**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended December 31, 2005**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from ***            * to

**Commissionfile number: 000-27127**

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**iBasis, Inc.**

(Exact name of registrantas 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 principalexecutive offices, including zip code)

**(781) 505-7500**

(Registrant’s telephonenumber, including area code)

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Securities registered pursuant to Section 12(b) ofthe Act:

**None**

Securities registered pursuant to Section 12(g) ofthe Act:

**Common Stock, $0.001 parvalue per share**

(Title of Class)

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o   No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o   No x

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x   No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-X isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and large acceleratedfiler” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o         Accelerated filer x         Non-accelerated filer o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o   No x

The aggregate market valueof the registrant’s common stock, $0.001 par value per share, held bynon-affiliates of the registrant as of June 30, 2005 was approximately$176,443,966 based on 64,869,105 shares held by such non-affiliates at theclosing price of a share of common stock of $2.72 as reported on the OTCBulletin Board on such date. Affiliates of the Company (defined as officers,directors and owners of 10 percent or more of the outstanding share ofcommon stock) owned 7,082,001 shares of common stock outstanding on suchdate. The number of outstanding shares of common stock of the Company on February 28,2006 was 99,511,016

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the Registrant’s definitive Proxy Statement to be delivered to shareholdersin connection with the Annual Meeting of Stockholders to be held on May 2,2006, are incorporated by reference into Part III hereof. With theexception of the portions of such Proxy Statement expressly incorporated intothis Annual Report on Form 10-K by reference, such Proxy Statementshall not be deemed filed as part of this Annual Report on Form 10-K.

 

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**iBASIS, INC.**

**FORM 10-KFor the Year Ended December 31, 2005**

|            | ** ** | **Table of Contents**                                                                                     | ** ** | **Page** | ** ** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| ** ** |       | **PART I**                                                                                                     |       |     |       |
| Item 1.    |       | Business                                                                                                            |       | 3        |       |
| Item 1A    |       | Risk Factors                                                                                                        |       | 13       |       |
| Item 2.    |       | Properties                                                                                                          |       | 24       |       |
| Item  3.   |       | Legal  Proceedings                                                                                                  |       | 24       |       |
| ** ** |       | **PART II**                                                                                                    |       |     |       |
| Item 5.    |       | Market for the Registrant’s Common Equity and Related  Stockholder Matters, and Issuer Purchases of Securities |       | 26       |       |
| Item  6.   |       | Selected  Financial Data                                                                                            |       | 27       |       |
| Item 7.    |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                         |       | 28       |       |
| Item 7A.   |       | Quantitative and Qualitative Disclosures About Market  Risk                                                         |       | 39       |       |
| Item 8.    |       | Financial  Statements and Supplementary Data                                                                        |       | 41       |       |
| Item 9A.   |       | Controls and  Procedures                                                                                            |       | 69       |       |
| Item  9B.  |       | Other  Information                                                                                                  |       | 71       |       |
| ** ** |       | **PART III**                                                                                                   |       |     |       |
| Item 10.   |       | Directors and Executive Officers of the Registrant                                                                  |       | 71       |       |
| Item 11.   |       | Executive Compensation                                                                                              |       | 71       |       |
| Item 12.   |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                     |       | 71       |       |
| Item 13.   |       | Certain Relationships and Related Transactions                                                                      |       | 71       |       |
| Item 14.   |       | Principal Accountant Fees and Services                                                                              |       | 71       |       |
| ** ** |       | **PART IV**                                                                                                    |       |     |       |
| Item 15.   |       | Exhibits and Financial Statement Schedules                                                                          |       | 72       |       |
| Signatures |       | 75                                                                                                                  |       |

 

*This annual reporton Form 10-K and the documents incorporated by reference, andaccompanying materials mailed to shareholders, contain forward-lookingstatements based on current expectations, estimates and projections aboutiBasis’ industry and management’s beliefs and assumptions. In some cases youcan 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 thesewords carefully because they discuss future expectations, contain projectionsof future results of operations, financial position, and cash flows or stateother “forward-looking” information. The important factors listed in thesection captioned “Item 1A Risk Factors,” as well as any cautionary language inthis annual report, provide examples of risks, uncertainties and events thatmay cause the actual results to differ materially from the expectationsdescribed in these forward-looking statements. You should be aware thatthe occurrence of the events described in these risk factors and elsewhere inthis annual report could have an adverse effect on the business, results ofoperations and financial position of iBasis.*

*Any forward-lookingstatements in this annual report are not guarantees of future performance, andactual results, developments and business decisions may differ from thoseenvisaged by these forward-looking statements, possibly materially.iBasis disclaims any duty to update any forward-looking statements, evenif 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 internationalcommunications services and a provider of retail prepaid calling services. Ouroperations consist of our Voice-Over-Internet-Protocol (“VoIP”) tradingbusiness (“Trading”), in which we connect buyers and sellers of internationaltelecommunications services, and our retail services business (“Retail”). Inthe Trading business we receive voice traffic from buyers—originating carrierswho are interconnected to our network via VoIP or traditional time divisionmultiplexing (“TDM”) connections, and we route that traffic over the Internetto sellers—local service providers and carriers in the destination countrieswith whom we have established agreements to manage the completion ortermination of the call. We use proprietary, patent-pending technology toautomate the selection of routes and termination partners based on a variety ofperformance, quality, and business metrics. We offer this Trading service on awholesale basis to carriers, consumer VoIP companies, telephony resellers andother service providers worldwide. We have call termination agreements withlocal service providers in North America, Europe, Asia, the Middle East, LatinAmerica, Africa and Australia.

We continue to expand our market share in our Tradingbusiness by expanding our customer base and by introducing cost-effectivesolutions for our customers to interconnect with our network. We have expandedour DirectVoIP offering with DirectVoIPTM Broadband, which addresses interconnectionrequirements that are specific to the growing consumer VoIP market. We havemore than 30 customers in the consumer VoIP market, including two of theindustry leaders, and we believe this market offers significant growthpotential for us. In addition, we continue to increase the traffic we terminateto mobile phones, which generally delivers higher average revenue per minuteand higher margins than fixed-line traffic. We also offer our PremiumCertified® international routing product which isdesigned to enhance our ability to compete for retail international trafficfrom existing customers as well as from mobile operators and consumer VoIPproviders. PremiumCertified® features routes to more than 700 destinationsthat are actively monitored and managed to deliver a level of quality that isequal to or exceeds the highest industry benchmarks for retail quality.

Our Retail business was launched in late 2003, withthe introduction of our retail prepaid calling cards that are marketed throughdistributors primarily to ethnic communities within major metropolitan marketsin the U.S. Our retail prepaid calling card business leverages our existinginternational VoIP network and has the potential to deliver higher margins thanare typically achieved in the Trading business. In addition, the retail prepaidcalling card business typically has a faster cash collection cycle than theTrading business. In September 2004, we launched Pingo®, a prepaid calling serviceoffered directly to consumers through an eCommerce web interface, which we haveincluded in our Retail business segment. Revenues from our Pingo services werenot material in 2005 and 2004.

We were incorporated as aDelaware corporation in 1996. Our principal executive offices are located at 20 SecondAvenue, Burlington, Massachusetts and our telephone number is (781) 505-7500.Our annual reports on Form 10-K, quarterly reports on Form 10-Q,and current reports on Form 8-K are available through the Securitiesand Exchange Commission’s (“SEC”) website at *www.sec.gov*or free of charge on our investor relations website at *http://investor.ibasis.com*.

**Industry Overview**

*MarketOverview.**  *Theinternational voice and fax traffic market is estimated by industry analystTeleGeography to be worth more than $65 billion. We believe that thismarket will grow as countries around the world continue to deregulate theirtelecommunication markets, prices fall and underlying trends in migration andeconomic integration drive fundamental demand. We believe there are three 

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major industry trends that will drive continued growthin the wholesale trading of international voice traffic. These trends involvethe migration of voice traffic:

·       fromtraditional vertically-integrated international carriers to morespecialized local service providers;

·       fromfixed-line networks to mobile networks; and

·       fromthe traditional time-division multiplexing (TDM) network to VoIP.

In most cases, international traffic is moving tocarriers that do not have extensive international networks and are dependent onwholesale providers like iBasis to provide effective international service forretail customers.

Global deregulationcombined with rapid technological advances has enabled the emergence of manynew communications service providers in dozens of local markets. In theirefforts to remain competitive, national carriers are focusing their capitalspending on “last-mile” services such as fixed-line, wireless, and cable, whichaccount for a very large percentage of their revenues. Consequently,communications service providers are looking for ways to expand their abilityto serve all of their customers’ telecom needs, while simultaneously reducingthe cost of providing international services. Increasingly, the world’scarriers are seeking to outsource international voice traffic to efficient VoIPnetworks, such as The iBasis NetworkÔ,whose inherently lower infrastructure and transport costs can help improve acarrier’s competitiveness and bottom line, without compromising servicequality.

*The Mainstreamingof VoIP.**  *Althoughthe consumer adoption of VoIP services is a recent development, iBasis has beentransmitting VoIP calls for many of the world’s largest carriers for severalyears. Managing quality of service at the core of the network, which iBasispioneered and mastered, has allowed phone-to-phone calls to betransmitted over the Internet with quality nearly indistinguishable from thatof traditional voice networks. Enabled by the quality of VoIP service fromproviders like iBasis, international VoIP traffic has grown rapidly. Accordingto industry analyst, TeleGeography, international VoIP traffic grew from23 billion minutes in 2003, to 31 billion minutes in 2004,  and was forecasted to reach 43 billionminutes in 2005.

Unlike fixed-line telecommunication networks andmanaged IP networks, the Internet has many potential points of congestion whereinformation, in the form of data packets, can be delayed or dropped. For nonreal-time communications, such as email, a slight delay in the receipt of amessage is not significant. However, for real-time communications, such astelephone calls, the result of a delay in transmitting the call, or losing thecall altogether, is significant. To minimize the risk of delays or losing callsover the Internet, we utilize complex and proprietary performance monitoringand call routing technology to ensure consistently high call completion andvoice quality. We have developed patent-pending quality managementtechnology that enables us to deliver call completion rates and average calldurations (the standard metrics carriers use for measuring quality) that webelieve are consistently equal to or better than those achieved by traditionalfixed-line carriers.

VoIP’s principalbenefits are:

·       *Cost Advantage from Internet Transport*.Traditional voice networks use circuit-switching technology, whichestablishes dedicated channels between an originating and terminating point forthe duration of a call. Physical facilities (typically fiber and associatedequipment) are dedicated to voice traffic between switching nodes, regardlessof changes in demand. In contrast, VoIP is based on packet-switchingtechnology. This technology completes a call by digitizing and dividing aspeaker’s voice into small packets that travel to their destination along linescarrying packets of other Internet traffic, in much the same way as emailtravels. Using a network of service facilities connected to the 

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public Internet fortransport is less costly than building a dedicated network as our calls sharethe Internet with other traffic.

·       *Cost Advantage from IP Technology*. VoIPgateway equipment which is used to convert and route phone calls over theInternet is less expensive and requires less physical space in telecomfacilities than traditional telecommunications equipment.

·       *Cost Advantage from Bypass of InternationalSettlement Rates*. Traditional international long distance calls arecompleted through international toll switches that provide access to theterminating network. These networks are often owned by government bodies ortelecommunications carriers who charge settlement rates well in excess ofcosts. Although these fees are being reduced in many countries as industryderegulation continues, these charges remain significant. Calls routed over theInternet bypass the toll switches, avoiding a significant portion of thesefees, which further lowers the cost of completing such calls.

·       *Positioning for New Services.* In contrastto the closed, proprietary structure inherent in a traditional circuit-switchedvoice network, VoIP embraces an open architecture and open standards, whichfacilitates innovation at lower cost. Traditional voice networks have beendesigned specifically to provide one basic service, making it difficult andcostly to introduce new services over those networks and their proprietaryplatforms. As data networks convert all services into standard data packets,new services are delivered from industry standard servers, integrating theInternet with the revolution in commodity computing. As a result, new servicescan be developed and brought to market much faster and more cost-efficiently.

*Outsourcing VoIP services.**  *Given the advantages of VoIP, manycarriers have begun to carry some portion of their voice traffic over IPnetworks. Despite the move by some large carriers to develop their owninternational VoIP infrastructures, most carriers have demonstrated more interestedin outsourcing international traffic to providers such as iBasis. The reasonsthese carriers prefer to outsource international traffic include:

·       therelatively low percentage of revenue that international service represents formany large carriers;

·       thedisproportionate cost and complexity of deploying and supporting internationalservice infrastructure in contrast with domestic investment opportunities;

·       ahesitation to build new networks and cannibalize traffic from their traditionalvoice networks;

·       concernsover sufficient in-house VoIP expertise to ensure that voice quality andnetwork reliability are comparable to that of the public-switchedtelephone network, especially when routing traffic over the Internet versusprivate networks; and

·       generally reduced capitalbudgets for network investment of any kind.

**Trading Business**

Our VoIP Trading business enables carriers and othercommunications service providers to outsource international voice and faxtraffic, 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 oneof our “Internet Central Offices” or “ICOs”. ICOs are strategically located inmajor telecommunications hubs in the U.S., Asia, and Europe. Calls aretransported over the Internet and terminated at “Internet Branch Offices” or “IBOs”generally managed by our terminating partners. In this way, our originatingcustomers receive a single point of interconnection to a global network oftermination points without the burden of managing the international networklogistics and interconnection agreements on the far end. Likewise, ourpartners, who sell us termination 

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capacity in their countries, receive a substantialsource of traffic revenue without having to negotiate individual agreements andinterconnections with originating carriers. Our services provide the followingkey benefits to our customers:

*High QualityCall Completion.**  *Ournetwork, monitoring and management technologies enable us to completeinternational voice and fax calls with quality comparable to that oftraditional circuit-switched voice networks. This high quality isreflected in the fact that carriers choose to provide our VoIP services totheir retail customers undifferentiated from their traditional services. Weachieve high quality over the Internet through a variety of controls andtechnologies. At our 24x7, expert-staffed global Network OperationsCenters (NOCs) in Burlington, Massachusetts, USA and Hong Kong, we are able tomonitor our carrier customers’ voice traffic and automatically select optimalrouting choices according to real time performance data. Using our patent-pendingAssured Quality Routing® and PathEngineÔtechnology, we dynamically route customers’ traffic over multiple Internetroutes, completing calls on our partners’ phone networks in destinationcountries.

*Cost EffectiveServices.**  *Ourcall transport costs are lower because packet switching is more efficient thantraditional circuit-switching. Because we use the Internet, rather than aprivate IP network, to deliver international voice traffic, we have greaterinfrastructure flexibility and lower capital costs than service providers that employdedicated point-to-point connections. VoIP equipment is less costly and haslower facilities costs (due to its smaller physical footprint) than equivalentcapacity circuit-switched equipment. We offer an open, scalablearchitecture that enables carriers and communications service providers toconnect quickly and without investment or technical expertise. An additionaladvantage derives from our ability to bypass many of the internationalsettlement rates associated with some international traffic carried overcircuit-switched voice networks, which produces additional cost savings.

For financial informationregarding our Trading business segment, see Note 3, Business Segment andGeographic Information, to our Consolidated Financial Statements.

**Retail Business**

Our Retail business consists primarily of our prepaidcalling card services and Pingo, our prepaid calling service sold directly toconsumer via an eCommerce interface. Our prepaid calling card business, whichwe launched in late 2003, leverages our global VoIP network and back-officesystems, including a sophisticated prepaid rating and billing platform**.**We sell our retail prepaid calling cardsthrough established distributors to retail outlets in major metropolitanmarkets across the U.S. We have established a dedicated operation to sell andservice our prepaid retail calling card services. Typically, our Retailbusiness delivers higher gross margins and has a faster cash collection cyclethan our Trading business.

In September 2004, we launched Pingo, our retailcalling services offered directly to consumers through our eCommerce webinterface. Pingo customers in the United States use credit cards to purchasecalling time over The iBasis Network by selecting a pre-set amount. Customersare provided with a toll-free access number, account number and personalidentification number to access the service. International access numbersenable customers to use their Pingo accounts to save on international callsfrom approximately 35 other countries. Pingo’s enhanced features include accessto on-line call and billing history, automatic recharging to maintain a balancein the customer’s Pingo account, and PIN*pass*ÔPIN-less dialing, which enables a customer to avoid keying in their accountnumber and PIN when calling from any fixed or mobile phone they have registeredon the Pingo site. These features are designed to increase the customer’sconvenience and loyalty to the service. For financial information regarding ourRetail business segment, see Note 3, Business Segment and GeographicInformation, to our Consolidated Financial Statements.

Our Retail services buildupon the underlying iBasis network and systems and gives us opportunities tocapture retail traffic directly from consumers, which may provide us highermargins than traffic we receive 

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through other carriers. Inoffering these services, we can, as described in the next section, takeadvantage of our high quality call completion and cost effective services.

**The iBasis Network**

iBasis transported approximately 7.8 billionminutes of traffic over the iBasis Network in 2005, a volume of traffic thatpositions the Compnay among the ten largest carriers of international trafficin the world, based on global traffic statistics contained in the industryanalyst publication TeleGeography 2006.  As of December 31, 2005, we had Points ofPresence—generally referred to as POPs—in 108 countries. POPs designate pointswhere The iBasis Network is directly connected to local telephone networks forcall origination or termination. In fact, we are capable of connecting to localnetworks in many more countries through our relationships with other carriers.These routes are commonly referred to as “off-net” routes and areutilized opportunistically when pricing is favorable.

The iBasis Network is based on a technologicallyadvanced switchless architecture, leveraging proven hardware from industryleaders such as Cisco Systems and NexTone, as well as patent-pendingiBasis software for quality management and advanced routing. Our AssuredQuality Routing® and PathEngineÔtechnology enable ongoing monitoring of network performance and automaticselection of best quality routes based on near real-time performance data. Theswitchless architecture provides us with significant savings in operationalcosts and capital expense by eliminating the need for costly telecommunicationsswitches and other equipment and connectivity in central offices. It also hasenabled us to simplify provisioning, real-time route monitoring, and network managementby decreasing the number of network components involved in carrying a call. Theresult for our customers is higher voice quality, call completion and callduration.

The iBasis Networkconsists of four principal elements:

·       InternetCentral Offices (ICOs) and Internet Branch Offices (IBOs) that convert circuit-switchedvoice traffic into data for transmission and reception over the Internet orvice versa;

·       thetransmission medium, which is principally the Internet;

·       AssuredQuality Routing® (AQR), our proprietary traffic monitoring androuting management software; and

·       ournetwork operations centers (NOCs), from which we oversee and coordinate theoperation of the ICOs and IBOs.

*InternetCentral Offices and Internet Branch Offices.**  *Our customers interconnect with ournetwork, at their cost, by connecting dedicated voice circuits from theirfacilities to one of our ICOs, which are strategically located in Frankfurt,Hong Kong, London, Los Angeles, New York, Paris, and Tokyo. Alternatively, ourcustomers may elect to install an iBasis IBO at their facilities. ICOs and IBOsreceive calls directly from a local carrier’s switched network. VoIP gatewaysin each ICO or IBO digitize, compress and packetize voice and fax calls and thentransmit them over the Internet. At the destination, another ICO or IBOreverses the process and the call is switched back from the Internet to a localcarrier’s circuit-switched network in the destination country.Increasingly, customers are investing in VoIP equipment and connecting to ususing an IP signal. As this trend progresses, our already asset-effectivebusiness model gains further strength, as iBasis no longer bears all the costof converting calls between traditional voice network and the Internet anddedicated physical circuit-switched interconnects are eliminatedaltogether.

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*The Internet.**  *We use the Internet to transmit thesubstantial majority of our voice and fax traffic because of its globalcoverage, low cost and flexible connectivity. As a result, we have avoided theexpense and delay of deploying and maintaining a private, dedicated network offiber and cable connections. In addition, because we do not have fixed,point-to-point connections, we can adapt to changes in international trafficflows rapidly and at minimal cost. We effectively address the challenges ofusing the Internet for high quality, real-time voice communications by:

·       selectingonly high quality, service-oriented Internet service providers as ourvendors;

·       purchasingmultiple, high-speed connections into the Internet backbone; and

·       continuouslymonitoring performance across our entire network of POPs and the Internet.

*AssuredQuality Routing.**  *Wehave deployed a proprietary patent-pending system of tools—collectivelyknown as Assured Quality Routing (“AQR”) to maintain high quality service overthe Internet. AQR optimizes the quality of calls placed over The iBasis Networkby integrating quality parameters into routing decisions. These parametersinclude measures of quality that are of direct importance to carriers includingcall duration, call completion and post-dial delay as well as underlyingdeterminants of successful data transmission, namely packet loss, jitter andlatency. Utilizing data collected in near real-time by our PathEngineperformance reporting technology, AQR automatically reroutes traffic inanticipation of quality dropping below specific thresholds, sending subsequentcalls through another Internet path, to an alternative terminating IP partneror to a circuit-switched backup vendor if necessary.

