rate and fee structure and are able to leverage common design and advertising, which enhances both administrative and marketing efficiency while building distributor and
customer loyalty. To broaden our calling distribution we identify the leading established distributors in major urban markets in the U.S. and work to establish mutually beneficial relationships. These
distributors possess the local market knowledge and relationships with retail outlets required to effectively build market presence for our calling cards. Some of our distributors operate as master
distributors supporting smaller sub-distributors that help to broaden and reinforce their market share

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within
various territories or types of outlets. We expand distribution into new ethnic and geographic markets by leveraging existing relationships and by pursuing new distributors as necessary.
Expanding gross margins in the prepaid calling card business is a function of managing card lifecycles. Typically, new cards are introduced with very aggressive promotional pricing to build
distributor and retailer enthusiasm and consumer interest. Once the card has proven its quality and reliability it moves beyond the promotional stage into production, enabling us to realize higher
margins. As we establish our presence in the calling card market the overall age of our product portfolio will increase, essentially resulting in more product having graduated from the promotional
phase into producing higher margins.

The
sales and marketing strategy for our Pingo service leverages the cost-efficiency and tracking capabilities of on-line paid placement advertising on major search engines,
such as Google and Yahoo, as well as targeted email campaigns utilizing opt-in email lists to create exposure of the Pingo web site and encourage sales. We have retained a search engine marketing firm
with specific expertise and proprietary technology designed to optimize our advertising investment, as well as our use of search engine optimization techniques on the Pingo.com web site. When
prospects visit the Pingo web site, we utilize special bonus awards and promotions to encourage initial purchase. We also market to our existing Pingo customers to encourage usage of the service,
recharges, and referrals.

Strategic Technology Relationships

Strategic technology relationships are important because they give us early access to new technologies, a voice in vendors' development direction and because strategic partners
engage with us in support of our sales and marketing programs.

Cisco Systems

Since its founding in 1996, we have maintained a strong, strategic technology and business relationship with Cisco Systems. The iBasis Network is aCisco Powered
network. This designation means that The iBasis Network is built predominantly with Cisco products and technologies, and meets a high standard of reliability and performance. As a Cisco
Powered network, we have enhanced access to Cisco technical resources and are able to more quickly deliver new capabilities and service features. We have regularly engaged in numerous
early field trials of Cisco VoIP technologies, during which we gain experience with new features before they are available to the marketplace. We have also conducted joint sales and marketing
activities with Cisco.

Competition

We compete in two markets: international VoIP services, which we sell on a wholesale basis to other carriers, and retail prepaid calling services which we sell to consumers
directly and through distributors. As described more completely in the section captioned "Risk Factors," the market for VoIP services is highly competitive. We compete with other wholesale trading
carriers worldwide. Many of these carriers have more resources, longer operating histories and more established positions in the telecommunications marketplace, and, in some cases, have begun to
develop VoIP capabilities. We also compete with smaller companies, including those that may be specialists in just one or two routes. We also compete against our customers' ability to carry traffic
themselves, whereby either retail carriers develop their own international networks or interconnect with one another and exchange international traffic by "meeting" in a major telecom hub. At present,
we do not compete with cable operators, or local exchange carriers, such as the U.S. "Baby Bells". Also, at present, we do not compete with emerging retail VoIP carriers as most have not developed
international networks. We compete principally on quality of service and price. In the overall international long distance market, which was approximately 180 billion minutes of phone calls in
2003 based on the current information, we were among the ten largest carriers with about 2% market share. We carried more than 16% of the 22 billion minutes of international VoIP traffic in
2003.

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In
the retail prepaid calling card business, we compete with major telecommunications carriers, and many smaller telecommunications providers. Many of our competitors have a longer operating history
and a more established market presence in the retail prepaid calling card business than us. Also, many of these competitors have greater resources than us. The U.S. market for retail prepaid calling
card services is currently estimated at over $4 billion per year.

Our
Pingo business competes with other on-line sellers of prepaid calling cards and services. Many of these operate as on-line catalogs, selling the same cards that are available in physical form in
retail stores.

Although
the market for wholesale international traffic and retail prepaid calling services is highly competitive and will almost certainly remain so, we believe that our brand-strength, customer
base, established global distribution and patented ability to manage traffic across the (low-cost) Internet, while maintaining required quality, collectively represent a competitive
advantage that will allow us to continue expanding both volumes and margins.

Government Regulation

As more fully described in the "Risk Factors" our business is subject to U.S. and foreign laws, which may include those relating to telecommunications.

We
are not licensed to offer traditional telecommunications services in any U.S. state and we have not filed tariffs for any service at the Federal Communications Commission or at any state regulatory
commission. Nonetheless, aspects of our operations may currently be, or become, subject to state or federal regulations governing licensing, universal service funding, advertising, disclosure of
confidential communications or other information, excise taxes, transactions restricted by U.S. embargo and other reporting or compliance requirements.

While
the FCC to date has maintained an informal policy that information service providers, including VoIP providers, are not telecommunications carriers for regulatory purposes, various entities have
challenged this idea, both before the FCC and at various state government agencies. The FCC recently ruled against AT&T, finding that certain traffic AT&T carried in part utilizing the Internet
protocol format was nonetheless regulated telecommunications for which terminating access charges were due. The FCC has also found that AT&T's prepaid calling cards, which AT&T had claimed as an
enhanced, non-regulated offering, constituted traditional telecommunications for which universal service subsidies are due. In so doing, the FCC imposed such liability retroactively, and
ruled that similarly situated carriers must also fulfill reporting and contribution requirements for universal service funding. The FCC is proceeding on two related Notices of Proposed Rulemaking, one
on regulation of prepaid calling cards and the extent that Internet protocol capabilities insulate such offerings from traditional regulation, and the existing proceeding covering
IP-enabled services more generally. Adverse rulings or rulemakings could subject us to licensing requirements and additional fees and subsidies.

The
regulatory treatment of VoIP and other iBasis services varies widely among other countries and is subject to constant change. Until recently, most countries did not have regulations addressing
VoIP or other VoIP services such as calling cards, in some cases classifying these services as unregulated services. As the VoIP market has grown and matured, increasing numbers of regulators have
begun to reconsider whether to regulate VoIP and other VoIP services. Some countries currently impose little or no regulation on VoIP or VoIP services. Conversely, other countries that prohibit or
limit competition for traditional voice telephony services generally do not permit Internet telephony or VoIP services or strictly limit the terms under which such services may be provided, even
imposing criminal penalties for individuals associated with such offerings. Still other countries regulate VoIP and VoIP services like traditional voice telephony services, requiring VoIP companies to
obtain licenses, incorporate local subsidiaries, make universal service contributions and pay other taxes.

13

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We
have advocated and supported deregulation for free and open market competition in a variety of countries.

Intellectual Property

We regard our copyrights, service marks, trademarks, trade dress, trade secrets, patents, patent applications and similar intellectual property as critical to our success and
we rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners, and others to protect our proprietary rights. Our
policy is to patent the technology, inventions and improvements that we consider important to the development of our business. As of December 31, 2004, we had five pending United States patent
applications for The iBasis Network and other inventions related to our business. We pursue the registration of our trademarks and service marks in the United States and overseas. As of
December 31, 2004, we have been granted trademark registration for the marks iBasis, Assured Quality Routing, ConnectPoint, and Mero Mejicano in the United States, and iBasis in the European
community, and have pending registration applications for other service marks. We also rely on trade secrets, technical know-how and continuing innovation to develop and maintain our
competitive position. We have granted licenses in the ordinary course of business for occasional use of the company's name, logo, trademarks and /or servicemarks to certain marketing partners pursuant
to joint marketing and/or other agreements. Likewise, we have been granted certain licenses for use in the ordinary course of business.

Employees

As of December 31, 2004, we employed 216 people. Our employees are not represented by a labor union.

Geographic Areas

For financial information about geographic areas, including information about revenues and long-lived assets, see Note 3, "Business Segment and Geographic
Information" to our Consolidated Financial Statements.

Item 2.Properties

We
lease the following facilities:

|Location        |  | Square Footage |  | Expiration of Lease |  | Facility Use                                     
|--------------- |  | -------------- |  | ------------------- |  | -------------------------------------------------
|Burlington, MA  |  | 44,265         |  | April 2010          |  | Headquarters and global network operations center
|New York, NY    |  | 11,654         |  | Various, 20082010  |  | Internet Central Office                          
|Miami, FL       |  | 10,500         |  | February 2010       |  | Vacant                                           
|Los Angeles, CA |  | 3,156          |  | April 2008          |  | Internet Central Office                          
|Hong Kong       |  | 576            |  | March 2005          |  | Internet Central Office                          

In
addition to the facilities listed above, we have obtained collocation space in special facilities around the world that are dedicated to housing equipment of multiple competitive telephony
carriers. We lease these smaller spaces to house Internet routing and related equipment. We lease collocation space in Amsterdam, Frankfurt, Hong Kong, London, Paris, and Tokyo. We also rent smaller
office space in London and Beijing. We believe that our existing facilities are adequate for our current needs and that suitable additional or alternative space will be available in the future on
commercially reasonable terms.

14

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Item 3.Legal Proceedings

In
addition to litigation that we have initiated or responded to in the ordinary course of business, we are currently party to the following potentially material legal proceedings:

Beginning
July 11, 2001, we were served with several class action complaints that were filed in the United States District Court for the Southern District of New York against us and several of
our officers, directors, and former officers and directors, as well as against the investment banking firms that underwrote our November 10, 1999 initial public offering of the common stock and
our March 9, 2000 secondary offering of the common stock. The complaints were filed on behalf of persons who purchased the common stock during different time periods, all beginning on or after
November 10, 1999 and ending on or before December 6, 2000.

The
complaints are similar to each other and to hundreds of other complaints filed against other issuers and their underwriters, and allege violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934 primarily based on the assertion that there was undisclosed compensation received by our underwriters in connection with our public offerings and that there were understandings
with customers to make purchases in the aftermarket. The plaintiffs have sought an undetermined amount of monetary damages in relation to these claims. On September 4, 2001, the cases against
us were consolidated. On October 9, 2002, the individual defendants were dismissed from the litigation by stipulation and without prejudice.

On
June 11, 2004, we and the individual defendants, as well as many other issuers named as defendants in the class action proceeding, entered into an
agreement-in-principle to settle this matter, and on June 14, 2004, this settlement was presented to the court. The court has preliminarily approved the settlement. Once
notice has been mailed, there will be an objection period, followed by a hearing for final approval of the settlement. Although we believe that we and the individual defendants have meritorious
defenses to the claims made in the complaints, in deciding to pursue settlement, we considered, among other factors, the substantial costs and the diversion of our management's attention and resources
that would be required by litigation. Pursuant to the terms of the proposed settlement, in exchange for a termination and release of all claims against us and the individual defendants and certain
protections against third-party claims, we will assign to the plaintiffs
certain claims we may have as an issuer against the underwriters, and our insurance carriers, along with the insurance carriers of the other issuers, will ensure a floor of $1 billion for any
underwriter-plaintiff settlement. Although the financial effect of the settlement on us will not be material, our insurance carriers' exposure in this connection will range from zero to a few hundred
thousand dollars, and will be reduced proportionately by any amounts recovered by plaintiffs directly from the underwriters.

We
cannot assure you that the settlement which has been finalized will be accepted by the court, or that we will be fully covered by collateral or related claims from underwriters, and that we would
be successful in resulting litigation. In addition, even though we have insurance and contractual protections that could cover some or all of the potential damages in these cases, or amounts that we
might have to pay in settlement of these cases, an adverse resolution of one or more of these lawsuits could have a material adverse affect on our financial position, results of operations and cash
flows in the period in which the lawsuits are resolved. We are not presently able to estimate losses, if any, related to the lawsuits.

We
are also party to suits for collection, related commercial disputes, claims from carriers and foreign service partners over reconciliation of payments for circuits, Internet bandwidth and/or access
to the public switched telephone network, and claims from estates of bankrupt companies alleging that we received preferential payments from such companies prior to their bankruptcy filings. Our
employees have also been named in proceedings arising out of business activities in foreign countries. We intend to prosecute vigorously claims that we have brought and employ all available defenses
in contesting claims against us, or our employees. Nevertheless, in deciding whether to pursue settlement, we will

15

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consider,
among other factors, the substantial costs and the diversion of management's attention and resources that would be required in litigation. In light of such costs, we have settled various and
in some cases similar matters on what we believe have been favorable terms which did not have a material impact our financial position, results of operations, or cash flows. The results or failure of
any suit may have a material adverse affect on our business.

Item 4.Submission of Matters to a Vote of Security Holders

None

PART II

Item 5.Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Securities

Market Information

Our common stock began trading publicly on the Nasdaq National Market on November 10, 1999 and was traded under the symbol "IBAS." On November 13, 2002, we
received a determination from Nasdaq that shares of our common stock would no longer trade on the Nasdaq National Market because we failed to meet certain minimum listing requirements. Our common
stock began trading on the Nasdaq operated Over-the-Counter Bulletin Board on November 14, 2002 under the same symbol "IBAS." The following table shows the range of the
high and low per share prices of our common stock, as reported by the Over-the-Counter Bulletin Board for the period indicated. Over-the-Counter market
quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.

High

LowFiscal 2004:Fourth Quarter

$
2.78

$
2.27Third Quarter


2.39


1.68Second Quarter


1.95


1.17First Quarter


1.80


1.44Fiscal 2003:Fourth Quarter

$
1.96

$
1.27Third Quarter


1.92


0.88Second Quarter


1.37


0.38First Quarter


0.54


0.38


Holders

As of February 28, 2005, there were 235 stockholders of record. This does not reflect persons or entities who hold their stock in nominee or "street" name through
various brokerage firms.

Dividends

We have never declared or paid cash dividends on our common stock. Our existing financing arrangements place restrictions on our ability to pay cash dividends. We intend to
retain all future earnings to finance future growth, and, therefore, we do not anticipate paying any cash dividends in the foreseeable future.

16

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Item 6.Selected Financial Data

The
following historical selected financial information of iBasis has been derived from, and should be read in conjunction with, the consolidated financial statements and related notes included
elsewhere in this document.

During
July 2002, we sold our Speech Solutions Business. Accordingly, the Consolidated Statements of Operations have been reclassified to present the results of the Speech Solutions Business
separately from continuing operations as discontinued operations.

|                                                                                     |                                  | Year Ended December 31, |        
|------------------------------------------------------------------------------------ | -------------------------------- | ----------------------- | -------
|
|
|Consolidated Statements of Operations Data:                                          |                                  |                         |        
|Net revenue                                                                          |                                  | $                       | 263,678
|Cost and operating expenses:                                                         |                                  |                         |        
|Data communications and telecommunications (excluding depreciation and amortization) |                                  |                         | 225,169
|Research and development                                                             |                                  |                         | 13,803 
|Selling and marketing                                                                |                                  |                         | 9,205  
|General and administrative                                                           |                                  |                         | 12,483 
|Depreciation and amortization                                                        |                                  |                         | 10,345 
|Non-cash stock-based compensation                                                    |                                  |                         |       
|Loss on sale of messaging business                                                   |                                  |                         |       
|Restructuring costs                                                                  |                                  |                         | 165    
|                                                                                     |                                  |                         |        
|Total cost and operating expenses                                                    |                                  |                         | 271,170
|                                                                                     |                                  |                         |        
|Loss from operations                                                                 |                                  |                         | (7,492 
|Interest income                                                                      |                                  |                         | 218    
|Interest expense                                                                     |                                  |                         | (4,249 
|Gain on bond repurchases and exchanges                                               |                                  |                         |       
|Other expense, net                                                                   |                                  |                         | (234   
|Loss on long-term non-marketable security                                            |                                  |                         | (5,000 
|Debt refinancing charges:                                                            |                                  |                         |        
|                                                                                     | Transaction costs                |                         |        
|                                                                                     | Additional interest expense, net |                         |        
|                                                                                     |                                  |                         |        
|Loss from continuing operations                                                      |                                  |                         | (19,397
|Income (loss) from discontinued operations                                           |                                  |                         | 1,861  
|                                                                                     |                                  |                         |        
|Net loss                                                                             |                                  | $                       | (17,536
|                                                                                     |                                  |                         |        
|Basic and diluted net loss per share:                                                |                                  |                         |        
|Loss from continuing operations                                                      |                                  | $                       | (0.38  
|Income (loss) from discontinued operations                                           |                                  |                         | 0.03   
|                                                                                     |                                  |                         |        
|Basic and diluted net loss per share                                                 |                                  | $                       | (0.35  
|                                                                                     |                                  |                         |        
|Basic and diluted weighted average common shares outstanding                         |                                  |                         | 50,514 
|                                                                                     |                                  |                         |        

|                                                                      |  | December 31,
|--------------------------------------------------------------------- |  | ------------
|
|
|Consolidated Balance Sheet Data:                                      |  |             
|Cash and cash equivalents, restricted cash and short-term investments |  | $           
|Working capital                                                       |  |             
|Total assets                                                          |  |             
|Long term debt, net of current portion                                |  |             
|Total stockholders' (deficit) equity                                  |  |             

17

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Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This annual report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a
"safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide
meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in
this annual report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations, financial position, and cash flows are forward-looking
statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. iBasis's actual results may differ significantly from management's expectations. We
disclaim any duty to update any forward-looking statements, all of which should be read in conjunction with the "Risk Factors" section of this annual report.

Overview

We are a leading provider of international communications services and a provider of retail prepaid calling services. Our continuing operations consist of our
Voice-Over-Internet-Protocol ("VoIP") trading business and our retail services business. In the VoIP trading business we receive voice traffic from
buyersoriginating carriers who are interconnected to our network via VoIP or traditional TDM connections, and we route that traffic over the Internet to sellerslocal carriers
in the destination countries with whom we have established termination agreements. We use proprietary, patent-pending technology to automate the selection of routes and termination partners based on a
variety of performance, quality, and business metrics. We offer this international call completion service on a wholesale basis to carriers, telephony resellers and other service providers worldwide
and have termination agreements with local service providers in North America, Europe, Asia, the Middle East, Latin America, Africa and Australia.

Many
major telecommunications carriers have announced plans to deploy VoIP technology in their networks, to migrate their traffic to VoIP, and to introduce VoIP-based services to their
retail customers. In addition, new providers of retail telephony services based on VoIP have emerged. We believe this trend may have a positive impact on our business in the future by lowering the
level of capital investment required for our network and potentially positioning us to receive a larger volume of international traffic in the future. Telephone calls that enter The iBasis Network as
traditional PSTN (TDM) calls must be converted into Internet protocol (IP) for transport through our VoIP infrastructure and over the public Internet. In contrast, telephone calls that enter our
network already in the form of IP do not require conversion from traditional PSTN to IP through a VoIP gateway. Thus, VoIP-based traffic we receive requires a lower capital investment in
our network. Major carriers have initially focused their VoIP plans on their U.S. networks, rather than their international networks. We believe that it may be more economical for these major carriers
to send their VoIP-based international traffic to our network rather than making the capital investment required to deploy VoIP in their international network infrastructure. Many of the
emerging providers of VoIP services do not have an international infrastructure in place and, similarly, we believe it may be more economical for these carriers to send theirVoIP-based international
traffic to us.

Our
retail services business was launched during the third quarter of 2003, with the introduction of our retail prepaid calling cards that are marketed through distributors primarily to ethnic
communities within major metropolitan markets in the U.S.. Our entry into the retail prepaid calling card business leverages our existing international VoIP network and termination agreements with
additional enhanced retail services that have the potential to deliver higher margins than typically achieved in the VoIP trading business. In addition, the retail prepaid calling card business
typically has a faster cash collection cycle than the VoIP trading business. Beginning in the second quarter of 2004, we created a

18

---



new
reportable business segment, retail prepaid calling card services and other enhanced services ("Retail"), in addition to our international VoIP trading business ("Trading"). Since we introduced
our retail prepaid calling card services, revenue from our Retail business has grown substantially. Since the second quarter of 2004, revenue from our Retail business has exceeded 10% of our total net
revenue.

In
September 2004, we launched a prepaid calling service, Pingo, offered directly to consumers through an eCommerce web interface, which we have included in our Retail business
segment. Revenues from our Pingo services were not material in 2004.

We
have a history of operating losses and, as of December 31, 2004, our accumulated deficit was $429.7 million and our stockholders' deficit was $23.9 million and we used
$7.2 million in cash from operations in 2004. These results are primarily attributable to the expenditures necessary to build our network and develop and expand our market.

Management Plans

Beginning in 2001, we have taken a series of actions to reduce operating expenses, restructure operations, reduce outstanding debt and provide additional liquidity. Such
actions included:



We
continue to expand our market share in VoIP Trading services by expanding our customer base and by introducing cost-effective solutions for our customers to interconnect with our
network. During the first quarter of 2004, we introduced our DirectVoIP service which eliminates the need for certain switches for our customers to interconnect to our network, thus reducing capital
equipment costs for both iBasis and our customers. More recently we expanded the DirectVoIP offering with DirectVoIP Broadband, which addresses interconnection requirements that are specific to the
growing consumer VoIP market, which we believe offers significant growth potential for us.

In
the Retail services business, our strategy is to continue to increase our retail traffic through the deployment of our prepaid calling services, which leverage our international VoIP network with
our real

19

---



time
back office systems, and have the potential to deliver higher margins and improve cash flow. In addition, we continue to increase the traffic we terminate to mobile phones, which generally
delivers higher average revenue per minute and margins than typical fixed-line traffic.

We
believe both business segments will benefit from our recently launched PremiumCertified international routing product. PremiumCertified is designed to enhance our ability to compete
for retail international traffic from existing customers as well as from mobile operators and emerging consumer VoIP providers. PremiumCertified features routes to more than 500 destinations that are
actively monitored and managed to deliver a level of quality that is equal to or exceeds the highest industry benchmarks for retail quality.

Our
plans also include:



We
anticipate that the December 31, 2004 balance of $38.8 million in cash, cash equivalents and short-term marketable investments, together with expected cash flows from
operations, will be sufficient to fund our operations for at least the next twelve months.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The preparation of these
financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to make judgments, assumptions and estimates that
affect the reported amounts of assets, liabilities, revenue and expenses and disclose contingent assets and liabilities. We base our accounting estimates on historical experience and other factors
that we consider reasonable under the circumstances. However, actual results may differ from these estimates. To the extent there are material differences between our estimates and the actual results,
our future financial condition and results of operations will be affected. The following is a summary of our critical accounting policies and estimates.

Revenue Recognition.For our VoIP Trading business, our revenue transactions are derived from the resale of international minutes of
calling time. We recognize revenue in the period the service is provided, net of revenue reserves for potential billing disputes. Such disputes can result from disagreements with customers regarding
the duration, destination or rates charged for each call. For our retail prepaid calling card business, revenue is deferred upon activation of the cards and is recognized as the prepaid calling card
balances are reduced based upon minute usage and service charges. Revenue from both the resale of minutes as well as the usage of the prepaid calling cards is recognized when all of the following
criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable and collectibility is reasonably assured.

Short-term marketable investments.Our investments are classified as available-for-sale and consist of
securities that are readily convertible into cash, including government securities and commercial paper, with original maturities at the date of acquisition ranging from 90 days to one year.

20

---



Allowance for Doubtful Accounts.We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history
and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a
provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. We have been able to mitigate our credit risk by using
reciprocal arrangements with customers, who are also iBasis suppliers, to offset our outstanding receivables. A majority of our accounts receivable are from international carriers. For financial
information about geographic areas and significant customers, see Note 3, "Business Segment and Geographic Information" to our Consolidated Financial Statements.

Impairment of Long Lived Assets.Our long-lived assets consist primarily of property and equipment. We have assessed the
realizability of these assets and determined that there was no asset impairment as of December 31, 2004 for these assets. Any future impairment would not impact cash flow but would result in an
additional charge in our statement of operations.

Long-term investment in non-marketable security.Our long-term investment in a
non-marketable security represents an equity investment in a privately-held company that was made in connection with a round of financing with other third-party investors. As
our investment does not permit us to exert significant influence or control over the entity in which we have invested, the recorded amount represents our cost of the investment less any adjustments we
make when we determine that an investment's carrying value is other-than-temporarily impaired.

The
process of assessing whether the equity investment's net realizable value is less than its carrying cost requires a significant amount of judgment due to the lack of a mature and stable public
market for investments of this type. In making this judgment, we carefully consider the investee's most recent financial results, cash position, recent cash flow data, projected cash flows (both short
and long-term), financing needs, recent financing rounds, most recent valuation data, the current investing environment, management or ownership changes, and competition. This valuation
process is based primarily on information that we request, receive and discuss with the investees' management on a quarterly basis. We consider our equity investment to be other than temporarily
impaired if, as of the end of any quarter, we believe that the carrying value of the investment is greater than the estimated fair value. Such evaluation is performed on a quarterly basis.

Based
on our evaluation for the quarter ended March 31, 2004, we determined that our investment in this privately-held company has been other than temporarily impaired and, as a
result, we recorded a $5.0 million non-cash charge to continuing operations in the first quarter of 2004. Since March 31, 2004, based on our on going monitoring of this
privately-held company, we believe that the current carrying value of our investment is appropriate.

Restructuring Charges.During 2002 and 2001, we recorded significant charges to operations in connection with our restructuring programs.
The related reserves reflect estimates, including those pertaining to severance costs and facility exit costs. We reassess the reserve requirements to complete each restructuring program at the end of
each reporting period. Actual experience may be different from these estimates. We had no restructuring charges in 2003. In the fourth quarter of 2004, we took an additional charge of
$0.2 million as a result of a change in estimates relating to our future sublease assumptions.

21

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Results of Operations

The following table sets forth for the periods indicated the principal items included in the Consolidated Statements of Operations as percentages of net revenue.

Year Ended December 31,2004

2003

2002Net revenue

100.0
%
100.0
%
100.0
%Costs and operating expenses:Data communications and telecommunications

85.4

85.8

86.6Research and development

5.2

7.5

10.8Selling and marketing

3.5

4.2

6.8General and administrative

4.7

4.3

14.6Depreciation and amortization

3.9

11.3

19.3Non-cash stock-based compensation





0.6Loss on sale of messaging business





1.3Restructuring costs

0.1



3.4Total costs and operating expenses

102.8

113.1

143.4Loss from operations

(2.8
)
(13.1
)
(43.4
)Interest income

0.1

0.1

0.8Interest expense

(1.6
)
(2.2
)
(7.1
)Gains on bond repurchases and exchanges



9.3

15.6Other expenses, net

(0.1
)
(0.2
)
(0.2
)Loss on long-term non-marketable security

(1.9
)


Debt refinancing charges

(1.0
)


Loss from continuing operations

(7.3
)
(6.1
)
(34.3
)Loss (income) from discontinued operations

0.7

0.7

(39.5
)Net loss

(6.6
)%
(5.4
)%
(73.8
)%


Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Net revenue.Our primary source of revenue is the fees that we charge customers for completing voice and fax calls over our network and
revenues from the sale of our prepaid calling services. Our VoIP Trading revenue is dependent on the volume of voice and fax traffic carried over the network, which is measured in minutes. We charge
our customers fees, per minute of traffic, that are dependent on the length and destination of the call and recognize this revenue in the period in which the call is completed. Our average revenue per
minute is based upon our total net revenue divided by the number of minutes of traffic over our network for the applicable period. Average revenue per minute is a key telecommunications industry
financial measurement. We believe this measurement is useful in understanding our financial performance, as well as industry trends. Although the long distance telecommunications industry has been
experiencing declining prices in recent years, due to the effects of deregulation and increased competition, our average revenue per minute can fluctuate from period to period as a result of shifts in
traffic over our network to higher priced, or lower priced, destinations.

Our
total net revenue increased by $85.5 million, or 48%, to $263.7 million for 2004 from $178.2 million for 2003. Traffic carried over our network increased to 4.9 billion
minutes for 2004 from 3.5 billion minutes for 2003 and our average revenue per minute increased to 5.4 cents per minute in 2004 compared to 5.1 cents per minute in 2003, as our traffic, as
indicated above, moved to higher priced destinations. Trading revenue increased $52.7 million, or 31%, to $225.3 million in 2004 compared to $172.6 million in 2003. Retail revenue
increased $32.8 million, or nearly 7 times, to $38.4 million in 2004 compared to $5.6 million in 2003. This increase reflects the rapid growth we have achieved with our retail
prepaid calling card services, which we introduced in the third quarter of 2003.

22

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Revenue
from our Pingo calling services, part of our Retail services, which we launched in September 2004, was not material in 2004.

Data communications and telecommunications expenses.Data communications and telecommunications expenses are composed primarily of
termination and circuit costs. Termination costs are paid to local service providers to terminate voice and fax calls received from our network. Terminating costs are negotiated with the local service
provider. Should competition cause a decrease in the prices we charge our customers and, as a result, a decrease in our profit margins, our contracts, in some cases, provide us with the flexibility to
renegotiate the per-minute termination fees. Circuit costs include charges for Internet access at our Internet Central Offices, fees for the connections between our Internet Central
Offices and our customers and/or service provider partners, facilities charges for overseas Internet access and phone lines to the primary telecommunications carriers in particular countries, and
charges for the limited number of dedicated international private line circuits we use. For our Retail calling services, these costs also include the cost of local and toll free access charges.

Data
communications and telecommunications expenses increased by $72.3 million, or 47%, to $225.2 million for 2004 from $152.9 million for 2003. Data communications and
telecommunications expenses were $192.6 million and $32.6 million for our Trading and Retail business segments, respectively. The increase in data communications and telecommunications expense
primarily reflects the increase in revenue and traffic, as discussed above. The largest component of this expense, termination costs, increased to $219.1 million for 2004 from
$147.2 million for 2003 while circuit costs increased slightly to $6.1 million for 2004 from $5.7 million in 2003. As a percentage of net revenues, data communications and
telecommunications expenses decreased to 85.4% for 2004 from 85.8% in 2003.

Research and development expensesResearch and development expenses include the expenses associated with developing, operating, supporting
and expanding our international and domestic network, expenses for improving and operating our global network operations centers, salaries, and payroll taxes and benefits paid for employees directly
involved in the development and operation of our global network operations centers and the rest of our network. Also included in this category are research and development expenses that consist
primarily of expenses incurred in enhancing, developing, updating and supporting our network and our proprietary software applications.

Research
and development expenses increased by $0.4 million to $13.8 million for 2004 from $13.4 million for 2003. The increase in research and development expenses is due to
expenditures related to the support of The iBasis Network, including network hardware and software maintenance. As a percentage of net revenue, research and development expenses decreased to 5.2% for
2004 from 7.5% for 2003.

Selling and marketing expenses.Selling and marketing expenses include expenses relating to the salaries, payroll taxes, benefits and
commissions that we pay for sales personnel and the expenses associated with the development and implementation of our promotion and marketing campaigns.

Selling
and marketing expenses increased by $1.7 million, to $9.2 million in 2004, from $7.5 million in 2003. The increase in expenses primarily relates to additional investments
we have made in sales and marketing to support our rapidly expanding Retail business. As a percentage of net revenue, selling and marketing expenses decreased to 3.5% for 2004 from 4.2% for 2003.

General and administrative expenses.General and administrative expenses include salary, payroll tax and benefit expenses and related costs
for general corporate functions, including executive management, finance and administration, legal and regulatory, facilities, information technology and human resources.

General
and administrative expenses increased by $4.8 million to $12.5 million for 2004 from $7.7 million for 2003. In 2003, general and administrative expenses were reduced by
$4.3 million for the

23

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recovery
of a previously reserved customer accounts receivable balance. Bad debt expense in 2004 was $0.3 million compared to $0.8 million in 2003. Professional fees increased by
$0.4 million, related in part to compliance with the Sarbanes-Oxley Act. As a percentage of net revenue, general and administrative expenses were 4.7% for 2004 and 4.3% for 2003.

Restructuring costs.In the fourth quarter of 2004, we took a charge of $0.2 million for a change in estimate relating to our
sublease assumptions associated with our 2002 Restructuring charge.

Depreciation and amortization expenses.Depreciation and amortization expenses decreased by $9.8 million to $10.3 million for
2004 from $20.1 million for 2003. This decrease was primarily due to the end of the depreciable life of certain networking equipment. As a percentage of net revenue, depreciation and
amortization expenses decreased to 3.9% for 2004 from 11.3% for 2003.

Non-cash stock-based compensation.Non-cash stock-based compensation represents compensation expense incurred in
connection with the grant of stock options to our employees with exercise prices less than the fair value of our common stock at the respective dates of grant. Such grants were made prior to our
initial public stock offering and are being expensed over the vesting periods of the options granted. Non-cash stock-based compensation was $86,000 in 2003. There was no
non-cash stock-based compensation expense in 2004 as these options became fully vested in 2003.

Interest income.Interest income was $218,000 and $161,000 for 2004 and 2003, respectively. This increase primarily reflects the income
earned on the proceeds from our private equity placement in September 2004.

Interest expense.Interest expense in 2004 is primarily composed of interest expense on the new 63/4% Convertible
Subordinated Notes due June 2009 and the new 8% Secured Convertible Notes due June 2007, as well as capital leases. Interest expense increased by $0.2 million to
$4.2 million in 2004 from $4.0 million in 2003. As a result of the completion of the refinancing of our debt in June 2004, interest expense includes interest on the new 8% Secured
Convertible Notes due June 2007. Previously, all of the interest on our 111/2% Senior Secured Notes due January 2005 had been charged to the gain on bond exchanges in
2003, in accordance with SFAS No. 15, "Accounting by Debtors and Creditors Regarding Troubled Debt Restructuring,". As a result, prior to the third quarter of 2004, interest expense did not
include interest on the 111/2% Senior Secured Notes due January 2005.

Gain on bond exchanges.During 2003, we entered into agreements with principal holders of our 53/4% Convertible Subordinated
Notes due March 2005 which resulted in the retirement of $50.4 million of such notes in exchange for new debt instruments at 50% of the face value of the retired notes. Under the terms
of the agreement, the holders of the retired notes received $25.2 million of new 111/2% Senior Secured Notes due January 2005 and warrants for 4,915,416 shares of our
common stock. Each warrant had an initial exercise price of $0.65 per share and is exercisable over a five-year term. The 111/2% Senior Secured Notes due
January 2005, shared in a second priority lien on our assets and were subordinated to our bank revolving line of credit.

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The
gain we recognized in 2003 was calculated as follows:

2003(in thousands)Face value of surrendered 53/4% Convertible Subordinated Notes due March 2005

$
50,350Less: Face value of issued 111/2% Senior Secured Notes due January 2005


(25,175
)Future interest payments on 111/2% Senior Secured Notes due January 2005


(5,527
)Fair value of warrants issued


(1,375
)Reduction of deferred debt financing costs


(723
)Professional fees


(935
)Gain

$
16,615


Other expenses, net.Other expenses, net were $0.2 million and $0.3 million in 2004 and 2003, respectively, and relate mostly
to state excise, use and franchise taxes.

Loss on long-term non-marketable security.In the first quarter of 2004, we determined that our equity investment
in a privately-held company had been other than temporarily impaired, and, as a result, recorded a non-cash $5.0 million charge. Our decision was based on our evaluation
of the privately-held company's current cash position and recent operating results, as well as the perceived inability of that company to obtain additional financing at a level, and in a
timely manner, to support its continued operations.

Refinancing transaction costs.Transaction costs relating to the refinancing of our debt in June 2004 were $2.2 million.
These costs consisted primarily of investment banking services, legal and audit fees.

Refinancing related interest expense.We issued warrants to purchase a total of 5.2 million shares of our common stock, at $1.85 per
share, to the holders of the 111/2% Senior Secured Notes due January 2005 as partial consideration for the prepayment of these notes in June 2004. The fair value of
$2.1 million for these warrants has been charged to operations as additional interest expense. Future interest on the 111/2% Senior Secured Notes due January 2005 of
$1.6 million, that had originally been charged to the gain
on bond exchanges in 2003 and was not paid as a result of the prepayment of these notes, was recorded as a reduction to the additional interest expense associated with the refinancing. As a result,
refinancing related interest expense, net was $0.5 million in 2004.

Income taxes.We have not recorded an income tax benefit for the losses associated with our operating losses in 2004 and 2003, as we
believe that it is more likely than not that these benefits will not be realized.

Income from discontinued operations.Income from discontinued operations of $1.9 million in 2004 relates to the expiration of
certain contingent obligations associated with the sale of our former Speech Solutions Business in 2002. Income from discontinued operations of $1.3 million in 2003 represents additional
consideration of $1.3 million for an earn-out payment based on the achievement of certain 2003 revenue-based milestones associated with our former Speech Solutions Business.

Net loss.Loss from continuing operations was $19.4 million in 2004 compared to a loss of $10.9 million in 2003. Excluding
refinancing charges of $2.6 million and the loss on a long-term non-marketable security of $5.0 million, the loss from continuing operations in 2004 was
$11.7 million. Excluding the gain on bond exchanges of $16.6 million, the loss in 2003 was $27.5 million. The reduction in the net loss in 2004 compared to 2003 of
$15.8 million, excluding debt refinancing charges, loss on a long-term non-marketable security and gain on bond exchanges, relates to the proportionately lower level of
costs and operating expenses on the higher level of revenues year-to-year.

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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Net revenue.Our primary source of revenue is fees that we charge customers for completing voice and fax calls over our network. Revenue is
dependent on the volume of voice and fax traffic carried over the network, which is measured in minutes. We charge our customers fees, per minute of traffic, that are dependent on the length and
destination of the call and recognize this revenue in the period in which the call is completed. Our average revenue per minute is based upon our total net revenue divided by the number of minutes of
traffic over our network for the applicable period.

During
the third quarter of 2003, we introduced our retail prepaid calling card services and have marketed such services primarily to ethnic communities within major domestic markets through
distributors. Revenue for these services were not material for 2003.

Our
net revenue increased by approximately $13.3 million to $178.2 million for 2003 from $164.9 million for 2002. While traffic carried over our network increased to
3.5 billion minutes for 2003 from 2.6 billion minutes for 2002, such increase was partially offset by the decline in the average revenue per minute. The average revenue per minute was
5.1 cents per minute in 2003 compared to 6.4 cents per minute in 2002. The long distance telecommunications industry has been experiencing declining prices in recent years, due to the effects
of deregulation and increased competition. In addition, our average revenue per minute can fluctuate from period to period as a result of shifts in traffic over our network to higher priced, or lower
priced, destinations.

Data communications and telecommunications expenses.Data communications and telecommunications expenses are composed primarily of
termination and circuit costs. Termination costs are paid to local service providers to terminate voice and fax calls received from our network. Terminating costs are negotiated with the local service
provider. Should competition cause a decrease in the prices we charge our customers and, as a result, a decrease in our profit margins, our contracts, in some cases, provide us with the flexibility to
renegotiate the per-minute termination fees. Circuit costs include charges for Internet access at our Internet Central Offices, fees for the connections between our Internet Central
Offices and our customers and/or service provider partners, facilities charges for overseas Internet access and phone lines to the primary telecommunications carriers in particular countries, and
charges for the limited number of dedicated international private line circuits we use.

Data
communications and telecommunications expenses increased by $10.0 million to $152.9 million for 2003 from $142.9 million for 2002. The increase in data communications and
telecommunications expense was primarily driven by the increase in traffic, as discussed above, offset by a decline in the average rate per minute and a reduction in our circuit costs. The largest
component of this expense, termination costs, increased $15.4 million, or 11.7%, to $147.2 million for 2003 from $131.8 million for 2002 while circuit costs decreased
$5.3 million, or 48.4%, to $5.7 million for 2003 from $11.0 million for 2002. The decrease in circuit costs was due to our efforts to further improve our network operations and
make it more cost efficient. We achieved cost savings by renegotiating prices with vendors and service provider partners, entering into more variable rather than fixed cost arrangements, reducing the
number of service providers, conducting extensive studies of our circuit needs and eliminating under-utilized circuits by re-engineering more cost-effective solutions. As a
percentage of net revenue, data communications and telecommunications expenses decreased to 85.8% for 2003 from 86.6% for 2002.

Research and development expenses.Research and development expenses include the expenses associated with developing, operating, supporting
and expanding our international and domestic network, expenses for improving and operating our global network operations centers, salaries, and payroll taxes and benefits paid for employees directly
involved in the development and operation of our global network operations centers and the rest of our network. Also included in this category are research and development expenses that consist
primarily of expenses incurred in enhancing, developing, updating and supporting our network and our proprietary software applications.

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Research
and development expenses decreased by $4.4 million to $13.4 million for 2003 from $17.8 million for 2002. The decrease in expenses reflect the effect of our 2002
restructuring program, which included the consolidation of our Internet central offices and a workforce reduction of 19 engineers, as well as our on-going efforts to improve the operations
of The iBasis Network. As a result, third-party network maintenance costs declined by $2.1 million and personnel-related costs declined by $2.3 million. As a percentage of net revenue,
research and development expenses decreased to 7.5% for 2003 from 10.8% for 2002.

Selling and marketing expenses.Selling and marketing expenses include expenses relating to the salaries, payroll taxes, benefits and
commissions that we pay for sales personnel and the expenses associated with the development and implementation of our promotion and marketing campaigns. Selling and marketing expenses decreased by
$3.8 million, or 33.4%, to $7.5 million for 2003 from $11.3 million for 2002. The decrease in expenses reflects the effect of our 2002 restructuring program, which included a
workforce reduction of 10 sales and marketing personnel. As a result, personnel-related costs, including sales commissions, declined by $3.4 million and travel expenses declined by
$0.7 million. As a percentage of net revenue, selling and marketing expenses decreased to 4.2% for 2003 from 6.8% for 2002.

General and administrative expenses.General and administrative expenses include salary, payroll taxes and benefits and related costs for
general corporate functions, including executive management, finance and administration, legal and regulatory, facilities, information technology and human resources. General and administrative
expenses decreased by $16.5 million, or 68.3%, to $7.7 million for 2003 from $24.2 million for 2002. During 2003, we recognized a $0.8 million expense for potentially
uncollectible customer accounts compared to $10.0 million in 2002. In addition, during 2003, we had a bad debt recovery of $4.3 million, resulting from the collection of a previously
reserved customer receivable balance, which was recorded as a credit in the 2003 statement of operations. As a percentage of net revenue, general and administrative expenses decreased to 4.3% for 2003
from 14.6% for 2002. Excluding the above-mentioned collection of a previously reserved receivable balance, general and administrative expenses decreased to 6.5% of net revenue for 2003.

Depreciation and amortization expenses.Depreciation and amortization expenses decreased by $11.8 million, or 37.0%, to
$20.1 million for 2003 from $31.9 million for 2002. This decrease was largely due to the $28.5 million reduction in historical cost value of our network equipment due to our
agreement to settle the majority of our capital lease obligations with our primary equipment vendor in August 2002, the write-off of property and equipment as a part of our
restructuring plans that were executed in 2002 as well as the end of the depreciable life of certain networking equipment. As a percentage of net revenue, depreciation and amortization expenses
decreased to 11.3% for 2003 from 19.3% for 2002.

Non-cash stock-based compensation.Non-cash stock-based compensation represents compensation expense recorded in
connection with the grant of stock options to our employees with exercise prices less than the fair value of the common stock at the respective dates of grant. Such grants were either made prior to
our initial public stock offering or were assumed in connection with our acquisition of PriceInteractive, Inc. in 2001, and were expensed over the vesting periods of the options granted. The
decrease in non-cash stock-based compensation to $0.1 million in 2003 from $1.0 million in 2002 was due to the expiration of certain option agreements issued in connection
with acquisition of PriceInteractive, Inc. in 2001, as well as our stock option exchange program which was completed in December 2002.

Loss on sale of messaging business.In March 2002, we sold our messaging line of business to Call Sciences, an enhanced
communications service provider. During 2002, we recognized a loss on the sale of $2.1 million, net of the royalty stream.

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Restructuring costs.During 2002, we announced cost reduction measures and recorded a net charge of approximately $5.5 million in
the statement of operations in 2002. The charge included the write off of leasehold improvements as well as termination costs for the Miami facility space and telecommunication circuits and employee
severance costs. We did not have any restructuring charges in 2003.

The
components of the restructuring charge were as follows:

(In thousands)Write-off of property and equipment

$
2,427Termination of contractual obligations


2,794Employee severance costs


750Less: Change in estimate of 2001 restructuring costs


(435
)Total

$
5,536


Interest income.Interest income is primarily composed of income earned on our cash and cash equivalents and marketable securities.
Interest income decreased by $1.1 million, or 87.5%, to $0.2 million in 2003 from $1.3 million in 2002. The decrease is primarily a result of our average cash balance during the
period, including marketable securities, declining by approximately 70% in 2003 compared to 2002. In addition, lower average interest rates in 2003, compared to 2002, contributed to the decline in
interest income.

Interest expense.Interest expense is primarily composed of interest paid on the 53/4% Convertible Subordinated Notes due
March 2005 and various capital lease agreements established to finance a substantial majority of the hardware and software components of our network. Interest expense decreased by
$7.6 million, or 65.8%, to $4.0 million in 2003 from $11.6 million in 2002. This decrease was attributable to reduced interest paid on capital equipment financing, the impact in
2003 of both the early termination of $40.6 million of our 53/4% Convertible Subordinated Notes due March 2005 throughout 2002 and the early termination of
$50.8 million of our capital lease obligations in August 2002. Our interest expense was also reduced as a result of the exchange of $50.4 million of our 53/4%
Convertible Subordinated Notes due March 2005 for $25.2 million of new 111/2% Senior Secured Notes due January 2005 during 2003.

In
accordance with SFAS No. 15, "Accounting by Debtors and Creditors Regarding Troubled Debt Restructuring," we recorded a gain on the exchange of approximately $16.6 million during
2003. SFAS No. 15 requires that the gain on the exchange be recorded net of the future interest payments on the
new 111/2% Senior Secured Notes due January 2005, the fair value of the warrants issued, the write off of the net book value of the deferred financing costs originally
capitalized with the issuance of the 53/4% Convertible Subordinated Notes due March 2005 and any other fees or costs. While our future cash flows relating to interest payments
will not be affected by the exchange, our future statements of operations will show a reduction of interest expense due to the inclusion of the interest payments on the Senior Secured Notes within the
gain.

Gain on bond repurchases and exchanges.During 2003, we entered into agreements with principal holders of our 53/4%
Convertible Subordinated Notes due March 2005 which resulted in the retirement of $50.4 million of such notes in exchange for new debt instruments at 50% of the face value of the retired
notes. Under the terms of the agreement, the holders of the retired notes received $25.2 million of new 111/2% Senior Secured Notes due January 2005 and warrants for
4,915,416 shares of our common stock. Each warrant has an initial exercise price of $0.65 per share and is exercisable over a five-year term. The 111/2% Senior Secured Notes
due January 2005, share in a second priority lien on our assets and are subordinated to our bank revolving line of credit.

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The
gain we recognized in 2003 was calculated as follows:

2003(In thousands)Face value of surrendered 53/4% Convertible Subordinated Notes due March 2005

$
50,350Less: Face value of issued 111/2% Senior Secured Notes due January 2005


(25,175
)Future interest payments on 111/2% Senior Secured Notes due January 2005


(5,527
)Fair value of warrants issued


(1,375
)Reduction of deferred debt financing costs


(723
)Professional fees


(935
)Gain

$
16,615


During
2002, we repurchased a portion of our outstanding 53/4% Convertible Subordinated Notes due March 2005 and recorded gains. The gains were calculated as follows:

2002(In thousands)Carrying value of repurchased Notes

$
40,588Less: Cost of repurchase of Notes


(13,993
)Write-off of deferred debt financing costs


(805
)Gain

$
25,790


Other expenses, net.Other expenses, net were $0.3 million and $0.4 million in 2003 and 2002, respectively, and relate mostly
to state excise and franchise taxes.

Loss from continuing operations.Our loss from continuing operations was $10.9 million and $56.5 million for 2003 and 2002,
respectively. The reduction in the loss from continuing operations in 2003 was primarily a result of substantially lower costs and operating expenses as a percentage of net revenue. As a result of our
restructuring programs and our continued focus on controlling expenses, our research and development, selling and marketing and general and administrative expenses, in total, declined to
$28.6 million for 2003 from $53.2 million for 2002. In addition, our data communications and telecommunications costs have declined to 85.8% of net revenue for 2003 from 86.6% of net
revenue for 2002.

Income (loss) from discontinued operations.On July 15, 2002, we completed the sale of substantially all the assets of our Speech
Solutions Business for $18.5 million in cash ($1.5 million of this amount is in escrow). The loss from discontinued operations of $65.2 million in 2002 represents the operating
loss of the Speech Solutions Business for 2002. In the fourth quarter of 2003, we recognized additional consideration of $1.3 million for an earn-out payment based on the
achievement of certain 2003 revenue-based milestones associated with our former Speech Solutions Business. The cash payment associated with the earn-out was $1.0 million and was
received in February 2004.

Income Taxes.We have not recorded an income tax benefit for the loss associated with our operating losses as it is more likely than not
that these benefits will not be realized.

Net loss.The net loss for 2003 was $9.7 million, or $0.21 per share, compared to a net loss of $121.7 million, or $2.70 per
share, for 2002. In 2003, income from discontinued operations was $1.3 million. The net loss of $121.7 million in 2002 included a loss from discontinued operations of
$65.2 million. The net loss from continuing operations in 2003 was $10.9 million, which was

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$45.6 million
lower than 2002. In total, our research and development, selling and marketing, and general and administrative expenses declined $24.6 million to $28.6 million in
2003 compared to $53.2 million in 2002. The reduction in these expenses reflects the effect of our 2001 and 2002 restructuring programs, as well as our continuing focus on reducing costs. In
addition, depreciation and amortization decreased $11.8 million and interest expense declined $7.6 million in 2003 compared to 2002.

Liquidity and Capital Resources

Our principal capital and liquidity needs historically have related to the development of our network infrastructure, our sales and marketing activities, research and
development expenses, and general capital needs. Our working capital needs have been met, in large part, from the net proceeds from public and private offerings of common stock and issuances of
convertible debt. In addition, we have also met our capital needs through vendor capital leases and other equipment financings.

Net
cash used in continuing operating activities was $7.2 million, $3.2 million (net of the collection of a previously reserved receivable balance of $4.3 million), and
$43.0 million in 2004, 2003 and 2002, respectively. Cash used in operating activities of $7.2 million in 2004 related to our loss from continuing operations for the year of
$19.4 million, partially offset by non-cash charges of $17.9 million. In addition, the increase in accounts receivable of $12.6 million was partially offset by an
increase in accounts payable, accrued expenses and deferred revenue of $8.1 million. The increase in accounts receivable relates primarily to the growth in revenue in 2004 compared to 2003.
Cash used in
continuing operating activities in 2003 of $3.2 million related to our loss from continuing operations of $10.9 million and the non-cash gain on our debt exchange of
$16.6 million, partially offset by non-cash charges of $17.0 million and changes in other assets and liabilities of $7.4 million. Cash used in continuing operating
activities in 2002 of $43.0 million related to our loss from continuing operations of $56.5 million, the non-cash gain on our debt repurchases of $25.8 million and
changes in other assets and liabilities of $11.8 million, partially offset by non-cash charges of $51.1 million. Net cash used in discontinued operating activities was
$1.9 million in 2002.

Net
cash used in investing activities included $3.3 million used for capital expenditures and $17.9 million, net in purchases of available-for-sale
short-term marketable investments. Our investments are classified as available-for-sale and consist of securities that are readily convertible into cash, including
government securities and commercial paper, with original maturities at the date of acquisition ranging from 30 days to one year. At December 31, 2004, $17.9 million of securities
with maturities of less than one year were classified as short-term investments. In addition, we received proceeds from an earn-out receivable and escrow payment of
$1.0 million and $1.5 million, respectively, relating to the sale of our former Speech Solutions Business. Net cash used in investing activities was $5.2 million in 2003, of which
$4.5 million was used for capital expenditures and $0.7 million was a payment relating to an adjustment associated with the sale of our Speech Solutions Business. Net cash provided by
investing activities was $46.6 million in 2002. This primarily reflected $34.0 million in the sale and maturity of marketable securities and $17.0 million in proceeds received
from the sale of the Speech Solutions Business, partially offset by $4.6 million for capital expenditures. We expect our capital expenditures to be approximately $7 million to
$8 million in 2005, some of which we may choose to fund through leasing financing.

Net
cash provided by financing activities was $29.5 million in 2004. In June 2004, we completed a refinancing or our outstanding debt obligations. As part of the refinancing, we
completed an exchange offer, pursuant to which $37.3 million of our outstanding 53/4% Convertible Subordinated Notes due March 2005, representing approximately 98% of the
total amount of these notes outstanding, were tendered for the same principal amount of new 63/4% Convertible Subordinated Notes due June 2009. Approximately $0.9 million
of the 53/4% Convertible Subordinated Notes due March 2005 remain outstanding after the exchange offer. We expect to redeem the remaining 53/4% Convertible

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Subordinated
Notes due March 2005 at their maturity for cash. Simultaneously with the exchange offer, we prepaid all $25.2 million of our existing 111/2% Senior Secured
Notes due January 2005 for cash equal to the principal amount plus accrued but unpaid interest and the issuance of warrants exercisable for an aggregate of 5,176,065 shares of our common stock
at $1.85 per share. We issued $29.0 million of new 8% Secured Convertible Notes due June 2007 of which $25.2 million was used to prepay the 111/2% Senior Secured
Notes due January 2005. The new 63/4% Convertible Subordinated Notes due June 2009 and the new 8% Secured Convertible Notes due June 2007 are convertible by holders
into shares of common stock at $1.85 per share. As a result of the refinancing, we have extended the maturity of $62.5 million in debt from the first quarter of 2005 until 2007 and 2009. This
refinancing will also reduce our future annual cash interest payments by $0.2 million. During the second half of 2004, holders of $1.3 million of 63/4% Convertible
Subordinated Notes due June 2009 voluntarily converted their notes into 0.7 million shares of common stock at the conversion price of $1.85 per share. Cash paid for transactions costs
associated with the debt refinancing were $2.0 million.

In
September 2004, we completed a private equity placement of 15,000,000 shares of our common stock at $2.10 per share, for total gross proceeds of $31.5 million, to a group of
institutional and accredited investors. Investment banking fees and other costs of the transaction were $1.3 million, resulting in net proceeds to us from the private equity placement of
$30.2 million. The net proceeds from the private equity placement will be used for working capital requirements, capital asset purchases and general corporate purposes.

We
received proceeds of $1.5 million from the exercise of warrants into 2.2 million shares of common stock. We had previously issued these warrants in 2003 to the holders of the
111/2% Senior Secured Notes due January 2005. Proceeds from the exercise of employee stock options were $0.5 million in 2004. Payments on capital leases were
$2.2 million in 2004. In addition, we paid down our bank borrowings of $2.3 million in the third quarter of 2004.