*Global Network OperationsCenters.**  *Wemanage our network and implement AQR through our network operations centers (“NOCs”).iBasis NOCs use leading network management tools from Hewlett-Packard anda number of other vendors, which are integrated with our AQR systems to enableus to monitor, test and diagnose all components of The iBasis Network. NOCs inBurlington, Massachusetts and Hong Kong are staffed by network and trafficengineers to provide expert coverage 7 days a week, 24 hours a day,365 days a year, and are equipped with:

·       toolsthat support the monitoring and analysis of various components of The iBasisNetwork to identify and address potential network problems before they affectour customers’

·       systemredundancy, including power back-up; and

·       a help desk that allows usto respond quickly to our customer’s needs and concerns.

**Research andDevelopment**

Our research anddevelopment activities are primarily focused on developing, improving andexpanding The iBasis Network and increasing the efficiency of ourinterconnections with buyers and sellers of telecommunications services. Theseactivities include the development of specific tools for our networks, such asour patent-pending Assured Quality Routing and PathEngine technologies,as well as specialized interconnection technologies like our DirectVoIPÔBroadband service, which is designed to meet the needs of emerging providers ofconsumer VoIP services. In addition, our engineering personnel contribute tothe support and operation of our global network operations centers, whichoversee and coordinate the operation of our ICO’s and IBO’s. Research anddevelopment expenses were $12.4 million, $13.8 million and$13.4 million for 2005, 2004 and 2003, respectively.

**Markets andCustomers**

Our VoIP Trading customer base can be segregated bysize into Tier 1, Tier 2 and Tier 3 carriers. Generally, Tier 1 carriers arelarge domestic and international carriers, such as AT&T, MCI, Sprint, Cable &Wireless, and certain government-affiliated or privatized dominantcarriers, such as the Chinese telecommunications carrier China United Telecom(Unicom). Tier 1 carriers generally have annual 

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revenues in excess of $2 billion. Tier 2 carriersgenerally have annual revenues in the range of $750 million to$2 billion, but have fewer direct operating agreements with other carriersand fewer international facilities. Tier 3 carriers are typically switch-basedresellers with annual revenues of less than $750 million. Recently, fast-growingproviders of consumer VoIP services have emerged as a new type of carrier withdistinct requirements including support for Session Initiation Protocol (SIP)signaling and security and support for multiple types of end user devices suchas computer softphones and IP phones. Our DirectVoIP Broadband service providesthe necessary signaling and security support, and PremiumCertified delivers theretail-quality international routing. As a result, we have begun to capture asignificant share of this rapidly growing market.

A significant portion of traffic carried over TheiBasis Network is from Tier 1 carriers. In 2005, Tier 1 carriers, the world’slargest and most demanding carriers, accounted for 35% of our total revenue.The ability to provide quality call completion consistently acceptable to Tier1 carriers is of vital importance because these carriers control the vastmajority of the world’s retail traffic. Tier 1 carriers will continue to be amain area of focus for our sales force. The proportion of our traffic thatoriginates from Tier 1 carriers in the future will be impacted by the growth ofour Retail services business. Traffic that comes to iBasis directly fromconsumers through our Retail services business has grown dramatically since thelaunch of our retail prepaid calling cards in late 2003.

As of December 31, 2005, iBasis provided servicesto approximately 391 carriers worldwide. No one carrier accounted for 10% ormore of revenue in 2005. One carrier accounted for more than 10% of revenue in2004 and 2003. For further discussion of our revenues related to significantcustomers 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 haveestablished relationships with local service providers that have strong localmarket expertise and relationships. Some of our overseas partners are verylarge, well-established national carriers. Others are emerging competitivecarriers or Internet Service Providers (ISPs) who are able to provide theinterconnection necessary to terminate minutes for us in their country.

Increasingly, traffic flows are becoming reciprocal—formerlydistinct customers and suppliers are becoming “trading-partners”—asderegulation and competition erode the distinction between the business modelsof our customers and suppliers. We expect continued growth in both size andprofitability as this trend progresses and we further consolidate our positionas a leading carrier that interconnects the world’s local service providers.

Margins on calls originatingfrom outside the U.S. are generally higher than margins on calls originatedfrom within the U.S. Deregulation and increased competition in thetelecommunications industry has caused prices for long distance telephoneservice to steadily decline, particularly in the U.S. As a wholesale providerof long distance telephone services, our margins in this business reflect theeffect of these lower prices. We attempt to offset the effect of these lowerprices by negotiating lower costs from our call termination partners and byincreasing the cost efficiency and utilization of our network. We haveimplemented a strategy to leverage retail traffic originating from both ourVoIP Trading customers and our own Retail services to drive higher margins thanwe might typically realize from our Trading services. With our prepaid callingcards and Pingo, we are able to charge per-minute rates that can exceed ourwholesale long distance rates, as well as generate revenue from fees typicallyassociated with the use of prepaid calling cards. In addition, our premiumproduct, PremiumCertifiedR, is designed to deliver the highest level of quality,comparable to that of any retail carrier. We have more than 700 certifiedroutes in the PremiumCertified product and these are generally priced higherand offer higher margin potential. PremiumCertified is marketed to all iBasistrading customers and used in the delivery of the prepaid calling card andPingo services.

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**Sales and Marketing**

*SalesStrategy.**  *Oursales efforts for the VoIP Trading business target both buyers of internationalminutes and sellers of termination capacity-leading fixed line andwireless telecommunications carriers globally, as well as emerging providers ofconsumer VoIP services over broadband connections. Our sales force is composedof experienced personnel with well-established relationships in thetelecommunications industry, based in key markets worldwide and typicallyresponsible for business development in a small number of countries regionally.Our sales process often involves a test of our services by potentialoriginating customers in which they route traffic over our network to aparticular country. Our experience to date has been that once a carrier hasbegun to use our network for a single country and finds our quality to beacceptable, the sales process for increasing the volume of traffic they send tous and increasing the number of destinations for which they use our networkbecomes incrementally easier. We also seek to cultivate relationships withservice providers that can terminate the local leg of international calls.iBasis country managers actively pursue connections with capable, licensedtermination partners in their regions. Our ability to deliver a high volume oftraffic, due to our interconnections with more than 280 carriers withinternational minutes, makes us an attractive potential partner for localservice providers.

As deregulation and competition push all local serviceproviders to both originate and terminate as much traffic as possible on theirlocal networks, we believe we will increasingly enjoy “reciprocal”relationships with the providers with which we do business, further improvingsales productivity.

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

*MarketingStrategy.**  *Inour VoIP Trading business, we seek to attract termination partners as well ascustomers and consequently address our marketing efforts to both. A very largeportion of retail origination continues to be controlled by the largest (Tier1) retail carriers. We believe that we have largely achieved our primarymarketing objectives of awareness and acceptance among much of this customersegment, as evidenced by our penetration of these carriers in the majordeveloped regions of the world. We continue to reinforce our brand presencewith this segment to help increase our share of its international traffic. Wealso concentrate on state-owned carriers, known as PTTs—in Asia and indeveloping economies generally—who we view as natural customers. In addition tothe Tier 1 carriers, we have over the past year begun to focus marketing efforton raising awareness of iBasis among consumer VoIP companies and mobileoperators, which represent signficant growth opportunities for iBasis.

While we increasingly expect our customers to also beour termination partners, local circumstances in many countries still are suchthat we look to partner with ISPs, new Competitive Local Exchange Carriers(CLECs) and specialist termination providers. Unlike marketing to thewell-known Tier 1 carriers, we actively identify and attract smallertermination partners in many countries, many of which are start-ups formedspecifically to terminate international traffic. Our marketing plan includespublic relations activity, outreach with industry analysts and the trade press,participation in industry trade shows and conferences, targeted mailings and acomprehensive website, and regular communications with our existing customerbase.

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

·       developingcalling card brands;

·       broadeningcalling card distribution;

·       expandinggross margins; and

·       enhancingquality.

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In developing our own calling card brands, in additionto supporting established brands of our distributors, we are building presenceof select brands in multiple markets across multiple distributors. These brandsleverage a common rate and fee structure and are able to leverage common designand advertising, which enhances both administrative and marketing efficiencywhile building distributor and customer loyalty. To broaden our callingdistribution we identify the leading established distributors in major urbanmarkets in the U.S. and work to establish mutually beneficial relationships.These distributors possess the local market knowledge and relationships withretail outlets required to effectively build market presence for our callingcards. Some of our distributors operate as master distributors supportingsmaller sub-distributors that help to broaden and reinforce their marketshare within various territories or types of outlets. We expand distributioninto new ethnic and geographic markets by leveraging existing relationships andby pursuing new distributors as necessary. Expanding gross margins in theprepaid calling card business is a function of managing card lifecycles.Typically, new cards are introduced with very aggressive promotional pricing tobuild distributor and retailer enthusiasm and consumer interest. Once the cardhas proven its quality and reliability we move beyond the promotional stageinto production, enabling us to realize higher margins. As we establish ourpresence in the calling card market the overall age of our product portfoliowill increase, essentially resulting in more product having graduated from thepromotional phase into producing higher margins.

The sales and marketingstrategy for our Pingo service leverages the cost-efficiency and trackingcapabilities of on-line paid placement advertising on major search engines,such as Google and Yahoo, as well as targeted email campaigns utilizing opt-inemail lists to create exposure of the Pingo website and encourage sales. Wehave retained a search engine marketing firm with specific expertise andproprietary technology designed to optimize our advertising investment. We alsouse search engine optimization techniques on the Pingo.com website. Whenprospects visit the Pingo website, we utilize special bonus awards andpromotions to encourage initial purchase. We also market to our existing Pingocustomers to encourage use of the service, recharges, and referrals.

**StrategicTechnology Relationships**

Strategic technologyrelationships are important because they give us early access to newtechnologies, a voice in vendors’ development direction and because strategicpartners engage with us in support of our sales and marketing programs. Since our founding in 1996, we have maintained astrong technology and business relationship with Cisco Systems. The iBasisNetwork is a Cisco PoweredÔ network. This designation means that The iBasisNetwork is built predominantly with Cisco products and technologies, and meetsa high standard of reliability and performance. As a Cisco PoweredÔ network, wehave enhanced access to Cisco technical resources and are able to more quicklydeliver new capabilities and service features.

**Competition**

We compete in two markets: international VoIPservices, which we sell on a wholesale basis to other carriers, and retailprepaid calling services which we sell to consumers directly and throughdistributors. As described more completely in Item 1A “Risk Factors,” themarket for VoIP services is highly competitive. We compete with other wholesaletrading carriers worldwide. Many of these carriers have more resources, longeroperating histories and more established positions in the communicationsmarketplace, and, in some cases, have begun to develop VoIP capabilities. Wealso compete with smaller companies, including those that may be specialists injust one or two routes. We compete with our own customers who have or maydevelop the ability to carry traffic themselves, including retail carriers whodevelop their own international networks or interconnect with one another andexchange international traffic by “meeting” in a major telecom hub. At present,we do not compete with cable operators, or local exchange carriers, such as theU.S. “Baby Bells”. Also, at present, we do not compete with emerging retailVoIP carriers as most have not developed international networks. We competeprincipally on quality of service and price. In the 

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overall international long distance market, which wasapproximately 260 billion minutes of phone calls in 2005 based on  current information, we were among the tenlargest carriers with about 3% market share. We carried more than 18% of theprojected 43 billion minutes of international VoIP traffic in 2005.

In the retail prepaid calling card business, wecompete with major telecommunications carriers, and many smallertelecommunications providers. Many of our competitors have a longer operatinghistory and a more established market presence in the retail prepaid callingcard business than we do. Also, many of these competitors have greaterresources.

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

Although the market forwholesale international traffic and retail prepaid calling services is highlycompetitive and will almost certainly remain so, we believe that our brand-strength,customer base, established global distribution and patented ability to managetraffic across the low-cost Internet while maintaining required quality,collectively represent a competitive advantage that will allow us to continueexpanding both volume and margins.

**GovernmentRegulation**

As more fully described in Item 1A “Risk Factors” ourbusiness is subject to U.S. and foreign laws, which may include those relatingto telecommunications.

We are not licensed to offer traditionaltelecommunications services in any U.S. state and we have not filed tariffs forany service at the Federal Communications Commission (“FCC”) or at any stateregulatory 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 confidentialcommunications or other information, excise taxes,  U.S. embargos and other reporting orcompliance requirements.

While the FCC to date has maintained an informalpolicy that information service providers, including VoIP providers, are nottelecommunications carriers for regulatory purposes, various entities havechallenged this premise, both before the FCC and at various state governmentagencies. However, the FCC has ruled that certain traffic carried in partutilizing the Internet protocol format was nonetheless regulatedtelecommunications for which certain regulatory obligations applied. The FCC ispresiding over several proceedings related to VoIP services, includingregulation of prepaid calling cards and the extent that Internet protocolcapabilities insulate such offerings from traditional regulation, and otherproceedings covering access charges, universal service, and interconnectionrights for VoIP. Adverse rulings or rulemakings could subject us to licensingrequirements and additional fees and subsidies.

The regulatory treatment of VoIP and other iBasisservices varies widely among other countries and is subject to constant change.Until recently, most countries did not have regulations addressing VoIP orother VoIP services such as calling cards, in some cases classifying theseservices as unregulated services. As the VoIP market has grown and matured,increasing numbers of regulators have begun to reconsider whether to regulateVoIP and other VoIP services. Some countries currently impose little or noregulation on VoIP or VoIP services. Conversely, other countries that prohibitor limit competition for traditional voice telephony services generally do notpermit Internet telephony or VoIP services or strictly limit the terms underwhich such services may be provided, even imposing criminal penalties forindividuals associated with such offerings. Still other countries regulate VoIPand VoIP services like traditional voice telephony services, requiring VoIPcompanies to obtain licenses, incorporate local subsidiaries, make universalservice contributions and pay other taxes.

We have advocated andsupported deregulation for free and open market competition in a variety ofcountries.

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**IntellectualProperty**

We regard our copyrights,service marks, trademarks, trade dress, trade secrets, patents, patentapplications and similar intellectual property as critical to our success andwe rely on trademark and copyright law, trade secret protection andconfidentiality and/or license agreements with our employees, customers,partners, and others to protect our proprietary rights. Our policy is to seekpatent protection of the technology, inventions and improvements that weconsider important to the development of our business. As of December 31,2005, we had several pending United States patent applications for The iBasisNetwork and other inventions related to our business. We pursue theregistration of our trademarks and service marks in the United States andoverseas. As of March 15, 2006, we have been granted trademarkregistration for the marks iBasis, Pingo, Assured Quality Routing,PremiumCertified, The last calling card you’ll ever need!, ConnectPoint, andMero Mejicano in the United States, and iBasis in the European community, andhave pending registration applications for other service marks. We also rely ontrade secrets, technical know-how and continuing innovation to develop andmaintain our competitive position. We have granted licenses in the ordinarycourse of business for occasional use of the company’s name, logo, trademarksand /or servicemarks to certain marketing partners pursuant to joint marketingand/or other agreements. Likewise, we have been granted certain licenses for usein the ordinary course of business.

**Employees**

As of December 31,2005, we employed 230 people. Our employees are not represented by a laborunion.

**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 FinancialStatements.

**Item 1A.**                *Risk Factors*

**RISK FACTORS**

*Any investment in our common stock involves a highdegree of risk. You should carefully consider the risks described below, whichwe believe include all the material risks to our business, together with theinformation contained elsewhere in this report, before you make a decision toinvest in our company.*

**Factors That May AffectFuture Results and Financial Condition**

***Risks Related to Our Operations***

**Our results ofoperations may fluctuate and the market price of our common stock may fall.**

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

·       theamount of traffic we are able to sell to our customers, and their decisions onwhether to route traffic over our network;

·       increasedcompetitive pricing pressure in the international long distance market;

·       thepercentage of traffic that we are able to carry over the Internet rather thanover the more costly traditional public-switched telephone network;

·       lossof arbitrage opportunities resulting from declines in international settlementrates or tariffs;

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·       ourability to negotiate lower termination fees charged by our local providers;

·       ourcontinuing ability to negotiate competitive costs to connect our network withthose of other carriers and Internet backbone providers;

·       fraudulentlysent or received traffic which is unbillable, for which we may be liable;

·       creditcard fraud in connection with our web-based prepaid offering;

·       capitalexpenditures required to expand or upgrade our network;

·       changesin call volume among the countries to which we complete calls;

·       theportion of our total traffic that we carry over more lucrative routes coulddecline, independent of route-specific price, cost or volume changes;

·       technicaldifficulties or failures of our network systems or third party delays inexpansion or provisioning system components;

·       ourability to manage distribution arrangements and provision of retail offerings,including card printing, marketing, usage tracking, web-based offerings andcustomer service requirements, and resolution of associated disputes;

·       ourability to manage our traffic on a constant basis so that routes areprofitable;

·       ourability to collect from our customers; and

·       currencyfluctuations and restrictions in countries where we operate.

Because of these factorsand others, you should not rely on quarter-to-quarter comparisons of ourresults of operations as an indication of our future performance. It ispossible that, in future periods, our results of operations will besignificantly lower than the estimates of public market analysts, investors orour own estimates. Such a discrepancy could cause the price of our common stockto decline significantly and adversely affect profitability.

**We may nevergenerate sufficient revenue and gross margin to become profitable iftelecommunications carriers and other communications service providers orothers are reluctant to use our services or do not use our services, includingany new services, in sufficient volume.**

If the market for VoIP telephony and new services doesnot develop as we expect, or develops more slowly than expected, our business,financial condition and results of operations will be materially and adverselyaffected.

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

·       perceptionsthat the quality of voice transmitted over the Internet is low;

·       perceptionsthat VoIP is unreliable;

·       ourinability to deliver traffic over the Internet with significant cost advantages;

·       developmentof their own capacity on routes served by us; and

·       anincrease in termination costs of international calls.

The growth of our coreTrading business depends on carriers and other communications service providersgenerating an increased volume of international voice and fax traffic andselecting our network to carry at least some of this traffic. Similarly, thegrowth of Retail services we offer depends on these factors as well asacceptance in the market of the brands that we service, including theirrespective rates, terms and 

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conditions. If the volumeof international voice and fax traffic and associated or other retail servicesfail to increase or decrease and these parties or other customers do not employour network or otherwise use our services, our profitability will be materiallyand adversely affected.

**We may not be ableto collect amounts due to us from our customers and we may have to disgorgeamounts already paid.**

Some of our customers have closed their businesses orfiled for bankruptcy owing us significant amounts for services we have providedto them in the past. Despite our efforts to collect these overdue funds, we maynever be paid. The bankruptcy court may require us to continue to provideservices to these companies during their reorganizations. Other customers maydiscontinue their use of our services at any time and without notice, or delaypayments that are owed to us. Additionally, we may have difficulty incollecting amounts from them. Although we have internal credit risk policies toidentify companies with poor credit histories, we may not effectively managethese policies and may provide services to companies that refuse to pay. Therisk is even greater in foreign countries, where the legal and collectionsystems available may not be adequate or impartial for us to enforce thepayment provisions of our contracts. Our cash reserves will be reduced and ourresults of operations will be materially adversely affected if we are unable tocollect amounts from our customers.

We have received claimsincluding lawsuits from estates of bankrupt companies alleging that we receivedpreferential payments prior to such companies’ bankruptcy filing. We may berequired to return amounts received from subsequent bankrupt entities. We intendto employ all available defenses in contesting such claims or, in thealternative settle such claims. The results of any suit or settlement may havea material adverse affect on our business.

**We may increasecosts and risks in our business to the extent we rely on third parties.**

*Vendors.*   Werely upon third-party vendors to provide us with the equipment, software,circuits, and other facilities that we use to provide our services. Forexample, we purchase a substantial portion of our VoIP equipment from CiscoSystems. We may be forced to try to renegotiate terms with vendors for productsor services that have become obsolete. Some vendors may be unwilling torenegotiate such contracts, which could affect our ability to continue toprovide services and consequently render us unable to generate sufficientrevenues for our business.

*Partiesthat Maintain Phone and Data Lines and Other Telecommunications Services.*   Ourbusiness model depends on the availability of the Internet and traditionaltelephone networks to transmit voice and fax calls. Third parties maintain andown these networks, other components that comprise the Internet, and businessrelationships that allow telephone calls to be terminated over the publicswitched telephone network. Some of these third parties are telephonecompanies. They may increase their charges for using these lines at any timeand thereby increase our expenses. They may also fail to maintain their linesproperly, fail to maintain the ability to terminate calls, or otherwise disruptour ability to provide service to our customers. Any such failure that leads toa material disruption of our ability to complete calls or provide other servicescould discourage our customers from using our network, which could adverselyeffect our revenues.

*LocalCommunications Service Providers.*   We maintainrelationships with local communications service providers in many countries,some of whom own the equipment that translates calls from traditional voicenetworks to the Internet, and vice versa. We rely upon these third parties bothto provide lines over which we complete calls and to increase their capacitywhen necessary as the volume of our traffic increases. There is a risk thatthese third parties may be slow, or may fail, to provide lines, which wouldaffect our ability to complete calls to certain destinations. We may not beable to continue our relationships with these local service providers onacceptable terms, if at all. Because we rely upon entering into relationships 

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with local service providers to expand into additionalcountries, we may not be able to increase the number of countries to which weprovide service. Finally, any technical difficulties that these providerssuffer, or difficulties in their relationships with companies that manage thepublic switched telephone network, could affect our ability to transmit callsto the countries that those providers help serve.