Net
cash used in financing activities was $6.7 million in 2003, of which $5.8 million was used to repay our capital lease obligations and $0.9 million was paid for fees in
connection the exchange of a portion of our outstanding 53/4% Convertible Subordinated Notes due March 2005 for 111/2% Senior Secured Notes due
January 2005. Net cash used in financing activities was $45.2 million in 2002. This primarily reflected $14.0 million used to repurchase $40.6 million face value of the our
53/4% Convertible Subordinated Notes due March 2005, and $38.9 million in payments of our capital leases and other debt obligations, including the early extinguishment of
$28.5 million of certain capital lease obligations. In the fourth quarter of 2002, we borrowed $2.3 million under a revised credit agreement. This credit agreement did
not require cash collateral and, therefore, $8.9 million of previously restricted cash is reported as a cash inflow due to the termination of this collateral requirement.

In
January 2005, we amended and extended our revolving line of credit with our bank. The new $15.0 million revolving line of credit has a two-year term, bears interest at the
bank's prime rate plus 1/2% and is collateralized by substantially all of our assets. Borrowings under the line may also be used for letters of credit and foreign exchange contracts and
are no longer on a borrowing formula. The new revolving line of credit requires us to comply with various non-financial and financial covenants, including minimum profitability and
liquidity and requires us to maintain a minimum cash balance of $15.0 million with the bank, or be subject to certain additional fees. Our previous $15.0 million revolving line of
credit, which commenced in December 2003, bore interest at the bank's prime rate plus 1%, matured on January 5, 2005 and was also collateralized by substantially all of our assets.
Borrowings under this previous revolving line of credit were on a formula basis and were limited to eligible accounts receivable. We were in compliance with all of the covenants under both our old and
new revolving lines of credit during 2004. At December 31, 2004, we had no borrowings under our previous revolving line of credit. We had borrowings outstanding under previous revolving lines
of credit of $2.3 million and $2.3 million as of December 31, 2003 and 2002, respectively. At December 31, 2004, we had $3.0 million in letters of credit
outstanding.

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At
a Special Meeting of Shareholders held on June 18, 2004, shareholders voted to increase the number of authorized shares of common stock, par value $0.001 per share, from 85,000,000 shares to
170,000,000 shares. As a result, on June 18, 2004, we filed an Amendment to our First Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common
stock, par value $0.001 per share, from 85,000,000 shares to 170,000,000 shares.

At
a Special Meeting of Shareholders held on February 18, 2004, shareholders voted to give our board of directors authority to effect a reverse stock split of our common stock. The affirmative
vote by shareholders permits our board of directors to choose to effect a reverse stock split of our common stock at a ratio of between one-and-a-half for one
(1.5:1) and five to one (5:1). The board of directors has chosen not to affect such a split.

During
2003, we entered into agreements with principal holders of our 53/4% Convertible Subordinated Notes due March 2005 which resulted in the retirement of $50.4 million
of such notes in exchange for new debt instruments at 50% of the face value of the retired notes. Under the terms of the agreement, the holders of the retired notes received $25.2 million of
new 8% Senior Secured Notes due January 2005 and warrants to purchase 4,915,416 shares of common stock. Each warrant has an exercise price of $0.65 per share and is exercisable over a
five-year term. The 8% Senior Secured Notes due January 2005 were prepaid in June 2004 as part of our debt refinancing. During 2004, holders of 2.2 million of these
warrants exercised their warrants for 2.2 million shares of our common stock for $1.5 million in cash. In addition, our bank exercised a warrant we issued in connection with our bank
lines for 0.3 million shares of common stock on a cashless basis.

On
August 5, 2002 we completed an agreement with our primary equipment vendor to reduce our capital lease obligations and related future cash commitments. Under the terms of the agreement, we
paid our vendor $28.5 million in exchange for the elimination of $50.8 million in existing vendor debt, $9.0 million in future interest obligations (assuming the debt was held to
maturity) and $4.0 million in tax and other obligations for a total of $63.8 million of future obligations. The difference between the cash paid and the recorded outstanding obligation
on that date was accounted for as a reduction in the carrying value of the underlying capital assets. This transaction reduced interest expense by $2.5 million and depreciation and amortization
by $3.3 million in the months subsequent to the transaction from the amounts that would have otherwise been recognized in 2002.

We
anticipate that the December 31, 2004 balance of $38.8 million in cash, cash equivalents and short-term investments, together with expected cash flow generated from
operations, will be sufficient to fund our operations and debt service requirements for at least the next twelve months.

Off-Balance Sheet Arrangements

Under accounting principles generally accepted in the U.S., certain obligations and commitments are not required to be included in the consolidated balance sheets and
statements of operations. These obligations and commitments, while entered into in the normal course of business, may have a material impact on liquidity. We do not have any relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could
arise if we had engaged in such relationships.

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Contractual Obligations

The following table summarizes our future contractual obligations as of December 31, 2004:

|                                                                |  | Payment Due Dates
|--------------------------------------------------------------- |  | -----------------
|
|
|63/4% Convertible Subordinated Notes due June 2009              |  | $                
|53/4% Convertible Subordinated Notes due March 2005             |  |                  
|8% Secured Convertible Notes due June 2007                      |  |                  
|Capital lease obligations                                       |  |                  
|Operating leases                                                |  |                  
|                                                                |  |                  
|Total                                                           |  | $                
|                                                                |  |                  
|Interest on 63/4% Convertible Subordinated Notes due June 2009  |  | $                
|Interest on 53/4% Convertible Subordinated Notes due March 2005 |  |                  
|Interest on 8% Secured Convertible Notes due June 2007          |  |                  
|                                                                |  |                  
|Total                                                           |  | $                
|                                                                |  |                  

Future Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment("SFAS No. 123R").
This Statement is a revision of SFAS No. 123,Accounting for Stock-Based
Compensation, and supercedes Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and
its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The
Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited
exceptions). SFAS No. 123R is effective for the first interim or annual reporting period that begins after June 15, 2005. The Statement is effective for us in the third quarter of 2005.

We
expect to adopt SFAS No. 123R using the Statement's modified prospective application method. Adoption of SFAS No. 123R is expected to increase our stock compensation expense
significantly. We are currently in the process of evaluating the impact and implementation of SFAS No. 123R. In addition, SFAS No. 123R requires that the excess of tax benefits related
to stock compensation be reported as a financing cash inflow rather than as a reduction of taxes paid in cash from operations.

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Factors That May Affect Future Results and Financial Condition

RISK FACTORS

Any investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, which we
believe are all the material risks to our business, together with the information contained elsewhere in this report, before you make a decision to invest in our company.

Risks Related to Our Company

A failure to obtain necessary additional capital in the future could jeopardize our operations.

We will need additional capital in the future to fund our operations, finance investments in equipment and corporate infrastructure, expand our network, increase the range of
services we offer and respond to competitive pressures and perceived opportunities. We have had a history of negative cash flows from operations. For year ended December 31, 2004 and for the
year ended December 31, 2003, our negative cash flow from continuing operations was $7.2 million and $3.2 million, respectively. Cash flow from operations and cash on hand may not
be sufficient to cover our operating expenses, working capital, interest on and repayment of our debt and capital investment needs. We may not be able to obtain additional financing on terms
acceptable to us, if at all. If we raise additional funds by selling equity securities, the relative equity ownership of our existing investors could be diluted or the new investors could obtain terms
more favorable than previous investors. A failure to obtain additional funding could prevent us from making expenditures that are needed to allow us to grow or maintain our operations.

Our financial condition, and the restrictive covenants contained in our credit facility may limit our ability to borrow additional funds or raise additional equity as may be
required to fund our future operations.

We incurred significant losses from continuing operations of $19.4 million for year ended December 31, 2004 and $10.9 million for the year ended
December 31, 2003. Our accumulated deficit, and stockholders' deficit was $429.7 million and $23.9 million, respectively, as of December 31, 2004. Moreover, the terms of
our new $15 million revolving credit facility and our new debt may limit our ability to, among other things:



Our
available cash, and the remaining borrowing capacity under our credit facility may not be sufficient to fund our operating and capital expenditure requirements in the foreseeable future. Our
ability to borrow additional funds or raise additional equity may be limited by our financial condition, in addition to the terms of our outstanding debt. Additionally, events such as our inability to
continue to reduce

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our
loss from continuing operations, could adversely affect our liquidity and our ability to attract additional funding as required.

We may not be able to pay our debt and other obligations and our assets may be seized as a result.

We may not generate the cash flow required to pay our liabilities as they become due. As of December 31, 2004, our outstanding debt included $0.9 million of our
53/4% Convertible Subordinated Notes due March 2005, $35.9 million of our 63/4% Convertible Subordinated Notes due June 2009 and $29.0 million
of our 8% Secured Convertible Notes due June 2007. The 8% Secured Convertible Notes due in June 2007 are secured by a second security interest in substantially all of our assets. We must
pay interest on all of the 53/4% Convertible Subordinated Notes due March 2005, the 63/4% Convertible Subordinated Notes due June 2009 and the 8% Secured
Convertible Notes due June 2007 twice a year. If our cash flow is inadequate to meet these obligations, we will default on the notes. Any default of the 53/4% Convertible
Subordinated Notes due March 2005, the 63/4% Convertible Subordinated Notes due June 2009 or the 8% Secured Convertible Notes due June 2007 could allow our note
holders to foreclose upon our assets or try to force us into bankruptcy.

As
of December 31, 2004, we had no outstanding borrowings on our bank revolving line of credit totaling $15.0 million. In addition, we had approximately $3.0 million of
outstanding letters of credit issued under this agreement. The bank holds a senior security interest in substantially all of our assets. If we fail to pay our liabilities under this credit line, the
bank may enforce all available remedies and foreclose upon our assets to satisfy any amounts owed. There are certain cross-default provisions among our bank and other debt instruments whereby a
default under one such instrument could result in a default under other such instruments.

We may be unable to repay or repurchase the 8% Secured Convertible Notes due June 2007 or the 63/4% Convertible Subordinated Notes due June 2009
upon a repurchase event and be forced into bankruptcy.

The holders of the 8% Secured Convertible Notes due June 2007 may require us to repurchase or prepay all of the outstanding 8% Secured Convertible Notes due
June 2007 upon a "repurchase event", as defined in such instrument. A repurchase event under the 8% Secured Convertible Notes due June 2007 includes a change of control under certain
circumstances or a termination of listing of our common stock on a U.S. national securities exchange or trading on an established over-the-counter trading market in the U.S. In
addition, upon the receipt of proceeds of certain asset sales by us that generate proceeds in excess of $10,000,000 (or if an event of default exists, regardless of the amount) that is not invested or
used to reduce existing indebtedness and does not result in a change of control, we are required to use the proceeds from the asset sale to prepay or repurchase the 8% Secured Convertible Notes due
June 2007. We may not have sufficient cash reserves to repurchase the 8% Secured Convertible Notes due June 2007 at such time, which would cause an event of default under the 8% Secured
Convertible Notes due June 2007 Indenture and under our other debt obligations.

The
holders of the 63/4% Convertible Subordinated Notes due June 2009 may require us to repurchase all or any portion of the 63/4% Convertible Subordinated Notes
due June 2009 upon a "repurchase event", as defined in such instrument. A repurchase event under the 63/4% Convertible Subordinated Notes due June 2009 includes a change
in control under certain circumstances or a termination of listing of our common stock on a U.S. national securities exchange or trading on an established over-the-counter
trading market in the U.S. We may not have sufficient cash reserves to repurchase the 63/4% Convertible Subordinated Notes due June 2009 at such time, which would cause an event
of default under the 63/4% Convertible Subordinated Notes due June 2009 Indenture and under our other debt obligations and may force us to declare bankruptcy.

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Investor interest in our common stock may be negatively affected by our continued trading on the Over-the-Counter Bulletin Board and other exchanges.

Since receiving a determination from the Nasdaq National Market on November 13, 2002, that shares of our common stock would no longer trade on the Nasdaq National Market
because we failed to meet certain minimum listing requirements, our common stock began trading on the NASD-operated Over-the-Counter Bulletin Board. The
Over-the-Counter Bulletin Board market is generally considered to be less efficient and not as liquid as the Nasdaq National Market (now known as the Nasdaq Stock Market).
Trading in this market may decrease the market value and liquidity of our common stock, which could materially and adversely affect our ability to attract additional investment to finance our
operations.

We
have also learned that our common stock may be trading on the Berlin, Germany exchange, which we have not authorized. Such exchange has been rumored to allow "naked" short selling of stock, or
otherwise not comply with exchange requirements that are customary in the U.S., and could thereby be detrimental to the value of the stock and our ability to attract investors.

Provisions of our governing documents and Delaware law could also discourage acquisition proposals or delay a change in control.

Our certificate of incorporation and by-laws contain anti-takeover provisions, including those listed below, that could make it more difficult for a
third party to acquire control of our company, even if that change in control would be beneficial to stockholders:



In
addition, provisions of Delaware law and our stock option plan may also discourage, delay or prevent a change of control of our company or unsolicited acquisition proposals.

International governmental regulation and legal uncertainties and other laws could limit our ability to provide our services, make them more expensive, or subject us to legal
or criminal liability.

A number of countries currently prohibit or limit competition in the provision of traditional voice telephony services. In some of those countries, licensed telephony carriers
as well as government regulators and law enforcement authorities have questioned our legal authority and/or the legal authority of our service partners or affiliated entities and employees to offer
our services, including initiating proceedings against such entities and employees. We may face similar questions in additional countries. Our failure to qualify as a properly licensed service
provider, or to comply with other foreign laws and regulations, could materially adversely affect our business, financial condition and results of operations, including subjecting us or our employees
to taxes and criminal or other penalties and/or by precluding us from, or limiting us in, enforcing contracts in such jurisdictions.

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It
is also possible that countries may apply to our activities laws otherwise relating to services provided over the Internet, including laws governing:



If
foreign governments or other regulatory agencies begin to impose related restrictions on VoIP or our other services or otherwise enforce criminal or other laws against us, our affiliates or
employees, such actions could have a material adverse effect on our ability to attain and maintain profitability.

The telecommunications industry is subject to domestic governmental regulation and legal uncertainties and other laws that could materially increase our costs and prevent us
from executing our business plan.

We are not licensed to offer traditional telecommunications services in any U.S. state and we have not filed tariffs for any service at the Federal Communications Commission
(FCC) or at any state regulatory commission.

Aspects
of our operations may currently be, or become, subject to state or federal regulations governing licensing, universal service funding, access charges, advertising, disclosure of confidential
communications or other information, excise taxes, transactions restricted by U.S. embargo and other reporting or compliance requirements.

While
the FCC to date has maintained an informal policy that information service providers, including VoIP providers, are not telecommunications carriers for regulatory purposes, various entities have
challenged this idea, before the FCC and at various state government agencies. The FCC recently ruled against AT&T, finding that certain traffic AT&T carried in part utilizing an Internet protocol
format was nonetheless regulated telecommunications for which terminating access charges were due. The FCC has also found that AT&T's prepaid calling cards, which AT&T had claimed as an enhanced,
non-regulated offering, constituted traditional telecommunications for which universal service subsidies are due. In so doing, the FCC imposed such liability retroactively, and ruled that
similarly situated carriers must also fulfill reporting and contribution requirements for universal service funding. The FCC is proceeding over two related Notices of Proposed Rulemaking, one on
regulation of prepaid calling cards and the extent that Internet protocol capabilities insulate such offerings from traditional regulation, and a previous proceeding covering IP-enabled services more
generally. Adverse rulings or rulemakings could subject us to licensing requirements and additional fees and subsidies.

The
IRS and the U.S. Department of Treasury have issued a notice of proposed rulemaking suggesting that VoIP calls may be subject to a 3% federal excise tax, the imposition of which could effect our
competitiveness.

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We
have offered our prepaid international calling card services on a wholesale basis to international carrier customers, and others, some of which provide these services to end-user
customers, enabling them to call internationally over The iBasis Network from the U.S. We have also participated in the selling and marketing of such cards on a retail basis. Further, we have entered
the retail market with a web-based prepaid card offering. Although the calling cards are not primarily used for domestic interstate or intrastate use, we have not blocked the ability to
place such calls or required our Trading customers or distributors to show evidence of their compliance with U.S. and state regulations. Domestic calling may employ transport and switching that is not
connected to the Internet and, therefore, may not enjoy the less restrictive regulation to which our Internet-based services may be subject. Because we provide services that are primarily wholesale
and/or international, we do not believe that we are subject to federal or state telecommunications regulation for the possible uses of these services described here and, accordingly, we have not
obtained state licenses, filed state or federal tariffs, posted bonds, contributed to the universal service fund, or undertaken other possible compliance steps. Under current standards or
as-yet undetermined rules, the FCC and state regulatory authorities or our vendors may not agree with our position. If they do not, we could become subject to regulation at the federal and
state level for these services, and could become subject to licensing and bonding requirements, and federal and state fees and taxes, including universal service contributions and other subsidies, and
other laws, all of which could materially affect our business.

We
are also subject to federal and state laws and regulations regarding consumer protection and disclosure regulations. These rules could substantially increase the cost of doing business domestically
and in any particular state. Law enforcement authorities may utilize their powers under consumer protection laws against us in the event we do not meet legal requirements in that jurisdiction which
could either increase costs or prevent us from doing business there.

The
Telecommunications Act of 1996 requires that payphone service providers be compensated for all completed calls originating from payphones in the United States. When calling cards are used, the
FCC's prior rules required the first switch-based carrier to compensate the payphone service provider, but newly adopted rules require the last switched-based carrier to do so, and further require
that all carriers in the call chain implement a call-tracking system, utilize it to identify such calls, provide an independent audit of the adequacy of such system, and provide a report
on these matters to the FCC and others in the call chain. We maintain that as an international VoIP provider, we sell an information service. We therefore claim that we are not a "carrier" for
regulatory purposes and, in any case, our Internet-based systems do not rely on traditional long distance switches. Nonetheless, we have indirectly paid, and intend to continue paying, payphone
service providers as part of our prepaid calling card business. To date, we have reimbursed certain of our toll-free access vendors  facilities-based long distance carriers
from which we have received payphone calls that could be construed to be compensable under the payphone compensation rules  who have indeed paid payphone compensation for such calls. We
have contracted with a clearinghouse to remit funds directly to payphone service providers for calls originating from payphones utilizing our prepaid calling cards. For all other types of traffic
related to our Trading business, we believe that we are not responsible for payphone compensation, but rather that the carrier that precedes us is. In accordance therewith, for wholesale traffic, we
are seeking to apportion such responsibility by contract.

We
are subject to other laws related to our business dealings that are not specifically related to telecommunications regulation. As an example, the Office of Foreign Asset Control of the U.S.
Department of the Treasury, or OFAC, administers the United States' sanctions against certain countries. OFAC rules restrict many business transactions with such countries and, in some cases, require
that licenses be obtained for such transactions. We may currently, or in the future, transmit telecommunications between the U.S. and countries subject to U.S. sanctions regulations and undertake
other transactions related to those services. We have undertaken such activities via our network or through various reciprocal traffic exchange agreements to which we are a party. We have received

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licenses
from OFAC to send traffic to some countries and, if necessary, will remain in contact with OFAC with regard to other transactions. Failure to obtain proper authority could expose us to legal
and criminal liability.

Risks Related to Our Operations

We may never achieve sustained profitability and the market price of our common stock may fall.

Our revenue and results of operations have fluctuated and will continue to fluctuate significantly from quarter to quarter in the future due to a number of factors, some of
which are not in our control, including, among others:



Because
of these factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is possible that, in
future periods, our results of operations will be significantly lower than the estimates of public market analysts, investors or our own estimates. Such a discrepancy could cause the price of the
Common Stock to decline significantly and prevent us from achieving profitability.

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We may never generate sufficient revenue to attain profitability if telecommunications carriers and other communications service providers or others are reluctant to use our
services or do not use our services, including any new services, in sufficient volume.

If the market for VoIP and new services does not develop as we expect, or develops more slowly than expected, our business, financial condition and results of operations will
be materially and adversely affected.

Our
customers may be reluctant to use our VoIP services for a number of reasons, including:



The
growth of our core business depends on carriers and other communications service providers generating an increased volume of international voice and fax traffic and selecting our network to carry
at least some of this traffic. Similarly, the growth of any retail services we offer depends on these factors as well as acceptance in the market of the brands that we service, including their
respective rates, terms and conditions. If the volume of international voice and fax traffic and associated or other retail services fail to increase, or decrease, and these parties or other customers
do not employ our network or otherwise use our services, our ability to become profitable will be materially and adversely affected.

We may not be able to collect amounts due to us from our customers and we may have to disgorge amounts already paid.

Some of our customers have closed their businesses or filed for bankruptcy owing us significant amounts for services we have provided to them in the past. Despite our efforts
to collect these overdue funds, we may never be paid. The bankruptcy court may require us to continue to provide services to these companies during their reorganizations. Other customers may
discontinue their use of our services at any time and without notice, or delay payments that are owed to us. Additionally, we may have difficulty in collecting amounts from them. Although we have
internal credit risk policies to identify companies with poor credit histories, we may not effectively manage these policies and provided services to companies that refuse to pay. The risk is even
greater in foreign countries, where the legal and collection systems available may not be adequate or impartial for us to enforce the payment provisions of our contracts. Our cash reserves will be
reduced and our results of operations will be materially adversely affected if we are unable to collect amounts from our customers.

We
have received claims including lawsuits from estates of bankrupt companies alleging that we received preferential payments prior to bankruptcy filing. We may be required to return amounts received
from bankrupt estates. We intend to employ all available defenses in contesting such claims or, in the alternative settle such claims. The results of any suit or settlement may have a material adverse
affect on our business.

We may increase costs and risks in our business by relying on third parties.

Vendors.We rely upon third-party vendors to provide us with the equipment, software, circuits, and other facilities that we use to provide
our services. For example, we purchase a substantial portion of our VoIP equipment from Cisco Systems. We may be forced to try to renegotiate terms with vendors for products or services that have
become obsolete. Some vendors may be unwilling to renegotiate such

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contracts,
which could affect our ability to continue to provide services and consequently render us unable to generate sufficient revenues to become profitable.

Parties that maintain phone and data lines and other telecommunications services.Our business model depends on the availability of the
Internet and traditional telephone networks to transmit voice and fax calls. Third parties maintain and own these networks, other components that comprise the Internet, and business relationships that
allow telephone calls to be terminated over the public switched telephone network. Some of these third parties are telephone companies. They may increase their charges for using these lines at any
time and thereby decrease our profitability. They may also fail to maintain their lines properly, fail to maintain the ability to terminate calls, or otherwise disrupt our ability to provide service
to our customers. Any such failure that leads to a material disruption of our ability to complete calls or provide other services could discourage our customers from using our network, which could
have the effect of delaying or preventing our ability to become profitable.

Local communications service providers.We maintain relationships with local communications service providers in many countries, some of
whom own the equipment that translates calls from traditional voice networks to the Internet, and vice versa. We rely upon these third parties both to provide lines over which we complete calls and to
increase their capacity when necessary as the volume of our traffic increases. There is a risk that these third parties may be slow, or fail, to provide lines, which would affect our ability to
complete calls to those destinations. We may not be able to continue our relationships with these local service providers on acceptable terms, if at all. Because we rely upon entering into
relationships with local service providers to expand into additional countries, we may not be able to increase the number of countries to which we provide service. Finally, any technical difficulties
that these providers suffer, or difficulties in their relationships with companies that manage the public switched telephone network, could affect our ability to transmit calls to the countries that
those providers help serve.

Strategic relationships.We depend in part on our strategic relationships to expand our distribution channels and develop and market our
services. In particular, we depend on our joint marketing and product development efforts with Cisco Systems to achieve market acceptance and brand recognition in certain markets. Strategic
relationship partners may choose not to renew existing arrangements on commercially acceptable terms, if at all. In general, if we lose these key strategic relationships, or if we fail to maintain or
develop new relationships in the future, our ability to expand the scope and capacity of our network and services provided, and to maintain state-of-the-art
technology, would be materially adversely affected.

Distributors of prepaid calling cards to retail outlets.We make arrangements with distributors to market and sell prepaid calling cards to
retail outlets. In some cases, we rely on these distributors to print cards, prepare marketing material, activate accounts, track usage and other data, and remit payments collected from retailers.
There is a risk that distributors will not properly perform these responsibilities, comply with legal requirements, or pay us monies when due. We may not have adequate contractual or credit
protections against these risks. There is also a risk that we will be ineffective in our efforts to implement new systems, customer care and disclosure policies, and certain technical and business
processes. The result of any attendant difficulties may have a material impact on our business.

We may not be able to succeed in the intensely competitive market for our various services.

We compete in our Trading business principally on quality of service and price. In recent years, prices for long distance telephone services have declined as a result of
deregulation and increased competition. We face competition from major telecommunications carriers, such as AT&T, British Telecom, Deutsche Telekom, MCI and Qwest, as well as new emerging carriers. We
also compete with Internet protocol and other VoIP service providers who route traffic to destinations worldwide. Also, VoIP service providers that presently focus on retail customers may in the
future enter the Trading

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market
and compete with us. If we can not offer competitive prices and quality of service our business could be materially adversely affected.

We may not be able to succeed in the intensely competitive market for retail calling services.

The market for prepaid calling services is extremely competitive. Hundreds of providers offer calling card products and services. We have relatively recently begun offering
prepaid calling card and related web-based services and have little prior experience in these businesses and no established distribution channel for these services. If we do not
successfully establish a distribution channel and enter geographic markets in which our rates, fees, surcharges, country services, and our other products and service characteristics, can successfully
compete, our business could be materially adversely affected.

We are subject to downward pricing pressures and a continuing need to renegotiate overseas rates, which could delay or prevent our profitability.

As a result of numerous factors, including increased competition and global deregulation of telecommunications services, prices for international long distance calls have been
decreasing. This downward trend of prices to end-users has caused us to lower the prices we charge communications service providers and calling card distributors for call completion on our
network. If this downward pricing pressure continues, we may not be able to offer VoIP services at costs lower than, or competitive with, the traditional voice network services with which we compete.
Moreover, in order for us to lower our prices, we have to renegotiate rates with our overseas local service providers who complete calls for us. We may not be able to renegotiate these terms favorably
enough, or fast enough, to allow us to continue to offer services in a particular country on a cost-effective basis. The continued downward pressure on prices and our failure to
renegotiate favorable terms in a particular country could have a material adverse effect on our ability to operate our network and VoIP business profitably.

A variety of risks associated with our international operations could materially adversely affect our business.

Because we provide many of our services internationally, we are subject to additional risks related to operating in foreign countries. In particular, in order to provide
services and operate facilities in some countries, we have established subsidiaries or other legal entities or have forged relationships with service partners or entities set up by our employees.
Associated risks include:



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These
and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations.

If we are not able to keep up with rapid technological change in a cost-effective way, the relative quality of our services could suffer.

The technology upon which our services depend is changing rapidly. Significant technological changes could render the hardware and software that we use obsolete, and
competitors may begin to offer new services that we are unable to offer. If we are unable to respond successfully to these developments or do not respond in a cost-effective way, we may
not be able to offer competitive services and our business results may suffer.

We may not be able to expand and upgrade our network adequately and cost-effectively to accommodate any future growth.