*StrategicRelationships.*   We depend in part on ourstrategic relationships to expand our distribution channels and develop andmarket our services. Strategic relationship partners may choose not to renewexisting arrangements on commercially acceptable terms, if at all. In general,if we lose these key strategic relationships, or if we fail to maintain ordevelop new relationships in the future, our ability to expand the scope andcapacity of our network and services provided, and to maintain state-of-the-arttechnology, would be materially adversely affected.

*Distributors of prepaidcalling cards to retail outlets.*   We makearrangements with distributors to market and sell prepaid calling cards toretail outlets. In some cases, we rely on these distributors to print cards,prepare marketing material, activate accounts, track usage and other data, andremit payments collected from retailers. There is a risk that distributors willnot properly perform these responsibilities, comply with legal requirements, orpay us monies when due. We may not have adequate contractual or creditprotections against these risks. There is also a risk that we will beineffective in our efforts to implement new systems, policies covering customercare, disclosure, and privacy, and certain technical and business processes.The result of any attendant difficulties may have a material impact on ourbusiness.

**We may not be ableto succeed in the intensely competitive market for our Trading services.**

We compete in our Tradingbusiness principally on quality of service and price. In recent years, pricesfor long distance telephone services have been declining as a result ofderegulation and increased competition. We face competition from majortelecommunications carriers, including AT&T, British Telecom, DeutscheTelekom, Verizon/MCI and Qwest, as well as new emerging carriers. We alsocompete with Internet protocol and other VoIP service providers who routetraffic to destinations worldwide. VoIP service providers that presently focuson retail customers may in the future enter the wholesale market and competewith us. If we can not offer competitive prices and quality of service ourbusiness could be materially adversely affected.

**We may not be ableto succeed in the intensely competitive market for prepaid calling services.**

The market for prepaidcalling services is extremely competitive. Hundreds of providers offer callingcard products and services. We have relatively recently begun offering prepaidcalling card and related web-based services and have little prior experience inthese businesses. If we do not successfully maintain and expand our distributionchannel and enter geographic markets in which our rates, fees, surcharges,country services, and our other products and service characteristics cansuccessfully compete, our business could be materially adversely affected.

**We are subject todownward pricing pressures and a continuing need to renegotiate overseas rates.**

As a result of numerousfactors, including increased competition and global deregulation oftelecommunications services, prices for international long distance calls havebeen decreasing. This downward trend of prices to end-users has caused us tolower the prices we charge communications service providers and calling carddistributors for call completion on our network. If this downward pricingpressure continues, we may not be able to offer VoIP services at costs lowerthan, or competitive with, the traditional voice network services with which wecompete. Moreover, in order for us to lower our prices, we have to renegotiaterates with our overseas local service providers who complete calls for us. Wemay not be able to renegotiate these terms favorably enough, or fast enough, toallow us to continue to offer services in a particular country on acost-effective basis. The continued downward pressure on prices and 

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our failure to renegotiatefavorable terms in a particular country could have a material adverse effect onour ability to operate our network and VoIP business profitably.

**A variety of risksassociated with our international operations could materially adversely affectour business.**

Because we providemany of our services internationally, we are subject to additional risksrelated to operating in foreign countries. In particular, in order to provideservices and operate facilities in some countries, we have established subsidiariesor other legal entities or may have forged relationships with service partnersor entities set up by our employees. We also rely on our own employees tomaintain certain functions of our Internet Central Offices and, in some cases,to deploy and operate our smaller Points of Presence installations. Associatedrisks include:

·       unexpectedchanges in tariffs, trade barriers and regulatory requirements relating toInternet access or VoIP;

·       economicweakness, including inflation, or political instability in particular foreigneconomies and markets;

·       difficultyin collecting accounts receivable;

·       tax,consumer protection, telecommunications, and other laws;

·       compliancewith tax, employment, securities, immigration, labor and other laws foremployees living and traveling, or conducting business, abroad, which maysubject them or us to criminal or civil penalties;

·       foreigntaxes including withholding of payroll taxes;

·       foreigncurrency fluctuations, which could result in increased operating expenses and reducedrevenues;

·       unreliablegovernment power to protect our rights and those of our employees;

·       exposureto liability under the Foreign Corrupt Practices Act or similar laws in foreigncountries;

·       otherobligations or restrictions, including, but not limited to, criminal penaltiesagainst us or our employees incident to doing business or operating asubsidiary or other entity in another country;

·       individualcriminal exposure of our employees, some of whom have been sought by lawenforcement agencies abroad to answer for the activities of the Company;

·       thepersonal safety of our employees and their families who at times have receivedthreats of, or who may in any case be subject to, violence, and who may not beadequately protected by legal authorities or other means; and

·       inadequateinsurance coverage to address these risks.

These and other risksassociated with our international operations may materially adversely affectour ability to attain or maintain profitable operations.

**Internationalgovernmental regulation and legal uncertainties and other laws could limit ourability to provide our services, make them more expensive, or subject us or ouremployees to legal or criminal liability.**

Many countries currently prohibit or limit competitionin the provision of traditional voice telephony services. In some of thosecountries, licensed telephony carriers as well as government regulators and lawenforcement authorities have questioned our legal authority and/or the legalauthority of our service 

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partners or affiliated entities and employees to offerour services. We may face similar questions in additional countries. Ourfailure to qualify as a properly licensed service provider, or to comply withother foreign laws and regulations, could materially adversely affect ourbusiness, financial condition and results of operations, including subjectingus or our employees to taxes and criminal or other penalties and/or byprecluding us from, or limiting us in, enforcing contracts in suchjurisdictions.

It is also possiblethat countries may apply to our activities laws relating to services providedover the Internet, including laws governing:

·       salesand other taxes, including payroll-withholding applications;

·       userprivacy;

·       pricingcontrols and termination costs;

·       characteristicsand quality of products and services;

·       qualificationto do business;

·       consumerprotection;

·       cross-bordercommerce, including laws that would impose tariffs, duties and other importrestrictions;

·       copyright,trademark and patent infringement; and

·       claimsbased on the nature and content of Internet materials, including defamation,negligence and the failure to meet necessary obligations.

If foreign governments orother bodies begin to impose related restrictions on VoIP or our other servicesor otherwise enforce criminal or other laws against us, our affiliates or ouremployees, such actions could have a material adverse effect on our operations.

**Thetelecommunications industry is subject to domestic governmental regulation andlegal uncertainties and other laws that could materially increase our costs andprevent us from executing our business plan.**

We are not licensed to offer traditionaltelecommunications services in any U.S. state and we have not filed tariffs forany service at the FCC or at any state regulatory commission.

Aspects of our operations may currently be, or maybecome, subject to state or federal regulations governing licensing, universalservice funding, access charges, advertising, disclosure of confidential communicationsor other information, excise taxes,  U.S.embargos and other reporting or compliance requirements.

While the FCC to date has maintained an informalpolicy that information service providers, including VoIP providers, are nottelecommunications carriers for regulatory purposes, various entities havechallenged this idea before the FCC and at various state government agencies. In2004, the FCC ruled that certain traffic AT&T carried in part utilizing anInternet protocol format was nonetheless regulated telecommunications for whichterminating access charges were due. The FCC subsequently found that AT&T’sprepaid calling cards, which AT&T had claimed as an enhanced, non-regulatedoffering, constituted traditional telecommunications for which universalservice subsidies are due. In so doing, the FCC imposed such liabilityretroactively, and ruled that similarly situated carriers must also fulfillreporting and contribution requirements for universal service funding. The FCCis proceeding over several related topics, including regulation of prepaidcalling cards and the extent that Internet protocol capabilities insulate suchofferings from traditional regulation, the extent to which wholesale and otherVoIP offerings may be subject to access charges or eligible for interconnectionwith incumbent networks, 

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and proceedings covering IP-enabled services andUniversal Service subsidies more generally. Adverse rulings or rulemakingscould subject us to licensing requirements and additional fees and subsidies.

We believe that iBasis qualifies for the enhancedservice provider (“ESP”) exemption for federal universal service fundcontributions because it provides a VoIP information service. Nevertheless,while reserving rights to claim the ESP exemption, we have decided tocontribute to the federal universal service fund as of January 1, 2005 onour interstate VoIP transport revenues.

The IRS and the U.S. Department of Treasury haveissued a notice of proposed rulemaking suggesting that VoIP calls may besubject to a 3% federal excise tax which could affect our competitiveness.

We have offered our prepaid international calling cardservices on a wholesale basis to international carrier customers, and others,some of which provide these services to end-user customers, enabling them tocall internationally over The iBasis Network from the U.S. We participate inselling and marketing such cards through a network of distributors on a retailbasis. Further, we also offer a web-based prepaid card offering. Although thecalling cards are not primarily used for domestic interstate or intrastate use,we have not blocked the ability to place such calls or required our wholesalecustomers or distributors to show evidence of their compliance with U.S. andstate regulations. As a result, there may be domestic use of the cards. Becausewe provide services that are primarily wholesale and/or international andutilize an enhanced technology, we do not believe that we are subject tofederal or state telecommunications regulation for the possible uses of theseservices described here and, accordingly, we have not obtained state licenses,filed state or federal tariffs, posted bonds, or undertaken other possiblecompliance steps. We have also been questioned by regulators about our offerings.Under current standards or as-yet undetermined rules, the FCC and stateregulatory authorities may not agree with our position. If they do not, wecould become subject to regulation at the federal and state level for theseservices, and could become subject to licensing and bonding requirements, andfederal and state fees and taxes, and other laws, all of which could materiallyaffect our business.

We are also subject to federal and state laws andregulations regarding consumer protection, advertising, and disclosureregulations. These rules could substantially increase the cost of doingbusiness domestically and in any particular state. Law enforcement authoritiesmay utilize their powers under consumer protection laws against us in the eventwe do not meet legal requirements in a given jurisdiction which could eitherincrease costs or prevent us from doing business there.

The Telecommunications Act of 1996 requires thatpayphone service providers be compensated for all completed calls originatingfrom payphones in the United States. When calling cards are used, the FCC’sprior rules required the first switch-based carrier to compensate thepayphone service provider, but subsequently adopted rules require the lastswitched-based carrier to do so, and further require that all carriers in thecall 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 reporton these matters to the FCC and others in the call chain. We maintain that asan international VoIP provider, we sell an information service. We thereforeclaim that we are not a “carrier” for regulatory purposes and, in any case, ourInternet-based systems do not rely on traditional long distance switches. Nonetheless,we have indirectly paid, and intend to continue paying, payphone serviceproviders as part of our prepaid calling card business. We have contracted witha clearinghouse to remit funds directly to payphone service providers for callsoriginating from payphones utilizing our prepaid calling cards. For all othertypes of traffic related to our wholesale business, we believe that we are notresponsible for payphone compensation, but rather that the carrier thatprecedes us is. In accordance therewith, for wholesale traffic, we have in mostcases sought to apportion such responsibility by contract.

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We are subject to otherlaws related to our business dealings that are not specifically related totelecommunications regulation. As an example, the Office of Foreign AssetControl of the U.S. Department of the Treasury, or OFAC, administers the UnitedStates’ sanctions against certain countries. OFAC rules restrict manybusiness transactions with such countries and, in some cases, require thatlicenses be obtained for such transactions. We may currently, or in the future,transmit telephone calls between the U.S. and countries subject to U.S.sanctions regulations and undertake other transactions related to thoseservices. We have undertaken such activities via our network or through variousreciprocal traffic exchange agreements to which we are a party. We havereceived licenses from OFAC to send traffic to some countries and, ifnecessary, will remain in contact with OFAC with regard to other transactions.Failure to obtain proper authority could expose us to legal and criminalliability.

**If weare not able to keep up with rapid technological change in a cost-effectiveway, the relative quality of our services could suffer.**

The technology upon whichour services depend is changing rapidly. Significant technological changescould render the hardware and software that we use obsolete, and competitorsmay begin to offer new services that we are unable to offer. If we are unableto respond successfully to these developments or do not respond in acost-effective way, we may not be able to offer competitive services and ourbusiness results may suffer.

**Wemay not be able to expand and upgrade our network adequately andcost-effectively to accommodate any future growth.**

Our VoIP business requiresthat we handle a large number of international calls simultaneously. As weexpand our operations, we expect to handle significantly more calls. If we donot expand and upgrade our hardware and software quickly enough, we will nothave sufficient capacity to handle the increased traffic and growth in ouroperating performance would suffer as a result. Even with such expansion, wemay be unable to manage new deployments or utilize them in a cost-effectivemanner. In addition to lost growth opportunities, any such failure couldadversely affect customer confidence in The iBasis Network and could result inus losing business outright.

**Wemay not be able to maintain our routing, reporting, and billing systems andrelated databases adequately and cost-effectively to accommodate our continuingneeds.**

Our business requires thatwe track enormous volumes of data so that we can manage traffic, margin,revenue, and customer accounts. We constantly measure and upgrade our technicalcapabilities, and develop new tools to address our needs. If we do not maintainthese systems or modify them in an appropriate manner, or bill our customersproperly, our business will be negatively affected.

**Singlepoints of failure on our network may make our business vulnerable.**

We operate two NOCs aswell as numerous ICOs throughout the world. In some cases we have designedredundant systems, provided for excess capacity, and taken other precautionsagainst platform and network failures as well as facility failures relating topower, air conditioning, destruction, or theft. Nonetheless, some of ourinfrastructure and functionality, including that associated with certaincomponents of our retail business, operate as a single point of failure,meaning, failures of the type described may prohibit us from offering services.

**Wedepend on our current personnel and may have difficulty attracting andretaining the skilled employees we need to execute our business plan.**

Our future success willdepend, in large part, on the continued service of our key management andtechnical personnel. If any of these individuals or others we employ are unableor unwilling to continue in their present positions, our business, financialcondition and results of operations could suffer. We do not carry key personlife insurance on our personnel.

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**Wewill need to retain skilled personnel to execute our plans.**

Our future success willalso depend on our ability to attract, retain and motivate highly skilledemployees, particularly engineering and technical personnel. Past workforcereductions have resulted in reallocations of employee duties that could resultin employee and contractor uncertainty and dissatisfaction. Reductions in ourworkforce or restrictions on salary increases or payment of bonuses may make itdifficult to motivate and retain employees and contractors, which could affectour ability to deliver our services in a timely fashion and otherwisenegatively affect our business.

**If weare unable to protect our intellectual property, our competitive position wouldbe adversely affected.**

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

We believe that we do notinfringe upon the proprietary rights of any third party. Nonetheless, we havereceived claims that our products or brands, or those of our retail prepaidcalling card distributors, infringe valid patents or trademarks. Such claims,even if resolved in our favor, could be substantial, and the litigation coulddivert management efforts. It is also possible that such claims might beasserted successfully against us in the future. Our ability to provide servicesdepends on our freedom to operate. That is, we must ensure that we do notinfringe upon the proprietary rights of others or have licensed all suchrights. A party making an infringement claim could secure a substantialmonetary award or obtain injunctive relief that could effectively block ourability to provide services in the United States or abroad.

**Werely on a variety of technologies, primarily software, which is licensed fromthird parties or is freely available.**

Continued use of certaintechnology by us requires that we purchase new or additional licenses fromthird parties or, in some cases, avail ourselves of “shareware” or otherwiseavailable open source code. We may not be able to obtain those third-partylicenses needed for our business or the technology and software that we do havemay not continue to be available to us on commercially reasonable terms or atall. The loss or inability to maintain or obtain upgrades to any suchtechnology or software could result in delays or breakdowns in our ability tocontinue developing and providing our services or to enhance and upgrade ourservices.

**Wemay undertake strategic acquisitions or dispositions, or may be the target ofsimilar strategic initiatives, that could be difficult to integrate or coulddamage our business.**

We may acquire additionalbusinesses and technologies that complement or augment our existing businesses,services and technologies. We may also be subject to or participate instrategic activities by others that result in a transfer of control of ourassets or control of our outstanding shares of stock. We may need to raiseadditional funds through public or private debt or equity financing or issuemore shares to effect such activities, which may result in dilution forshareholders and the incurrence of indebtedness. We may have difficultyintegrating any additional businesses into our existing business and the processof any acquisitions or subsequent integration could divert management’sattention and expend our resources. 

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We may not be able tooperate acquired businesses profitably or otherwise implement our growthstrategy successfully.

If we are unable to effectivelyintegrate any new business into our overall business operations, our costs mayincrease and our business results may suffer significantly.

We may need to sellexisting assets or businesses in the future to generate cash or focus ourefforts on making our core Trading business profitable. As with many companiesin our sector that have experienced rapid growth in recent years, we may needto reach profitability in one market before entering another. In the future, wemay need to sell assets to cut costs or generate liquidity.

***Risks Related to the Internet and Internet TelephonyIndustry***

**Ifthe Internet infrastructure is not adequately maintained, we may be unable tomaintain the quality of our services and provide them in a timely andconsistent manner.**

Our future success willdepend upon the maintenance of the Internet infrastructure, including areliable network backbone with the necessary speed, data capacity and securityfor providing reliability and timely Internet access and services. To the extentthat the Internet continues to experience increased numbers of users, frequencyof use or bandwidth requirements, the Internet may become congested and beunable to support the demands placed on it and its performance or reliabilitymay decline thereby impairing our ability to complete calls and provide otherservices using the Internet at consistently high quality. The Internet hasexperienced a variety of outages and other delays as a result of failures ofportions of its infrastructure or otherwise. Future outages or delays couldadversely 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 ownershipand other legal liability issues, remain unresolved and could materially andadversely affect both the growth of Internet usage generally and our businessin particular. Finally, important opportunities to increase traffic on TheiBasis Network will not be realized if the underlying infrastructure of theInternet does not continue to be expanded to more locations worldwide.

**Networksecurity breaches could adversely affect our operations.**

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

**Undetecteddefects in our technology could adversely affect our operations.**

Our technology is complexand is susceptible to errors, defects or performance problems, commonly called “bugs”.Although we regularly test our software and systems extensively, we can notensure that our testing will detect every potential bug. Any such bug couldmaterially adversely affect our business.

**Ourability to provide our services using the Internet may be adversely affected bycomputer vandalism.**

If the overall performanceof the Internet is seriously downgraded by website attacks, failure of serviceattacks, or other acts of computer vandalism or virus infection, our ability todeliver our communication services over the Internet could be adverselyimpacted, which could cause us to have to increase the amount of traffic wehave to carry over alternative networks, including the more costly publicswitched telephone network. In addition, traditional business interruptioninsurance may not cover losses we could 

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incur because of any suchdisruption of the Internet. While some insurers are beginning to offer productspurporting to cover these losses, we do not have any of this insurance at thistime.

***Risks Related to Our Company***

**Afailure to obtain necessary additional capital in the future could jeopardizeour operations.**

We may need additional capital in the future to fundour operations, finance investments in equipment and corporate infrastructure,expand our network, increase the range of services we offer and respond tocompetitive pressures and perceived opportunities. We may not be able to obtainadditional financing on terms acceptable to us, if at all. If we raiseadditional funds by selling equity securities, the relative equity ownership ofour existing investors could be diluted or the new investors could obtain termsmore favorable than previous investors. A failure to obtain additional fundingcould prevent us from making expenditures that are needed to allow us to growor maintain our operations.

**Investorinterest in our common stock may be negatively affected by our continued tradingon the Over-the-Counter Bulletin Board.**

Since receiving adetermination from the Nasdaq National Market on November 13, 2002 thatshares of our common stock would no longer trade on the Nasdaq National Marketbecause we failed to meet certain minimum listing requirements, our commonstock began trading on the NASD-operated Over-the-Counter Bulletin Board. TheOver-the-Counter Bulletin Board market is generally considered to be lessefficient and not as liquid as the Nasdaq National Market (now known as theNasdaq Stock Market). Trading in this market may decrease the market value andliquidity of our common stock, which could materially and adversely affect ourability to attract additional investment to finance our operations.

We have also learned thatour common stock may be trading on the Berlin, Germany stock exchange, which wehave not authorized. Such exchange has been rumored to allow “naked” shortselling of stock, or otherwise not comply with exchange requirements that arecustomary in the U.S., and could thereby be detrimental to the value of ourstock and our ability to attract investors.

**Provisionsof our governing documents and Delaware law could also discourage acquisitionproposals or delay a change in control.**

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

·       ourboard of directors has the authority to issue common stock and preferred stock,and to determine the price, rights and preferences of any new series ofpreferred stock, without stockholder approval;

·       ourboard of directors is divided into three classes, each serving three-yearterms;

·       asupermajority of votes of our stockholders is required to amend key provisionsof our certificate of incorporation and by-laws;

·       ourbylaws contain provisions limiting who can call special meetings ofstockholders;

·       ourstockholders may not take action by written consent; and

·       ourstockholders must provide specified advance notice to nominate directors orsubmit stockholder proposals.

In addition, provisions ofDelaware law and our stock option plan may discourage, delay or prevent a changeof control of our company or an unsolicited acquisition proposal.

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**Item 2.**                        *Properties*

Welease 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                            |

 

In addition to thefacilities listed above, we have obtained collocation space in specialfacilities around the world that are dedicated to housing equipment of multiplecompetitive telephony carriers. We lease these smaller spaces to house Internetrouting and related equipment. We lease collocation space in Frankfurt, HongKong, London, Paris, Sydney and Tokyo. We also rent smaller office space inLondon, Beijing, Buenos Aires, Dubai and Hong Kong. We believe that ourexisting facilities are adequate for our current needs and that suitableadditional or alternative space will be available in the future on commerciallyreasonable terms.

**Item 3.**                        *Legal Proceedings*

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

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

The complaints are similar to each other and tohundreds of other complaints filed against other issuers and theirunderwriters, and allege violations of the Securities Act of 1933 and theSecurities Exchange Act of 1934 primarily based on the assertion that there wasundisclosed compensation received by our underwriters in connection with ourpublic offerings and that there were understandings with customers to makepurchases in the aftermarket. The plaintiffs have sought an undetermined amountof monetary damages in relation to these claims. On September 4, 2001, thecases against us were consolidated. On October 9, 2002, the individualdefendants were dismissed from the litigation by stipulation and withoutprejudice.

On June 11, 2004, we and the individualdefendants, as well as many other issuers named as defendants in the classaction proceeding, entered into an agreement-in-principle to settle thismatter, and on June 14, 2004, this settlement was presented to the court.The district court granted a preliminary approval of the issuers’ settlement onFebruary 15, 2005, subject to certain modifications to the proposed barorder, to which plaintiffs and issuers agreed. On August 31, 2005, thecourt issued a preliminary order further approving the modifications to thesettlement and certifying the settlement classes. The court appointed GardenCity Group as the notice administrator for the settlement and ordered thatnotice of the settlement be distributed to all settlement class membersbeginning on November 15, 2005 and completed by January 15, 2006. Thedeadline for filing objections to the settlement is March 24, 2006, andthe fairness hearing has been set for April 26, 2006. Although we believethat we and the individual defendants have meritorious defenses to the claimsmade in the complaints, in deciding to pursue settlement, we 

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considered, among other factors, the substantial costsand the diversion of our management’s attention and resources that would berequired by litigation.

Pursuant to the terms of the proposed settlement, inexchange for a termination and release of all claims against us and theindividual defendants and certain protections against third-party claims, wewill assign to the plaintiffs certain claims we may have as an issuer againstthe underwriters, and our insurance carriers, along with the insurance carriersof the other issuers, will ensure a floor of $1 billion for any underwriter-plaintiffsettlement. Although the financial effect of the settlement on us will not bematerial, our insurance carriers’ exposure in this connection will range fromzero to a few hundred thousand dollars, and will be reduced proportionately byany amounts recovered by plaintiffs directly from the underwriters.

We cannot assure you that the settlement which hasbeen finalized will be accepted by the court, or that we will be fully coveredby collateral or related claims from underwriters, and that we would besuccessful in resulting litigation. In addition, even though we have insuranceand contractual protections that could cover some or all of the potentialdamages in these cases, or amounts that we might have to pay in settlement ofthese cases, an adverse resolution of one or more of these lawsuits could havea material adverse affect on our financial position and results of operationsin the period in which the lawsuits are resolved. We are not presently able toestimate potential losses, if any, related to the lawsuits.

We are also party to suits for collection, relatedcommercial disputes, claims by former employees, claims related to certaintaxes, claims from carriers and foreign service partners over reconciliation ofpayments for circuits, Internet bandwidth and/or access to the public switchedtelephone network, and claims from estates of bankrupt companies alleging thatwe received preferential payments from such companies prior to their bankruptcyfilings. Our employees have also been named in proceedings arising out ofbusiness activities in foreign countries. We intend to prosecute vigorouslyclaims that we have brought and employ all available defenses in contestingclaims against us, or our employees. Nevertheless, in deciding whether topursue settlement, we will consider, among other factors, the substantial costsand the diversion of management’s attention and resources that would berequired in litigation. In light of such costs, we have settled various and insome cases similar matters on what we believe have been favorable terms whichdid 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 adverseaffect on our business.

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**PART II**

**Item5.**                        *Market for the Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Securities*

*Market Information*

Ourcommon stock began trading publicly on the Nasdaq National Market on November 10,1999 and was traded under the symbol “IBAS.” On November 13, 2002, wereceived a determination from Nasdaq that shares of our common stock would nolonger trade on the Nasdaq National Market because we failed to meet certainminimum listing requirements. Our common stock began trading on the Nasdaqoperated Over-the-Counter Bulletin Board on November 14, 2002 under thesame symbol “IBAS.” The following table shows the range of the high and low pershare prices of our common stock, as reported by the Over-the-Counter BulletinBoard for the period indicated. Over-the-Counter market quotations reflectinterdealer prices, without retail mark-up, mark-down or commission and may notnecessarily reflect actual transactions.

| ** **       | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|----------|------------|---------|------------|
| **Fiscal 2005:** |       |     |       |    |       |
| Fourth Quarter   |       | $        | 2.75       |    | $          | 1.76 |   |
| Third Quarter    |       | 3.42     |       | 2.40    |       |
| Second Quarter   |       | 2.72     |       | 2.08    |       |
| First Quarter    |       | 2.48     |       | 1.95    |       |
| **Fiscal 2004:** |       |     |       |    |       |
| Fourth Quarter   |       | $        | 2.78       |    | $          | 2.27 |   |
| Third Quarter    |       | 2.39     |       | 1.68    |       |
| Second Quarter   |       | 1.95     |       | 1.17    |       |
| First Quarter    |       | 1.80     |       | 1.44    |       |

 

*Holders*

As of February 28, 2006,there were 230 stockholders of record. This does not reflect persons orentities who hold their stock in nominee or “street” name through variousbrokerage firms.

*Dividends*

We have never declared orpaid cash dividends on our common stock. We intend to retain all futureearnings to finance future growth, and, therefore, we do not currentlyanticipate paying any cash dividends in the foreseeable future.

*Issuer Purchases of Equity Securities*

Duringthe three months ended December 31, 2005, we purchased the followingshares of our common stock under a $5 million stock repurchase program publiclyannounced in October 2005:

| **Period**                                         | ** ** | ** ** | ** ** | **Total Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------------------------------|------------|--------------------------------------------------|------------|
| October 1,  2005—October 31, 2005   |       |       | —     |                             |       |                                             | —     |   |   |
| November 1,  2005—November 30, 2005 |       |       | 86,900     |                             |       |                                             | $          | 1.89 |   |   |
| December 1,  2005—December 31, 2005 |       |       | 896,150    |                             |       |                                             | 1.86       |   |   |
| Total                                              |       |       | 983,050    |                             |       |                                             | $          | 1.87 |   |   |

 

As of December 31,2005, we had approximately $3.1 million remaining for further repurchases underthis program. In February 2006, we announced a $10 million increase in ourstock repurchase program. Through March 10, 2006, we had repurchased anadditional $2.2 million of our common stock in 2006, leaving $10.9 millionremaining for repurchases under this program.

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**Item 6.**                        *Selected Financial Data*

The following historical selected financialinformation of iBasis has been derived from, and should be read in conjunctionwith, the consolidated financial statements and related notes includedelsewhere in this document.

DuringJuly 2002, we sold our Speech Solutions Business. Accordingly, theConsolidated Statements of Operations have been reclassified to present theresults of the Speech Solutions Business separately from continuing operationsas discontinued operations for all periods presented.

| ** **                                                                             | ** ** | **Year Ended December 31,**                         | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                             | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statements of  Operations Data:**                                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net revenue                                                                            |       | $                                                                  | 385,485    |   | $ | 263,678 |   | $ | 178,159 |   | $ | 164,942 |   | $ | 110,180 |   |
| Cost and operating  expenses:                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Data  communications and telecommunications (excluding depreciation and  amortization) |       | 336,152                                                            |       | 225,169 |   | 152,853 |   | 142,847 |   | 102,320 |   |
| Research and  development                                                              |       | 12,435                                                             |       | 13,803 |   | 13,387 |   | 17,781 |   | 23,939 |   |
| Selling and marketing                                                                  |       | 11,618                                                             |       | 9,205 |   | 7,513 |   | 11,279 |   | 20,323 |   |
| General and  administrative                                                            |       | 15,203                                                             |       | 12,822 |   | 8,174 |   | 24,387 |   | 25,601 |   |
| Depreciation and  amortization                                                         |       | 6,712                                                              |       | 10,345 |   | 20,065 |   | 31,871 |   | 32,364 |   |
| Non-cash  stock-based compensation                                                     |       | —                                                             |       | — |   | 86 |   | 967 |   | 1,368 |   |
| Loss on sale of  messaging business                                                    |       | —                                                             |       | — |   | — |   | 2,066 |   | — |   |
| Restructuring  costs                                                                   |       | 218                                                                |       | 165 |   | — |   | 5,536 |   | 51,834 |   |
| Total cost and  operating expenses                                                     |       | 382,338                                                            |       | 271,509 |   | 202,078 |   | 236,734 |   | 257,749 |   |
| Income (loss) from  operations                                                         |       | 3,147                                                              |       | (7,831 | ) | (23,919 | ) | (71,792 | ) | (147,569 | ) |
| Interest income                                                                        |       | 1,109                                                              |       | 218 |   | 161 |   | 1,290 |   | 9,169 |   |
| Interest expense                                                                       |       | (2,601                                                             | )          | (4,249 | ) | (3,967 | ) | (11,608 | ) | (16,518 | ) |
| Gain on bond  repurchases and exchanges                                                |       | —                                                             |       | — |   | 16,615 |   | 25,790 |   | 14.549 |   |
| Other expense, net                                                                     |       | (324                                                               | )          | (184 | ) | (180 | ) | (330 | ) | (565 | ) |
| Loss on long-term  non-marketable security                                             |       | —                                                             |       | (5,000 | ) | — |   | — |   | — |   |
| Foreign exchange  (loss) gain                                                          |       | (939                                                               | )          | 339 |   | 509 |   | 201 |   | 38 |   |
| Debt conversion  premium and transaction costs                                         |       | (1,975                                                             | )          | — |   | — |   | — |   | — |   |
| Debt refinancing charges:                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Transaction costs                                                                      |       | —                                                             |       | (2,159 | ) | — |   | — |   | — |   |
| Additional interest expense, net                                                       |       | —                                                             |       | (481 | ) | — |   | — |   | — |   |
| Loss before taxes  from continuing operations                                          |       | (1,583                                                             | )          | (19,347 | ) | (10,781 | ) | (56,449 | ) | (140,896 | ) |
| Foreign income tax  expense                                                            |       | (93                                                                | )          | (50 | ) | (157 | ) | (52 | ) | (22 | ) |
| Loss from continuing  operations                                                       |       | (1,676                                                             | )          | (19,397 | ) | (10,938 | ) | (56,501 | ) | (140,918 | ) |
| Income (loss) from  discontinued operations                                            |       | —                                                             |       | 1,861 |   | 1,251 |   | (65,222 | ) | (49,771 | ) |
| Net loss                                                                               |       | $                                                                  | (1,676     | ) | $ | (17,536 | ) | $ | (9,687 | ) | $ | (121,723 | ) | $ | (190,689 | ) |
| Basic and diluted  net loss per share:                                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss from  continuing operations                                                       |       | $                                                                  | (0.02      | ) | $ | (0.38 | ) | $ | (0.24 | ) | $ | (1.25 | ) | $ | (3.30 | ) |
| Income (loss) from  discontinued operations                                            |       | —                                                             |       | 0.03 |   | 0.03 |   | (1.45 | ) | (1.17 | ) |
| Basic and diluted  net loss per share                                                  |       | $                                                                  | (0.02      | ) | $ | (0.35 | ) | $ | (0.21 | ) | $ | (2.70 | ) | $ | (4.47 | ) |
| Basic and diluted  weighted average common shares outstanding                          |       | 80,236                                                             |       | 50,514 |   | 44,696 |   | 45,164 |   | 42,645 |   |

 

| ** **                                         | ** ** | **December 31,**   | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| **Consolidated Balance Sheet  Data:**              |       |                    |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and short-term  investments |       | $                       | 44,414     |   | $ | 38,825 |   | $ | 17,270 |   | $ | 32,317 |   | $ | 118,690 |   |
| Working capital                                    |       | 31,341                  |       | 30,774 |   | 3,264 |   | 21,906 |   | 155,509 |   |
| Total assets                                       |       | 106,808                 |       | 87,776 |   | 67,538 |   | 98,524 |   | 328,825 |   |
| Long term debt, net of current portion             |       | 2,216                   |       | 65,933 |   | 65,829 |   | 93,590 |   | 171,343 |   |
| Total  stockholders’ equity (deficit)         |       | 40,286                  |       | (23,893 | ) | (42,108 | ) | (33,972 | ) | 86,717 |   |
|                                                    |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 7.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

**Overview**

We are a leading provider of internationalcommunications services and a provider of retail prepaid calling services. Ouroperations consist of our Voice-Over-Internet-Protocol (“VoIP”) tradingbusiness (“Trading”), in which we connect buyers and sellers of internationaltelecommunications services, and our retail services business (“Retail”). Inthe Trading business we receive voice traffic from buyers—originating carrierswho are interconnected to our network via VoIP or traditional time divisionmultiplexing (“TDM”) connections, and we route that traffic over the Internetto sellers—local service providers and carriers in the destination countrieswith whom we have established agreements to manage the completion ortermination of the call. We use proprietary, patent-pending technology toautomate the selection of routes and termination partners based on a variety ofperformance, quality, and business metrics. We offer this Trading service on awholesale basis to carriers, consumer VoIP companies, telephony resellers andother service providers worldwide. We have call termination agreements withlocal service providers in North America, Europe, Asia, the Middle East, LatinAmerica, Africa and Australia.

We continue to expand our market share in our Tradingbusiness by expanding our customer base and by introducing cost-effectivesolutions for our customers to interconnect with our network. We have expandedour DirectVoIP offering with DirectVoIPTM Broadband, which addresses interconnectionrequirements that are specific to the growing consumer VoIP market. We havemore than 30 customers in the consumer VoIP market, including two of theindustry leaders, and we believe this market offers significant growthpotential for us. In addition, we continue to increase the traffic we terminateto mobile phones, which generally delivers higher average revenue per minuteand higher margins than fixed-line traffic. We also offer our PremiumCertified® international routing product which isdesigned to enhance our ability to compete for retail international trafficfrom existing customers as well as from mobile operators and consumer VoIPproviders. PremiumCertified® features routes to more than 700 destinationsthat are actively monitored and managed to deliver a level of quality that isequal to or exceeds the highest industry benchmarks for retail quality.

Our Retail business waslaunched in late 2003, with the introduction of our retail prepaid callingcards that are marketed through distributors primarily to ethnic communitieswithin major metropolitan markets in the U.S.. Our retail prepaid calling cardbusiness leverages our existing international VoIP network and has thepotential to deliver higher margins than are typically achieved in the Tradingbusiness. In addition, the retail prepaid calling card business typically has afaster cash collection cycle than the Trading business. In September 2004,we launched Pingo®,a prepaid calling service offered directly to consumers through an eCommerceweb interface, which we have included in our Retail business segment. Revenuesfrom our Pingo services were not material in 2005 and 2004.

**Critical AccountingPolicies**

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements.The preparation of these financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesof America requires us to (i) make judgments, assumptions and estimatesthat affect the reported amounts of assets, liabilities, revenue and expenses;and (ii) disclose contingent assets and liabilities. We base ouraccounting estimates on historical experience and other factors that weconsider reasonable under the circumstances. However, actual results may differfrom these estimates. To the extent there are material differences between ourestimates and the actual results, our future financial condition and results ofoperations will be affected. The following is a summary of our criticalaccounting policies and estimates.

*RevenueRecognition.**  *Forour Trading business, our revenue transactions are derived from the resale ofinternational minutes of calling time. We recognize revenue in the period theservice is provided, net of 

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revenue reserves for potential billing disputes. Suchdisputes can result from disagreements with customers regarding the duration,destination or rates charged for each call. For our Retail business, revenue isdeferred upon activation of the cards, or purchase of our web-based callingservices, and is only recognized as the prepaid balances are reduced based uponminute usage and service charges.

*Short-termmarketable investments.**  *Our investments are classified as available-for-sale,carried at fair value and consist of securities that are readily convertibleinto cash, including government securities and commercial paper, with originalmaturities at the date of acquisition ranging from 90 days to one year. Asour investments are classified as available-for-sale, we are only exposed tocharges to our results of operations in the event of a sale or an impairment ofa security.

*Allowancefor Doubtful Accounts.**  *Weperform ongoing credit evaluations of our customers and adjust credit limitsbased upon their payment history and current credit worthiness, as determinedby our review of their current credit information. We continuously monitorcollections and payments from our customers and take a provision for estimatedcredit losses based upon our historical experience and any specific customercollection issues that we have identified. We have been able to mitigate ourcredit risk, in part, by using reciprocal arrangements with customers, who arealso iBasis suppliers, to offset our outstanding receivables, as well asrequiring letters of credit and prepayments for certain customers. A majorityof our accounts receivable are from international carriers. For financial informationabout geographic areas and significant customers, see Note 3, “BusinessSegment and Geographic Information” to our Consolidated Financial Statements.

*Impairmentof Long Lived Assets.**  *Ourlong-lived assets consist primarily of property and equipment, which arecarried at historical cost. Only in situations where there are specificimpairment indicators are the value of these assets subject to impairment. Anyfuture impairment would not impact cash flow but would result in a charge toour statement of operations.

*RestructuringCharges.**  *Inprior years, we recorded significant charges to operations in connection withour restructuring programs. The related reserves reflect estimates, includingthose pertaining to severance costs and facility exit costs. We reassess thereserve requirements to complete each restructuring program at the end of eachreporting period. Actual experience may be different from these estimates. Wehad no changes to our restructuring accrual in 2003. In 2005 and 2004, we tookan additional charge of $0.2 million each year as a result of a change inestimates relating to our future sublease assumptions on vacant facilities.

*Income Taxes.**  *We have net deferred tax assetsrelated to net operating loss carryforwards, that expire at various datesthrough 2025 and other tax temporary differences. Significant judgment isrequired in determining our provision for income taxes, the amount of deferredtax assets and liabilities and the valuation allowance required to offsetagainst our net deferred tax assets. Factors such as future reversals ofdeferred tax assets and liabilities, projected future taxable income, changesin enacted tax rates and the period over which our deferred tax assets will berecoverable are considered in making these determinations.  We evaluate the realizability of our deferredtax assets quarterly and we may reverse a portion, or all of our net deferredtax asset in future periods. If this occurs, a tax benefit would be recordedfor financial reporting purposes. Our deferred tax asset is subject to a 100%valuation allowance.

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**Results ofOperations**

Thefollowing table sets forth for the periods indicated the principal items includedin the Consolidated Statements of Operations as percentages of net revenue.

| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net revenue                                          |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |
| Costs and operating  expenses:                       |       |                                       |       |   |   |   |   |
| Data communications and  telecommunications          |       | 87.2                                       |       | 85.4 |   | 85.8 |   |
| Research and development                             |       | 3.2                                        |       | 5.2 |   | 7.5 |   |
| Selling and marketing                                |       | 3.0                                        |       | 3.5 |   | 4.2 |   |
| General and  administrative                          |       | 4.0                                        |       | 4.8 |   | 4.6 |   |
| Depreciation and  amortization                       |       | 1.7                                        |       | 3.9 |   | 11.3 |   |
| Non-cash stock-based  compensation                   |       | —                                     |       | — |   | — |   |
| Restructuring costs                                  |       | 0.1                                        |       | 0.1 |   | — |   |
| Total costs and  operating expenses                  |       | 99.2                                       |       | 102.9 |   | 113.4 |   |
| Income (loss) from  operations                       |       | 0.8                                        |       | (2.9 | ) | (13.4 | ) |
| Interest income                                      |       | 0.3                                        |       | 0.1 |   | 0.1 |   |
| Interest expense                                     |       | (0.7                                       | )          | (1.6 | ) | (2.2 | ) |
| Gains on bond  repurchases and exchanges             |       | —                                     |       | — |   | 9.3 |   |
| Other expenses, net                                  |       | (0.1                                       | )          | (0.1 | ) | (0.1 | ) |
| Loss on long-term  non-marketable security           |       | —                                     |       | (1.9 | ) | — |   |
| Foreign exchange (loss)  gain                        |       | (0.2                                       | )          | 0.1 |   | 0.3 |   |
| Debt conversion premium  and transaction costs       |       | (0.5                                       | )          | — |   | — |   |
| Debt refinancing charges                             |       | —                                     |       | (1.0 | ) | — |   |
| Loss before income taxes  from continuing operations |       | (0.4                                       | )          | (7.3 | ) | (6.0 | ) |
| Foreign income tax  expense                          |       | —                                     |       | — |   | (0.1 | ) |
| Loss from continuing  operations                     |       | (0.4                                       | )          | (7.3 | ) | (6.1 | ) |
| Income from discontinued  operations                 |       | —                                     |       | 0.7 |   | 0.7 |   |
| Net loss                                             |       | (0.4                                       | )%         | (6.6 | )% | (5.4 | )% |

 

**Year Ended December 31,2005 Compared to Year Ended December 31, 2004**

*Netrevenue.**  *Ourprimary source of revenue is the fees that we charge customers for completingvoice and fax calls over our network and revenues from the sale of our prepaidcalling services. Our VoIP Trading revenue is dependent on the volume of voiceand fax traffic carried over the network, which is measured in minutes. Wecharge our customers fees, per minute of traffic, that are dependent on thelength and destination of the call and recognize this revenue in the period inwhich the call is completed. Our average revenue per minute is based upon ourtotal net revenue divided by the number of minutes of traffic over our networkfor the applicable period. Average revenue per minute is a keytelecommunications industry financial measurement. We believe this measurementis useful in understanding our financial performance, as well as industrytrends. Although the long distance telecommunications industry has beenexperiencing declining prices in recent years, due to the effects ofderegulation and increased competition, our average revenue per minute canfluctuate from period to period as a result of shifts in traffic over ournetwork to higher priced, or lower priced, destinations.