Our VoIP business requires that we handle a large number of international calls simultaneously. As we expand our operations, we expect to handle significantly more calls. If we
do not expand and upgrade our hardware and software quickly enough, we will not have sufficient capacity to handle the increased traffic and growth in our operating performance would suffer as a
result. Even with such expansion, we may be unable to manage new deployments or utilize them in a cost-effective manner. In addition to lost growth opportunities, any such failure could
adversely affect customer confidence in The iBasis Network and could result in us losing business outright

We depend on our current personnel and may have difficulty attracting and retaining the skilled employees we need to execute our business plan.

Our future success will depend, in large part, on the continued service of our key management and technical personnel. If any of these individuals or others we employ are
unable or unwilling to continue in their present positions, our business, financial condition and results of operations could suffer. We do not carry key person life insurance on any personnel.

We will need to retain skilled personnel to execute our plans.Our future success will also depend on our ability to attract, retain and
motivate highly skilled employees, particularly engineering and technical personnel. Past workforce reductions have resulted in reallocations of employee duties that could result in employee and
contractor uncertainty and dissatisfaction. Reductions in our workforce or restrictions on salary increases or payment of bonuses may make it difficult to motivate and retain employees and
contractors, which could affect our ability to deliver our services in a timely fashion and otherwise negatively affect our business.

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If we are unable to protect our intellectual property, our competitive position would be adversely affected.

We rely on patent, trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to
protect our intellectual property. Unauthorized third parties may copy our services or reverse engineer or obtain and use information that we regard as proprietary. End-user license
provisions protecting against unauthorized use, copying, transfer and disclosure of any licensed program may be unenforceable under the laws of certain jurisdictions and foreign countries. We may seek
to patent certain processes or equipment in the future. We do not know if any of our patent applications will be issued with the scope of the claims we seek, if at all. In addition, the laws of some
foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. Our means of protecting our proprietary rights in the United States or abroad may not be
adequate and third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. If we fail to protect our intellectual property and proprietary rights, our
business, financial condition and results of operations would suffer.

We
believe that we do not infringe upon the proprietary rights of any third party. Nonetheless, we have received claims that our products or brands, or those of our retail prepaid calling card
distributors, infringe valid patents or trademarks. Such claims, even if resolved in our favor, could be substantial, and the litigation could divert our management's efforts. It is also possible that
such a claim might be asserted successfully against us in the future. Our ability to provide our services depends on our freedom to operate. That is, we must ensure that we do not infringe upon the
proprietary rights of others or have licensed all such rights. A party making an infringement claim could secure a substantial monetary award or obtain injunctive relief that could effectively block
our ability to provide services in the United States or abroad.

We rely on a variety of technologies, primarily software, which is licensed from third parties.

Continued use of this technology by us requires that we purchase new or additional licenses from third parties. We may not be able to obtain those third-party licenses needed
for our business or that the third party technology licenses that we do have will continue to be available to us on commercially reasonable terms or at all. The loss or inability to maintain or obtain
upgrades to any of these technology licenses could result in delays or breakdowns in our ability to continue developing and providing our services or to enhance and upgrade our services.

We may undertake strategic acquisitions or dispositions that could damage our ability to attain or maintain profitability.

We may acquire additional businesses and technologies that complement or augment our existing businesses, services and technologies. We may need to raise additional funds
through public or private debt or equity financing to acquire any businesses, which may result in dilution for stockholders and the incurrence of indebtedness. We may not be able to operate acquired
businesses profitably or otherwise implement our growth strategy successfully.

If
we our unable to effectively integrate any newly acquired business into our overall business operations, our costs may increase and our business results may suffer significantly.

We
may need to sell existing assets or businesses in the future to generate cash or focus our efforts in making our core business, VoIP, profitable. As with many companies in the telecommunications
sector that experienced rapid growth in recent years, we may need to reach profitability in one market before entering another. In the future, we may need to sell assets to cut costs or generate
liquidity.

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Risks Related to the Internet and VoIP Industry

If the Internet infrastructure is not adequately maintained, we may be unable to maintain the quality of our services and provide them in a timely and consistent manner.

Our future success will depend upon the maintenance of the Internet infrastructure, including a reliable network backbone with the necessary speed, data capacity and security
for providing reliability and timely Internet access and services. To the extent that the Internet continues to experience increased numbers of users, frequency of use or bandwidth requirements, the
Internet may become congested and be unable to support the demands placed on it and its performance or reliability may decline thereby impairing our ability to complete calls and provide other
services using the Internet at consistently high quality. The Internet has experienced a variety of outages and other delays as a result of failures of portions of its infrastructure or otherwise.
Future outages or delays could adversely affect our ability to complete calls and provide other services. Moreover, critical issues concerning the commercial use of the Internet, including security,
cost, ease of use and access, intellectual property ownership and other legal liability issues, remain unresolved and could materially and adversely affect both the growth of Internet usage generally
and our business in particular. Finally, important opportunities to increase traffic on The iBasis Network will not be realized if the underlying infrastructure of the Internet does not continue to be
expanded to more locations worldwide.

Network security breaches could adversely affect our operations.

We currently have practices, policies and procedures in place to ensure the integrity and security of our network. Nevertheless, from time to time we have experienced
fraudulent activities whereby perpetrators have disguised themselves as our customers and transmitted traffic to us, or have disguised themselves as us and transmitted traffic to our communications
service providers for termination. While we have undertaken steps to thwart such fraud, including revamping our securities procedures and capabilities and alerting other members of the industry as
well as law enforcement personnel, such actions may not be sufficient and financial exposure from fraudulent activities could materially adversely affect us.

Undetected defects in our technology could adversely affect our operations.

Our technology is complex and is susceptible to errors, defects or performance problems, commonly called "bugs." Although we regularly test our software and systems
extensively, we cannot ensure that our testing will detect every potential bug. Any such bug could materially adversely affect our business.

Our ability to provide our services using the Internet may be adversely affected by computer vandalism.

If the overall performance of the Internet is seriously downgraded by website attacks, failure of service attacks, or other acts of computer vandalism or virus infection, our
ability to deliver our communication services over the Internet could be adversely impacted, which could cause us to have to increase the amount of traffic we have to carry over alternative networks,
including the more costly public-switched telephone network. In addition, traditional business interruption insurance may not cover losses we could incur because of any such disruption of the
Internet. While some insurers are beginning to offer products purporting to cover these losses, we do not have any of this insurance at this time.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk exposure is related to interest rates and foreign currency exchange rates. To date, we have not engaged in trading market risk sensitive
instruments or purchasing hedging

45

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instruments,
whether interest rate, foreign currency exchange, commodity price or equity price risk. We have not purchased options or entered into swaps or forward or futures contracts.

Our
investments in commercial paper and debt instruments are subject to interest rate risk, but due to the short-term nature of these investments, interest rates would not have a material
impact on their value at December 31, 2004. Our primary interest rate risk is the risk on borrowings under our line of credit agreements, which are subject to interest rates based on the bank's
prime rate. A change in the applicable interest rates would also affect the rate at which we could borrow funds or finance equipment purchases. All other debt, including capital lease obligations, are
fixed rate debt. A 10% change in interest rates would not have a material impact on interest expense associated with our line of credit agreement. In addition, a 10% change in interest rates would not
significantly impact the fair value of our 63/4% Convertible Subordinated Notes due June 2009 or our 8% Secured Convertible Notes due June 2007.

Although
we conduct our business in various regions of the world, most of our revenues and costs are denominated in U.S. dollars with the remaining being primarily denominated in Euros or British
pounds. Thus, we are exposed to foreign currency exchange rate fluctuations as the financial results and balances of our foreign subsidiaries are translated into U.S. dollars. As exchange rates vary,
these results, when translated, may vary from expectations and may adversely impact our results of operations and financial condition. Accordingly, if the dollar weakens relative to foreign
currencies, particularly the Euro or British Pound, our foreign currency-based denominated revenues and expenses would increase
when stated in U.S. Dollars. Conversely, if the dollar strengthens, our foreign currency denominated revenues and expenses would decrease.

46

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Item 8.Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

|                                           |                                                                                                       | Page
|------------------------------------------ | ----------------------------------------------------------------------------------------------------- | ----
|Consolidated Financial Statements:         |                                                                                                       |     
|                                           | Report of Independent Registered Public Accounting Firm                                               |     
|                                           | Consolidated Balance Sheets as of December 31, 2004 and 2003                                          |     
|                                           | Consolidated Statements of Operations for the Three Years Ended December 31, 2004                     |     
|                                           | Consolidated Statements of Stockholders' Equity (Deficit) for the Three Years Ended December 31, 2004 |     
|                                           | Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2004                     |     
|Notes to Consolidated Financial Statements |                                                                                                       | 54  

47

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
iBasis, Inc.
Burlington, MA

We
have audited the accompanying consolidated balance sheets of iBasis, Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of iBasis, Inc. and subsidiaries as of December 31, 2004 and 2003, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United
States of America.

As
discussed in Note 2 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of
Financial Accounting Standards No. 142.

/s/
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 24, 2005

48

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iBasis, Inc.        Consolidated Balance Sheets

|                                                |                                                                                                           | December 31,                |       
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------- | ------
|
|
|Assets                                          |                                                                                                           |                             |       
|Current assets:                                 |                                                                                                           |                             |       
|                                                | Cash and cash equivalents                                                                                 |                             | $     
|                                                | Short-term marketable investments                                                                         |                             |       
|                                                | Accounts receivable, net of allowance for doubtful accounts of $3,391 and $3,128, respectively            |                             |       
|                                                | Prepaid expenses and other current assets                                                                 |                             |       
|                                                |                                                                                                           |                             |       
|                                                |                                                                                                           | Total current assets        |       
|                                                |                                                                                                           |                             |       
|Property and equipment, at cost:                |                                                                                                           |                             |       
|                                                | Network equipment                                                                                         |                             |       
|                                                | Equipment under capital lease                                                                             |                             |       
|                                                | Computer software                                                                                         |                             |       
|                                                | Leasehold improvements                                                                                    |                             |       
|                                                | Furniture and fixtures                                                                                    |                             |       
|                                                |                                                                                                           |                             |       
|                                                |                                                                                                           |                             | 97,918
|                                                | LessAccumulated depreciation and amortization                                                            |                             |       
|                                                |                                                                                                           |                             |       
|                                                |                                                                                                           |                             | 11,861
|                                                |                                                                                                           |                             |       
|Deferred debt financing costs, net              |                                                                                                           |                             | 177   
|Long-term investment in non-marketable security |                                                                                                           |                             |      
|Other assets                                    |                                                                                                           |                             | 360   
|                                                |                                                                                                           |                             |       
|                                                |                                                                                                           | $                           | 87,776
|                                                |                                                                                                           |                             |       
|Liabilities and Stockholders' Deficit           |                                                                                                           |                             |       
|Current liabilities:                            |                                                                                                           |                             |       
|                                                | Accounts payable                                                                                          |                             | $     
|                                                | Accrued expenses                                                                                          |                             |       
|                                                | Deferred revenue                                                                                          |                             |       
|                                                | Current portion of long-term debt                                                                         |                             |       
|                                                |                                                                                                           |                             |       
|                                                |                                                                                                           | Total current liabilities   |       
|                                                |                                                                                                           |                             |       
|Long-term debt, net of current portion          |                                                                                                           |                             | 65,933
|Other long-term liabilities                     |                                                                                                           |                             | 1,132 
|Commitments and contingencies                   |                                                                                                           |                             |      
|Stockholders' deficit:                          |                                                                                                           |                             |      
|                                                | Preferred stock, $0.001 par value, authorized 15,000 shares; issued and outstanding; none                 |                             |       
|                                                | Common stock, $0.001 par value, authorized170,000 shares;
issued64,778 and 45,913 shares, respectively; |                             |       
|                                                | Treasury stock, 1,135 shares at cost                                                                      |                             |       
|                                                | Additional paid-in capital                                                                                |                             |       
|                                                | Accumulated other comprehensive loss                                                                      |                             |       
|                                                | Accumulated deficit                                                                                       |                             |       
|                                                |                                                                                                           |                             |       
|                                                |                                                                                                           | Total stockholders' deficit |       
|                                                |                                                                                                           |                             |       
|                                                |                                                                                                           | $                           | 87,776
|                                                |                                                                                                           |                             |       

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

49

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iBasis, Inc.        Consolidated Statements of Operations

|                                                                                     |                                  | Years Ended December 31,          |        
|------------------------------------------------------------------------------------ | -------------------------------- | --------------------------------- | -------
|
|
|Net revenue                                                                          |                                  | $                                 | 263,678
|Cost and operating expenses:                                                         |                                  |                                   |        
|Data communications and telecommunications (excluding depreciation and amortization) |                                  |                                   | 225,169
|Research and development                                                             |                                  |                                   | 13,803 
|Selling and marketing                                                                |                                  |                                   | 9,205  
|General and administrative                                                           |                                  |                                   | 12,483 
|Depreciation and amortization                                                        |                                  |                                   | 10,345 
|Non-cash stock-based compensation                                                    |                                  |                                   |       
|Loss on sale of messaging business                                                   |                                  |                                   |       
|Restructuring costs                                                                  |                                  |                                   | 165    
|                                                                                     |                                  |                                   |        
|                                                                                     |                                  | Total cost and operating expenses |        
|                                                                                     |                                  |                                   |        
|Loss from operations                                                                 |                                  |                                   | (7,492 
|Interest income                                                                      |                                  |                                   | 218    
|Interest expense                                                                     |                                  |                                   | (4,249 
|Gain on bond repurchases and exchanges                                               |                                  |                                   |       
|Other expenses, net                                                                  |                                  |                                   | (234   
|Loss on long-term non-marketable security                                            |                                  |                                   | (5,000 
|Debt refinancing charges:                                                            |                                  |                                   |        
|                                                                                     | Transaction costs                |                                   |        
|                                                                                     | Additional interest expense, net |                                   |        
|                                                                                     |                                  |                                   |        
|Loss from continuing operations                                                      |                                  |                                   | (19,397
|Income (loss) from discontinued operations                                           |                                  |                                   | 1,861  
|                                                                                     |                                  |                                   |        
|Net loss                                                                             |                                  | $                                 | (17,536
|                                                                                     |                                  |                                   |        
|Basic and diluted net loss per share:                                                |                                  |                                   |        
|Loss from continuing operations                                                      |                                  | $                                 | (0.38  
|Income (loss) from discontinued operations                                           |                                  |                                   | 0.03   
|                                                                                     |                                  |                                   |        
|Net loss                                                                             |                                  | $                                 | (0.35  
|                                                                                     |                                  |                                   |        
|Basic and diluted weighted average common shares outstanding                         |                                  |                                   | 50,514 
|                                                                                     |                                  |                                   |        

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

50

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iBasis, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)

|                                                                                  |  | Common Stock |  | Treasury Stock |    |  |        |   |   |      |   |   |         |   |  
|--------------------------------------------------------------------------------- |  | ------------ |  | -------------- | -- |  | ------ | - | - | ---- | - | - | ------- | - | -
|
|
|
|Balance, January 1, 2002                                                          |  | 45,271       |  | $              | 45 |  |       |   |   |     |   | $ | 369,693 |   | $
|Net loss                                                                          |  |             |  |                |   |  |       |   |   |     |   |   |        |   |  
|Acquisition of treasury shares from escrow settlement with PriceInteractive, Inc. |  |             |  |                |   |  | (1,135 | ) |   | (341 | ) |   |        |   |  
|Exercise of common stock options                                                  |  | 149          |  |                |   |  |       |   |   |     |   |   | 122     |   |  
|Sale of common stock related to employee stock purchase plan                      |  | 365          |  |                | 1  |  |       |   |   |     |   |   | 284     |   |  
|Reduction in deferred compensation                                                |  |             |  |                |   |  |       |   |   |     |   |   | (1,172  | ) |  
|Amortization of deferred compensation                                             |  |             |  |                |   |  |       |   |   |     |   |   |        |   |  
|                                                                                  |  |              |  |                |    |  |        |   |   |      |   |   |         |   |  
|Balance, December 31, 2002                                                        |  | 45,785       |  |                | 46 |  | (1,135 | ) |   | (341 | ) |   | 368,927 |   |  
|Net loss                                                                          |  |             |  |                |   |  |       |   |   |     |   |   |        |   |  
|Exercise of common stock options.                                                 |  | 128          |  |                |   |  |       |   |   |     |   |   | 91      |   |  
|Fair value of warrants issued on bond exchange                                    |  |             |  |                |   |  |       |   |   |     |   |   | 1,375   |   |  
|Amortization of deferred compensation                                             |  |             |  |                |   |  |       |   |   |     |   |   |        |   |  
|                                                                                  |  |              |  |                |    |  |        |   |   |      |   |   |         |   |  
|Balance, December 31, 2003                                                        |  | 45,913       |  |                | 46 |  | (1,135 | ) |   | (341 | ) |   | 370,393 |   |  
|Net loss                                                                          |  |             |  |                |   |  |       |   |   |     |   |   |        |   |  
|Unrealized loss on available-for-sale short-term investments                      |  |             |  |                |   |  |       |   |   |     |   |   |        |   |  
|                                                                                  |  |              |  |                |    |  |        |   |   |      |   |   |         |   |  
|Total comprehensive loss                                                          |  |             |  |                |   |  |       |   |   |     |   |   |        |   |  
|Gross proceeds from sale of common stock in private placement                     |  | 15,000       |  |                | 15 |  |       |   |   |     |   |   | 31,485  |   |  
|Cash transaction costs of private placement                                       |  |             |  |                |   |  |       |   |   |     |   |   | (1,310  | ) |  
|Fair value of warrant issued for investment banking services                      |  |             |  |                |   |  |       |   |   |     |   |   | (2,808  | ) |  
|Issuance of warrant for investment banking services                               |  |             |  |                |   |  |       |   |   |     |   |   | 2,808   |   |  
|Common stock issued as partial payment of investment banking fees                 |  | 110          |  |                | 0  |  |       |   |   |     |   |   | 175     |   |  
|Exercise of common stock options                                                  |  | 508          |  |                | 0  |  |       |   |   |     |   |   | 455     |   |  
|Exercise of warrants                                                              |  | 2,522        |  |                | 3  |  |       |   |   |     |   |   | 1,459   |   |  
|Fair value of warrants issued in debt refinancing                                 |  |             |  |                |   |  |       |   |   |     |   |   | 2,140   |   |  
|Conversion of 63/4%                                                               |  |              |  |                |    |  |        |   |   |      |   |   |         |   |  
|Convertible Subordinated Notes due June 2009 to common stock                      |  | 725          |  |                | 1  |  |       |   |   |     |   |   | 1,340   |   |  
|                                                                                  |  |              |  |                |    |  |        |   |   |      |   |   |         |   |  
|Balance, December 31, 2004                                                        |  | 64,778       |  | $              | 65 |  | (1,135 | ) | $ | (341 | ) | $ | 406,137 |   | $
|                                                                                  |  |              |  |                |    |  |        |   |   |      |   |   |         |   |  

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

51

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iBasis, Inc.        Consolidated Statements of Cash Flows

|                                             |                                                                                                    | Years ended December 31,                           |                                          
|-------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------------- | -----------------------------------------
|
|
|Cash flows from operating activities:        |                                                                                                    |                                                    |                                          
|                                             | Loss from continuing operations                                                                    |                                                    | $                                        
|                                             | Adjustments to reconcile loss from continuing operations to net cash used in operating activities: |                                                    |                                          
|                                             |                                                                                                    | Gain on bond repurchases and exchanges             |                                          
|                                             |                                                                                                    | Restructuring costs                                |                                          
|                                             |                                                                                                    | Depreciation and amortization                      |                                          
|                                             |                                                                                                    | Loss on sale of messaging business                 |                                          
|                                             |                                                                                                    | Amortization of deferred debt financing costs      |                                          
|                                             |                                                                                                    | Amortization of deferred compensation              |                                          
|                                             |                                                                                                    | Loss on long-term non-marketable security          |                                          
|                                             |                                                                                                    | Fair value of warrant issued in debt refinancing   |                                          
|                                             |                                                                                                    | Bad debt expense                                   |                                          
|                                             |                                                                                                    | Recovery of previously reserved receivable balance |                                          
|Changes in current assets and liabilities:   |                                                                                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    | Accounts receivable, net                 
|                                             |                                                                                                    |                                                    | Prepaid expenses and other current assets
|                                             |                                                                                                    |                                                    | Other assets                             
|                                             |                                                                                                    |                                                    | Accounts payable                         
|                                             |                                                                                                    |                                                    | Deferred revenue                         
|                                             |                                                                                                    |                                                    | Accrued expenses                         
|                                             |                                                                                                    |                                                    | Other long-term liabilities              
|                                             |                                                                                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|Cash flows from investing activities:        |                                                                                                    |                                                    |                                          
|                                             | Purchases of property and equipment                                                                |                                                    |                                          
|                                             | Purchases of available-for-sale short-term marketable investments                                  |                                                    |                                          
|                                             | Maturities of available-for-sale short-term marketable investments                                 |                                                    |                                          
|                                             | Sales of available-for-sale short-term marketable investments                                      |                                                    |                                          
|                                             | Sales of available-for-sale long-term marketable investments                                       |                                                    |                                          
|                                             | Proceeds from sale of messaging business                                                           |                                                    |                                          
|                                             | Proceeds from sale of Speech Solutions business                                                    |                                                    |                                          
|                                             | Proceeds from earn-out relating to sale of Speech Solutions business                               |                                                    |                                          
|                                             | Payment associated with the sale of Speech Solutions businesses                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|Cash flows from financing activities:        |                                                                                                    |                                                    |                                          
|                                             | Proceeds from sale of common stock in private placement                                            |                                                    |                                          
|                                             | Transaction costs of private placement                                                             |                                                    |                                          
|                                             | Proceeds from issuance of 8% Secured Convertible Notes due June 2007                               |                                                    |                                          
|                                             | Prepayment of 111/2% 8% Senior Secured Notes due January 2005                                      |                                                    |                                          
|                                             | Decrease (increase) in restricted cash                                                             |                                                    |                                          
|                                             | Bank borrowings                                                                                    |                                                    |                                          
|                                             | Repayments of bank borrowings                                                                      |                                                    |                                          
|                                             | Payments of principal on capital lease obligations                                                 |                                                    |                                          
|                                             | Repurchase of 53/4% Convertible Subordinated Notes due March 2005                                  |                                                    |                                          
|                                             | Transaction costs of debt refinancing and exchange of debt                                         |                                                    |                                          
|                                             | Proceeds from issuance of shares related to employee stock purchase plan                           |                                                    |                                          
|                                             | Proceeds from exercise of warrants                                                                 |                                                    |                                          
|                                             | Proceeds from exercise of common stock options                                                     |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|                                             |                                                                                                    |                                                    |                                          
|Cash and cash equivalents, beginning of year |                                                                                                    |                                                    | 17,270                                   
|                                             |                                                                                                    |                                                    |                                          
|Cash and cash equivalents, end of year       |                                                                                                    | $                                                  | 20,928                                   
|                                             |                                                                                                    |                                                    |                                          

52

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|Supplemental disclosure of cash flow information:                                                                        |                                                                |   |        |       |   |       |        |   |        |       
|------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------- | - | ------ | ----- | - | ----- | ------ | - | ------ | ------
|                                                                                                                         | Cash paid during the year for interest                         |   | $      | 7,198 |   | $     | 5,996  |   | $      | 10,738
|                                                                                                                         |                                                                |   |        |       |   |       |       
|                                                                                                                         | Treasury stock-settlement of escrow                            |   | $      |      |   | $     |       |   | $      | 341   
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Supplemental disclosure of non-cash investing and financing activities:                                                  |                                                                |   |        |       |   |       |        |   |        |       
|Face value of 53/4% Convertible Subordinated Notes due March 2005 surrendered                                            |                                                                | $ | 37,285 |       | $ |      |        | $ |       |       
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Face value of 63/4% Convertible Subordinated Notes due June 2009 issued                                                  |                                                                | $ | 37,285 |       | $ |      |        | $ |       |       
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Conversion of 63/4% Convertible Subordinated Notes to common stock                                                       |                                                                | $ | 1,341  |       | $ |      |        | $ |       |       
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Common stock issued as partial payment of investment banking fees                                                        |                                                                | $ | 175    |       | $ |      |        | $ |       |       
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Exercise of warrant issued to bank on net basis                                                                          |                                                                | $ | 114    |       | $ |      |        | $ |       |       
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Fair value of warrant issued for investment banking services                                                             |                                                                | $ | 2,808  |       | $ |      |        | $ |       |       
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Exchange of 53/4% Convertible Subordinated Notes for 111/2% Senior Secured Notes:                                        |                                                                |   |        |       |   |       |        |   |        |       
|                                                                                                                         |                                                                |   |        |       |   |       |       
|                                                                                                                         | Face value of 53/4% Convertible Subordinated Notes surrendered |   | $      |      |   | $     | 50,350 |   | $      |      
|                                                                                                                         |                                                                |   |        |       |   |       |       
|                                                                                                                         | Face value of 111/2% Senior Secured Notes issued               |   | $      |      |   | $     | 25,175 |   | $      |      
|                                                                                                                         |                                                                |   |        |       |   |       |       
|                                                                                                                         | Future interest payments on 111/2% Senior Secured Notes        |   | $      |      |   | $     | 5,527  |   | $      |      
|                                                                                                                         |                                                                |   |        |       |   |       |       
|                                                                                                                         | Fair value of warrants issued                                  |   | $      |      |   | $     | 1,375  |   | $      |      
|                                                                                                                         |                                                                |   |        |       |   |       |       
|                                                                                                                         | Reduction in deferred financing costs                          |   | $      |      |   | $     | 723    |   | $      |      
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Equipment acquired under capital lease obligations                                                                       |                                                                | $ | 1,765  |       | $ |      |        | $ | 3,247  |       
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Equipment acquired under operating lease obligations                                                                     |                                                                | $ | 577    |       | $ |      |        | $ |       |       
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Reduction in carrying value of certain property and equipment as a result of the settlement of capital lease obligations |                                                                | $ |       |       | $ |      |        | $ | 23,906 |       
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Escrow and earn-out receivable related to sale of Speech Solutions Business                                              |                                                                | $ |       |       | $ | 1,251 |        | $ | 1,500  |       
|                                                                                                                         |                                                                |   |        |       |   |       |       
|Conversion of accrued interest to capital lease obligations                                                              |                                                                | $ |       |       | $ |      |        | $ | 2,096  |       
|                                                                                                                         |                                                                |   |        |       |   |       |       

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

53

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iBasis, Inc.        Notes to Consolidated Financial Statements

(1) Business and Management Plans

BusinessWe are a leading provider of international communications services and a provider of retail prepaid calling
services. Our continuing operations consist of our Voice-Over-Internet-Protocol ("VoIP") trading business, in which we connect buyers and sellers of international telecommunications services, and our
retail services business. In the VoIP trading business we receive voice traffic from buyersoriginating carriers who are interconnected to our network via VoIP or traditional TDM
connections, and we route that traffic over the Internet to sellerslocal carriers in the destination countries with whom we have established termination agreements. We use proprietary,
patent-pending technology to automate the selection of routes and termination partners based on a variety of performance, quality, and business metrics. We offer this international call completion
service on a wholesale basis to carriers, telephony resellers and other service providers worldwide and have termination agreements with local service providers in North America, Europe, Asia, the
Middle East, Latin America, Africa and Australia.