Our total net revenue increased by$121.8 million, or 46%, to $385.5 million for 2005 from$263.7 million for 2004. Traffic carried over our network increased to7.8 billion minutes for 2005 from 4.9 billion minutes for 2004. Ouraverage revenue per minute was 5.0 cents per minute in 2005 compared to 5.4cents per minute in 2004. The lower average revenue per minute in 2005primarily reflected a proportionately higher mix of lower priced traffic. Tradingrevenue increased $87.3 million, or 39%, to $312.6 million in 2005compared to $225.3 million in 2004. The increase in Trading revenue in2005 was, in part, a result of adding approximately 100 new Trading customersduring the year. We ended 2005 with approximately 30 

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consumer VoIP customers, including two industryleaders, and achieved significant year-to-year revenue growth in this fastgrowing market. Retail revenue increased $34.5 million to $72.9 million,or nearly double 2004 revenue of $38.4 million. This increase reflects thegrowth we have achieved with our retail prepaid calling card services, which weintroduced in late 2003. During 2005, we introduced a significant number of newcalling card brands and expanded our distribution network, particularly insouthern California. Revenue from our Pingo calling services, part of ourRetail services, which we launched in September 2004, was not material in2005 or 2004.  We believe that total revenuein 2006 will be in the range of $480 million to $500 million.

*Datacommunications and telecommunications expenses.**  *Data communications andtelecommunications expenses are composed primarily of termination and circuitcosts. Termination costs are paid to local service providers to terminate voiceand fax calls received from our network. Terminating costs are negotiated withthe local service provider. Should competition cause a decrease in the priceswe charge our customers and, as a result, a decrease in our profit margins, ourcontracts, in some cases, provide us with the flexibility to renegotiate theper-minute termination fees. Circuit costs include charges for Internet accessat our Internet Central Offices, fees for connections between our InternetCentral Offices and our customers and/or service provider partners, facilitiescharges for overseas Internet access and phone lines to the primarytelecommunications carriers in particular countries, and charges for thelimited number of dedicated international private line circuits we use. For ourRetail calling services, these costs also include the cost of local and tollfree access charges.

Data communications and telecommunications expensesincreased by $111.0 million, or 49%, to $336.2 million for 2005 from$225.2 million for 2004. Data communications and telecommunicationsexpenses were $276.4 million and $60.8 million for our Trading and Retailbusiness segments in 2005, respectively, compared to $192.6 million and $32.6million in 2004, respectively. The increase in data communications andtelecommunications expense primarily reflects the increase in revenue andtraffic, as discussed above. The largest component of this expense, terminationcosts, increased to $329.4 million for 2005 from $219.1 million for2004 while circuit costs increased slightly to $6.8 million for 2005 from$6.1 million in 2004. As a percentage of net revenues, data communicationsand telecommunications costs increased to 87.4% for 2005 from 85.4% in 2004.

*Grossmargin**  *Totalgross margin (net revenue less data communications and telecommunicationscosts) declined to 12.8% of total net revenue in 2005, compared to 14.6% oftotal net revenue in 2004. Trading gross margin was 11.9% of Trading revenue in2005, compared to 14.5% in 2004. The lower Trading gross margin was primarilydue to lower rates on certain U.S.-originated and China-originated traffic in2005. Retail gross margin was 16.6% of Retail revenue in 2005, compared to14.9% in 2004.

*Researchand development expenses*   Research anddevelopment 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 involvedin the development and operation of our global network operations centers andthe rest of our network. Also included in this category are research anddevelopment expenses that consist primarily of expenses incurred in enhancing,developing, updating and supporting our network and our proprietary softwareapplications.

Research and development expenses decreased$1.4 million to $12.4 million for 2005 from $13.8 million for2004. The decrease in research and development expenses is due to lowerexpenditures related to the support of The iBasis Network. As a percentage ofnet revenue, research and development expenses decreased to 3.2% for 2005 from5.2% for 2004.

*Sellingand marketing expenses.**  *Selling and marketing expenses increased by$2.4 million, to $11.6 million in 2005, from $9.2 million in2004. The increase in expenses primarily relates to additional investments wehave made in sales and marketing, primarily to support our expanding Retailbusiness, including increasing 

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advertising and marketing expenditures by $0.6million. As a percentage of net revenue, selling and marketing expensesdecreased to 3.0% for 2005 from 3.5% for 2004.

*Generaland administrative expenses.**  *General and administrative expenses include salary,payroll tax and benefit expenses and related costs for general corporatefunctions, including executive management, finance and administration, legaland regulatory, facilities, information technology and human resources.

General and administrative expenses increased by$2.4 million to $15.2 million for 2005 from $12.8 million for2004. Increases to the allowance for doubtful accounts were $0.9 million in2005 compared to $0.3 million in 2004. In addition, incentive compensationwas $0.3 million and professional fees increased by $0.8 million, whichrelated largely to compliance with the internal control provisions undersection 404 of the Sarbanes-Oxley Act. As a percentage of net revenue,general and administrative expenses were 4.0% for 2005 and 4.8% for 2004.

*Restructuringcosts.**  *In2005 and 2004, we took charges of $0.2 million for a change in estimaterelating to our sublease assumptions associated with our prior restructuringcharges.

*Depreciationand amortization expenses.**  *Depreciation and amortization expenses decreased by$3.6 million to $6.7 million for 2005 from $10.3 million for2004. This decrease was primarily due to the end of the depreciable life ofcertain networking equipment and computer software. As a percentage of netrevenue, depreciation and amortization expenses decreased to 1.7% for 2005 from3.9% for 2004.

*Interestincome.**  *Interestincome was $1.1 million for 2005, compared to $0.2 million in 2004. Thisincrease primarily reflects the income earned on higher average cash andshort-term investment balances in 2005 compared to 2004.

*Interestexpense.**  *Interestexpense decreased $1.6 million in 2005 to $2.6 million, from $4.2 million in2004, as a result of the conversion of our 63⁄4%Convertible Subordinated Notes and 8% Secured Convertible Notes to common stockbetween June and September 2005. In addition, interest expense alsoincludes interest on capital leases of $0.3 million and $0.5 million in 2005and 2004, respectively.

*Otherexpenses, net.**  *Otherexpenses, net were $0.4 million and $0.2 million in 2005 and 2004,respectively, and relate mostly to state excise, use and franchise taxes.

*Foreignexchange loss (gain), net.**  *Foreignexchange loss was $0.9 million in 2005, compared to a gain of $0.3 million in2004. The increase in foreign exchange loss primarily reflects the effect ofthe weakening Euro on our Euro-denominated accounts receivable. We beganseparately reporting foreign exchange gain and losses in 2005 as they havebecome material. We have reclassified prior year amounts to conform to thecurrent year presentation.

*Losson long-term non-marketable security.**  *In the first quarter of 2004, wedetermined that our equity investment in a privately-held company had beenother 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-heldcompany’s current cash position and recent operating results, as well as theperceived inability of that company to obtain additional financing at a level,and in a timely manner, to support its continued operations.

*Debtconversion premium and transaction costs.**  *Debt conversion premium and transactioncosts of $2.0 million reflects debt conversion premium payments made of$1,855,000 to certain noteholders in June and July 2005 in negotiatedagreements to encourage early conversion of $29.0 of our 8% Secured ConvertibleNotes due June 2007 and $2.0 million of our 63⁄4% Convertible SubordinatedNotes due June 2009.  Of the totalpayment, $1,740,000 was paid in cash and the balance was paid in the form of43,736 shares of iBasis common stock with a fair value of $115,000. Inaddition, transactions costs were approximately $120,000 and consisted ofinvestment banking and legal fees.

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*Refinancingtransaction costs.**  *Transactioncosts relating to the refinancing of our debt in June 2004 were$2.2 million. These costs consisted primarily of investment bankingservices, legal and audit fees.

*Refinancingrelated interest expense.**  *We issued warrants to purchase a total of5.2 million shares of our common stock, at $1.85 per share, to the holdersof the 111¤2%Senior Secured Notes due January 2005 as partial consideration for theprepayment of these notes in June 2004. The fair value of $2.1 millionfor these warrants has been charged to operations as additional interestexpense. Future interest on the 111¤2%Senior Secured Notes due January 2005 of $1.6 million, that hadoriginally been charged to the gain on bond exchanges in 2003 and was not paidas a result of the prepayment of these notes, was recorded as a reduction tothe additional interest expense associated with the refinancing. As a result,refinancing related interest expense, net was $0.5 million in 2004.

*Incometaxes.**  *Wehave not recorded an income tax benefit for the losses associated with ouroperations in 2005 and 2004, as we believe that it is more likely than not thatthese benefits will not be realized. Foreign income tax expense on the earningsof our foreign subsidiaries was $93,000 and $50,000 in 2005 and 2004,respectively.

*Incomefrom discontinued operations.**  *We had no income or loss fromdiscontinued operations in 2005. Income from discontinued operations of$1.9 million in 2004 relates to the expiration of certain contingentobligations associated with the sale of our former Speech Solutions Business in2002.

*Net loss.**  *Loss from continuing operations was$1.7 million in 2005 compared to a loss of $19.4 million in 2004. Excludingdebt conversion premium and transaction costs of $2.0 million, profit fromcontinuing operations was $0.3 million in 2005. Excluding debt refinancingcharges of $2.6 million and the loss on a long-term non-marketablesecurity of $5.0 million, the loss from continuing operations in 2004 was$11.8 million. The improved profitability of $12.1 million in 2005compared to 2004, excluding debt conversion premium and transactions costs,refinancing charges and loss on a long-term non-marketable security, relates tothe proportionately lower level of costs and operating expenses on the higherlevel of revenues year-to-year. In 2006, weexpect to achieve net income per share of $0.05 per share to $0.08 per share.

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

*Netrevenue.**  *Ourtotal net revenue increased by $85.5 million, or 48%, to$263.7 million for 2004 from $178.2 million for 2003. Traffic carriedover our network increased to 4.9 billion minutes for 2004 from3.5 billion minutes for 2003 and our average revenue per minute increasedto 5.4 cents per minute in 2004 compared to 5.1 cents per minute in 2003, as ourtraffic, as indicated above, moved to higher priced destinations. Tradingrevenue increased $52.7 million, or 31%, to $225.3 million in 2004compared to $172.6 million in 2003. Retail revenue increased$32.8 million, or nearly 7 times, to $38.4 million in 2004 comparedto $5.6 million in 2003. This increase reflects the rapid growth we haveachieved with our retail prepaid calling card services, which we introduced inthe third quarter of 2003. Revenue from our Pingo calling services, part of ourRetail services, which we launched in September 2004, was not material in2004.

*Datacommunications and telecommunications expenses.**  *Data communications andtelecommunications expenses increased by $72.3 million, or 47%, to$225.2 million for 2004 from $152.9 million for 2003. Datacommunications and telecommunications expenses were $192.6 million and$32.6 million for our Trading and Retail business segments, respectively. Theincrease in data communications and telecommunications expense primarilyreflects the increase in revenue and traffic, as discussed above. The largestcomponent of this expense, termination costs, increased to $219.1 millionfor 2004 from $147.2 million for 2003 while circuit costs increasedslightly to $6.1 million for 2004 from $5.7 million in 2003. As apercentage of net revenues, data communications and telecommunications expensesdecreased to 85.4% for 2004 from 85.8% in 2003.

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*Grossmargin**  *Totalgross margin (net revenue less data communications and telecommunicationscosts) increased to 14.6% of total net revenue in 2004, compared to 14.2% oftotal net revenue in 2003. Trading gross margin increased to 14.5% of Tradingrevenue in 2004, compared to 13.7% in 2003. Retail gross margin was 14.9% ofRetail revenue in 2004, compared to 29.4% in 2003.

*Researchand development expenses*   Research anddevelopment expenses increased by $0.4 million to $13.8 million for2004 from $13.4 million for 2003. The increase in research and developmentexpenses is due to expenditures related to the support of The iBasis Network,including network hardware and software maintenance. As a percentage of netrevenue, research and development expenses decreased to 5.2% for 2004 from 7.5%for 2003.

*Sellingand marketing expenses.**  *Selling and marketing expenses increased by$1.7 million, to $9.2 million in 2004, from $7.5 million in2003. The increase in expenses primarily relates to additional investments wehave made in sales and marketing to support our rapidly expanding Retail business.As a percentage of net revenue, selling and marketing expenses decreased to3.5% for 2004 from 4.2% for 2003.

*Generaland administrative expenses.**  *General and administrative expenses increased by$4.6 million to $12.8 million for 2004 from $8.2 million for2003. In 2003, general and administrative expenses were reduced by$4.3 million for the recovery of a previously reserved customer accountsreceivable 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 apercentage of net revenue, general and administrative expenses were 4.7% for2004 and 4.3% for 2003.

*Restructuringcosts.**  *Inthe fourth quarter of 2004, we took a charge of $0.2 million for a changein estimate relating to our sublease assumptions associated with ourrestructuring charge initiated in 2002.

*Depreciationand amortization expenses.**  *Depreciation and amortization expenses decreased by$9.8 million to $10.3 million for 2004 from $20.1 million for2003. This decrease was primarily due to the end of the depreciable life ofcertain networking equipment and computer software. As a percentage of net revenue,depreciation and amortization expenses decreased to 3.9% for 2004 from 11.3%for 2003.

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

*Interestincome.**  *Interestincome was $218,000 and $161,000 for 2004 and 2003, respectively. This increaseprimarily reflects the income earned on the proceeds from our private equityplacement in September 2004.

*Interestexpense.**  *Interestexpense in 2004 is primarily composed of interest expense on the 63⁄4%Convertible Subordinated Notes and the 8% Secured Convertible Notes, as well ascapital leases. Interest expense increased by $0.2 million to$4.2 million in 2004 from $4.0 million in 2003. As a result of thecompletion of the refinancing of our debt in June 2004, interest expenseincludes 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 2005had been charged to the gain on bond exchanges in 2003, in accordance with SFASNo. 15, “Accounting by Debtors and Creditors Regarding Troubled DebtRestructuring”. As a result, prior to the third quarter of 2004, interestexpense did not include interest on the 111⁄2% Senior Secured Notes due January 2005.

*Gainon bond exchanges.**  *During2003, we entered into agreements with principal holders of our 53⁄4% ConvertibleSubordinated Notes which resulted in the retirement of $50.4 million ofsuch notes in 

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exchange for new debt instruments at 50% of the facevalue of the retired notes. Under the terms of the agreement, the holders ofthe retired notes received $25.2 million of new 111⁄2% Senior Secured Notesand warrants for 4,915,416 shares of our common stock. Each warrant had aninitial exercise price of $0.65 per share and is exercisable over a five-yearterm. The 111⁄2% Senior Secured Notes, shared in a second priority lien on ourassets and were subordinated to our bank revolving line of credit.

Thegain we recognized in 2003 was calculated as follows:

| ** **                                                                             | ** ** | **2003**                | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                             | ** ** | **(in thousands)** | ** ** |
| Face value of  surrendered 53⁄4% Convertible Subordinated Notes due March 2005 |       |                    | $          | 50,350 |   |   |
| Less: 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 |   |   |

 

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

*Foreignexchange gain, net.**  *Foreignexchange gain was $0.3 million in 2004, compared to a gain of $0.5 millionin 2003. The foreign exchange gains in both years primarily reflected theeffect of the strengthening Euro on our Euro-denominated accounts receivable.

*Losson long-term non-marketable security.**  *In the first quarter of 2004, wedetermined that our equity investment in a privately-held company had beenother than temporarily impaired, and, as a result, recorded a non-cash$5.0 million charge. Our decision was based on our evaluation of theprivately-held company’s current cash position and recent operating results, aswell as the perceived inability of that company to obtain additional financingat a level, and in a timely manner, to support its continued operations.

*Refinancingtransaction costs.**  *Transactioncosts relating to the refinancing of our debt in June 2004 were$2.2 million. These costs consisted primarily of investment bankingservices, legal and audit fees.

*Refinancingrelated interest expense.**  *We issued warrants to purchase a total of5.2 million shares of our common stock, at $1.85 per share, to the holdersof the 111⁄2% Senior Secured Notes as partial consideration for the prepayment ofthese notes in June 2004. The fair value of $2.1 million for thesewarrants has been charged to operations as additional interest expense. Futureinterest on the 111⁄2% Senior Secured Notes of $1.6 million, that hadoriginally been charged to the gain on bond exchanges in 2003 and was not paidas a result of the prepayment of these notes, was recorded as a reduction tothe additional interest expense associated with the refinancing. As a result,refinancing related interest expense, net was $0.5 million in 2004.

*Incometaxes.**  *Wehave not recorded an income tax benefit for the losses associated with our operatinglosses in 2004 and 2003, as we believe that it is more likely than not thatthese benefits will not be realized. Foreign income tax expense on the earningsof our foreign subsidiaries was $50,000 and $157,000 in 2004 and 2003,respectively.

*Incomefrom discontinued operations.**  *Income from discontinued operationsof $1.9 million in 2004 relates to the expiration of certain contingentobligations associated with the sale of our former Speech Solutions 

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Business in 2002. Income from discontinued operationsof $1.3 million in 2003 represents additional consideration of$1.3 million for an earn-out payment based on the achievement of certain2003 revenue-based milestones associated with our former Speech SolutionsBusiness.

*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-termnon-marketable security of $5.0 million, the loss from continuingoperations in 2004 was $11.7 million. Excluding the gain on bond exchangesof $16.6 million, the loss in 2003 was $27.5 million. The reductionin the net loss in 2004 compared to 2003 of $15.8 million, excluding debtrefinancing charges, loss on a long-term non-marketable security and gain onbond exchanges, relates to the proportionately lower level of costs andoperating expenses on the higher level of revenues year-to-year.

**Liquidity and Capital Resources**

Our principal capital and liquidity needs historicallyhave related to the development of our network infrastructure, our sales andmarketing activities, research and development expenses, and general capitalneeds. Our working capital needs have been met, in large part, from the netproceeds from public and private offerings of common stock and issuances ofconvertible debt. In addition, we have also met our capital needs throughvendor capital leases and other equipment financings.

Net cash provided by operating activities was$12.2 million in 2005, compared to net cash used in operating activitiesof $7.2 million and $3.2 million in 2004 and 2003, respectively. Cashprovided by operating activities in 2005 was result of the  loss of $1.6 million offset by non-cashcharges of $8.0 million, and an increase in accounts payable, accruedexpenses and deferred revenue of $20.6 million, partially offset by anincrease in accounts receivable of $14.4 million. The increases in accountsreceivable and accounts payable relate primarily to the growth in revenue andtraffic in 2005 compared to 2004. Accounts receivable days sales outstandingdeclined to 41 days at December 31, 2005 compared to 43 days atDecember 31, 2004. Cash used in operating activities in 2004 related tothe loss from continuing operations of $19.4 million, partially offset bynon-cash charges of $17.9 million. In addition, the increase in accountsreceivable of $12.6 million was partially offset by an increase in accountspayable, accrued expenses and deferred revenue of $8.1 million. Cash used incontinuing operating activities in 2003 related to our loss from continuingoperations 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 millionand changes in other assets and liabilities of $7.4 million.

Net cash used in investing activities in 2005 of $2.4million included $3.4 million used for capital expenditures, partially offsetby net maturities of $1.0 million of short-term investments. Our short-terminvestments are classified as available-for-sale and consist of securities thatare readily convertible into cash, including government securities andcommercial paper, with original maturities at the date of acquisition rangingfrom 90 days to one year. At December 31, 2005, $16.9 million ofsecurities with maturities of less than one year were classified as short-terminvestments. Net cash used in investing activities in 2004 of $18.7 millionconsisted of $3.3 million used for capital expenditures and$17.9 million in net purchases of short-term  investments.  In 2004, we also received proceeds from anearn-out receivable and escrow payment of $1.0 million and$1.5 million, respectively, relating to the sale of our former SpeechSolutions Business. Net cash used in investing activities was $5.2 millionin 2003, of which $4.5 million was used for capital expenditures and$0.7 million was a payment relating to an adjustment associated with thesale of our Speech Solutions Business.

Net cash used in financing activities was $3.2 millionin 2005 and consisted of debt conversion premium payments and transaction costsof $1.9 million, the redemption of the remaining $0.9 million of 53⁄4%Convertible Subordinated Notes on their maturity date in March 2005 andcapital lease payments of $1.2 million. During 2005, we received proceedsof $2.6 million from warrant and stock option exercises. In 

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addition, in October 2005, we announced a programto repurchase up to $5.0 million of our common stock. In the fourth quarter of2005, we repurchased 983,050 shares of our common stock at a cost of $1.9million. In February 2006, we expanded our stock repurchase program toallow for the repurchase of up to a total of $15.0 million. Through March 10,2006, we repurchased an additional 1,131,300 shares in 2006 at a cost of $2.3million, leaving $10.9 million remaining for repurchases under this program.

During 2005, we completed the process of eliminatingour long-term bond debt through a series of debt conversion transactions.  These transactions have resulted in interestsavings on an annualized basis of approximately $4.7 million. In June 2005,we negotiated (i) the early conversion of $9,100,000 of our 8% SecuredConvertible Notes due June 2007 into 4.9 million shares of common stock atthe conversion price of $1.85 per common share and (ii) the earlyconversion of $2,000,000 of our 63⁄4% Convertible Subordinated Notes due June 2009into 1.1 million shares of common stock at the conversion price of $1.85 percommon share.  We paid a total of$661,000 in premiums to the noteholders to encourage the early conversion ofthese notes, of which $546,000 was paid in cash and the remaining $115,000 waspaid in the form of 43,736 shares of our common stock with a fair value of$115,000.  In addition, $1,150,000 of our63⁄4% Convertible Subordinated Notes due June 2009 voluntarily convertedinto 0.6 million shares of common stock at the conversion price of $1.85 pershare. In total, $12,250,000 of notes were converted into 6.6 million shares ofcommon stock.

In July 2005, we negotiated the early conversionof the remaining $19,900,000 of our 8% Secured Convertible Notes due June 2007into 10.8 million shares of common stock at the stated conversion price of$1.85 per share. We paid a total premium of $1,194,000 in cash to thenoteholders to encourage the early conversion of these notes. In addition,transaction costs associated with this early conversion were $0.1 million andconsisted primarily of investment banking fees.

From mid-August 2005 through early September 2005,the remaining $32,599,000 of our 63⁄4% Convertible Subordinated Notes due June 2009were converted to shares of our common stock at the stated conversion price of$1.85 per share. In mid-August 2005, we announced our intention to redeemall of these outstanding notes for cash at the face value of the notes, plusaccrued interest, with a planned redemption date of September 6, 2005. Priorto the redemption date, all of the holders elected to convert their notes tocommon stock at the stated conversion price of $1.85 per share.

Net cash provided by financing activities was $29.5 millionin 2004. In June 2004, we completed a refinancing of our outstanding debtobligations. As part of the refinancing, we completed an exchange offer,pursuant to which $37.3 million of our outstanding 53⁄4% ConvertibleSubordinated Notes due March 2005, representing approximately 98% of thetotal amount of these notes then outstanding, were tendered for the sameprincipal amount of new 63⁄4% Convertible Subordinated Notes due June 2009.Approximately $0.9 million of the 53⁄4% Convertible Subordinated Notes due March 2005remained outstanding after the exchange offer. Simultaneously with the exchangeoffer, we prepaid all $25.2 million of our existing 111⁄2% Senior SecuredNotes due January 2005 for cash equal to the principal amount plus accruedbut unpaid interest and the issuance of warrants exercisable for an aggregateof 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 ofwhich $25.2 million was used to prepay the 111⁄2% Senior Secured Notes due January 2005.Cash paid for transactions costs associated with the debt refinancing were$2.0 million. During the second half of 2004, holders of $1.3 millionof 63⁄4% Convertible Subordinated Notes due June 2009 voluntarily converted theirnotes into 0.7 million shares of common stock at the conversion price of$1.85 per share. In 2005, the remaining 63⁄4% Convertible Subordinated Notes due June 2009and the 8% Secured Convertible Notes due June 2007 were converted intoshares of our common stock at $1.85 per share, as described above.

In September 2004, we completed a private equityplacement of 15,000,000 shares of our common stock at $2.10 per share, fortotal gross proceeds of $31.5 million, to a group of institutional andaccredited 

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investors. Investment banking fees and other costs ofthe transaction were $1.3 million, resulting in net proceeds to us fromthe private equity placement of $30.2 million. The net proceeds from theprivate equity placement were used for working capital requirements, capitalasset purchases and general corporate purposes. In addition in 2004, wereceived proceeds of $2.0 million from the exercise of warrants and stockoptions, made payments on capital leases of $2.2 million and paid down ourbank borrowings of $2.3 million.

Net cash used in financing activities was$6.7 million in 2003, of which $5.8 million was used to repay ourcapital lease obligations and $0.9 million was paid for fees in connectionthe exchange of a portion of our outstanding 53⁄4% Convertible Subordinated Notesfor 111⁄2% Senior Secured Notes.

During 2003, we entered into agreements with principalholders of our 53⁄4% Convertible Subordinated Notes due March 2005 whichresulted in the retirement of $50.4 million of such notes in exchange for newdebt instruments at 50% of the face value of the retired notes. Under the termsof the agreement, the holders of the retired notes received $25.2 millionof new 8% Senior Secured Notes due January 2005 and warrants to purchase4,915,416 shares of common stock. Each warrant has an exercise price of $0.65per share and is exercisable over a five-year term. The 8% Senior Secured Notesdue January 2005 were prepaid in June 2004 as part of our debtrefinancing. During 2003, our bank exercised a warrant we issued in connectionwith our bank lines for 0.3 million shares of common stock on a cashlessbasis.

In January 2005, we amended and extended ourrevolving line of credit with our bank. The new $15.0 million revolvingline of credit has a two-year term, bears interest at the bank’s prime rateplus 1⁄2% and is collateralized by substantially all of our assets. Borrowingsunder the line may also be used for letters of credit and foreign exchangecontracts and are no longer on a borrowing formula. The new revolving line ofcredit requires us to comply with various non-financial and financialcovenants, including minimum profitability and liquidity and requires us tomaintain a minimum cash balance of $15.0 million with the bank, or besubject to certain additional fees. We were in compliance with all of thecovenants under our new revolving lines of credit during 2005. At December 31,2005 and 2004, we had no borrowings under our bank line of credit. We hadborrowings outstanding under previous revolving lines of credit of$2.3 million at December 31, 2003. At December 31, 2005, we had$2.4 million in letters of credit outstanding under our bank line ofcredit.

During 2005 and 2004, we financed $3.2 million and$1.8 million of capital expenditures, respectively, with lease financing. Themajority of the capital lease obligations have a three year term.

In February 2006, we announced our intention toseek shareholder approval for a reverse stock split at our next Annual Meetingfor the purpose of increasing the share price of our common stock to helpachieve compliance with the listing requirements of the NASDAQ National Market.

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

We anticipate that the December 31,2005 balance of $44.4 million in cash, cash equivalents and short-terminvestments, together with expected cash flow generated from operations, willbe sufficient to fund our operations, capital expenditures and stock repurchaseprogram for at least the next twelve months. We expect capital expenditures tobe between $10 million and $12 million in 2006. In addition, we have expandedour stock repurchase program in February 2006 to repurchase up to $15million of our common stock, of which $1.9 million was used in 2005, leaving$13.1 million remaining for 2006.

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**Off-Balance Sheet Arrangements**

Under accountingprinciples generally accepted in the U.S., certain obligations and commitmentsare not required to be included in the consolidated balance sheets andstatements of operations. These obligations and commitments, while entered intoin the normal course of business, may have a material impact on liquidity. Wedo not have any relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities, which would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited 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.

**Contractual Obligations**

Thefollowing table summarizes our future contractual obligations as of December 31,2005:

| ** **                                     | ** ** | **Payment Due Dates** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **Total**                       | ** ** | **Less than  1 Year** | ** ** | **1 to 2  Years** | ** ** | **2 to 3  Years** | ** ** | **3 to 5  Years** | ** ** | **After  5 Years** | ** ** |
| ** **                                     | ** ** | **(In thousands)**         | ** ** |
| Capital lease  obligations, including interest |       | $                               | 4,265      |   |   | $1,866 |   |   | $1,604 |   | $ | 795 |   | $ | — |   |   | $ | — |   |   |
| Operating leases                               |       | 8,782                           |       |   | 2,669 |   |   | 2,136 |   | 1,834 |   | 2,143 | ** ** | ** ** | — |   |   |
| Total                                          |       | $                               | 13,047     |   |   | $ | 4,535 |   |   | $ | 3,740 |   | $ | 2,629 |   | $ | 2,143 |   |   | $ | — |   |   |
|                                                |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**New Accounting Pronouncements**

In April 2005, the Securities and ExchangeCommission announced a new rule that amends the compliance date foradoption of Statement of Financial Accounting Standards No. 123R, *Share-Based Payment*(“SFAS No. 123R”). The new rule extends the requiredadoption of SFAS No. 123R for companies with calendar fiscal years to thefirst quarter of 2006. SFAS No. 123R focuses primarily on accounting fortransactions in which an entity obtains employee services in share-basedpayment transactions. The Statement requires entities to recognize stockcompensation expense for awards of equity instruments to employees based on thegrant-date fair value of those awards (with limited exceptions).

We expect to adopt SFAS No. 123R using theStatement’s modified prospective application method. Adoption of SFAS No. 123Ris expected to increase our stock compensation expense. We are currently in theprocess of evaluating the financial statement impact of the implementation ofSFAS No. 123R. We expect stock compensation expense in 2006, relating tounvested, outstanding stock options as of December 31, 2005, will be inthe range of $0.7 million to $1.0 million. Additional grants of stock optionsin 2006 will further increase our stock compensation expense.

In March 2005 theFASB issued FASB Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations*(“FIN 47”)*.* FIN 47 requires us to recognize aliability for the fair value of a conditional asset retirement obligation ifthe fair value of the liability can be reasonably recognized. A conditionalasset retirement obligation refers to a legal obligation to perform an assetretirement activity, such as restoring a leased facility to its originalcondition, and where the timing and method of settlement are contingent upon afuture event, that may or may not be beyond our control. This liability shouldbe recognized when incurred; typically upon acquisition or entering into alease. The adoption of FIN 47 did not have a material impact on ourconsolidated results of operations and financial condition in 2005.

**Item 7A.**                Quantitativeand Qualitative Disclosures About Market Risk

Our primary market risk exposure is related tointerest rates and foreign currency exchange rates. To date, we have notengaged in trading market risk sensitive instruments or purchasing hedginginstruments, 

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

Our investments in commercial paper and debtinstruments are subject to interest rate risk, but due to the short-term natureof these investments, interest rates would not have a material impact on theirvalue at December 31, 2005. Our primary interest rate risk is the risk onborrowings under our line of credit agreements, which are subject to interestrates based on the bank’s prime rate. A change in the applicable interest rateswould also affect the rate at which we could borrow funds or finance equipmentpurchases. Our capital lease obligations are fixed rate debt. A 10% change ininterest rates would not have a material impact on interest expense associatedwith our line of credit agreement.

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

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**Item 8.**                        *Financial Statements and Supplementary Data*

**Indexto Consolidated Financial Statements**

|                                                                                                                       | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **Consolidated Financial  Statements:**                                                                               |       |     |       |   |   |
| Report of Independent Registered Public Accounting  Firm                                                              |       |     | 42         |   |   |
| Consolidated Balance Sheets as of December 31,  2005 and 2004                                               |       |     | 43         |   |   |
| Consolidated Statements of Operations for the Three  Years Ended December 31, 2005                          |       |     | 44         |   |   |
| Consolidated Statements of Stockholders’ Equity  (Deficit) for the Three Years Ended December 31, 2005 |       |     | 45         |   |   |
| Consolidated Statements of Cash Flows for the Three  Years Ended December 31, 2005                          |       |     | 46         |   |   |
| Notes to  Consolidated Financial Statements                                                                           |       |     | 48         |   |   |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directorsand Stockholders ofiBasis, Inc.Burlington, MA

We have audited the accompanying consolidated balancesheets of iBasis, Inc. and subsidiaries (the “Company”) as of December 31,2005 and 2004, and the related consolidated statements of operations,stockholders’ equity (deficit), and cash flows for each of the three years inthe period ended December 31, 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 statementspresent fairly, in all material respects, the financial position of iBasis, Inc.and subsidiaries as of December 31, 2005 and 2004, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2005, in conformity with accounting principlesgenerally accepted in the United States of America.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2005, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 15, 2006, expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting.

/s/ DELOITTE &TOUCHE LLP

Boston, MassachusettsMarch 15, 2006

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**iBasis, Inc.Consolidated Balance Sheets**

 

| ** **                                                                                                                       | ** ** | **December 31,**                                          | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2005**                                                       | ** ** | **2004** | ** ** |
| ** **                                                                                                                       | ** ** | **(In thousands, except  per share data)** | ** ** |
| **Assets**                                                                                                                       |       |                                                           |       |   |   |
| Current assets:                                                                                                                  |       |                                                           |       |   |   |
| Cash and cash  equivalents                                                                                                       |       | $                                                              | 27,478     |   | $ | 20,928 |   |
| Short-term  marketable investments                                                                                               |       | 16,936                                                         |       | 17,897 |   |
| Accounts receivable, net  of allowance for doubtful accounts of $2,507 and $3,391, respectively                             |       | 47,641                                                         |       | 34,133 |   |
| Prepaid expenses and  other current assets                                                                                       |       | 2,676                                                          |       | 2,420 |   |
| Total current assets                                                                                                             |       | 94,731                                                         |       | 75,378 |   |
| Property and equipment, at cost:                                                                                                 |       |                                                           |       |   |   |
| Network equipment                                                                                                                |       | 53,434                                                         |       | 74,768 |   |
| Equipment under capital  lease                                                                                                   |       | 4,917                                                          |       | 5,632 |   |
| Computer software                                                                                                                |       | 10,353                                                         |       | 10,006 |   |
| Leasehold improvements                                                                                                           |       | 6,697                                                          |       | 6,437 |   |
| Furniture and fixtures                                                                                                           |       | 1,049                                                          |       | 1,075 |   |
|                                                                                                                             |       | 76,450                                                         |       | 97,918 |   |
| Less—Accumulated  depreciation and amortization                                                                             |       | (64,696                                                        | )          | (86,057 | ) |
|                                                                                                                             |       | 11,754                                                         |       | 11,861 |   |
| Deferred debt financing  costs, net                                                                                              |       | —                                                         |       | 177 |   |
| Other assets                                                                                                                     |       | 323                                                            |       | 360 |   |
|                                                                                                                             |       | $                                                              | 106,808    |   | $ | 87,776 |   |
| **Liabilities  and Stockholders’ Equity (Deficit)**                                                                         |       |                                                           |       |   |   |
| Current liabilities:                                                                                                             |       |                                                           |       |   |   |
| Accounts payable                                                                                                                 |       | $                                                              | 27,796     |   | $ | 24,340 |   |
| Accrued expenses                                                                                                                 |       | 24,479                                                         |       | 12,186 |   |
| Deferred revenue                                                                                                                 |       | 9,517                                                          |       | 6,303 |   |
| Current portion of long-term  debt                                                                                               |       | 1,598                                                          |       | 1,775 |   |
| Total current  liabilities                                                                                                       |       | 63,390                                                         |       | 44,604 |   |
| Long-term debt,  net of current portion                                                                                          |       | 2,216                                                          |       | 65,933 |   |
| Other long-term  liabilities                                                                                                     |       | 916                                                            |       | 1,132 |   |
| Commitments and contingencies                                                                                                    |       |                                                           |       |   |   |
| Stockholders’ equity (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—102,336 and 64,778 shares,  respectively; |       | 102                                                            |       | 65 |   |
| Treasury stock, 2,074  and 1,135 shares, respectively, at cost                                                                   |       | (2,091                                                         | )          | (341 | ) |
| Additional paid-in  capital                                                                                                      |       | 473,710                                                        |       | 406,137 |   |
| Accumulated other  comprehensive loss                                                                                            |       | (17                                                            | )          | (12 | ) |
| Accumulated deficit                                                                                                              |       | (431,418                                                       | )          | (429,742 | ) |
| Total stockholders’  equity (deficit)                                                                                       |       | 40,286                                                         |       | (23,893 | ) |
|                                                                                                                             |       | $                                                              | 106,808    |   | $ | 87,776 |   |

 

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

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**iBasis, Inc.Consolidated Statements of Operations**

| ** **                                                                             | ** ** | **Years Ended December 31,**                        | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                             | ** ** | **(In thousands, except per share data)** | ** ** |
| Net revenue                                                                            |       | $                                                                  | 385,485    |   | $ | 263,678 |   | $ | 178,159 |   |
| Cost and operating  expenses:                                                          |       |                                                               |       |   |   |   |   |
| Data  communications and telecommunications (excluding depreciation and  amortization) |       | 336,152                                                            |       | 225,169 |   | 152,853 |   |
| Research and  development                                                              |       | 12,435                                                             |       | 13,803 |   | 13,387 |   |
| Selling and  marketing                                                                 |       | 11,618                                                             |       | 9,205 |   | 7,513 |   |
| General and  administrative                                                            |       | 15,203                                                             |       | 12,822 |   | 8,174 |   |
| Depreciation and amortization                                                          |       | 6,712                                                              |       | 10,345 |   | 20,065 |   |
| Non-cash  stock-based compensation                                                     |       | —                                                             |       | — |   | 86 |   |
| Restructuring  costs                                                                   |       | 218                                                                |       | 165 |   | — |   |
| Total cost and operating expenses                                                      |       | 382,338                                                            |       | 271,509 |   | 202,078 |   |
| Income (loss)  from operations                                                         |       | 3,147                                                              |       | (7,831 | ) | (23,919 | ) |
| Interest income                                                                        |       | 1,109                                                              |       | 218 |   | 161 |   |
| Interest expense                                                                       |       | (2,601                                                             | )          | (4,249 | ) | (3,967 | ) |
| Gain on bond  repurchases and exchanges                                                |       | —                                                             |       | — |   | 16,615 |   |
| Other expenses,  net                                                                   |       | (324                                                               | )          | (184 | ) | (180 | ) |
| Loss on long-term  non-marketable security                                             |       | —                                                             |       | (5,000 | ) | — |   |
| Foreign exchange  (loss) gain                                                          |       | (939                                                               | )          | 339 |   | 509 |   |
| Debt conversion  premium and transaction costs                                         |       | (1,975                                                             | )          | — |   | — |   |
| Debt refinancing  charges:                                                             |       |                                                               |       |   |   |   |   |
| Transaction costs                                                                      |       | —                                                             |       | (2,159 | ) | — |   |
| Additional interest expense, net                                                       |       | —                                                             |       | (481 | ) | — |   |
| Loss before taxes  from continuing operations                                          |       | (1,583                                                             | )          | (19,347 | ) | (10,781 | ) |
| Foreign income  tax expense                                                            |       | (93                                                                | )          | (50 | ) | (157 | ) |
| Loss from  continuing operations                                                       |       | (1,676                                                             | )          | (19,397 | ) | (10,938 | ) |
| Income from  discontinued operations                                                   |       | —                                                             |       | 1,861 |   | 1,251 |   |
| Net loss                                                                               |       | $                                                                  | (1,676     | ) | $ | (17,536 | ) | $ | (9,687 | ) |
| Basic and diluted  net loss per share:                                                 |       |                                                               |       |   |   |   |   |
| Loss from  continuing operations                                                       |       | $                                                                  | (0.02      | ) | $ | (0.38 | ) | $ | (0.24 | ) |
| Income from  discontinued operations                                                   |       | —                                                             |       | 0.03 |   | 0.03 |   |
| Net loss                                                                               |       | $                                                                  | (0.02      | ) | $ | (0.35 | ) | $ | (0.21 | ) |
| Basic and diluted  weighted average common shares outstanding                          |       | 80,236                                                             |       | 50,514 |   | 44,696 |   |

 