Our
retail services business was launched during the third quarter of 2003, with the introduction of our retail prepaid calling cards which are marketed through distributors primarily to ethnic
communities within major metropolitan markets in the U.S. Our retail prepaid calling card business leverages our existing international VoIP network and termination agreements and has the potential to
deliver higher
margins than those typically achieved in the VoIP trading business. In addition, the retail prepaid calling card business typically has a faster cash collection cycle than the VoIP trading business.
Beginning in the second quarter of 2004, we created a new reportable business segment, retail prepaid calling card services and other enhanced services ("Retail"), in addition to our international
VoIP trading business ("Trading"). Since the second quarter of 2004, revenue from our Retail business has exceeded 10% of our total net revenue.

In
September 2004, we launched a prepaid calling service, Pingo, offered directly to consumers through an eCommerce web interface, which we have included in our Retail business
segment. Revenues from our Pingo services were not material in 2004.

We
have a history of operating losses and, as of December 31, 2004, our accumulated deficit was $429.7 million and our stockholders' deficit was $23.9 million. We used
$7.2 million and $3.2 million in cash from operations in the years ended December 31, 2004 and 2003, respectively. These results are primarily attributable to the expenditures
necessary to build our network and develop and expand our market.

Management PlansBeginning in 2001, we have taken a series of actions to reduce operating expenses, restructure
operations, reduce outstanding debt and provide additional liquidity. Such actions included:



54

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We
continue to expand our market share in VoIP Trading services by expanding our customer base and by introducing cost-effective solutions for our customers to interconnect with our
network. During the first quarter of 2004, we introduced our DirectVoIP service which eliminates the need for certain switches for our customers to interconnect to our network, thus reducing capital
equipment costs for both iBasis and our customers. More recently we expanded the DirectVoIP offering with DirectVoIP Broadband, which addresses interconnection requirements that are specific to the
growing consumer VoIP market, which we believe offers significant growth potential for us.

In
the Retail services business, our strategy is to continue to increase our retail traffic through the deployment of our prepaid calling services, which leverage our international VoIP network with
our real time back office systems, and have the potential to deliver higher margins and improve cash flow. In addition, we continue to increase the traffic we terminate to mobile phones, which
generally delivers higher average revenue per minute and margins than typical fixed-line traffic.

We
believe both business segments will benefit from our recently launched PremiumCertified international routing product. PremiumCertified is designed to
enhance our ability to compete for retail international traffic from existing customers as well as from mobile operators and emerging consumer VoIP providers. PremiumCertified features routes to more
than 500 destinations that are actively monitored and managed to deliver a level of quality that is equal to or exceeds the highest industry benchmarks for retail quality.

Our
plans also include:



55

---





We
anticipate that the December 31, 2004 balance of $38.8 million in cash, cash equivalents and short-term marketable investments, together with expected cash flows from
operations, will be sufficient to fund our operations and debt service requirements for at least the next twelve months.

(2) Summary of Significant Accounting Policies

Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of
iBasis, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated on consolidation.

Basis of PresentationDuring July 2002, we sold our Speech Solutions Business. Accordingly, the Consolidated
Statements of Operations have been reclassified to present the results of the Speech Solutions Business separately from continuing operations as discontinued operations.

Foreign Currency Translation and TransactionsThe functional currency of our subsidiaries is the local currency. For
the purposes of presenting the consolidated financial statements, the functional currencies of our foreign subsidiaries have been converted into U.S. dollars for balance sheet accounts using
the exchange rate in effect at the balance sheet date, and for revenue and expense accounts using an average exchange rate for the respective periods. The gains or losses resulting from such
translations were not material since the majority of our business is carried out by our US operations. Transactions in foreign currency are recorded at the original rates of exchange in force at the
time the transactions are effected. Monetary items denominated in a foreign currency are translated using the exchange rates prevailing at the date of the balance sheet. Exchange differences arising
on settlement of transactions and translations of assets and liabilities at the balance sheet date are recognized in operations. Translation adjustments, while are normally a component of accumulated
other comprehensive income, were not material in 2004, 2003 and 2002 and were charged or credited to results of operations.

Revenue RecognitionFor our Trading services, our revenue transactions are derived from the resale of international
minutes of calling time. We recognize revenue in the period the service is provided, net of revenue reserves for potential billing credits. Such disputes can result from disagreements with customers
regarding the duration, destination or rates charged for each call. For our Retail services, revenue is deferred upon activation of the cards, or purchase of the calling service, and is recognized as
the prepaid calling card balances, or purchased calling services, are reduced based upon minute usage and service charges. Revenue for both our Trading and Retail services is recognized when all of
the following criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the seller's price to the buyer is fixed or determinable and collectibility is reasonably assured.

Net Loss Per ShareBasic and diluted net loss per common share are determined by dividing net loss by the weighted
average common shares outstanding during the period. Basic net loss per share and diluted net loss per share are the same, as outstanding common stock options, common shares to be issued upon
conversion of the 53/4% Convertible Subordinated Notes due March 2005, 63/4% Convertible Subordinated Notes due June 2009, 8% Secured Convertible Notes due
June 2007 and warrants to purchase common shares are anti-dilutive since we have recorded a net loss for all periods presented.

56

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The
following have been excluded from the computation of diluted weighted average common shares for the periods presented:

|                                                                                                                          |  | Years Ended December 31,
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------
|
|
|Options to purchase common shares                                                                                         |  | 6,569                   
|Common shares to be issued upon conversion of the 53/4% Convertible Subordinated Notes                                    |  | 10                      
|Common shares to be issued upon conversion of the 63/4% Convertible Subordinated Notes                                    |  | 19,429                  
|Common shares to be issued upon conversion of the 8% Secured Convertible Notes                                            |  | 15,676                  
|Warrants to purchase common shares, issued in connection with the prepayment of the 111/2% Senior Secured Notes           |  | 5,176                   
|Warrants to purchase common shares, issued in connection with the issuance of the 111/2% Senior Secured Notes             |  | 2,666                   
|Warrants to purchase common shares issued for investment banking services in connection with the private equity placement |  | 1,733                   
|Warrants to purchase common shares issued in connection with bank credit lines                                            |  |                        
|                                                                                                                          |  |                         
|Total common shares excluded                                                                                              |  | 51,259                  
|                                                                                                                          |  |                         

The
following table reconciles the weighted average common shares outstanding to the shares used in the computation of basic and diluted weighted average common shares outstanding:

|                                                                     |  | Years Ended December 31, | 
|-------------------------------------------------------------------- |  | ------------------------ | 
|
|
|Weighted average common shares outstanding                           |  | 50,514                   | 
|Less: Weighted average unvested restricted common shares outstanding |  |                         | 
|                                                                     |  |                          | 
|Basic and diluted weighted average common shares outstanding         |  | 50,514                   | 
|                                                                     |  |                          | 

Other Comprehensive Income (Loss)We report comprehensive income (loss) in accordance with Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). For 2004, the unrealized loss on our short-term marketable investments, which is recorded as a
component of stockholders' equity, was the only difference between reported net loss and total comprehensive loss.

Cash and Cash EquivalentsWe consider highly liquid investments purchased with an original maturity of
90 days or less at the time of purchase to be cash equivalents. Cash equivalents include money market accounts and commercial paper that are readily convertible into cash.

Short-term marketable investmentsOur investments at December 31, 2004, are classified as
available-for-sale and carried at fair value. These investments consist of securities that are readily

57

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convertible
into cash, including government securities and commercial paper, with original maturities at the date of acquisition ranging from 90 days to one year. At December 31, 2004,
$17.9 million of securities with maturities of less than one year were classified as short-term marketable investments. At December 31, 2004, the fair value of our government
securities and commercial paper included in short-term marketable investments was $7.7 million and $10.2 million, respectively.

The
unrealized loss of $12,000 on our short-term marketable investments in government securities and commercial paper was caused by interest rate increases. Because we have the ability and
intent to hold these investments until a recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at
December 31, 2004 due to the short-term duration and insignificant severity of the impairment.

Short-term
marketable investments at December 31, 2004 were as follows:

Description of Security

Fair Value

Unrealized
Loss(In thousands)Government securities

$
7,728

$
(7
)Commercial paper


10,169


(5
)Total

$
17,897

$
(12
)


Property and EquipmentProperty and equipment are stated at cost. Assets under capital leases are recorded at the
present value of minimum lease payments. These assets are depreciated over the lesser of the lease term or the estimated useful lives of the assets using the straight-line method.
Significant improvements and betterments are capitalized if they extend the useful life of the asset. Routine repairs and maintenance are expensed when incurred.

For
assets that have been placed in service, we provide for depreciation and amortization using the straight-line method over the useful life of the asset, as follows:

Asset Classification

Estimated Useful LifeNetwork equipment

3 yearsEquipment under capital lease

Life of leaseComputer software

3 yearsLeasehold improvements

Lesser of Useful Life or Lease TermFurniture and fixtures

5 years


We
review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired,
the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Total depreciation and amortization expense included in the consolidated statements of operations was approximately $10.3 million, $20.1 million,
and $31.9 million for the years ended December 31, 2004, 2003 and 2002, respectively.

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Deferred Debt Financing CostsUnderwriter discounts and other costs incurred in connection with the issuance of debt
are being amortized to interest expense using the straight-line method which is not materially different than the effective interest rate method over the term of the related debt. As a
result of our debt refinancing in June 2004, unamortized deferred debt financing costs associated with the 53/4% Convertible Subordinated Notes due March 2005 which were
exchanged for new 63/4% Convertible Subordinated Notes due June 2009, are being amortized to June 2009, the term of the new 63/4% Convertible Subordinated
Notes due June 2009. The original deferred debt financing costs were $1.3 million and, as of December 31, 2004 and 2003, accumulated amortization was $1.1 million and
$1.0 million, respectively.

Investment in Long-Term Non-marketable SecurityOur long-term investment in a
non-marketable security represents an equity investment in a privately-held company that was made in 2000 in connection with a round of financing with other third-party
investors. As our investment does not permit us to exert significant influence or control over the entity in which we have invested, the recorded amount represents our cost of the investment less any
adjustments we make when we determine that an investment's carrying value is other than temporarily impaired.

The
process of assessing whether the equity investment's net realizable value is less than its carrying cost requires a significant amount of judgment due to the lack of a mature and stable public
market for investments of this type. In making this judgment, we carefully consider the investee's most recent financial results, cash position, recent cash flow data, projected cash flows (both short
and long-term), financing needs, recent financing rounds, most recent valuation data, the current investing environment, management or ownership changes, and competition. This valuation
process is based primarily on information that we request, receive and discuss with the investees' management on a quarterly basis. Such evaluation is performed on a quarterly basis.

Based
on our evaluation for the quarter ended March 31, 2004, we determined that our investment in this privately-held company has been other than temporarily impaired and, as a
result, we recorded a $5.0 million non-cash charge to continuing operations for the first quarter of 2004. Our decision was based on our evaluation of the company's current cash
position and recent operating results, as well as the perceived inability of the company to obtain additional financing at a level, and in a timely manner, to support its continued operations.

Other AssetsOther assets at December 31, 2004 and 2003 consist primarily of deposits for call termination
services and leased facilities.

Goodwill and Other Intangible AssetsEffective January 1, 2002, we adopted the provisions of Statement on
Financial Accounting Standards No.142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under the provisions of SFAS 142, if an intangible asset is determined to have an indefinite
useful life, it shall not be amortized until its useful life is determined to be no longer indefinite. An intangible asset that is not subject to amortization shall be tested for impairment annually,
or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is not amortized but is tested for impairment, for each reporting unit, on an annual basis
and between annual tests in certain circumstances. As a result of the adoption of SFAS No. 142 we discontinued amortizing goodwill related to the 2001 acquisition of
PriceInteractive Inc. and did not record any related amortization expense after January 1, 2002. Upon adoption of SFAS 142, we performed an impairment

59

---



review
and concluded that there were no necessary adjustments. We do not have any indefinite life intangible assets at December 31, 2004.

Research and Development ExpensesWe charge research and development expenses to operations as incurred.

Concentration of Credit Risk/Significant CustomersFinancial instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash investments, short-term marketable investments and accounts receivable. We place our cash investments with a high quality
financial institution and limits the amount of credit exposure. We have established certain credit requirements that our customers must meet before sales credit is extended. We monitor the financial
condition of our customers to help ensure collections and to minimize losses.

We
had one customer, each year, account for 11%, 11%, and 12% of net revenue for the years ended December 31, 2004, 2003, and 2002, respectively. We did not have a customer that accounted for
10% or more of accounts receivable at December 31, 2004 and 2003.

Fair Value of Financial InstrumentsFinancial instruments consist principally of cash and cash equivalents,
short-term marketable investments, accounts receivable, long-term investments in marketable securities, long-term debt and accounts payable. The estimated fair
value of these instruments, except for the 63/4% Convertible Subordinated Notes due June 2009 and the 8% Secured Convertible Notes due June 2007, approximates their
carrying value. The fair value of the 63/4% Convertible Subordinated Notes due June 2009 at December 31, 2004 was approximately $46.7 million and the fair value of
the 8% Secured Convertible Notes due June 2007 was approximately $37.7 million.

Stock-Based CompensationWe account for stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," using the intrinsic-value method as permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 encourages, but does not require, the recognition of compensation expense for the fair value of stock options and other equity instruments issued to
employees and non-employee directors.

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At
December 31, 2004, we had two stock-based employee compensation plans, which are described more fully in Note 11. The following table illustrates the effect on net loss and net loss
per share if we had applied the fair value recognition provisions of SFAS No. 123.

|                                      |                                                                                                              | December 31, |  
|------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------ | -
|
|
|Net loss:                             |                                                                                                              |              |  
|                                      | As reported                                                                                                  |              | $
|                                      | Deduct: Stock-based employee compensation expense included in reported net loss                              |              |  
|                                      | Add: Total stock-based employee compensation expense determined under fair value based method for all awards |              |  
|                                      |                                                                                                              |              |  
|                                      | Pro forma                                                                                                    |              | $
|                                      |                                                                                                              |              |  
|Basic and diluted net loss per share: |                                                                                                              |              |  
|                                      | As reported                                                                                                  |              | $
|                                      | Pro forma                                                                                                    |              | $

We
estimate the fair value of its stock-based awards to employees using the Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price
volatility. Because stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of stock-based awards to employees. The fair value of
stock-based awards to
employees was estimated assuming no expected dividends and the following weighted-average assumptions:

|                                               |  | December 31, |  
|---------------------------------------------- |  | ------------ | -
|
|Risk-free interest rate                        |  | 3.35         | %
|Dividend yield                                 |  | 0.0          | %
|Expected life                                  |  | 5 years      |  
|Expected volatility                            |  | 136          | %
|Weighted average remaining contractual life    |  | 8.17 years   |  
|Weighted average fair value of options granted |  | $1.77        |  

Income TaxesWe account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." This
statement requires an asset and liability approach to accounting for income taxes based upon the future expected values of the related assets and liabilities. Deferred income taxes are provided for
tax and financial reporting basis differences between assets and liabilities at tax rates expected to be in effect when the basis differences reverse. Valuation allowances are provided in situations
where recoverability of deferred tax assets is not considered more likely than not.

61

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Future Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment("SFAS
No. 123R"). This Statement is a revision of SFAS No. 123,Accounting for Stock-Based
Compensation, and supercedes Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and
its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The
Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited
exceptions). SFAS No. 123R is effective for the first interim or annual reporting period that begins after June 15, 2005. The Statement is effective for us in the third quarter of 2005.

We
expect to adopt SFAS No. 123R using the Statement's modified prospective application method. Adoption of SFAS No. 123R is expected to increase our stock compensation expense
significantly. We are currently in the process of evaluating the impact and implementation of SFAS No. 123R. In addition, SFAS No. 123R requires that the excess of tax benefits related
to stock compensation be reported as a financing cash inflow rather than as a reduction of taxes paid in cash from operations.

(3) Business Segment and Geographic Information

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for reporting information about operating
segments in annual financial statements and
requires selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, and
geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision
maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the chief executive officer, members of
senior management and the Board of Directors. We have viewed our operations and we manage our business principally as two business segments, Trading and Retail.

Business Segment InformationBeginning in the second quarter of 2004, our recently created operating segment, retail
prepaid calling card services and other enhanced services ("Retail") became a reportable business segment, in addition to our international wholesale VoIP services ("Trading"). Since we introduced our
retail prepaid calling card services, revenue from our Retail services has grown substantially. Since the second quarter of 2004, revenue from our Retail business has exceeded 10% of total revenue.

Our
Trading business consists of international long distance services we provide using VoIP. We offer these services on a wholesale basis through our worldwide network to carriers, telephony resellers
and others around the world by operating through various service agreements with local service providers in United States, Europe, Asia, the Middle East, Latin America, Africa and Australia.

62

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(3) Business Segment and Geographic Information (Continued)

Our Retail business consists of our retail prepaid calling cards, Pingo, a prepaid calling service sold to consumers through an eCommerce interface, and other
enhanced services. To date, we have marketed our retail prepaid calling card services primarily to ethnic communities within major domestic markets through distributors. Revenue from our retail
prepaid calling card services were 87% of our total Retail revenue in 2004. We expect that revenue from our retail prepaid calling card services will continue to be an increasingly large percentage of
our total Retail revenue in the future. Launched in the third quarter of 2004, Pingo revenues were not material in 2004. Our other enhanced services primarily consist of revenue derived from the
outsourcing of our retail prepaid calling card platform.

Our
executive management team uses net revenue and gross margin, which is net revenue less data communications and telecommunications costs, as the basis for measuring profit or loss and making
decisions on our Trading and Retail businesses. We do not allocate our research and development expenses, selling and marketing expenses, general and administrative expenses and depreciation and
amortization between Trading and Retail.

Operating
results, excluding interest income and expense, other income and expense, and refinancing related charges, for our two business segments are as follows:

Year ended December 31, 2004Trading

Retail

Total(In thousands)Net revenue

$
225,324

$
38,354

$
263,678Data communications and telecommunication costs (excluding depreciation and amortization)


192,541


32,628


225,169Gross margin

$
32,783

$
5,726


38,509Research and development expenses








13,803Selling and marketing expenses








9,205General and administrative expenses and restructuring costs








12,648Depreciation and amortization








10,345Loss from operations







$
(7,492
)


Year ended December 31, 2003Trading

Retail

Total(In thousands)Net revenue

$
172,552

$
5,607

$
178,159Data communications and telecommunication costs (excluding depreciation and amortization)


148,895


3,958


152,853Gross margin

$
23,657

$
1,649


25,306Research and development expenses








13,387Selling and marketing expenses








7,513General and administrative expenses








7,665Depreciation and amortization








20,065Non-cash stock-based compensation








86Loss from operations







$
(23,410
)


63

---



Year ended December 31, 2004Trading

Retail

Total(In thousands)Segment assets

$
28,541

$
5,592

$
34,133Non-segment assets








53,643Total assets







$
87,776


Geographic InformationThe following table represents percentage revenue derived from individual countries:

Year Ended December 31,2004

2003

2002United States

58
%
57
%
55
%United Kingdom

29

16

11China

11

3

10Other

2

24

24100
%
100
%
100
%


We
had one customer, each year, account for 11%, 11%, and 12% of net revenue for the years ended December 31, 2004, 2003, and 2002, respectively. We did not have a customer that accounted for
10% or more of accounts receivable at December 31, 2004 and 2003.

The
net book value of long-lived tangible assets by geographic area was as follows:

Geographic Location

2004

2003(In thousands)North America

$
11,753

$
16,930Europe


67


141Asia


41


104$
11,861

$
17,175


(4) Discontinued Operations

Loss from discontinued operations.On July 15, 2002 we completed the sale of substantially all the assets of our Speech Solutions
Business for $18.5 million in cash ($1.5 million of this amount was held in escrow until March 2004). The loss from discontinued operations has been recorded under the provisions
of SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets." In the fourth quarter of 2003, we recognized additional consideration of $1.3 million for an
earn-out payment based on the achievement of certain 2003 revenue-based milestones associated with this business. The cash payment associated with the earn-out was
$1.1 million and was received in February 2004. In addition, in March 2004, we received the balance of $1.5 million that had been held in escrow from the sale of this
business since July 2002. There are no further payments to be made to us relating to the

64

---



sale
of our former Speech Solutions Business. In the third quarter of 2004, we recognized income from discontinued operations of $1.9 million resulting from the expiration of certain contingent
obligations.

Summary
operating results of the discontinued operation for 2004, 2003 and 2002 were as follows:

Years Ended December 31,2004

2003

2002(In thousands)Revenue

$


$


$
12,306Operating loss








(5,906
)Pre-tax income (loss) from discontinued operations


1,861


1,251


(65,222
)


The
operating loss for 2002 includes depreciation of $2.6 million and amortization of intangibles of $3.3 million.

(5) Accrued Expenses

Accrued expenses at December 31, consist of the following:

|                                            |  | 2004 |        | 2003
|------------------------------------------- |  | ---- | ------ | ----
|
|Termination fees and circuit costs          |  | $    | 8,926  |     
|Restructuring and other non-recurring costs |  |      | 559    |     
|Interest                                    |  |      | 226    |     
|Acquisition related costs                   |  |      |       |     
|Professional services                       |  |      | 372    |     
|Payroll and related costs                   |  |      | 462    |     
|Equipment purchases                         |  |      |       |     
|Customer deposits                           |  |      | 250    |     
|Accrued other                               |  |      | 1,391  |     
|                                            |  |      |        |     
|Total accrued expenses                      |  | $    | 12,186 |     
|                                            |  |      |        |     

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(6) Restructuring Costs

2001 RestructuringDuring 2001, we announced a restructuring plan to better align our organization with our corporate strategy and recorded
a charge of approximately $51.8 million in accordance with the criteria set forth in EITF 94-3 and SEC Staff Accounting Bulletin 100. The restructuring included the
write-off of property and equipment, the termination of certain contractual obligations and the reduction in our workforce resulting in employee benefit costs.

2002 RestructuringDuring 2002, we announced cost reduction measures and recorded a charge of approximately $5.5 million in the
accompanying consolidated statement of operations:

The
write-off of fixed assets relates primarily to the closure and abandonment of our Miami and Singapore internet central offices. The costs include the write-off of leasehold
improvements as well as a provision for termination costs for the facility space and telecommunication circuits. The employee severance costs relate to a reduction in our workforce as we terminated 44
employees on June 28, 2002. Of these 44 people, 19 were within research and development, 10 were from sales and marketing and 15 were from general and administrative departments. These cost
reduction measures were completed in the first quarter of 2003. In addition, the 2002 restructuring expense was reduced by a change in estimated restructuring costs related to the 2001 restructuring
and specifically related to a reduction in the estimated cost of terminating contractual lease obligations.

The
components of the 2002 Restructuring charge were as follows:

(In thousands)Write off of fixed assets and facilities costs

$
2,427Termination of contractual lease obligations


2,794Employee severance costs


750Less: Change in estimate of 2001 restructuring costs


(435
)Total restructuring and other non-recurring costs

$
5,536


At
December 31, 2004, accrued restructuring costs of $1.7 million consisted of costs accrued for leased facility obligations, net of certain future sublease assumptions. In the fourth
quarter of 2004, we took an additional charge of $0.2 million as a result of a change in estimates relating to our future sublease assumptions. In the second quarter of 2004, we subleased a
major portion of one of our vacant facilities through the end of our lease term, April 2005. At December 31, 2004 and 2003, the current portion of accrued restructuring costs were
$0.6 million and $0.8 million and the long-term portion of accrued

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restructuring
costs were $1.1 million and $1.4 million, respectively. A summary of accrued restructuring costs for the 2001 and 2002 Restructuring charges are as follows:

2001 Restructuring Charge:

Property and
Equipment

Termination of
Contractual
Obligations

Employee
Severance
Costs

Total(In thousands)Original charge

$
42,629

$
7,442

$
1,763

$
51,834Less: write-off of property and equipment


42,258








42,258Less: cash payments





4,232


1,460


5,692Balance, December 31, 2001


371


3,210


303


3,884Less: cash payments





2,640


303


2,943Less: adjustments


371


64





435Balance, December 31, 2002





506





506Less: cash payments





325





325Balance, December 31, 2003





181





181Less: cash payments





181





181Balance, December 31, 2004

$


$


$


$



2002 Restructuring Charge:

Property and
Equipment

Termination of
Contractual
Obligations

Employee
Severance
Costs

Total(In thousands)Original charge

$
2,427

$
2,794

$
750

$
5,971Less: write-off of property and equipment


2,427








2,427Less: cash payments





131


725


856Balance, December 31, 2002





2,663


25


2,688Less: cash payments





612





612Balance, December 31, 2003





2,051


25


2,076Change in estimates





165





165Less: cash payments, net of sublease income





525


25


550Balance, December 31, 2004

$


$
1,691

$


$
1,691


(7) Income Taxes

No provision for federal or state income taxes has been recorded, as we have incurred net operating losses for all periods presented and it is more likely than
not that the tax benefit of such losses will not be realized. As of December 31, 2004, we had net operating loss carryforwards of approximately $315 million available to reduce future
federal and state income taxes, if any. If not utilized, these carryforwards expire at various dates through 2024. If substantial changes in our ownership should occur, as defined by
Section 382 of the Internal Revenue Code (the "Code"), there could be annual limitations on the amount of carryforwards which can be realized in future periods. The Company has completed
several financings since its inception and a ownership change, as defined under the Code, may have occurred.

67

---



The
approximate income tax effects of temporary differences and carryforwards are as follows:

December 31,2004

2003(in thousands)Net operating loss carryforwards

$
97,616

$
91,868Accruals


956


1,308Depreciation


8,280


8,054Accounts receivable


1,120


1,240Other


1,700


1,704Total deferred tax assets


109,672


104,174Valuation allowance


(109,672
)

(104,174
)$


$



We
have recorded a 100% valuation allowance against the net deferred tax asset as of December 31, 2004 and 2003, as we have determined that it is more likely than not that such assets will not
be realized. The increase in the valuation allowance during the year primarily relates to the tax benefit associated with the increase in the net operating loss carryforward.

The
major components of our income tax expense (benefit) for the years ended December 31 are:

2004

2003

2002(in thousands)Net operating loss carryforwards

$
(14,028
)
$
(11,667
)
$
27,056Deferred tax items


(189
)

(20,888
)

(6,199
)Valuation Allowance


14,217


32,555


(20,857
)$


$


$



(8) Long-Term Debt

Long-term debt consists of the following as of December 31:

2004

2003(In thousands)63/4% Convertible Subordinated Notes due June 2009

$
35,944

$
8% Secured Convertible Notes due June 2007


29,000


53/4% Convertible Subordinated Notes due March 2005


895

$
38,180111/2% Senior Secured Notes due January 2005





25,175Revolving line of credit





2,300Capital lease obligations


1,869


2,27167,708


67,926Less: Current portion


1,775


2,097$
65,933

$
65,829


68

---



In
June 2004, we completed a refinancing of our outstanding debt obligations. As part of the refinancing, we completed an exchange offer, pursuant to which $37.3 million of our
53/4% Convertible Subordinated Notes due March 2005, representing approximately 98% of the total amount outstanding, were tendered for the same principal amount of new
63/4% Convertible Subordinated Notes due June 2009. Approximately $0.9 million of the 53/4% Convertible Subordinated Notes due March 2005 remain
outstanding after the exchange offer. Simultaneously with the exchange offer, we prepaid all $25.2 million of our 111/2% Senior Secured Notes due January 2005 for cash
equal to the principal amount plus accrued but unpaid interest and the issuance of warrants exercisable for an aggregate of 5,176,065 shares of our common stock at $1.85 per share, which had a fair
value of $2.1 million. We issued $29.0 million of new 8% Secured Convertible Notes due June 2007, of which $25.2 million was used to prepay the 111/2% Senior
Secured Notes due January 2005. The 8% Secured Convertible Notes due June 2007 are convertible into shares of common stock at $1.85 per share. During the second half of 2004, holders of
$1.3 million of 63/4% Convertible Subordinated Notes due June 2009 voluntarily converted their notes into 0.7 million shares of common stock at the conversion price
of $1.85 per share. Both notes are convertible to common stock at the conversion price at the option of the holder.

In
January 2005, we amended and extended our revolving line of credit with our bank. The new $15.0 million revolving line of credit has a two-year term, bears interest at the
bank's prime rate plus 1/2% and is collateralized by substantially all of our assets. Borrowings under the line may also be used for letters of credit and foreign exchange contracts and
are no longer on a borrowing formula. The new revolving line of credit requires us to comply with various non-financial and financial covenants, including minimum profitability and
liquidity and requires us to maintain a minimum cash balance of $15.0 million with the bank, or be subject to certain additional fees. Our previous $15.0 million revolving line of
credit, which commenced in December 2003, bore interest at the bank's prime rate plus 1%, matured on January 5, 2005 and was also collateralized by substantially all of our assets.
Borrowings under this previous revolving line of credit were on a formula basis and were limited to eligible accounts receivable. At December 31, 2004, we had no borrowings under our previous
revolving line of credit. We had borrowings outstanding under previous revolving lines of credit of $2.3 million and $2.3 million as of December 31, 2003 and 2002, respectively.
These borrowings were at prime rate plus 1%. At December 31, 2004, we had $3.0 million in letters of credit outstanding. During 2004, we entered into capital lease agreements to finance
$1.8 million in equipment purchases for The iBasis Network. The capital lease agreements have a term of three years.

69

---





(8) Long-Term Debt (Continued)

Gains on Exchanges and Repurchases of 53/4% Convertible Subordinated NotesDuring 2003, we entered
into agreements with principal holders of our 53/4% Convertible Subordinated Notes which resulted in the retirement of $50.4 million of such notes in exchange for new debt
instruments at 50% of the face value of the retired Notes. Under the terms of the agreement, the holders of the retired Notes received $25.2 million of new, 111/2% Senior Secured
Notes and warrants to purchase 4,915,416 shares of our Common Stock. Each warrant has an initial exercise price of $0.65 per share and is exercisable over a five-year term. The
111/2% Senior Secured Notes were scheduled to mature on January 15, 2005 and share in a second priority lien on our assets and are subordinated to our revolving line of credit
with our bank.

In
accordance with SFAS No. 15, "Accounting by Debtors and Creditors Regarding Troubled Debt Restructuring," we recorded a gain on the exchange of debt of approximately $16.6 million
during the year ended December 31, 2003. SFAS No. 15 requires that the gain on the exchange be recorded net of the accrual for future interest payments on the new 11.5% Senior Secured
Notes, the fair value of the warrants issued, the reduction of the net book value of the deferred financing costs originally capitalized with the issuance of our 5.75% Convertible Subordinated Notes
and any other fees or costs. The fair value of $1,375,000 of the detachable warrants was estimated utilizing a valuation method similar to the Black-Scholes model. Assumptions utilized within the
pricing model included a) a useful life of 5 years; b) volatility of 46%; c) no dividends; and d) a discount rate of 3%. While our future cash flows relating to
interest payments will not be affected by the exchange, our future Statement of Operations will show, as required, a reduction of interest expense due to the accrual of the future interest payments on
the 11.5% Senior Secured Notes within the gain.

The
gain recognized in 2003 was calculated as follows:

2003(In thousands)Face value of surrendered 53/4% Convertible Subordinated Notes

$
50,350Less: Face value of issued 111/2% Senior Secured Notes


(25,175
)Future interest payments on 11.5% Senior Secured Notes


(5,527
)Fair value of warrants issued


(1,375
)Reduction of deferred debt financing costs


(723
)Professional fees


(935
)Gain

$
16,615


During
2002, we repurchased (as opposed to "redeemed") a portion of our outstanding 53/4% Convertible Subordinated Notes and recorded gains. The gains were calculated as follows:

2002(In thousands)Carrying value of repurchased Notes

$
40,588Less: Cost of repurchase of Notes


(13,993
)Write-off of deferred debt financing costs


(805
)Gain

$
25,790


70

---



Capital Lease SettlementIn August 2002, we completed an agreement with our primary equipment vendor to
reduce our capital lease obligations and related future cash commitments. Under the terms of the agreement, we paid our vendor $28.5 million to purchase the leased assets. In exchange the
vendor eliminated $63.8 million in existing debt, future interest obligations and other fees ($50.8 million in principal, $9.0 million in interest assuming the vendor debt was
held to maturity, and $4.0 million in tax obligations). The difference between the cash paid and the recorded outstanding obligation on that date was accounted for as a reduction in the
carrying value of the underlying capital assets.

Repayments of debtScheduled maturities of long-term debt as of December 31, 2004 are as follows:

|Year                                    |  | 53/4%
Convertible
Subordinated
Notes |     | 8% Secured
Convertible
Notes |   | 63/4%
Convertible
Subordinated
Notes |  | Capital
Leases |        | Total
|--------------------------------------- |  | ------------------------------------ | --- | ---------------------------- | - | ------------------------------------ |  | -------------- | ------ | -----
|
|2005                                    |  | $                                    | 895 |                              | $ |                                     |  | $              |       |      
|2006                                    |  |                                      |    |                              |   |                                     |  |                |       |      
|2007                                    |  |                                      |    |                              |   | 29,000                               |  |                |       |      
|2008                                    |  |                                      |    |                              |   |                                     |  |                |       |      
|2009                                    |  |                                      |    |                              |   |                                     |  |                | 35,944 |      
|Thereafter                              |  |                                      |    |                              |   |                                     |  |                |       |      
|                                        |  |                                      |     |                              |   |                                      |  |                |        |      
|Total future minimum payments           |  |                                      | 895 |                              |   | 29,000                               |  |                | 35,944 |      
|Less: Amounts representing interest     |  |                                      |    |                              |   |                                     |  |                |       |      
|                                        |  |                                      |     |                              |   |                                      |  |                |        |      
|Present value of minimum repayments     |  |                                      | 895 |                              |   | 29,000                               |  |                | 35,944 |      
|Less: Current portion of long-term debt |  |                                      | 895 |                              |   |                                     |  |                |       |      
|                                        |  |                                      |     |                              |   |                                      |  |                |        |      
|Long-term debt, net of current portion  |  | $                                    |    |                              | $ | 29,000                               |  | $              | 35,944 |      
|                                        |  |                                      |     |                              |   |                                      |  |                |        |      

(9) Other Long-Term Liabilites

Other long-term liabilities at December 31, consist of the following:

2004

2003(In thousands)Accrued interest on 111/2% Senior Secured Notes

$


$
1,303Restructuring charges


1,132


1,446Total

$
1,132

$
2,749


71

---



(10) Commitments and Contingencies

Operating LeasesWe lease our administrative and operating facilities and certain equipment under non-cancelable operating
leases, which expire at various dates through 2011. The future approximate minimum lease payments under such operating leases consist of the following:

Year

(in thousands)2005

$
3,4102006


2,4942007


2,0812008


1,8382009


1,514Thereafter


859Total future minimum lease payments

$
12,196


Total
rent expense included in the consolidated statements of operations was approximately $3,818,000, $3,669,000, and $3,918,000 for the years ended December 31, 2004, 2003, and 2002,
respectively.

LitigationIn addition to litigation that we have initiated or responded to in the ordinary course of business, we are currently party to
the following potentially material legal proceedings:

Beginning
July 11, 2001, we were served with several class action complaints that were filed in the United States District Court for the Southern District of New York against us and several of
our officers, directors, and former officers and directors, as well as against the investment banking firms that underwrote our November 10, 1999 initial public offering of the common stock and
our March 9, 2000 secondary offering of the common stock. The complaints were filed on behalf of persons who purchased the common stock during different time periods, all beginning on or after
November 10, 1999 and ending on or before December 6, 2000.

The
complaints are similar to each other and to hundreds of other complaints filed against other issuers and their underwriters, and allege violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934 primarily based on the assertion that there was undisclosed compensation received by our underwriters in connection with our public offerings and that there were understandings
with customers to make purchases in the aftermarket. The plaintiffs have sought an
undetermined amount of monetary damages in relation to these claims. On September 4, 2001, the cases against us were consolidated. On October 9, 2002, the individual defendants were
dismissed from the litigation by stipulation and without prejudice.

On
June 11, 2004, we and the individual defendants, as well as many other issuers named as defendants in the class action proceeding, entered into an
agreement-in-principle to settle this matter, and on June 14, 2004, this settlement was presented to the court. The court has preliminarily approved the settlement. Once
the notice has been mailed, there will be an objection period, followed by a hearing for final approval of the settlement. Although we believe that we and the individual defendants have meritorious
defenses to the claims made in the complaints, in deciding to pursue settlement, we considered, among other factors, the substantial costs and the diversion of our management's attention and resources
that would be required by litigation. Pursuant to the terms of the proposed settlement, in exchange for a termination and release of all claims against us and the individual defendants and certain
protections against third-party claims, we will assign to the plaintiffs certain claims we may have

72

---



as
an issuer against the underwriters, and our insurance carriers, along with the insurance carriers of the other issuers, will ensure a floor of $1 billion for any underwriter-plaintiff
settlement. Although the financial effect of the settlement on us will not be material, our insurance carriers' exposure in this connection will range from zero to a few hundred thousand dollars, and
will be reduced proportionately by any amounts recovered by plaintiffs directly from the underwriters.

We
cannot assure you that the settlement which has been finalized will be accepted by the court, or that we will be fully covered by collateral or related claims from underwriters, and that we would
be successful in resulting litigation. In addition, even though we have insurance and contractual protections that could cover some or all of the potential damages in these cases, or amounts that we
might have to pay in settlement of these cases, an adverse resolution of one or more of these lawsuits could have a material adverse affect on our financial position and results of operations in the
period in which the lawsuits are resolved. We are not presently able to estimate potential losses, if any, related to the lawsuits.

We
are also party to suits for collection, related commercial disputes, claims from carriers and foreign service partners over reconciliation of payments for circuits, Internet bandwidth and/or access
to the public switched telephone network, and claims from estates of bankrupt companies alleging that we received preferential payments from such companies prior to their bankruptcy filings. Our
employees have also been named in proceedings arising out of business activities in foreign countries. We intend to prosecute vigorously claims that we have brought and employ all available defenses
in contesting claims against us, or our employees. Nevertheless, in deciding whether to pursue settlement, we will consider, among other factors, the substantial costs and the diversion of
management's attention and resources that would be required in litigation. In light of such costs, we have settled various and in some cases similar matters on what we believe have been favorable
terms which did not have a material impact our financial position, results of operations, or cash flows. The results or failure of any suit may have a material adverse affect on our business.

(11) Stockholders' Equity (Deficit)

(a) Authorized Capital StockWe have authorized for issuance 170,000,000 shares of common stock, $0.001 par value
per share ("Common Stock") and 15,000,000 shares of preferred stock, $0.001 par value per share ("Preferred Stock").

At
a Special Meeting of Shareholders held on June 18, 2004, shareholders voted to increase the number of authorized shares of common stock, par value $0.001 per share, from 85,000,000 shares to
170,000,000 shares. As a result, on June 18, 2004, we filed an Amendment to our First Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common
stock, par value $0.001 per share, from 85,000,000 shares to 170,000,000 shares.

(b) Reverse Stock SplitAt a Special Meeting of Shareholders held on February 18, 2004, shareholders voted
to give the iBasis board of directors authority to effect a reverse split of our common stock. The affirmative vote by shareholders permits our board of directors to choose to effect a reverse stock
split of our common stock at a ratio of between one-and-a-half for one (1.5:1) and five for one (5:1). The board of directors has chosen not to affect such a split.

73

---





(11) Stockholders' Equity (Deficit) (Continued)

(c) Treasury StockDuring 2002, we negotiated a settlement of the 2,070,225 shares of our Common Stock that we
placed into escrow in connection the the acquisition of PriceInteractive, Inc. in 2001. As a part of this settlement, 1,135,113 shares were returned to us and have been accounted for on the
accompanying balance sheet as treasury stock, stated at the fair value of the shares on the date of the settlement.

(d) Stock Incentive PlanOur 1997 Stock Incentive Plan (the "Plan") provides for the granting of restricted stock
awards and incentive stock options ("ISOs") and nonqualified options to purchase shares of Common Stock to key employees, directors and consultants. Under the terms of the Plan, the exercise price of
options granted shall be determined by the Board of Directors and for ISOs shall not be less than fair market value of our Common Stock on the date of grant. Options vest quarterly in equal
installments over two to four years, provided that no options shall vest during the employees' first year of employment. The expiration date of each stock option shall be determined by the Board of
Directors, but shall not exceed 10 years from the date of grant.

The
following table summarizes the option activity for the years ended December 31, 2004, 2003 and 2002:

|                               |           | Number of
Shares |        | Exercise
Price Per
Share |             | Weighted
Average
Exercise Price
|------------------------------ | --------- | ---------------- | ------ | ------------------------ | ----------- | -------------------------------
|
|Outstanding, January 1, 2002   |           | 7,768            |        | $                        | 0.43$74.63 |                                
|                               | Granted   |                  | 312    |                          |             | 0.250.97                      
|                               | Exercised |                  | (149   | )                        |             | 0.502.13                      
|                               | Forfeited |                  | (5,674 | )                        |             | 0.3774.63                     
|                               |           |                  |        |                          |             |                                
|Outstanding, December 31, 2002 |           | 2,257            |        |                          | 0.2528.75  |                                
|                               | Granted   |                  | 4,710  |                          |             | 0.381.54                      
|                               | Exercised |                  | (128   | )                        |             | 0.861.57                      
|                               | Forfeited |                  | (507   | )                        |             | 0.2514.81                     
|                               |           |                  |        |                          |             |                                
|Outstanding, December 31, 2003 |           | 6,332            |        |                          | 0.2528.75  |                                
|                               | Granted   |                  | 1,327  |                          |             | 1.172.42                      
|                               | Exercised |                  | (508   | )                        |             | 0.252.16                      
|                               | Forfeited |                  | (582   | )                        |             | 0.2514.81                     
|                               |           |                  |        |                          |             |                                
|Outstanding, December 31, 2004 |           | 6,569            |        | $                        | 0.25$28.75 |                                
|                               |           |                  |        |                          |             |                                
|Exercisable, December 31, 2004 |           | 3,269            |        | $                        | 0.25$28.75 |                                
|                               |           |                  |        |                          |             |                                
|Exercisable, December 31, 2003 |           | 2,216            |        | $                        | 0.25$28.75 |                                
|                               |           |                  |        |                          |             |                                
|Exercisable, December 31, 2002 |           | 1,160            |        | $                        | 0.43$28.75 |                                
|                               |           |                  |        |                          |             |                                

74

---



The
following table summarizes information relating to currently outstanding and exercisable stock options as of December 31, 2004:

|              |  |       |  | Outstanding |  |   |       | Exercisable
|------------- |  | ----- |  | ----------- |  | - | ----- | -----------
|
|
|$0.25$0.69   |  | 228   |  | 7.07        |  | $ | 0.55  |            
|0.72          |  | 791   |  | 6.87        |  |   | 0.72  |            
|0.881.10     |  | 2,465 |  | 8.28        |  |   | 0.91  |            
|1.171.88     |  | 2,367 |  | 8.94        |  |   | 1.49  |            
|2.123.10     |  | 366   |  | 8.74        |  |   | 2.38  |            
|3.715.00     |  | 250   |  | 5.23        |  |   | 4.49  |            
|11.0013.50   |  | 53    |  | 5.38        |  |   | 13.41 |            
|$14.81$28.75 |  | 49    |  | 5.44        |  |   | 15.27 |            
|              |  |       |  |             |  |   |       |            
|              |  | 6,569 |  | 8.17        |  | $ | 1.51  |            
|              |  |       |  |             |  |   |       |            

At
December 31, 2004, options to purchase 338,983 shares of common stock were available for future grants under the Plan.

We
apply the accounting provisions prescribed in APB No. 25 and related Interpretations. In 1999 we issued stock options with an exercise price less than the fair market value of the Common
Stock as determined for accounting purposes. Deferred compensation related to these stock options of approximately $2.4 million was recorded and was amortized over four years, the vesting
period of those options. In connection with the 2001 acquisition of PriceInteractive, Inc., we assumed vested options with exercise prices that were less than the fair market value of our
Common Stock as determined for accounting purposes. As such, we recorded approximately $1.8 million of deferred compensation which was amortized over the remaining life of those options of up
to four years. Deferred compensation was reduced in 2002 due to the settlement with the former shareholders of PriceInteractive and the forfeit of options by Company employees. As of
December 31, 2003, all deferred compensation had been amortized.

Total
compensation cost recognized in the statements of operations as a result of stock-based employee compensation awards was $0.1 million and $1.0 million for the years ended
December 31, 2003 and 2002, respectively. There was no stock-based employee compensation expense in 2004.

(e) Stock Option Exchange ProgramIn December 2002 we announced an offer to exchange outstanding employee
stock options in return for new stock options to be granted by us. In exchange for existing options, each option holder received a commitment to receive new options to be issued exercisable for the
same number of shares of common stock tendered by the option holder and accepted for exchange. A total of 1,786,950 options were accepted for exchange under the exchange offers and, accordingly, were
canceled in 2002. The new option grants were granted in the second quarter of 2003 at $1.24 per share, more than six months and one day from the date on which each exchange offer terminated and vest
quarterly over at two-year period.

75

---



(f) WarrantsAs described in Note 8, we issued 5,176,065 warrant shares in connection with our debt
refinancing in June 2004 ("2004 Warrant"). The 2004 Warrant shares were issued to the holders of our 111/2% Senior Secured Notes due January 2005 for the right to prepay
the notes. Each 2004 Warrant share is exercisable into our common stock on a one-to-one basis at an exercise price of $1.85 per share and is exercisable over a
five-year term. The fair value of $2.1 million of the 2004 Warrant was charged to results of operations as additional interest associated with our debt
refinancing.In 2003, we issued 4,915,416 warrant shares in connection with the exchange of our 53/4% Convertible Subordinated Notes due
March 2005 for the 111/2% Senior Secured Notes due January 2005 ("2003 Warrant"). Each 2003 Warrant share is exercisable into our common stock on a
one-to-one basis at an exercise price of $0.65 per warrant share and are exercisable over a five-year term. The warrant had a fair value of $1.4 million and
was charged to the gain on the debt exchanges in 2003. During 2004, 2003 Warrant shares totaling 2,249,316 shares were exercised for $1.5 million in cash. In connection with our private equity
placement in September 2004, we issued a warrant for 1,732,500 shares in partial payment of investment banking services. This warrant has an exercise price of $2.10 per share, is exercisable
over a five-year term and had a fair value of $2.8 million. The fair value of this warrant was charged to stockholders' deficit as a non-cash transaction cost of the
private equity placement. In December 2002, in conjunction with the initiation of our bank credit lines, we issued a warrant to the bank for the purchase of 337,500 shares of our common stock
at an exercise price of $0.337 per share. In January 2004, the bank exercised its warrant in full on a net issue basis, and received 272,876 shares of our common stock. As a result of the bank
exercising its warrant on a net issue basis, no cash was received by us.

At
December 31, 2004 and 2003, outstanding warrants were:

2004

2003(In thousands)2004 Warrant

5,176

2003 Warrant

2,666

4,915Warrant issued for investment banking services

1,733

Warrant issued to bank



338Total warrants outstanding

9,575

5,253


(g) Shares Issuable Upon Conversion of Convertible NotesAt December 31, 2004 and 2003, shares issuable upon
conversion of convertible notes were:

2004

2003(In thousands)63/4% Convertible Subordinated Notes due June 2009

19,429

8% Secured Convertible Notes due June 2007

15,676

53/4% Convertible Subordinated Notes due March 2005

10

443Total

35,115

443


(h) Employee Stock Purchase PlanWe issued 364,531 shares under our Employee Stock Purchase Plan ("ESPP") during
2002. No shares were issued under the ESPP in 2004 and 2003, and at December 31, 2004, all shares authorized under the ESPP had been issued.

76

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(12) Valuation and Qualifying Accounts

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the account receivable balance. We determine the allowance based on
known troubled accounts, historical experience, and other currently available evidence. Activity in the allowance for doubtful accounts is as follows:

Year Ended
December 31,

Balance at
Beginning of
Year

Charged to costs
and expenses

Write-offs
and other

Recovery
of previously
reserved
balance

Balance at
End of Year(In thousands)2002

$
5,867

10,026

(8,060
)


$
7,8332003

$
7,833

800

(1,236
)
(4,269
)
$
3,1282004

$
3,128

250

13



$
3,391


(13) Subsidiary Guarantors

In June 2004, we completed a refinancing of our outstanding debt obligations. As part of the refinancing, we prepaid all $25.2 million of our
111/2% Senior Secured Notes due January 2005 plus accrued but unpaid interest and issued warrants exercisable for an aggregate of 5,176,065 shares of our common stock at $1.85
per share. In conjunction with the refinancing we issued $29.0 million of new 8% Secured Convertible Notes due June 2007, proceeds of $25.2 million were used to prepay the 8%
Senior Secured Notes due January 2005. The new 8% Secured Convertible Notes due June 2007 are convertible into shares of common stock at $1.85 per share. Our new 8% Secured Convertible
Notes due June 2007 are fully and unconditionally guaranteed, jointly and severally, by our wholly-owned subsidiaries, iBasis Global, Inc., iBasis Holdings, Inc. and iBasis
Securities Corporation.

The
following tables contain condensed consolidating financial information for iBasis, Inc ("Parent Company") and iBasis Global, Inc., iBasis Holdings, Inc., and iBasis Securities
Corporation (collectively, "Subsidiary Guarantors"), on a combined basis, for the periods presented. Separate financial statements of the Subsidiary Guarantors are not presented as we believe they
would be immaterial to investors.

77

---



Condensed Consolidating Balance Sheet  As of December 31, 2004

|                                                                                                |  | Parent
Company |          | Subsidiary
Guarantors |   | Eliminations |   | Consolidated |        
|----------------------------------------------------------------------------------------------- |  | -------------- | -------- | --------------------- | - | ------------ | - | ------------ | -------
|
|Assets                                                                                          |  |                |          |                       |   |              |   |              |        
|Cash and cash equivalents                                                                       |  | $              | 19,121   |                       | $ | 1,807        |   | $            |       
|Short-term marketable investments                                                               |  |                | 17,897   |                       |   |              |   |              |        
|Accounts receivable, net                                                                        |  |                | 32,853   |                       |   | 1,280        |   |              |        
|Prepaid expenses and other current assets                                                       |  |                | 1,642    |                       |   | 778          |   |              |        
|Due from parent                                                                                 |  |                |          |                       |   | 14,352       |   |              | (14,352
|                                                                                                |  |                |          |                       |   |              |   |              |        
|Total current assets                                                                            |  |                | 71,513   |                       |   | 18,217       |   |              | (14,352
|Property and equipment, net                                                                     |  |                | 11,753   |                       |   | 108          |   |              |        
|Deferred debt financing costs, net                                                              |  |                | 177      |                       |   |              |   |              |        
|Other assets                                                                                    |  |                | 300      |                       |   | 60           |   |              |        
|Investment in guarantor subsidiaries                                                            |  |                | 51       |                       |   |              |   |              | (51    
|                                                                                                |  |                |          |                       |   |              |   |              |        
|Total assets                                                                                    |  | $              | 83,794   |                       | $ | 18,385       |   | $            | (14,403
|                                                                                                |  |                |          |                       |   |              |   |              |        
|Liabilities and stockholders' equity (deficit)                                                  |  |                |          |                       |   |              |   |              |        
|Accounts payable                                                                                |  | $              | 19,674   |                       | $ | 4,666        |   | $            |       
|Accrued expenses                                                                                |  |                | 8,267    |                       |   | 3,919        |   |              |        
|Deferred revenue                                                                                |  |                | 6,303    |                       |   |              |   |              |        
|Current portion of long-term debt                                                               |  |                | 1,775    |                       |   |              |   |              |        
|Due to guarantor subsidiaries                                                                   |  |                | 4,222    |                       |   |              |   |              | (4,222 
|                                                                                                |  |                |          |                       |   |              |   |              |        
|Total current liabilities                                                                       |  |                | 40,241   |                       |   | 8,585        |   |              | (4,222 
|Long-term debt, net of current portion                                                          |  |                | 65,933   |                       |   |              |   |              |        
|Other long-term liabilities                                                                     |  |                | 1,132    |                       |   |              |   |              |        
|Stockholders' equity (deficit):                                                                 |  |                |          |                       |   |              |   |              |        
|Common stock, $0.001 par value, authorized 170,000 shares; issued and outstanding 64,778 shares |  |                | 65       |                       |   |              |   |              |        
|Treasury stock; 1,135 shares at cost                                                            |  |                | (341     | )                     |   |              |   |              |        
|Additional paid-in capital                                                                      |  |                | 406,137  |                       |   | 10,130       |   |              | (10,130
|Capital stock of Guarantor subsidiaries                                                         |  |                |          |                       |   | 100          |   |              | (100   
|Accumulated other comprehensive loss                                                            |  |                | (12      | )                     |   |              |   |              |        
|Accumulated deficit                                                                             |  |                | (429,361 | )                     |   | (430         | ) |              | 49     
|                                                                                                |  |                |          |                       |   |              |   |              |        
|Total stockholders' equity (deficit)                                                            |  |                | (23,512  | )                     |   | 9,800        |   |              | (10,181
|                                                                                                |  |                |          |                       |   |              |   |              |        
|Total liabilities and stockholders' equity (deficit)                                            |  | $              | 83,794   |                       | $ | 18,385       |   | $            | (14,403
|                                                                                                |  |                |          |                       |   |              |   |              |        