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

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

| ** **                                                                                       | ** ** | **Common Stock**      | ** ** | **Treasury Stock**    | ** ** | **Additional**             | ** ** | ** ** | ** ** | ** **           | ** ** | **Accumulated  Other**     | ** ** | **Total  Stockholders'** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|------------|------------|----------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                                                                                       | ** ** | **Number of  Shares** | ** ** | **$0.001 Par  Value** | ** ** | **Number of  Shares** | ** ** | **Amount** | ** ** | **Paid-In  Capital** | ** ** | **Deferred  Compensation** | ** ** | **Accumulated  Deficit** | ** ** | **Comprehensive  Loss** | ** ** | **Equity  (Deficit)** | ** ** |
| ** **                                                                                       | ** ** | **(In thousands)**    | ** ** |
| Balance, January  1, 2003                                                                        |       |                       | 45,785     |                       |       |                       | $          | 46         |       |                 |       | (1,135                     | )          |                     |       | $ | (341 | ) |   |   | $ | 368,927 |   |   |   | $ | (86 | ) |   |   | $ | (402,519 | ) |   |   | $ | — |   |   |   | $ | (33,973 | ) |   |
| Net loss                                                                                         |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | — |   |   |   | — |   |   |   | (9,687 | ) |   |   | — |   |   |   | (9,687 | ) |   |
| Translation  adjustment                                                                          |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total  comprehensive loss                                                                        |       |                       |       |                       |       |                       |       |       |       |                 |       |                       |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (9,687 | ) |   |
| Exercise of common  stock options.                                                               |       |                       | 128        |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | 91 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 91 |   |   |
| Fair value of  warrants issued on bond exchange                                                  |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | 1,375 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,375 |   |   |
| Amortization of  deferred compensation                                                           |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | — |   |   |   | 86 |   |   |   | — |   |   |   | — |   |   |   | 86 |   |   |
| Balance, December  31, 2003                                                                      |       |                       | 45,913     |                       |       |                       | 46         |       |       |                 | (1,135     | )                          |       |                     | (341       | ) |   |   | 370,393 |   |   |   | — |   |   |   | (412,206 | ) |   |   | — |   |   |   | (42,108 | ) |   |
| Net loss                                                                                         |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | — |   |   |   | — |   |   |   | (17,536 | ) |   |   | — |   |   |   | (17,536 | ) |   |
| Unrealized loss on  available-for-sale short-term investments                                    |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (12 | ) |   |   | (12 | ) |   |
| Translation  adjustment                                                                          |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total  comprehensive loss                                                                        |       |                       |       |                       |       |                       |       |       |       |                 |       |                       |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (17,548 | ) |   |
| Gross proceeds  from sale of common stock in private placement                                   |       |                       | 15,000     |                       |       |                       | 15         |       |       |                 | —     |                       |       |                     | —     |   |   |   | 31,485 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 31,500 |   |   |
| Cash transaction  costs of private placement                                                     |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | (1,310 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (1,310 | ) |   |
| Fair value of  warrant issued for investment banking services                                    |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | (2,808 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (2,808 | ) |   |
| Issuance of  warrant for investment banking services                                        |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | 2,808 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,808 |   |   |
| Common stock  issued as partial payment of investment banking fees                               |       |                       | 110        |                       |       |                       | 0          |       |       |                 | —     |                       |       |                     | —     |   |   |   | 175 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 175 |   |   |
| Exercise of common  stock options                                                                |       |                       | 508        |                       |       |                       | 0          |       |       |                 | —     |                       |       |                     | —     |   |   |   | 455 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 455 |   |   |
| Exercise of  warrants                                                                            |       |                       | 2,522      |                       |       |                       | 3          |       |       |                 | —     |                       |       |                     | —     |   |   |   | 1,459 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,462 |   |   |
| Fair value of  warrants issued in debt refinancing                                               |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | 2,140 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,140 |   |   |
| Conversion of 63¤4% Convertible Subordinated Notes due  June 2009 converted to common stock |       |                       | 725        |                       |       |                       | 1          |       |       |                 | —     |                       |       |                     | —     |   |   |   | 1,340 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,341 |   |   |
| Balance, December  31, 2004                                                                      |       |                       | 64,778     |                       |       |                       | 65         |       |       |                 | (1,135     | )                          |       |                     | (341       | ) |   |   | 406,137 |   |   |   | — |   |   |   | (429,742 | ) |   |   | (12 | ) |   |   | (23,893 | ) |   |
| Net loss                                                                                         |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | — |   |   |   | — |   |   |   | (1,676 | ) |   |   | — |   |   |   | (1,676 | ) |   |
| Unrealized loss on  available-for-sale short-term investments                                    |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (5 | ) |   |   | (5 | ) |   |
| Translation  adjustment                                                                          |       |                       | —     |                       |       |                       | —     |       |       |                 | —     |                       |       |                     | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — | ) |   |
| Total  comprehensive loss                                                                        |       |                       |       |                       |       |                       |       |       |       |                 |       |                       |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,681 | ) |   |
| Exercise of common  stock options.                                                               |       |                       | 238        |                       |       |                       | 0          |       |       |                 | —     |                       |       |                     | —     |   |   |   | 244 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 244 |   |   |
| Exercise of  warrants                                                                            |       |                       | 2,215      |                       |       |                       | 2          |       |       |                 | —     |                       |       |                     | —     |   |   |   | 2,420 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,422 |   |   |
| Convertible  Subordinated Notes due June 2009 converted to common stock                          |       |                       | 19,429     |                       |       |                       | 19         |       |       |                 | —     |                       |       |                     | —     |   |   |   | 35,925 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 35,944 |   |   |
| Secured  Convertible Notes due June 2007 converted to common stock                               |       |                       | 15,676     |                       |       |                       | 16         |       |       |                 | —     |                       |       |                     | —     |   |   |   | 28,984 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 29,000 |   |   |
| Common shares  issued as payment of debt conversion premium.                                     |       |                       | —     |                       |       |                       | —     |       |       |                 | 44         |                       |       |                     | 115        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 115 |   |   |
| Repurchases of  common stock                                                                     |       |                       | —     |                       |       |                       | —     |       |       |                 | (983       | )                          |       |                     | (1,865     | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (1,865 | ) |   |
| Balance, December  31, 2005                                                                      |       |                       | 102,336    |                       |       |                       | $          | 102        |       |                 |       | (2,074                     | )          |                     |       | $ | (2,091 | ) |   |   | $ | 473,710 |   |   |   | $ | — |   |   |   | $ | (431,418 | ) |   |   | $ | (17 | ) |   |   | $ | 40,286 |   |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

45

 

----

**iBasis, Inc. Consolidated Statements of Cash Flows**

| ** **                                                                                          | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                          | ** ** | **(In thousands)**                     | ** ** |
| Cash flows from operating activities:                                                               |       |                                        |       |   |   |   |   |
| Net loss                                                                                            |       | $                                           | (1,676     | ) | $ | (17,536 | ) | $ | (9,687 | ) |
| Income from discontinued  operations                                                                |       | —                                      |       | (1,861 | ) | (1,251 | ) |
| Loss from continuing operations                                                                     |       | (1,676                                      | )          | (19,397 | ) | (10,938 | ) |
| Adjustments to reconcile loss from continuing  operations to net cash used in operating activities: |       |                                        |       |   |   |   |   |
| Gain on bond repurchases  and exchanges                                                             |       | —                                      |       | — |   | (16,615 | ) |
| Restructuring costs                                                                                 |       | 218                                         |       | 165 |   | — |   |
| Depreciation and  amortization                                                                      |       | 6,712                                       |       | 10,345 |   | 20,065 |   |
| Amortization of deferred  debt financing costs                                                      |       | 177                                         |       | 149 |   | 333 |   |
| Amortization of discount  on short-term marketable securities                                       |       | (45                                         | )          | — |   | — |   |
| Non-cash debt conversion  premium                                                                   |       | 115                                         |       | — |   | — |   |
| Amortization of deferred  compensation                                                              |       | —                                      |       | — |   | 86 |   |
| Loss on long-term  non-marketable security                                                          |       | —                                      |       | 5,000 |   | — |   |
| Fair value of warrant  issued in debt refinancing                                                   |       | —                                      |       | 2,140 |   | — |   |
| Allowance for doubtful  accounts                                                                    |       | 850                                         |       | 250 |   | 800 |   |
| Recovery of previously  reserved receivable balance                                                 |       | —                                      |       | — |   | (4,269 | ) |
| Changes in current assets and liabilities:                                                          |       |                                        |       |   |   |   |   |
| Accounts receivable, net                                                                            |       | (14,358                                     | )          | (12,616 | ) | 2,556 |   |
| Prepaid expenses and  other current assets                                                          |       | (256                                        | )          | 124 |   | 1,330 |   |
| Other assets                                                                                        |       | 37                                          |       | 345 |   | 535 |   |
| Accounts payable                                                                                    |       | 3,443                                       |       | 4,438 |   | 6,760 |   |
| Deferred revenue                                                                                    |       | 3,214                                       |       | 5,886 |   | 417 |   |
| Accrued expenses                                                                                    |       | 13,935                                      |       | (2,369 | ) | (4,718 | ) |
| Other long-term  liabilities                                                                        |       | (216                                        | )          | (1,617 | ) | 481 |   |
| Net cash provided by  (used in) continuing operating activities                                     |       | 12,150                                      |       | (7,157 | ) | (3,177 | ) |
| Cash flows from investing activities:                                                               |       |                                        |       |   |   |   |   |
| Purchases of property and  equipment                                                                |       | (3,441                                      | )          | (3,266 | ) | (4,452 | ) |
| Purchases of available-for-sale  short-term marketable investments                                  |       | (28,234                                     | )          | (18,534 | ) | — |   |
| Maturities of available-for-sale  short-term marketable investments                                 |       | 29,235                                      |       | 625 |   | — |   |
| Proceeds from sale of  Speech Solutions business                                                    |       | —                                      |       | 1,500 |   | — |   |
| Proceeds from earn-out  relating to sale of Speech Solutions business                               |       | —                                      |       | 1,009 |   | — |   |
| Payment associated with  the sale of Speech Solutions businesses                                    |       | —                                      |       | — |   | (736 | ) |
| Net cash used in investing  activities                                                              |       | (2,440                                      | )          | (18,666 | ) | (5,188 | ) |
| Cash flows from financing activities:                                                               |       |                                        |       |   |   |   |   |
| Redemption of 53⁄4%  Convertible Subordinated Notes                                              |       | (895                                        | )          | — |   | — |   |
| 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% 8% Senior Secured Notes due  January 2005                            |       | —                                      |       | (25,175 | ) | — |   |
| Bank borrowings                                                                                     |       | —                                      |       | 4,600 |   | 9,200 |   |
| Repayments of bank borrowings                                                                       |       | —                                      |       | (6,900 | ) | (9,200 | ) |
| Payments of principal on  capital lease obligations                                                 |       | (1,206                                      | )          | (2,167 | ) | (5,838 | ) |
| Debt conversion premium  and transaction costs                                                      |       | (1,860                                      | )          | — |   | — |   |
| Transaction costs of debt  refinancing and exchange of debt                                         |       | —                                      |       | (1,984 | ) | (935 | ) |
| Repurchases of common  stock                                                                        |       | (1,865                                      | )          | — |   | — |   |
| Proceeds from exercise of  warrants                                                                 |       | 2,422                                       |       | 1,462 |   | — |   |
| Proceeds from exercise of  common stock options                                                     |       | 244                                         |       | 455 |   | 91 |   |
| Net cash (used in)  provided by financing activities                                                |       | (3,160                                      | )          | 29,481 |   | (6,682 | ) |
| Net increase (decrease)  in cash and cash equivalents                                               |       | 6,550                                       |       | 3,658 |   | (15,047 | ) |
| Cash and cash  equivalents, beginning of year                                                       |       | 20,928                                      |       | 17,270 |   | 32,317 |   |
| Cash and cash  equivalents, end of year                                                             |       | $                                           | 27,478     |   | $ | 20,928 |   | $ | 17,270 |   |

46

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**iBasis, Inc. Consolidated Statements of Cash Flows (Continued)**

 

| Supplemental  disclosure of cash flow information:                                               |   |   |   |   |   |   |   |
|--------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Cash paid during the year for interest                                                           |   | $      | 2,651  |   | $      | 7,198  |   | $ | 5,996 |   |
| Supplemental disclosure  of non-cash investing and financing activities:                         |   |   |   |   |   |   |   |
| Conversion of 63¤4% Convertible Subordinated Notes to  common stock                         |   | $      | 35,944 |   | $      | 1,341  |   | $ | — |   |
| Conversion of 8%  Secured Convertible Notes to common stock                                      |   | $      | 29,000 |   | $      | — |   | $ | — |   |
| Face value of 53¤4% Convertible Subordinated Notes due  March 2005 surrendered         |   | $      | — |   | $      | 37,285 |   | $ | — |   |
| Face value of 6 3¤4% Convertible Subordinated Notes  due June 2009 issued    |   | $      | — |   | $      | 37,285 |   | $ | — |   |
| 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                                               |   | $      | 3,151  |   | $      | 1,765  |   | $ | — |   |
| Equipment acquired under operating lease obligations                                             |   | $      | — |   | $      | 577    |   | $ | — |   |
| Escrow and earn-out  receivable related to sale of Speech Solutions Business                     |   | $      | — |   | $      | — |   | $ | 1,251 |   |

 

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

47

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**iBasis, Inc. Notes to Consolidated Financial Statements**

**(1)   Business**

***Business—******We*********are a leading provider of international communicationsservices and a provider of retail prepaid calling services. Our operationsconsist of our Voice-Over-Internet-Protocol (“VoIP”) tradingbusiness (“Trading”), in which we connect buyers and sellers of internationaltelecommunications services, and our retail services business (“Retail”). Inthe Trading business we receive voice traffic from buyers—originating carrierswho are interconnected to our network via VoIP or traditional time divisionmultiplexing (“TDM”) connections, and we route that traffic over the Internetto sellers—local carriers in the destination countries with whom we haveestablished agreements to manage the completion or termination of the call. Weuse proprietary, patent-pending technology to automate the selection ofroutes and termination partners based on a variety of performance, quality, andbusiness metrics. We offer this Trading service on a wholesale basis to carriers, telephony resellers and otherservice providers worldwide. We have call termination agreements with localservice providers in North America, Europe, Asia, the Middle East, LatinAmerica, Africa and Australia. Our Retail business was launched in late 2003,with the introduction of our retail prepaid calling cards which are marketedthrough distributors primarily to ethnic communities within major metropolitanmarkets in the U.S. In September 2004, we launched a prepaid callingservice, Pingo®,offered directly to consumers through an eCommerce web interface, which we haveincluded in our Retail business segment. Revenues from our Pingo services werenot material in the years ended December 31, 2005 or 2004.

**(2)   Summary of Significant Accounting Policies**

***Principles ofConsolidation—******The***accompanyingconsolidated financial statements include the accounts of iBasis, Inc. andits subsidiaries. All intercompany balances and transactions have beeneliminated on consolidation.

***Use ofEstimates—****The preparation of these financial statements and relateddisclosures in conformity with accounting principles generally accepted in theUnited States of America requires us to (i) make judgments, assumptionsand estimates that affect the reported amounts of assets, liabilities, revenueand expenses; and (ii) disclose contingent assets and liabilities. We baseour accounting estimates on historical experience and other factors that weconsider reasonable under the circumstances. Actual results and outcomes maydiffer from our estimates and assumptions.*

***Foreign CurrencyTranslation and Transactions—******The***functionalcurrency of our foreign subsidiaries is the local currency. For the purposes ofpresenting the consolidated financial statements, the functional currencies ofour foreign subsidiaries have been converted into U.S. dollars for balancesheet accounts using the exchange rate in effect at the balance sheet date, andfor revenue and expense accounts using an average exchange rate for therespective periods. The gains or losses resulting from such translations werenot material since the majority of our business is carried out by our U.S.operations. Transactions in foreign currency are recorded at the original ratesof exchange in force at the time the transactions are effected. Exchangedifferences arising on (i) settlement of transactions and (ii) translationof such transactions, given that no settlement has occurred, are recognized inoperations. Translation adjustments, while normally a component of othercomprehensive income or loss, were not material in 2005, 2004 and 2003 and werecharged or credited to results of operations.

***Revenue Recognition—******For***ourTrading services, our revenue transactions are derived from the resale ofinternational minutes of calling time. We recognize revenue in the period theservice is provided, net of revenue reserves for potential billing credits.Such disputes can result from disagreements with customers regarding theduration, destination or rates charged for each call. For our Retail services,revenue is 

48

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(2)   Summary of Significant Accounting Policies(Continued)**

deferred upon activation of the cards, or purchase ofthe calling service, and is recognized as the prepaid calling card balances, orpurchased calling services, are reduced based upon minute usage and servicecharges. Revenue for both our Trading and Retail services is recognized whenall of the following criteria are met: persuasive evidence of an arrangementexists, delivery has occurred or services have been rendered, the seller’sprice to the buyer is fixed or determinable and collectibility is reasonablyassured.

***Net Loss Per Share—******Basic***anddiluted net loss per common share are determined by dividing net loss by theweighted average common shares outstanding during the period. Basic net lossper share and diluted net loss per share are the same for all periodspresented, as outstanding common stock options, common shares to be issued uponconversion of the Company’s convertible notes and warrants to purchase commonshares are anti-dilutive.

Thefollowing have been excluded from the computation of diluted weighted averagecommon shares for the periods presented:

| ** **                                                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                  | ** ** | **(In thousands)**                     | ** ** |
| Options to  purchase common shares                                                                                          |       | 6,305                                       |       | 6,569 |   | 6,332 |   |
| Warrants to  purchase common shares, issued in connection with the prepayment of the 111¤2%  Senior Secured Notes      |       | 4,376                                       |       | 5,176 |   | — |   |
| Warrants to  purchase common shares, issued in connection with the issuance of the 111¤2%  Senior Secured Notes        |       | 1,266                                       |       | 2,666 |   | 4,915 |   |
| Warrants to  purchase common shares issued for investment banking services in connection  with the private equity placement |       | 1,718                                       |       | 1,733 |   | — |   |
| 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 |   | — |   |
| Common shares to  be issued upon conversion of the 53¤4%  Convertible Subordinated Notes                               |       | —                                      |       | 10 |   | 443 |   |
| Warrants to  purchase common shares issued in connection with bank credit lines                                        |       | —                                      |       | — |   | 338 |   |
| Total common shares  excluded                                                                                               |       | 13,665                                      |       | 51,259 |   | 12,028 |   |

 

***Other ComprehensiveIncome (Loss)—******We*********report comprehensive income (loss) in accordance withStatement of Financial Accounting Standards No. 130, “ReportingComprehensive Income” (“SFAS 130”). For 2005 and 2004, the unrealized losson our short-term marketable investments, which is recorded as a component ofstockholders’ equity, was the only difference between reported net loss andtotal comprehensive loss. Translation adjustments, while normally a componentof other comprehensive income or loss, were not material in 2005, 2004 and 2003and were charged or credited to results of operations.

***Cash and CashEquivalents—******We***considerhighly liquid investments purchased with an original maturity of 90 daysor less at the time of purchase to be cash equivalents. Cash equivalentsinclude money market accounts and commercial paper that are readily convertibleinto cash.

49

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(2)   Summary of Significant Accounting Policies (Continued)**

***Short-termmarketable investments—******Our***investmentsat December 31, 2005, are classified as available-for-sale and carried atfair value. These investments consist of securities that are readilyconvertible into cash, including government securities and commercial paper,with original maturities at the date of acquisition ranging from 90 daysto one year.

Short-termmarketable investments consist of:

| ** **                            | ** ** | **December 31,**   | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **2005**                | ** ** | **2004** | ** ** |
| **Description of Security** | ** ** | ** **              | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** |
| ** **                            | ** ** | **(In thousands)** | ** ** |
| Government  securities                |       |                    | $          | 5,402 |   |   |   | $ | (7 | ) |   |   | $ | 7,728 |   |   |   | $ | (7 | ) |   |
| Commercial paper  and corporate bonds |       |                    | 11,534     |   |   |   | (10 | ) |   |   | 10,169 |   |   |   | (5 | ) |   |
| Total                                 |       |                    | $          | 16,936 |   |   |   | $ | (17 | ) |   |   | $ | 17,897 |   |   |   | $ | (12 | ) |   |
|                                       |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The net unrealized loss of$17,000 as of December 31, 2005 on our short-term marketable investmentsin government securities, commercial paper and corporate bonds was caused byinterest rate increases. Because we have the ability and intent to hold theseinvestments until a recovery of fair value, which may be maturity, we do notconsider these investments to be other-than-temporarily impaired at December 31,2005 due to the short-term duration and insignificant severity of theimpairment. As of December 31, 2005 and 2004, the unrealized loss on ourshort-term marketable securities is a component of other comprehensive loss.

***Property and Equipment—******Property***andequipment are stated at cost. Assets under capital leases are recorded at thepresent value of minimum lease payments. These assets are depreciated over thelesser of the lease term or the estimated useful lives of the assets using thestraight-line method. Significant improvements and betterments are capitalized ifthey extend the useful life of the asset. Routine repairs and maintenance areexpensed when incurred.

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

| **Asset  Classification**      | ** ** | ** **                           | ** ** | **Estimated Useful Life** |
|--------------------------------|------------|--------------------------------------|------------|---------------------------|
| Network equipment              |       | 3  years                             |
| Equipment under capital  lease |       | Life  of lease                       |
| Computer software              |       | 3  years                             |
| Leasehold improvements         |       | Lesser  of Useful Life or Lease Term |
| Furniture and fixtures         |       | 5 years                              |

 

We review long-lived assets for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to futureundiscounted net cash flows expected to be generated by the asset. If suchassets are considered to be impaired, the impairment recognized is measured bythe amount by which the carrying amount of the assets exceeds the fair value ofthe assets. Assets to be disposed of are reported at the lower of the carryingamount or fair value less costs to sell. During the year endedDecember 31, 2005, we retired approximately $28.1 million of fullydepreciated property and equipment. Total depreciation and amortization expenseincluded in the 

50

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(2)  Summary of Significant Accounting Policies (Continued)**

consolidated statements ofoperations was approximately $6.7 million, $10.3 million, and $20.1 millionfor the years ended December 31, 2005, 2004 and 2003, respectively.

***Deferred DebtFinancing Costs—******Underwriter***discountsand other costs incurred in connection with the issuance of  convertible debt were amortized to interestexpense using the straight-line method over the term of the debt, whichapproximated the effective interest method. As a result of our debt conversionsto common stock in 2005, remaining unamortized deferred debt financing costswere charged to interest expense.