78

---



Condensed Consolidating Balance Sheet  As of December 31, 2003

|                                                                                               |  | Parent
Company |          | Subsidiary
Guarantors |   | Eliminations |   | Consolidated |        
|---------------------------------------------------------------------------------------------- |  | -------------- | -------- | --------------------- | - | ------------ | - | ------------ | -------
|
|Assets                                                                                         |  |                |          |                       |   |              |   |              |        
|Cash and cash equivalents                                                                      |  | $              | 15,520   |                       | $ | 1,750        |   | $            |       
|Accounts receivable, net                                                                       |  |                | 21,247   |                       |   | 520          |   |              |        
|Prepaid expenses and other current assets                                                      |  |                | 4,568    |                       |   | 727          |   |              |        
|Due from parent                                                                                |  |                |          |                       |   | 13,121       |   |              | (13,121
|                                                                                               |  |                |          |                       |   |              |   |              |        
|Total current assets                                                                           |  |                | 41,335   |                       |   | 16,118       |   |              | (13,121
|Property and equipment, net                                                                    |  |                | 16,931   |                       |   | 244          |   |              |        
|Deferred debt financing costs, net                                                             |  |                | 326      |                       |   |              |   |              |        
|Long-term investment in non- marketable security                                               |  |                | 5,000    |                       |   |              |   |              |        
|Other assets                                                                                   |  |                | 620      |                       |   | 85           |   |              |        
|Investment in guarantor subsidiaries                                                           |  |                | 51       |                       |   |              |   |              | (51    
|                                                                                               |  |                |          |                       |   |              |   |              |        
|Total assets                                                                                   |  | $              | 64,263   |                       | $ | 16,447       |   | $            | (13,172
|                                                                                               |  |                |          |                       |   |              |   |              |        
|Liabilities and stockholders' equity (deficit)                                                 |  |                |          |                       |   |              |   |              |        
|Accounts payable                                                                               |  | $              | 17,678   |                       | $ | 2,224        |   | $            |       
|Accrued expenses                                                                               |  |                | 14,399   |                       |   | 4,253        |   |              |        
|Deferred revenue                                                                               |  |                | 417      |                       |   |              |   |              |        
|Current portion of long-term debt                                                              |  |                | 2,097    |                       |   |              |   |              |        
|Due to guarantor subsidiaries                                                                  |  |                | 2,991    |                       |   |              |   |              | (2,991 
|                                                                                               |  |                |          |                       |   |              |   |              |        
|Total current liabilities                                                                      |  |                | 37,582   |                       |   | 6,477        |   |              | (2,991 
|Long-term debt, net of current portion                                                         |  |                | 65,829   |                       |   |              |   |              |        
|Other long-term liabilities                                                                    |  |                | 2,749    |                       |   |              |   |              |        
|Stockholders' equity (deficit):                                                                |  |                |          |                       |   |              |   |              |        
|Common stock, $0.001 par value, authorized 85,000 shares; issued and outstanding 45,913 shares |  |                | 46       |                       |   |              |   |              |        
|Treasury stock; 1,135 shares at cost                                                           |  |                | (341     | )                     |   |              |   |              |        
|Additional paid-in capital                                                                     |  |                | 370,393  |                       |   | 10,130       |   |              | (10,130
|Capital stock of Guarantor subsidiaries                                                        |  |                |          |                       |   | 100          |   |              | (100   
|Accumulated deficit                                                                            |  |                | (411,995 | )                     |   | (260         | ) |              | 49     
|                                                                                               |  |                |          |                       |   |              |   |              |        
|Total stockholders' equity (deficit)                                                           |  |                | (41,897  | )                     |   | 9,970        |   |              | (10,181
|                                                                                               |  |                |          |                       |   |              |   |              |        
|Total liabilities and stockholders' equity (deficit)                                           |  | $              | 64,263   |                       | $ | 16,447       |   | $            | (13,172
|                                                                                               |  |                |          |                       |   |              |   |              |        

79

---





(13) Subsidiary Guarantors (Continued)

Condensed Consolidating Statement of Operations  Year Ended December 31, 2004

|                                           |                                  | Parent
Company |         | Subsidiary
Guarantors |   | Eliminations |   | Consolidated
Total |        
|------------------------------------------ | -------------------------------- | -------------- | ------- | --------------------- | - | ------------ | - | ------------------ | -------
|
|Net revenue                                |                                  | $              | 263,040 |                       | $ | 12,809       |   | $                  | (12,171
|Costs and expenses:                        |                                  |                |         |                       |   |              |   |                    |        
|Data communications and telecommunications |                                  |                | 225,498 |                       |   | 7,254        |   |                    | (7,583 
|Research and development                   |                                  |                | 12,074  |                       |   | 1,729        |   |                    |        
|Selling and marketing                      |                                  |                | 7,091   |                       |   | 2,114        |   |                    |        
|General and administrative                 |                                  |                | 15,428  |                       |   | 1,643        |   |                    | (4,588 
|Restructuring costs                        |                                  |                | 165     |                       |   |              |   |                    |        
|Depreciation and amortization              |                                  |                | 10,200  |                       |   | 145          |   |                    |        
|                                           |                                  |                |         |                       |   |              |   |                    |        
|Total costs and expenses                   |                                  |                | 270,456 |                       |   | 12,885       |   |                    | (12,171
|(Loss) income from operations              |                                  |                | (7,416  | )                     |   | (76          | ) |                    |       
|Interest income                            |                                  |                | 215     |                       |   | 3            |   |                    |        
|Interest expense                           |                                  |                | (4,201  | )                     |   | (48          | ) |                    |        
|Other expenses, net                        |                                  |                | (185    | )                     |   | (49          | ) |                    |        
|Loss on long-term non-marketable security  |                                  |                | (5,000  | )                     |   |              |   |                    |        
|Debt refinancing charges:                  |                                  |                |         |                       |   |              |   |                    |        
|                                           | Transaction costs                |                |         | (2,159                | ) |              |   |                    |        
|                                           | Additional interest expense, net |                |         | (481                  | ) |              |   |                    |        
|                                           |                                  |                |         |                       |   |              |   |                    |        
|(Loss) income from continuing operations   |                                  |                | (19,227 | )                     |   | (170         | ) |                    |       
|Income from discontinued operations        |                                  |                | 1,861   |                       |   |              |   |                    |        
|                                           |                                  |                |         |                       |   |              |   |                    |        
|Net (loss) income                          |                                  | $              | (17,366 | )                     | $ | (170         | ) | $                  |       
|                                           |                                  |                |         |                       |   |              |   |                    |        

80

---



Condensed Consolidating Statement of Operations  Year Ended December 31, 2003

|                                           |  | Parent
Company |         | Subsidiary
Guarantors |   | Eliminations |   | Consolidated
Total |        
|------------------------------------------ |  | -------------- | ------- | --------------------- | - | ------------ | - | ------------------ | -------
|
|Net revenue                                |  | $              | 177,810 |                       | $ | 28,645       |   | $                  | (28,296
|Costs and expenses:                        |  |                |         |                       |   |              |   |                    |        
|Data communications and telecommunications |  |                | 139,046 |                       |   | 22,380       |   |                    | (8,573 
|Research and development                   |  |                | 11,654  |                       |   | 1,733        |   |                    |        
|Selling and marketing                      |  |                | 5,248   |                       |   | 2,265        |   |                    |        
|General and administrative                 |  |                | 26,107  |                       |   | 1,281        |   |                    | (19,723
|Depreciation and amortization              |  |                | 19,701  |                       |   | 364          |   |                    |        
|Non-cash stock-based compensation          |  |                | 86      |                       |   |              |   |                    |        
|                                           |  |                |         |                       |   |              |   |                    |        
|Total costs and expenses                   |  |                | 201,842 |                       |   | 28,023       |   |                    | (28,296
|(Loss) income from operations              |  |                | (24,032 | )                     |   | 622          |   |                    |       
|Interest income                            |  |                | 159     |                       |   | 2            |   |                    |        
|Interest expense                           |  |                | (3,965  | )                     |   | (2           | ) |                    |        
|Gain on bond exchanges                     |  |                | 16,615  |                       |   |              |   |                    |        
|Other expenses, net                        |  |                | (181    | )                     |   | (156         | ) |                    |        
|(Loss) income from continuing operations   |  |                | (11,404 | )                     |   | 466          |   |                    |       
|Income from discontinued operations        |  |                | 1,251   |                       |   |              |   |                    |        
|                                           |  |                |         |                       |   |              |   |                    |        
|Net (loss) income                          |  | $              | (10,153 | )                     | $ | 466          |   | $                  |       
|                                           |  |                |         |                       |   |              |   |                    |        

81

---



Condensed Consolidating Statement of Operations  Year Ended December 31, 2002

|                                           |  | Parent
Company |          | Subsidiary
Guarantors |   | Eliminations |   | Consolidated
Total |        
|------------------------------------------ |  | -------------- | -------- | --------------------- | - | ------------ | - | ------------------ | -------
|
|Net revenue                                |  | $              | 164,231  |                       | $ | 17,453       |   | $                  | (16,742
|Costs and expenses:                        |  |                |          |                       |   |              |   |                    |        
|Data communications and telecommunications |  |                | 137,470  |                       |   | 11,289       |   |                    | (5,912 
|Research and development                   |  |                | 16,376   |                       |   | 1,405        |   |                    |        
|Selling and marketing                      |  |                | 9,404    |                       |   | 1,875        |   |                    |        
|General and administrative                 |  |                | 33,338   |                       |   | 1,678        |   |                    | (10,830
|Depreciation and amortization              |  |                | 31,036   |                       |   | 835          |   |                    |        
|Non-cash stock-based compensation          |  |                | 967      |                       |   |              |   |                    |        
|Loss on sale of messaging business         |  |                | 2,066    |                       |   |              |   |                    |        
|Restructuring costs                        |  |                | 5,536    |                       |   |              |   |                    |        
|                                           |  |                |          |                       |   |              |   |                    |        
|Total costs and expenses                   |  |                | 236,193  |                       |   | 17,082       |   |                    | (16,742
|(Loss) income from operations              |  |                | (71,962  | )                     |   | 371          |   |                    |       
|Interest income                            |  |                | 1,405    |                       |   | 562          |   |                    | (677   
|Interest expense                           |  |                | (11,708  | )                     |   | (577         | ) |                    | 677    
|Gain on bond repurchases                   |  |                | 25,790   |                       |   |              |   |                    |        
|Other expenses, net                        |  |                | (330     | )                     |   | (52          | ) |                    |        
|                                           |  |                |          |                       |   |              |   |                    |        
|(Loss) income from continuing operations   |  |                | (56,805  | )                     |   | 304          |   |                    |       
|Loss from discontinued operations          |  |                | (65,222  | )                     |   |              |   |                    |        
|                                           |  |                |          |                       |   |              |   |                    |        
|Net (loss) income                          |  | $              | (122,027 | )                     | $ | 304          |   | $                  |       
|                                           |  |                |          |                       |   |              |   |                    |        

82

---





(13) Subsidiary Guarantors (Continued)

Condensed Consolidating Statement of Cash Flows  Year Ended December 31, 2004

|                                               |                                                                            | Parent
Company                                    |                                           | Subsidiary
Guarantors                                          |        | Eliminations |         | Consolidated
Total |       
|---------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | -------------------------------------------------------------- | ------ | ------------ | ------- | ------------------ | ------
|
|Cash flows from operating activities:          |                                                                            |                                                   |                                           |                                                                |        |              |         |                    |       
|                                               | Loss from continuing operations                                            |                                                   | $                                         | (19,227                                                        | )      | $            | (170    | )                  | $     
|                                               | Adjustments to reconcile net loss to net cash used in operating activities |                                                   |                                           |                                                                |        |              |         |                    |       
|                                               |                                                                            | Restructuring costs                               |                                           |                                                                | 165    |              |         |                    |       
|                                               |                                                                            | Depreciation and amortization                     |                                           |                                                                | 10,200 |              |         | 145                |       
|                                               |                                                                            | Amortization of deferred debt financing costs     |                                           |                                                                | 149    |              |         |                    |       
|                                               |                                                                            | Loss on sale of long-term non-marketable security |                                           |                                                                | 5,000  |              |         |                    |       
|                                               |                                                                            | Fair value of warrant issued                      |                                           |                                                                | 2,140  |              |         |                    |       
|                                               |                                                                            | Bad debt expense                                  |                                           |                                                                | 250    |              |         |                    |       
|                                               |                                                                            | Change in assets and liabilities                  |                                           |                                                                |        |              |         |                    |       
|                                               |                                                                            |                                                   | Accounts receivable                       |                                                                |        | (11,856      | )       |                    | (760  
|                                               |                                                                            |                                                   | Prepaid expenses and other current assets |                                                                |        | 175          |         |                    | (51   
|                                               |                                                                            |                                                   | Other assets                              |                                                                |        | 320          |         |                    | 25    
|                                               |                                                                            |                                                   | Accounts payable                          |                                                                |        | 1,996        |         |                    | 2,442 
|                                               |                                                                            |                                                   | Accrued expenses                          |                                                                |        | (2,035       | )       |                    | (334  
|                                               |                                                                            |                                                   | Deferred revenue                          |                                                                |        | 5,886        |         |                    |       
|                                               |                                                                            |                                                   | Other long-term liabilities               |                                                                |        | (1,617       | )       |                    |       
|                                               |                                                                            |                                                   | Due from parent                           |                                                                |        |              |         |                    | (1,231
|                                               |                                                                            |                                                   | Due to guarantor subsidiaries             |                                                                |        | 1,231        |         |                    |       
|                                               |                                                                            |                                                   |                                           |                                                                |        |              |         |                    |       
|                                               |                                                                            |                                                   |                                           | Net cash provided by (used in) continuing operating activities |        |              | (7,223  | )                  |       
|                                               |                                                                            |                                                   |                                           |                                                                |        |              |         |                    |       
|Cash flows from investing activities:          |                                                                            |                                                   |                                           |                                                                |        |              |         |                    |       
|                                               | Purchases of property and equipment                                        |                                                   |                                           | (3,257                                                         | )      |              | (9      | )                  |       
|                                               | Purchases of available-for-sale short-term marketable investments          |                                                   |                                           | (18,534                                                        | )      |              |         |                    |       
|                                               | Maturities of available-for-sale short-term marketable investments         |                                                   |                                           | 625                                                            |        |              |         |                    |       
|                                               | Proceeds from sale of Speech Solutions Business                            |                                                   |                                           | 1,500                                                          |        |              |         |                    |       
|                                               | Proceeds from earn-out relating to the sale of Speech Solutions Business   |                                                   |                                           | 1,009                                                          |        |              |         |                    |       
|                                               |                                                                            |                                                   |                                           | Net cash used in investing activities                          |        |              | (18,657 | )                  |       
|Cash flows from financing activities:          |                                                                            |                                                   |                                           |                                                                |        |              |         |                    |       
|                                               | Proceeds from sale of common stock in private placement                    |                                                   |                                           | 31,500                                                         |        |              |         |                    |       
|                                               | Transaction costs of private placement                                     |                                                   |                                           | (1,310                                                         | )      |              |         |                    |       
|                                               | Proceeds from issuance of 8% Secured Convertible Notes due June 2007       |                                                   |                                           | 29,000                                                         |        |              |         |                    |       
|                                               | Prepayment of 111/2% Senior Secured Notes due January 2005                 |                                                   |                                           | (25,175                                                        | )      |              |         |                    |       
|                                               | Bank borrowings                                                            |                                                   |                                           | 4,600                                                          |        |              |         |                    |       
|                                               | Payments of bank borrowings                                                |                                                   |                                           | (6,900                                                         | )      |              |         |                    |       
|                                               | Payments of principal on capital lease obligations                         |                                                   |                                           | (2,167                                                         | )      |              |         |                    |       
|                                               | Transaction costs of debt refinancing                                      |                                                   |                                           | (1,984                                                         | )      |              |         |                    |       
|                                               | Proceeds from exercise of warrants                                         |                                                   |                                           | 1,462                                                          |        |              |         |                    |       
|                                               | Proceeds from exercises of common stock options                            |                                                   |                                           | 455                                                            |        |              |         |                    |       
|                                               |                                                                            |                                                   |                                           |                                                                |        |              |         |                    |       
|                                               |                                                                            |                                                   |                                           | Net cash provided by financing activities                      |        |              | 29,481  |                    |       
|                                               |                                                                            |                                                   |                                           |                                                                |        |              |         |                    |       
|                                               |                                                                            |                                                   |                                           | Net increase in cash and cash equivalents                      |        |              | 3,601   |                    |       
|                                               |                                                                            |                                                   |                                           |                                                                |        |              |         |                    |       
|Cash and cash equivalents, beginning of period |                                                                            |                                                   | 15,520                                    |                                                                |        | 1,750        |         |                    |      
|                                               |                                                                            |                                                   |                                           |                                                                |        |              |         |                    |       
|Cash and cash equivalents, end of period       |                                                                            | $                                                 | 19,121                                    |                                                                | $      | 1,807        |         | $                  |      
|                                               |                                                                            |                                                   |                                           |                                                                |        |              |         |                    |       

83

---



Condensed Consolidating Statement of Cash Flows  Year Ended December 31, 2003

|                                               |                                                                            | Parent
Company                                     |                                           | Subsidiary
Guarantors                                          |         | Eliminations |        | Consolidated
Total |        
|---------------------------------------------- | -------------------------------------------------------------------------- | -------------------------------------------------- | ----------------------------------------- | -------------------------------------------------------------- | ------- | ------------ | ------ | ------------------ | -------
|
|Cash flows from operating activities:          |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        
|                                               | (Loss) income from continuing operations                                   |                                                    | $                                         | (11,404                                                        | )       | $            | 466    |                    | $      
|                                               | Adjustments to reconcile net loss to net cash used in operating activities |                                                    |                                           |                                                                |         |              |        |                    |        
|                                               |                                                                            | Gain on bond exchanges                             |                                           |                                                                | (16,615 | )            |        |                    |        
|                                               |                                                                            | Depreciation and amortization                      |                                           |                                                                | 19,701  |              |        | 364                |        
|                                               |                                                                            | Amortization of deferred debt financing costs      |                                           |                                                                | 333     |              |        |                    |        
|                                               |                                                                            | Amortization of deferred compensation              |                                           |                                                                | 86      |              |        |                    |        
|                                               |                                                                            | Bad debt expense                                   |                                           |                                                                | 800     |              |        |                    |        
|                                               |                                                                            | Recovery of previously reserved receivable balance |                                           |                                                                | (4,269  | )            |        |                    |        
|                                               |                                                                            | Change in assets and liabilities                   |                                           |                                                                |         |              |        |                    |        
|                                               |                                                                            |                                                    | Accounts receivable                       |                                                                |         | 2,199        |        |                    | 357    
|                                               |                                                                            |                                                    | Prepaid expenses and other current assets |                                                                |         | 895          |        |                    | 435    
|                                               |                                                                            |                                                    | Other assets                              |                                                                |         | 504          |        |                    | 31     
|                                               |                                                                            |                                                    | Accounts payable                          |                                                                |         | 5,655        |        |                    | 1,105  
|                                               |                                                                            |                                                    | Accrued expenses                          |                                                                |         | (6,650       | )      |                    | 1,932  
|                                               |                                                                            |                                                    | Deferred revenue                          |                                                                |         | 417          |        |                    |        
|                                               |                                                                            |                                                    | Other long-term liabilities               |                                                                |         | 481          |        |                    |        
|                                               |                                                                            |                                                    | Due from parent                           |                                                                |         |              |        |                    | (14,792
|                                               |                                                                            |                                                    | Due to guarantor subsidiaries             |                                                                |         | 14,792       |        |                    |        
|                                               |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        
|                                               |                                                                            |                                                    |                                           | Net cash provided by (used in) continuing operating activities |         |              | 6,925  |                    |        
|                                               |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        
|Cash flows from investing activities:          |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        
|                                               | Purchases of property and equipment                                        |                                                    |                                           | (4,346                                                         | )       |              | (106   | )                  |        
|                                               | Payment associated with the sale of Speech Solutions Business              |                                                    |                                           | (736                                                           | )       |              |        |                    |        
|                                               |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        
|                                               |                                                                            |                                                    |                                           | Net cash used in investing activities                          |         |              | (5,082 | )                  |        
|                                               |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        
|Cash flows from financing activities:          |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        
|                                               | Bank borrowings                                                            |                                                    |                                           | 9,200                                                          |         |              |        |                    |        
|                                               | Payments of bank borrowings                                                |                                                    |                                           | (9,200                                                         | )       |              |        |                    |        
|                                               | Payments of principal on capital lease obligations                         |                                                    |                                           | (5,838                                                         | )       |              |        |                    |        
|                                               | Professional fees paid for exchange of bonds                               |                                                    |                                           | (935                                                           | )       |              |        |                    |        
|                                               | Proceeds from exercises of common stock options                            |                                                    |                                           | 91                                                             |         |              |        |                    |        
|                                               |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        
|                                               |                                                                            |                                                    |                                           | Net cash provided by financing activities                      |         |              | (6,682 | )                  |        
|                                               |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        
|                                               |                                                                            |                                                    |                                           | Net increase (decrease) in cash and cash equivalents           |         |              | (4,839 | )                  |        
|                                               |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        
|Cash and cash equivalents, beginning of period |                                                                            |                                                    | 20,359                                    |                                                                |         | 11,958       |        |                    |       
|                                               |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        
|Cash and cash equivalents, end of period       |                                                                            | $                                                  | 15,520                                    |                                                                | $       | 1,750        |        | $                  |       
|                                               |                                                                            |                                                    |                                           |                                                                |         |              |        |                    |        

84

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Condensed Consolidating Statement of Cash Flows  Year Ended December 31, 2002

|                                               |                                                                            | Parent
Company                                |                                           | Subsidiary
Guarantors                                          |         | Eliminations |         | Consolidated
Total |        
|---------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------- | -------------------------------------------------------------- | ------- | ------------ | ------- | ------------------ | -------
|
|Cash flows from operating activities:          |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|                                               | (Loss) income from continuing operations                                   |                                               | $                                         | (56,805                                                        | )       | $            | 304     |                    | $      
|                                               | Adjustments to reconcile net loss to net cash used in operating activities |                                               |                                           |                                                                |         |              |         |                    |        
|                                               |                                                                            | Gain on bond repurchases                      |                                           |                                                                | (25,790 | )            |         |                    |        
|                                               |                                                                            | Restructuring costs                           |                                           |                                                                | 5,536   |              |         |                    |        
|                                               |                                                                            | Depreciation and amortization                 |                                           |                                                                | 31,036  |              |         | 835                |        
|                                               |                                                                            | Loss on sale of messaging business            |                                           |                                                                | 2,066   |              |         |                    |        
|                                               |                                                                            | Amortization of deferred debt Financing costs |                                           |                                                                | 672     |              |         |                    |        
|                                               |                                                                            | Amortization of deferred compensation         |                                           |                                                                | 967     |              |         |                    |        
|                                               |                                                                            | Bad debt expense                              |                                           |                                                                | 9,674   |              |         | 352                |        
|                                               |                                                                            | Change in assets and liabilities              |                                           |                                                                |         |              |         |                    |        
|                                               |                                                                            |                                               | Accounts receivable                       |                                                                |         | (6,175       | )       |                    | (255   
|                                               |                                                                            |                                               | Prepaid expenses and other current assets |                                                                |         | 4,070        |         |                    | (463   
|                                               |                                                                            |                                               | Other assets                              |                                                                |         | 670          |         |                    |        
|                                               |                                                                            |                                               | Accounts payable                          |                                                                |         | 2,006        |         |                    | 477    
|                                               |                                                                            |                                               | Accrued expenses                          |                                                                |         | (15,904      | )       |                    | 1,492  
|                                               |                                                                            |                                               | Other long-term liabilities               |                                                                |         | 2,268        |         |                    |        
|                                               |                                                                            |                                               | Due to parent                             |                                                                |         |              |         |                    | (78,735
|                                               |                                                                            |                                               | Due from guarantor subsidiaries           |                                                                |         | 78,735       |         |                    |        
|                                               |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|                                               |                                                                            |                                               |                                           | Net cash provided by (used in) continuing operating activities |         |              | 33,026  |                    |        
|                                               |                                                                            |                                               |                                           | Net cash used in discontinued operations                       |         |              | (1,874  | )                  |        
|                                               |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|                                               |                                                                            |                                               |                                           | Net cash provided by (used in) operating activities            |         |              | 31,152  |                    |        
|                                               |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|Cash flows from investing activities:          |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|                                               | Purchases of property and equipment                                        |                                               |                                           | (3,692                                                         | )       |              | (940    | )                  |        
|                                               | Decrease in marketable securities                                          |                                               |                                           |                                                                |         |              | 25,614  |                    |        
|                                               | Decrease in long-term marketable securities                                |                                               |                                           |                                                                |         |              | 8,411   |                    |        
|                                               | Proceeds from sale of messaging business                                   |                                               |                                           | 168                                                            |         |              |         |                    |        
|                                               | Proceeds from sale of Speech Solutions Business                            |                                               |                                           | 17,000                                                         |         |              |         |                    |        
|                                               |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|                                               |                                                                            |                                               |                                           | Net cash provided by investing activities                      |         |              | 13,476  |                    |        
|                                               |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|Cash flows from financing activities:          |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|                                               | Decrease in restricted cash                                                |                                               |                                           | 8,867                                                          |         |              |         |                    |        
|                                               | Bank borrowings                                                            |                                               |                                           | 2,300                                                          |         |              |         |                    |        
|                                               | Payments of principal on long-term debt                                    |                                               |                                           | (3,866                                                         | )       |              |         |                    |        
|                                               | Payments of principal on capital lease obligations                         |                                               |                                           | (38,918                                                        | )       |              |         |                    |        
|                                               | Repurchase of bonds                                                        |                                               |                                           | (13,992                                                        | )       |              |         |                    |        
|                                               | Proceeds from exercises of warrants and common stock options               |                                               |                                           | 122                                                            |         |              |         |                    |        
|                                               | Proceeds from employee stock purchase plan                                 |                                               |                                           | 285                                                            |         |              |         |                    |        
|                                               |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|                                               |                                                                            |                                               |                                           | Net cash used in financing activities                          |         |              | (45,202 | )                  |        
|                                               |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|                                               |                                                                            |                                               |                                           | Net decrease in cash and cash equivalents                      |         |              | (574    | )                  |        
|                                               |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|Cash and cash equivalents, beginning of period |                                                                            |                                               | 20,933                                    |                                                                |         | 54,866       |         |                    |       
|                                               |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        
|Cash and cash equivalents, end of period       |                                                                            | $                                             | 20,359                                    |                                                                | $       | 11,958       |         | $                  |       
|                                               |                                                                            |                                               |                                           |                                                                |         |              |         |                    |        

85

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(14) Summary of Quarterly Information (Unaudited)

Quarterly financial information for 2004 and 2003 is as follows:

|2004                                  |                                     | First
Quarter(1) |        | Second
Quarter(2) |   | Third
Quarter(3) |       | Fourth
Quarter |        | Total
Year |  
|------------------------------------- | ----------------------------------- | ---------------- | ------ | ----------------- | - | ---------------- | ----- | -------------- | ------ | ---------- | -
|
|Net revenue                           |                                     | $                | 57,008 |                   | $ | 61,175           |       | $              | 70,359 |            | $
|Total cost and operating expenses     |                                     |                  | 66,350 |                   |   | 67,088           |       |                | 73,255 |            |  
|Loss from continuing operations       |                                     |                  | (9,342 | )                 |   | (5,913           | )     |                | (2,896 | )          |  
|Income from discontinued operations   |                                     |                  |       |                   |   |                 |       |                | 1,861  |            |  
|                                      |                                     |                  |        |                   |   |                  |       |                |        |            |  
|Net loss                              |                                     | $                | (9,342 | )                 | $ | (5,913           | )     | $              | (1,035 | )          | $
|                                      |                                     |                  |        |                   |   |                  |       |                |        |            |  
|Basic and diluted net loss per share: |                                     |                  |        |                   |   |                  |       |                |        |            |  
|                                      | Loss from continuing operations     |                  | $      | (0.21             | ) | $                | (0.13 | )              | $      | (0.06      | )
|                                      | Income from discontinued operations |                  |        |                  |   |                  |      |                |        | 0.04       |  
|                                      |                                     |                  |        |                   |   |                  |       |                |        |            |  
|                                      | Net loss                            |                  | $      | (0.21             | ) | $                | (0.13 | )              | $      | (0.02      | )
|                                      |                                     |                  |        |                   |   |                  |       |                |        |            |  

|2003                                     |                                          | First
Quarter |        | Second
Quarter |   | Third
Quarter |       | Fourth
Quarter |        | Total
Year |  
|---------------------------------------- | ---------------------------------------- | ------------- | ------ | -------------- | - | ------------- | ----- | -------------- | ------ | ---------- | -
|
|Net revenue                              |                                          | $             | 41,841 |                | $ | 39,119        |       | $              | 44,032 |            | $
|Total cost and operating expenses        |                                          |               | 49,254 |                |   | 47,312        |       |                | 48,796 |            |  
|Income (loss) from continuing operations |                                          |               | 4,032  |                |   | (5,505        | )     |                | (5,633 | )          |  
|Income from discontinued operations      |                                          |               |       |                |   |              |       |                |       |            |  
|                                         |                                          |               |        |                |   |               |       |                |        |            |  
|Net loss                                 |                                          | $             | 4,032  |                | $ | (5,505        | )     | $              | (5,633 | )          | $
|                                         |                                          |               |        |                |   |               |       |                |        |            |  
|Basic and diluted net loss per share:    |                                          |               |        |                |   |               |       |                |        |            |  
|                                         | Income (loss) from continuing operations |               | $      | 0.09           |   | $             | (0.12 | )              | $      | (0.13      | )
|                                         | Income from discontinued operations      |               |        |               |   |               |      |                |        |           |  
|                                         |                                          |               |        |                |   |               |       |                |        |            |  
|                                         | Net loss                                 |               | $      | 0.09           |   | $             | (0.12 | )              | $      | (0.13      | )
|                                         |                                          |               |        |                |   |               |       |                |        |            |  

---

86

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Item 9A.Controls and Procedures



As
of December 31, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Company's management, including its Chief Executive
Officer and the Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective.



During
the quarter ended December 31, 2004, there have not been any significant changes in the Company's internal controls over financial reporting that have materially affected, or are likely
to materially affect, the Company's internal control over financial reporting.

Item 9B.Other Information

None

87

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PART III

Item 10.Directors and Executive Officers of the Registrant

Information
required by Part III, Item 10, regarding iBasis' directors may be found in iBasis' Proxy Statement relating to iBasis' annual meeting of stockholders to be held on May 26,
2005, and is incorporated herein by reference. Information relating to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, may be found in the Proxy Statement and
is incorporated herein by reference.

We
have adopted a code of ethics that applies to our chief executive officer, chief financial officer and other senior financial officials. This code of ethics is available on our website at www.ibasis.com.

Item 11.Executive Compensation

Information
required by Part III, Item 11, may be found in iBasis' Proxy Statement relating to iBasis' annual meeting of stockholders to be held on May 26, 2005, and is incorporated
herein by reference.

Item 12.Security Ownership of Certain Beneficial Owners and Management

Information
required by Part III, Item 12, may be found in iBasis' Proxy Statement relating to iBasis' annual meeting of stockholders to be held on May 26, 2005, and is incorporated
herein by reference.

Item 13.Certain Relationships and Related Transactions

Information
required by Part III, Item 13, may be found in iBasis' Proxy Statement relating to iBasis' annual meeting of stockholders to be held on May 26, 2005, and is incorporated
herein by reference.

Item 14.Principal Accountant Fees and Services

Information
relating to fees paid to the Company's independent auditors and certain related matters is set forth under the caption "Deloitte & Touche LLP Fees and Services" in the Proxy
Statement and is incorporated by reference.

88

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PART IV

Item 15.Exhibit, Financial Statement Schedules, and Reports on Form 8-K

(A) List of Documents Filed as a Part of This Annual Report:



|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                          
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            |  | Asset Purchase Agreement, dated as of July 12, 2002, by and among iBasis, ISS and Purchaser (incorporated by reference from Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated July 15, 2002 (file no.
000-27127)).                                                    
|3.1            |  | Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference from Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (file no. 333-96535)).                                                                                        
|3.2            |  | Amended and Restated By-Laws of the Registrant (incorporated by reference from Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (file no. 333-96535)).                                                                                                             
|4.1            |  | Specimen Certificate for shares of the Registrant's common stock (incorporated by reference from Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (file no. 333-85545)).                                                                                           
|4.2            |  | Indenture for the 53/4% Convertible Subordinated Notes, dated as of March 15, 2000, between the Registrant and The Bank of New York, as Trustee (incorporated by reference from Exhibit 4.2 to
the Registrant's Registration Statement of Form S-1 (file no. 333-96533)).            
|4.3            |  | Form of Existing Note (incorporated by reference from Exhibit 4.3 to the Registrant's Registration Statement on Form S-1 (file no. 333-96533)).                                                                                                                                      
|4.4            |  | Indenture for the 63/4% Convertible Subordinated Notes, dated as of June 18, 2004, between the Registrant and The Bank of New York, as Trustee (incorporated by reference from Exhibit 99.1 to
the Registrant's Current Report on Form 8-K dated June 29, 2004 (file no. 000-27127)).
|4.5            |  | Global Note, issued June 18, 2004, representing $37,285,000 aggregate principal amount of New Notes (incorporated by reference from Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated June 29, 2004 (file no.
000-27127)).                                           
|4.6            |  | Indenture for the 8% Secured Convertible Notes, dated as of June 18, 2004, between the Registrant and the Bank of New York, as trustee (incorporated by reference from Exhibit 99.7 to the Registrant's Current Report on
Form 8-K dated June 29, 2004 (file no. 000-27127)).        
|4.7            |  | Global Note, issued June 18, 2004, representing $29,000,000 aggregate principal amount of New Secured Notes (incorporated by reference from Exhibit 99.8 to the Registrant's Current Report on Form 8-K dated June 29, 2004
(file no. 000-27127)).                                   
|               |  |                                                                                                                                                                                                                                                                                      

89

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|10.1  |  | Lease, dated January 8, 1999, as amended, between the Registrant and Rodger P. Nordblum and Peter C. Nordblum as Trustees of Northwest Associates under Declaration of Trust dated December 9, 1971 with respect to property
located at 20 Second Avenue, Burlington, Massachusetts (incorporated by reference from Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (file no. 333-85545)).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2  |  | Lease, dated as of August 7, 1998, between the Registrant and 111 Eighth Avenue LLC, relating to property located at 111 Eighth Avenue, New York, New York (incorporated by reference from Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 (file no. 333-85545)).                                                                                                                         
|10.3  |  | Lease, dated December 11, 1998 between the Registrant and Downtown Properties L.L.C., with respect to property located at 611 Wilshire Boulevard, Los Angeles, California (incorporated by reference from Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 (file no. 333-85545)).                                                                                                          
|10.4  |  | Warrant, dated as of September 10, 1997, for the purchase of shares of preferred stock of the Company issued to TLP Leasing Programs, Inc. (incorporated by reference from Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (file no. 333-85545)).                                                                                                                                         
|10.5  |  | Warrant, dated as of June 8, 1998, for the purchase of shares of preferred stock of the Company issued to TLP Leasing Programs, Inc. (incorporated by reference from Exhibit 10.6 to the Registrant's Registration Statement
on Form S-1 (file no. 333-85545)).                                                                                                                                               
|10.6  |  | Master Agreement of Terms and Conditions for Lease between the Registrant and Cisco Systems Capital Corporation, dated as of November 3, 1998, as amended (incorporated by reference from Exhibit 10.7 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001 file no. 000-27127).                                                                                               
|10.7  |  | 1997 Stock Incentive Plan of the Registrant (incorporated by reference from Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (file no. 333-85545).                                                                                                                                                                                                                                         
|10.8  |  | Employment Agreement between the Registrant and Ofer Gneezy, dated as of August 11, 1997 (incorporated by reference from Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (file no. 333-85545)
).                                                                                                                                                                                          
|10.9  |  | Employment Agreement between the Registrant and Gordon J. VanderBrug, dated as of August 11, 1997. (incorporated by reference from Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (file no.
333-85545)).                                                                                                                                                                                
|10.10 |  | Series B Convertible Preferred Stock Purchase Agreement, dated as of August 26, 1998, between the Registrant and the "Purchaser" parties thereto (incorporated by reference from Exhibit 10.14 to the Registrant's
Registration Statement on Form S-1 (file no. 333-85545)).                                                                                                                                  
|10.11 |  | Series C Convertible Purchase Agreement, dated as of July 12, 1999, between the Registrant and the "Purchaser" parties thereto (incorporated by reference from Exhibit 10.15 to the Registrant's Registration Statement on
Form S-1 (file no. 333-85545)).                                                                                                                                                    
|10.12 |  | Second Amended and Restated Shareholders' Agreement, dated as of July 12, 1999, among the Registrant and the holders of the capital stock of the Registrant who become parties thereto (incorporated by reference from
Exhibit 10.16 to the Registrant's Registration Statement on Form S-1 (file no. 333-85545).                                                                                             
|10.13 |  | First Amended and Restated Registration Rights Agreement, dated as of July 12, 1999, among the Registrant and the holders of the capital stock of the Registrant who become parties thereto (incorporated by reference from
Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (file no. 333-85545)).                                                                                       
|10.14 |  | Shareholders Agreement, dated as of March 28, 1998, relating to VIP Calling (Hong Kong) Limited (incorporated by reference from Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 (file no.
333-85545)).                                                                                                                                                                                   
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                               

90

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|10.15 |  | Amendment No. 1 to the Shareholders Agreement, dated as of March 28, 1998, relating to VIP Calling (Hong Kong) Limited (incorporated by reference from Exhibit 10.19 to the Registrant's Registration Statement on Form S-1
(file no. 333-85545)).                                                                                                                                                                                                                                                          
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.16 |  | Amendment No. 2 to the Shareholders Agreement, dated as of March 28, 1998, relating to VIP Calling (Hong Kong) Limited (incorporated by reference from Exhibit 10.20 to the Registrant's Registration Statement on Form S-1
(file no. 333-85545)).                                                                                                                                                                                                                                                          
|10.17 |  | Stock Restriction Agreement, dated as of August 26, 1998, between the Registrant and Ofer Gneezy and Gordon VanderBrug (incorporated by reference from Exhibit 10.22 to the Registrant's Registration Statement on Form
S-1 (file no. 333-85545)).                                                                                                                                                                                                                                                          
|10.18 |  | Alliance Agreement, dated January 4, 1999, between the Registrant and Cisco Systems, Inc. (incorporated by reference from Exhibit 10.23 to the Registrant's Registration Statement on Form S-1 (file no. 33-85545)
).                                                                                                                                                                                                                                                                                       
|10.19 |  | 1999 Employee Stock Purchase Plan of the Registrant, as amended (incorporated by reference from Exhibit 10.26 to the Registrant's Registration Statement on Form S-1 (file no. 333-96535)).                                                                                                                                                                                                                                                                                                                 
|10.20 |  | Lease, dated October 22, 1999, between the Registrant and Roger P. Nordblom and Peter C. Nordblom, as Trustees of N.W. Building 1 Associates under Declaration of Trust dated November 11, 1984 and filed with the Middlesex
South Registry District of the Land Court as Document Number 674807 with respect to property located at 10 Second Avenue, Burlington, Massachusetts (incorporated by reference from Exhibit 10.28 to the Registrant's Registration Statement on Form S-1
(file no. 333-96535)).
|10.21 |  | Supply Contract, dated as of December 30, 1999, between the Registrant and Belle Systems A/S (incorporated by reference from Exhibit 10.30 to the Registrant's Registration Statement on Form S-1 (file no.
333-96535)).                                                                                                                                                                                                                                                                                    
|10.22 |  | Offer Letter between the Registrant and Richard Tennant, dated as of September 17, 2001 and Employment Agreement, dated as of September 20, 2001 (incorporated by reference from Exhibit 10.30 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001 (file no. 000-27127)).                                                                                                                                                                                                   
|10.23 |  | Offer Letter between the Registrant and Paul Floyd, dated as of April 2, 2001 and Proprietary Information and Inventions Agreement dated April 12, 2001 (incorporated by reference from Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 (file no. 000-27127)).                                                                                                                                                                                            
|10.24 |  | Loan and Security Agreement between the Registrant and Silicon Valley Bank, dated as of October 9, 2001 (incorporated by reference from Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001 (file no. 000-27127)).                                                                                                                                                                                                                                            
|10.25 |  | Securities Exchange Agreement, dated January 30, 2003, by and among iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, the Symphony Funds signatories thereto and U.S. Bank National Association, as
Collateral Agent (incorporated by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 30, 2003 (file no. 000-27127)).                                                                                                                               
|10.26 |  | Global Note dated January 30, 2003 (incorporated by reference from Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated January 30, 2003 (file no. 000-27127)).                                                                                                                                                                                                                                                                                                                                 
|10.27 |  | Warrant and Registration Rights Agreement, dated January 29, 2003, by and among iBasis, Inc. and U.S. Bank National Association, as Collateral Agent (incorporated by reference from Exhibit 4.3 to the Registrant's Current
Report on Form 8-K dated January 30, 2003 (file no. 000-27127)).                                                                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

91

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|10.29 |  | Security Exchange Agreement, dated January 30, 2003, by and among iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, and U.S. Bank National Association, as Collateral Agent (incorporated by reference from
Exhibit 4.5 to the Registrant's Current Report on Form 8-K dated January 30, 2003 (file no. 000-27127)).                                                                                             
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.30 |  | Subordination Agreement, dated January 30, 2003, by and among iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, Silicon Valley Bank, the Creditors party thereto, U.S. Bank National Association, as
Collateral Agent and Fiscal Agent (incorporated by reference from Exhibit 4.6 to the Registrant's Current Report on Form 8-K dated January 30, 2003 (file no. 000-27127)).                                  
|10.31 |  | Fiscal Agency Agreement, dated January 30, 2003, by and among iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, and U.S. Bank National Association, as Fiscal Agent (incorporated by reference from Exhibit
4.7 to the Registrant's Current Report on Form 8-K dated January 30, 2003 (file no. 000-27127)).                                                                                                     
|10.32 |  | Guarantee, dated January 30, 2003, by and between iBasis Securities Corporation and U.S. Bank National Association, as Collateral Agent (incorporated by reference from Exhibit 4.7 to the Registrant's Current
Report on Form 8-K dated January 30, 2003 (file no. 000-27127)).                                                                                                                                                 
|10.33 |  | Security Exchange Agreement, dated February 21, 2003, by and among iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, and U.S. Bank National Association, as Collateral Agent. (incorporated by reference from
Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (file no. 000-27127)).                                                                           
|10.34 |  | Global Note, dated February 21, 2003 (incorporated by reference from Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (file no. 000-27127)).                                                                                                                                                                                                                                    
|10.35 |  | Global Warrant Certificate, dated February 21, 2003 (incorporated by reference from Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002
(file no. 000-27127)).                                                                                                                                                                                                                     
|10.36 |  | Amendment 1 to Securities Exchange Agreement, dated February 21, 2003, by and among iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, JMG Triton Offshore Fund Limited CITCO signatories thereto and U.S.
Bank National Association, as Collateral Agent (incorporated by reference from Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (file no. 000-27127)).
|10.37 |  | Amendment No. 1 to Fiscal Agency Agreement, dated February 21, 2003, by and among iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, and U.S. Bank National Association, as Fiscal Agent (incorporated by
reference from Exhibit 10.43 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (file no.000-27127)).                                                                  
|10.38 |  | Amended and Restated Warrant and Registration Rights Agreement dated February 21, 2003, by and among iBasis, Inc. and U.S. Bank National Association, as Warrant Agent (incorporated by reference from Exhibit 10.44 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (file no. 000-27127)).                                                                                                  
|10.39 |  | Collateral Agency and Intercreditor Agreement as of February 21, 2003, by and among U.S. Bank National Association, as Collateral Agent, the Exchanging Holders (as defined therein), iBasis Inc., iBasis Global, Inc.
and iBasis Securities Corporation (incorporated by reference from Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (file no. 000-27127)).                
|10.40 |  | Guarantee, dated February 21, 2003, by and between iBasis Securities Corporation and U.S. Bank National Association, as Collateral Agent (incorporated by reference from Exhibit 10.46 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002 (file no. 000-27127)).                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  

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|10.41 |  | Security Agreement dated as of February 21, 2003, by and among iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation and U.S. Bank National Association, as Collateral Agent (incorporated by reference from
Exhibit 10.47 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (file no. 000-27127)).                                                                                                                                                                        
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.42 |  | Master Agreement to Lease Equipment (incorporated by reference from Exhibit 99.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (file no. 000-27127)).                                                                                                                                                                                                                                                                                                                      
|10.43 |  | Settlement Agreement made as of August 2, 2002 among Cisco Systems Capital Corporation, Cisco Systems, Inc and iBasis, Inc.(incorporated by reference from Exhibit 99.4 to the Registrant's Annual Report on Form 10-Q for
the quarter ended September 30, 2002 (file no. 000-27127)).                                                                                                                                                                                                                                  
|10.44 |  | Bill of Sale pursuant to the Settlement Agreement made as of August 2, 2002 among Cisco Systems Capital Corporation, Cisco Systems, Inc and iBasis, Inc. (incorporated by reference from Exhibit 99.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (file no. 000-27127)).                                                                                                                                                                                                 
|10.45 |  | Silicon Valley Bank Loan and Security Agreement, dated December 30, 2002, by and among Silicon Valley Bank, the Registrant and iBasis Global, Inc. (incorporated by reference from Exhibit 99.2 to the Registrant's Current
Report on Form 8-K dated December 31, 2002 (file no. 000-27127)).                                                                                                                                                                                                                           
|10.46 |  | Export-Import Bank Loan and Security Agreement, dated December 30, 2002, by and among Silicon Valley Bank, the Registrant and iBasis Global, Inc. (incorporated by reference from Exhibit 99.3 to the Registrant's Current
Report on Form 8-K dated December 31, 2002 (file no. 000-27127)).                                                                                                                                                                                                                            
|10.47 |  | Side Letter, dated February 5, 2003, by and among iBasis, Inc. and the Symphony Funds signatories thereto (incorporated by reference from Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated December 31, 2002
(file no. 000-27127)).                                                                                                                                                                                                                                                                    
|10.48 |  | Global Note of the Registrant dated May 29, 2003 (incorporated by reference from Exhibit 4.2 of the Registrant's Quarterly Report on Form 10-Q for period ended June 30, 2003 (file no. 000-27127)).                                                                                                                                                                                                                                                                                                                    
|10.49 |  | Global Warrant Certificate of the Registrant dated May 29, 2003 (incorporated by reference from Exhibit 4.2 of the Registrant's Quarterly Report on Form 10-Q for period ended June 30, 2003 (file no. 000-27127)
).                                                                                                                                                                                                                                                                                                    
|10.50 |  | Third modification to the loan agreement, dated December 30, 2002, evidenced by, among other documents, a certain Loan and Security Agreement dated as of December 30, 2002 between iBasis, iBasis Global, Inc. and Silicon
Valley Bank, as amended by a certain First Loan Modification Agreement dated as of January 30, 2003 (as amended, the "Loan Agreement." ((incorporated by reference from Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for period ended
June 30, 2003 (file no. 000-27127)).
|10.51 |  | Joinder Agreement, dated May 29, 2003, by and among iBasis, Inc., iBasis Global, Inc., U.S. Bank National Association, as Collateral Agent, and the Acceding Holders (incorporated by reference from Exhibit 10.57 of
the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003 (file no. 000-27127)).                                                                                                                                                                                           
|10.52 |  | Registration Rights Agreement, dated May 29, 2003, by and among iBasis, Inc. and the Holders (incorporated by reference from Exhibit 10.58 of the Registrant's Annual Report on Form 10-K for the year ended December 31,
2003 (file no. 000-27127)).                                                                                                                                                                                                                                                                   
|10.53 |  | Amendment No. 2 to Fiscal Agency Agreement, dated May 29, 2003, by and among iBasis, Inc., iBasis Global, Inc., and U.S. Bank National Association as fiscal agent (incorporated by reference from Exhibit 10.4 of the
Registrant's Quarterly Report on Form 10-Q for period ended June 30, 2003 (file no. 000-27127)).                                                                                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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|10.54 |  | Fourth modification to the loan agreement dated December 30, 2002, evidenced by, among other documents, a certain Loan and Security Agreement dated as of December 30, 2002 between iBasis, Inc., iBasis Global, Inc. and
Silicon Valley Bank (incorporated by reference from Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for period ended September 30, 2003 (file no. 000-27127)).      
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.55 |  | Amended and Restated Loan and Security Agreement dated December 29, 2003, evidenced by, among other documents, a certain Amended and Restated Loan and Security Agreement dated as of December 29, 2003 between iBasis, Inc.
and Silicon Valley Bank (incorporated by reference from Exhibit 10.61 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003 (file no. 000-27127)).
|10.56 |  | Note Repurchase, Exchange and Amendment Agreement, dated as of April 27, 2004, by and among the Registrant and the noteholder signatories thereto (incorporated by reference from Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 2004).                                                                                                                       
|10.57 |  | 2004 Warrant and Registration Rights Agreement, dated as of June 18, 2004, by and between the Registrant and U.S. Bank as Warrant Agent (incorporated by reference from Exhibit 99.4 to the Registrant's Current Report on
Form 8-K dated June 29, 2004 (file no. 000-27127)).                                                                                                                               
|10.58 |  | Global Warrant Certificate, issued June 18, 2004, representing 5,176,065 shares of common stock (incorporated by reference from Exhibit 99.5 to the Registrant's Current Report on Form 8-K dated June 29, 2004 (file no.
000-27127)).                                                                                                                                                                       
|10.59 |  | Note Purchase Agreement, dated as of June 18, 2004, by and among the Registrant and the Purchasers (as such term is defined therein) (incorporated by reference from Exhibit 99.6 to the Registrant's Current Report on Form
8-K dated June 29, 2004 (file no. 000-27127)).                                                                                                                                  
|10.60 |  | Registration Rights Agreement, dated as of June 18, 2004, by and among the Company and the Initial Holders (as such term is defined therein) (incorporated by reference from Exhibit 99.9 to the Registrant's Current
Report on Form 8-K dated June 29, 2004 (file no. 000-27127)).                                                                                                                          
|10.61 |  | Security Agreement, dated as of June 18, 2004, by and between the Registrant and The Bank of New York, as Collateral Agent for the holders of the New Secured Notes (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (file no. 333-117346), filed with the SEC on July 13, 2004).                                                                                           
|10.62 |  | Security Agreement, dated as of June 18, 2004, by and between iBasis Global, Inc. and The Bank of New York, as Collateral Agent for the holders of the New Secured Notes (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (file no. 333-117346), filed with the SEC on July 13, 2004).                                                                                      
|10.63 |  | Security Agreement, dated as of June 18, 2004, by and between iBasis Holdings, Inc. and The Bank of New York, as Collateral Agent for the holders of the New Secured Notes (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (file no. 333-117346), filed with the SEC on July 13, 2004).                                                                                    
|10.64 |  | Security Agreement, dated as of June 18, 2004, by and between iBasis Securities Corporation and The Bank of New York, as Collateral Agent for the holders of the New Secured Notes (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346), filed with the SEC on July 13, 2004).                                                                            
|10.65 |  | Intellectual Property Security Agreement, dated as of June 18, 2004, by and between the Registrant and The Bank of New York, as Collateral Agent for the holders of the New Secured Notes (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346), filed with the SEC on July 13, 2004).                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                              

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|10.66 |  | Intercreditor Agreement, dated as of June 18, 2004, by and among the Creditors (as such term is defined therein), Silicon Valley Bank, the Obligors (as such term is defined therein), and The Bank of New York as Collateral
Agent and Trustee (incorporated by reference to the Registrant's Registration Statement on Form S-1 (file no. 333-117346), filed with the SEC on July 13, 2004).      
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.67 |  | Collateral Agency Agreement, dated as of June 18, 2004, by and among The Bank of New York as Collateral Agent, the Noteholders (as such term is defined therein), the Registrant and the Subsidiary Guarantors (as such term
is defined therein) (incorporated by reference to the Registrant's Registration Statement on Form S-1 (file no. 333-117346), filed with the SEC on July 13, 2004).     
|10.68 |  | Securities Purchase Agreement, dated as of September 24, 2004, by and among the Registrant and each of the Purchasers (as defined therein) (incorporated by reference from Exhibit 10.1 to the Registrant's Current Report on
Form 8-K dated September 30, 2004 (file no. 000-27127)).                                                                                                              
|10.69 |  | Registration Rights Agreement, dated as of September 24, 2004, by and among the Company and each of the Purchasers (as defined therein) (incorporated by reference from Exhibit 10.2 to the Registrant's Current Report on
Form 8-K dated September 30, 2004 (file no. 000-27127)).                                                                                                                 
|10.70 |  | Form of Common Stock Purchase Warrant issued by the Registrant pursuant to the terms of the Securities Purchase Agreement, dated as of September 24, 2004, by and among the Registrant and the Purchasers (as defined
therein) to each of the Purchasers (incorporated by reference from Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated September 30, 2004 (file no. 000-27127)).
|10.71 |  | Common Stock Purchase Warrant issued by the Registrant to Tejas Securities Group, Inc. on September 24, 2004. (incorporated by reference from Exhibit 10.70 to the Registrant's Amendment No. 1 on Form S-1 (file no.
33-119796), filed November 22, 2004.                                                                                                                                          
|10.72 |  | Third Loan Modification Agreement, dated January 5, 2005, to the Amended and Restated Loan and Security Agreement dated December 29, 2003, evidenced by, among other documents, a certain Third Loan Modification Agreement,
dated January 5, 2005 between iBasis, Inc. and Silicon Valley Bank, filed herewith.                                                                                    
|14.1  |  | Code of Ethics for CEO, CFO and Other Senior Financial Officials, filed herewith.                                                                                                                                                                                                                                                                                                                   
|16.1  |  | Amended letter of Arthur Andersen LLP regarding change in certifying accountant (incorporated by reference from Exhibit 16.1 to the Registrant's Current Report on Form 8-K dated May 20, 2002 (file no .000-27127)
).                                                                                                                                                                              
|21.1  |  | Significant Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                         
|31.1  |  | Certificate of iBasis, Inc. Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                      
|31.2  |  | Certificate of iBasis, Inc. Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                      
|32.1  |  | Certificate of iBasis, Inc Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                       
|32.2  |  | Certificate of iBasis, Inc Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                       

(B) Reports on Form 8-K during the fourth quarter of fiscal 2004:

On
October 20, 2004, the Company filed a Form 8-K related to the press release regarding financial results for the three months ended September 30, 2004.

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SIGNATURES

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

|               |  | IBASIS, INC.
|-------------- |  | ------------
|               |  | By:         
|March 25, 2005 |  |             

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

|Name                                        |  | Title                                                                                            |  | Date          
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | --------------
|                                            |  |                                                                                                  |  |               
|/s/OFER GNEEZYOfer Gneezy                   |  | President and Chief Executive Officer and Director (Principal Executive Officer)                 |  | March 25, 2005
|/s/GORDON J. VANDERBRUGGordon J. VanderBrug |  | Executive Vice President and Director                                                            |  | March 25, 2005
|/s/RICHARD G. TENNANTRichard G. Tennant     |  | Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 25, 2005
|Peter D. Aquino                             |  | Director                                                                                         |  |               
|/s/CHARLES N. CORFIELDCharles N. Corfield   |  | Director                                                                                         |  | March 25, 2005
|/s/W. FRANK KINGW. Frank King               |  | Director                                                                                         |  | March 25, 2005
|/s/DAVID LEEDavid Lee                       |  | Director                                                                                         |  | March 25, 2005
|/s/CHARLES M. SKIBOCharles M. Skibo         |  | Director                                                                                         |  | March 25, 2005

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