***Investment inLong-Term Non-marketable Security—******Our***long-terminvestment in a non-marketable security represents a small equity investment ina privately-held company that was made in 2000 in connection with a round offinancing with other third-party investors. As our investment does notpermit us to exert significant influence or control over the entity in which wehave invested, the recorded amount represents our cost of the investment lessany adjustments we make when we determine that an investment’s carrying valueis other than temporarily impaired.

The process of assessing whether the equity investment’snet realizable value is less than its carrying cost requires a significantamount of judgment due to the lack of a mature and stable public market forinvestments of this type. In making this judgment, we carefully consider theinvestee’s most recent financial results, cash position, recent cash flow data,projected cash flows (both short and long-term), financing needs, recentfinancing rounds, most recent valuation data, the current investingenvironment, management or ownership changes, and competition. This valuationprocess is based primarily on information that we request, receive and discusswith the investees’ management on a quarterly basis. Such evaluation isperformed on a quarterly basis.

Based on our evaluation during the quarter ended March 31,2004, we had determined that our investment in this privately-held company hasbeen other than temporarily impaired and, as a result, we recorded a$5.0 million non-cash charge to continuing operations for the quarterended March 31,2004. This charge represented the full carrying value ofthis investment. Our decision was based on our evaluation of the company’scurrent cash position and recent operating results, as well as the perceivedinability of the company to obtain additional financing at a level, and in atimely manner, to support its continued operations.

***Other Assets—******Other***assetsat December 31, 2005 and 2004 consist primarily of deposits for call terminationservices and leased facilities.

***Research andDevelopment Expenses—******We***chargeresearch and development expenses to operations as incurred.

***Concentration ofCredit Risk/Significant Customers—******Financial***instrumentsthat potentially subject us to significant concentrations of credit riskconsist principally of cash investments, short-term marketable investments andaccounts receivable. We place our cash investments with a high qualityfinancial institution and limits the amount of credit exposure. We haveestablished certain credit requirements that our customers must meet beforesales credit is extended. We monitor the financial condition of our customersto help ensure collections and to minimize losses.

51

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(2)   Summary of Significant Accounting Policies (Continued)**

We did not have a customer that accounted for 10% ormore of net revenue for the year ended December 31, 2005. We had onecustomer which accounted for 11% of net revenue, each year, for the years endedDecember 31, 2004 and 2003. We did not have a customer that accounted for10% or more of accounts receivable at either December 31, 2005 and 2004.

***Fair Value ofFinancial Instruments—******Financial***instrumentsconsist principally of cash and cash equivalents, short-term marketableinvestments, accounts receivable, long-term investments in marketablesecurities, long-term debt and accounts payable. The estimated fair value ofthese instruments approximates their carrying value.

***Stock-BasedCompensation—******We***accountfor stock-based compensation in accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”using the intrinsic-value method as permitted by Statement of FinancialAccounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation.” SFAS No. 123 encourages, but does not require, therecognition of compensation expense for the fair value of stock options andother equity instruments issued to employees and non-employee directors.

At December 31,2005, we had one stock-based employee compensation plan, which isdescribed more fully in Note 11. The following table illustrates theeffect on net loss and net loss per share if we had applied the fair valuerecognition provisions of SFAS No. 123.

| ** **                                                                                                    | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                    | ** ** | **(In thousands)** | ** ** |
| Net loss:                                                                                                     |       |                    |       |   |   |   |   |
| As reported                                                                                                   |       | $                       | (1,676     | ) | $ | (17,536 | ) | $ | (9,687 | ) |
| Deduct: Stock-based employee compensation  expense included in reported net loss                              |       | —                  |       | — |   | 86 |   |
| Add: Total stock-based employee compensation  expense determined under fair value based method for all awards |       | (1,731                  | )          | (2,737 | ) | (2,200 | ) |
| Pro forma                                                                                                     |       | $                       | (3,407     | ) | $ | (20,273 | ) | $ | (11,801 | ) |
| Basic and diluted net  loss per share:                                                                        |       |                    |       |   |   |   |   |
| As reported                                                                                                   |       | $                       | (0.02      | ) | $ | (0.35 | ) | $ | (0.21 | ) |
| Pro forma                                                                                                     |       | $                       | (0.04      | ) | $ | (0.40 | ) | $ | (0.26 | ) |

 

52

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(2)  Summary of Significant Accounting Policies (Continued)**

We estimate the fair valueof stock-based awards to employees and non-employee directors using theBlack-Scholes option pricing model. The Black-Scholes model wasdeveloped for use in estimating the fair value of traded options which have novesting restrictions and are fully transferable. In addition, the Black-Scholesmodel requires the input of highly subjective assumptions including theexpected stock price volatility. Because stock-based awards to employeesand non-employee directors have characteristics significantly different fromthose of traded options, and because changes in the subjective inputassumptions can materially affect the fair value estimate, in our opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of stock-based awards to employees and non-employee directors.The fair value of stock-based awards to employees and non-employeedirectors was estimated assuming no expected dividends and the followingweighted-average assumptions:

| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free  interest rate |       | 4.00                  | %          | 3.35 | % | 3.25 | % |
| Dividend yield           |       | 0.0                   | %          | 0.0 | % | 0.0 | % |
| Expected life            |       | 5 years               |       | 5 years |   | 5 years |   |
| Expected  volatility     |       | 121                   | %          | 136 | % | 143 | % |

*** ***

***The weighted average fair value of options granted was$2.14, $1.77 and $0.88 per share for the years ended December 31, 2005,2004 and 2003, respectively. The weighted average remaining contractual lifewas 7.26 years, 8.17 years and 8.84 years as of December 31,2005, 2004 and 2003, respectively.***

***Income Taxes—******We***accountfor income taxes in accordance with SFAS No. 109, “Accounting for IncomeTaxes.” This statement requires an asset and liability approach to accountingfor income taxes based upon the future expected values of the related assetsand liabilities. Deferred income taxes are provided for tax and financialreporting basis differences between assets and liabilities at tax ratesexpected to be in effect when the basis differences reverse. Valuationallowances are provided in situations where recoverability of deferred taxassets is not considered more likely than not.

***New Accounting Pronouncements***

In December 2004, the Financial AccountingStandards 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*, andsuperceded Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*,and its related implementation guidance. SFAS No. 123R focusesprimarily on accounting for transactions in which an entity obtains employeeservices in share-based payment transactions. The Statement requiresentities to recognize stock compensation expense for awards of equity instrumentsto employees based on the grant-date fair value of those awards (with limitedexceptions). In April 2005, the Securities and Exchange Commission amendedthe compliance date for adoption of SFAS No. 123R.  The new rule extends the required adoptionof SFAS No. 123R for companies with calendar fiscal years to the firstquarter of 2006. SFAS No. 123R is effective for us beginning in the firstquarter of 2006.

53

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(2)   Summary of Significant Accounting Policies(Continued)**

We expect to adopt SFAS No. 123R using theStatement’s modified prospective application method. Adoption of SFASNo. 123R is expected to increase our stock compensation expensesignificantly. We are currently in the process of evaluating the impact andimplementation of SFAS No. 123R. In addition, SFAS No. 123R requiresthat the excess of tax benefits related to stock compensation be reported as afinancing cash inflow rather than as a reduction of taxes paid in cash fromoperations.

In March 2005 the FASB issued FASB InterpretationNo. 47, *Accounting for ConditionalAsset Retirement Obligations*(“FIN 47”)*.* FIN 47 requires us to recognize a liability for the fairvalue of a conditional asset retirement obligation if the fair value of theliability can be reasonably recognized. A conditional asset retirementobligation refers to a legal obligation to perform an asset retirementactivity, such as restoring a leased facility to its original condition, andwhere the timing and method of settlement are contingent upon a future event,that may or may not be beyond our control. This liability should be recognizedwhen incurred; typically upon acquisition or entering into a lease. Theadoption of FIN 47 did not have a material impact on our consolidated resultsof operations and financial condition in 2005.

**(3) Business Segmentand Geographic Information**

SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information,” establishes standards for reportinginformation about operating segments in annual financial statements andrequires selected information about operating segments in interim financialreports issued to stockholders. It also establishes standards for relateddisclosures about products and services, and geographic areas. Operatingsegments are defined as components of an enterprise about which separatefinancial information is available that is evaluated regularly by the chiefoperating decision maker, or decision-making group, in deciding how toallocate resources and in assessing performance. Our chief operating decision-makinggroup is composed of the chief executive officer, members of senior managementand the Board of Directors. We have viewed our operations and we manage ourbusiness principally as two business segments, Trading and Retail.

***Business SegmentInformation—******Beginning***inthe second quarter of 2004, our retail prepaid calling card services and otherenhanced services (“Retail”) became a reportable business segment, in additionto our international wholesale VoIP services (“Trading”). Since we introducedour retail prepaid calling card services, revenue from our Retail services hasgrown substantially.

Our Trading business consists of international longdistance services we provide using VoIP. We offer these services on a wholesalebasis through our worldwide network to carriers, telephony resellers and othersaround the world by operating through various service agreements with localservice providers in United States, Europe, Asia, the Middle East, LatinAmerica, Africa and Australia.

Our Retail business consists of our retail prepaidcalling cards, and Pingo, a prepaid calling service sold to consumers throughan eCommerce interface. To date, we have marketed our retail prepaid callingcard services primarily to ethnic communities within major domestic marketsthrough distributors.  Launched in thethird quarter of 2004, Pingo revenues were not material in the years ended December 31,2005 or 2004.

Our executive management team uses net revenue andgross margin, which is net revenue less data communications andtelecommunications costs, as the basis for measuring profit or loss by segmentand making decisions on our Trading and Retail businesses. We do not allocate ourresearch and development expenses, selling and marketing expenses, general andadministrative expenses, restructuring costs and depreciation and amortizationbetween Trading and Retail.

54

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(3) BusinessSegment and Geographic Information (Continued)**

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

| ** **                                                                                  | ** ** | **Year ended December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Trading**                                          | ** ** | **Retail** | ** ** | **Total** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands)**                              | ** ** |
| Net revenue                                                                                 |       | $                                                    | 312,594    |   | $ | 72,891 |   | $ | 385,485 |   |
| Data  communications and telecommunication costs (excluding depreciation and  amortization) |       | 275,378                                              |       | 60,774 |   | 336,152 |   |
| Gross margin                                                                                |       | $                                                    | 37,216     |   | $ | 12,117 |   | 49,333 |   |
| Research and  development expenses                                                          |       |                                                 |       |   |   | 12,435 |   |
| Selling and  marketing expenses                                                             |       |                                                 |       |   |   | 11,618 |   |
| General and  administrative expenses and restructuring costs                                |       |                                                 |       |   |   | 15,421 |   |
| Depreciation and  amortization                                                              |       |                                                 |       |   |   | 6,712 |   |
| Income from operations                                                                      |       |                                                 |       |   |   | $ | 3,147 |   |

 

| ** **                                                                                  | ** ** | **Year ended December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Trading**                                          | ** ** | **Retail** | ** ** | **Total** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands)**                              | ** ** |
| Net revenue                                                                                 |       | $                                                    | 225,324    |   | $ | 38,354 |   | $ | 263,678 |   |
| Data  communications and telecommunication costs (excluding depreciation and  amortization) |       | 192,541                                              |       | 32,628 |   | 225,169 |   |
| Gross margin                                                                                |       | $                                                    | 32,783     |   | $ | 5,726 |   | 38,509 |   |
| Research and  development expenses                                                          |       |                                                 |       |   |   | 13,803 |   |
| Selling and  marketing expenses                                                             |       |                                                 |       |   |   | 9,205 |   |
| General and  administrative expenses and restructuring costs                                |       |                                                 |       |   |   | 12,987 |   |
| Depreciation and  amortization                                                              |       |                                                 |       |   |   | 10,345 |   |
| Loss from operations                                                                        |       |                                                 |       |   |   | $ | (7,831 | ) |

 

| ** **                                                                                  | ** ** | **Year ended December 31, 2003** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Trading**                                          | ** ** | **Retail** | ** ** | **Total** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands)**                              | ** ** |
| Net revenue                                                                                 |       | $                                                    | 172,552    |   | $ | 5,607 |   | $ | 178,159 |   |
| Data  communications and telecommunication costs (excluding depreciation and  amortization) |       | 148,895                                              |       | 3,958 |   | 152,853 |   |
| Gross margin                                                                                |       | $                                                    | 23,657     |   | $ | 1,649 |   | 25,306 |   |
| Research and  development expenses                                                          |       |                                                 |       |   |   | 13,387 |   |
| Selling and  marketing expenses                                                             |       |                                                 |       |   |   | 7,513 |   |
| General and  administrative expenses                                                        |       |                                                 |       |   |   | 8,174 |   |
| Depreciation and  amortization                                                              |       |                                                 |       |   |   | 20,065 |   |
| Non-cash stock  based compensation                                                          |       |                                                 |       |   |   | 86 |   |
| Loss from operations                                                                        |       |                                                 |       |   |   | $(23,919 | ) |
|                                                                                             |            |                                                      |            |  |  |  |  |  |  |  |

 

55

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(3) BusinessSegment and Geographic Information (Continued)**

Our executive managementteam uses accounts receivable as a basis for measuring liquidity and makingdecisions on our Trading and Retail businesses. We do not allocate any otherassets or liabilities between Trading and Retail.

| ** **          | ** ** | **As of December 31, 2005** | ** ** |
|---------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | **Trading**                                | ** ** | **Retail** | ** ** | **Total** | ** ** |
| ** **          | ** ** | **(In thousands)**                    | ** ** |
| Segment assets      |       | $                                          | 38,574     |   | $ | 9,067 |   | $ | 47,641 |   |
| Non-segment  assets |       |                                       |       |   |   | 59,167 |   |
| Total assets        |       |                                       |       |   |   | $ | 106,808 |   |
|                     |            |                                            |            |  |  |  |  |  |  |  |

 

| ** **          | ** ** | **As of December 31, 2004** | ** ** |
|---------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | **Trading**                                | ** ** | **Retail** | ** ** | **Total** | ** ** |
| ** **          | ** ** | **(In thousands)**                    | ** ** |
| Segment assets      |       | $                                          | 28,541     |   | $ | 5,592 |   | $ | 34,133 |   |
| Non-segment  assets |       |                                       |       |   |   | 53,643 |   |
| Total assets        |       |                                       |       |   |   | $ | 87,776 |   |
|                     |            |                                            |            |  |  |  |  |  |  |  |

*** ***

***GeographicInformation—******The***followingtable represents percentage of total revenue derived from each geographicregion:

| ** **                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| North America                   |       |                                       | 54         | % |   |   | 58 | % |   |   | 57 | % |   |
| Europe, Middle  East and Africa |       |                                       | 33         |   |   |   | 29 |   |   |   | 16 |   |   |
| Asia Pacific                    |       |                                       | 11         |   |   |   | 11 |   |   |   | 3 |   |   |
| Other                           |       |                                       | 2          |   |   |   | 2 |   |   |   | 24 |   |   |
|                            |       |                                       | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

We did not have any single customer account for 10% ofnet revenue for the year ended December 31, 2005. We had one customeraccount for 11% of net revenue, each year, for the years ended December 31,2004 and 2003. We did not have a customer that accounted for 10% of accountsreceivable at December 31, 2005 and 2004.

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

| ** **                   | ** ** | **As of December 31,** | ** ** |
|------------------------------|------------|-----------------------------|------------|
| **Geographic Location** | ** ** | ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(In thousands)**     | ** ** |
| North America                |       | $                           | 11,715     |   | $ | 11,753 |   |
| Europe                       |       | 26                          |       | 67 |   |
| Asia                         |       | 13                          |       | 41 |   |
|                         |       | $                           | 11,754     |   | $ | 11,861 |   |
|                              |            |                             |            |  |  |  |  |  |  |

 

56

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(4) DiscontinuedOperations**

*Income  from discontinued operations.**  *In 2002 we completed the sale ofsubstantially all the assets of our Speech Solutions Business for$18.5 million in cash ($1.5 million of this amount was held in escrowuntil March 2004). Losses from discontinued operations in 2002 and prioryears had been recorded under the provisions of SFAS No. 144, “Accountingfor the Impairment or Disposal of Long Lived Assets.” In the fourth quarter of2003, we recognized additional consideration of approximately $1.3 millionfor an earn-out payment based on the achievement of certain 2003 revenue-basedmilestones associated with this business. The cash payment associated with theearn-out was $1.1 million and was received in February 2004. Inaddition, in March 2004, we received the balance of $1.5 million thathad been held in escrow from the sale of this business since July 2002. Inthe third quarter of 2004, we recognized income from discontinued operations of$1.9 million resulting from the expiration of certain contingentobligations.

**(5) Accrued Expenses**

Accruedexpenses at December 31, consist of the following:

| ** **                             | ** ** | **2005**                | ** ** | **2004** | ** ** |
|----------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                             | ** ** | **(In thousands)** | ** ** |
| Termination fees  and circuit costs    |       | $                       | 20,824     |     | $          | 8,926 |   |
| Payroll and  related costs             |       | 665                     |       | 462      |       |
| Professional  services                 |       | 513                     |       | 372      |       |
| Restructuring  costs (current portion) |       | 475                     |       | 559      |       |
| Customer deposits                      |       | 235                     |       | 250      |       |
| Interest                               |       | —                  |       | 226      |       |
| Accrued other                          |       | 1,767                   |       | 1,391    |       |
| Total accrued expenses                 |       | $                       | 24,479     |     | $          | 12,186 |   |

 

**(6) RestructuringCosts**

During 2002, we announced restructuring plans tobetter align our organization with our corporate strategy and recorded a chargeof to our Statements of Operations in that year in accordance with the criteriaset forth in EITF 94-3 and SEC Staff Accounting Bulletin 100. Therestructuring included the write-off of property and equipment, contractualobligations relating to vacant certain leased facilities and a reduction in ourworkforce resulting in employee severance costs.

At December 31, 2005, accrued restructuring costsof $1.4 million consisted of costs accrued for leased facility obligations,net of certain future sublease assumptions. In the years ended December 31,2005 and 2004, we took an additional charge of $218,000 and $165,000,respectively, as a result of a change in estimates relating to our futuresublease assumptions.

57

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(6) RestructuringCosts (Continued)**

A summary of accrued restructuring costs is asfollows:

| ** **                                   | ** ** | **Property and  Equipment** | ** ** | **Contractual  Obligations  Relating to  Vacant Facilities** | ** ** | **Employee  Severance  Costs** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|------------------------------------------------------------------------|------------|--------------------------------|------------|-----------|------------|
| ** **                                   | ** ** | **(In thousands)**          | ** ** |
| Original charge                              |       |                             | $          | 2,427                                                                  |       |                           |       | $         | 2,794      |   |   |   | $ | 750 |   |   | $ | 5,971 |   |
| Less: write-off  of property and equipment   |       |                             | 2,427      |                                                                   |       |                           | —     |      |       |   | — |   |   | 2,427 |   |
| Less: cash  payments                         |       |                             | —     |                                                                   |       |                           | 743        |      |       |   | 725 |   |   | 1,468 |   |
| Balance, December 31, 2003              |       |                             | —     |                                                                   |       |                           | 2,051      |      |       |   | 25 |   |   | 2,076 |   |
| Change in estimates                          |       |                             | —     |                                                                   |       |                           | 165        |      |       |   | — |   |   | 165 |   |
| Less: cash  payments, net of sublease income |       |                             | —     |                                                                   |       |                           | 525        |      |       |   | 25 |   |   | 550 |   |
| Balance, December 31, 2004              |       |                             | —     |                                                                   |       |                           | 1,691      |      |       |   | — |   |   | 1,691 |   |
| Change in  estimates                         |       |                             | —     |                                                                   |       |                           | 218        |      |       |   | — |   |   | 218 |   |
| Less: cash  payments                         |       |                             | —     |                                                                   |       |                           | 518        |      |       |   | — |   |   | 518 |   |
| Balance, December 31,  2005             |       |                             | $          | —                                                                 |       |                           |       | $         | 1,391      |   |   |   | $ | — |   |   | $ | 1,391 |   |

 

At December 31, 2005 and 2004, the currentportion of accrued restructuring costs were $475,000 and $559,000 and thelong-term portion of accrued restructuring costs were $916,000 and $1,132,000,respectively

**(7) Deferred Revenue**

A summary of ourdeferred revenue activity is as follows:

| ** **                         | ** ** | **(In thousands)** | ** **                           |
|------------------------------------|------------|-------------------------|--------------------------------------|
| Balance at  January 1, 2004   |       |                    | $417                                 |   |   |
| Revenue deferred                   |       |                    | 44,240                               |   |   |
| Revenue  recognized                |       |                    | (38,354                              | ) |   |
| Balance at December 31,  2004 |       |                    |       6,303 |   |   |
| Revenue deferred                   |       |                    | 76,105                               |   |   |
| Revenue  recognized                |       |                    | (72,891                              | ) |   |
| Balance at  December 31, 2005 |       |                    | $                                    | 9,517 |   |   |
|                                    |            |                         |                                      |  |  |  |

 

Deferred revenue consistsof billings to our distributors for prepaid calling cards and purchases of ourPingo prepaid calling services, for which revenue is recognized when minuteusage and service charges occur.

**(8) Income Taxes**

No provision or benefit for federal or state incometaxes has been recorded, as we have incurred net operating losses for allperiods presented and it is more likely than not that the tax benefit of suchlosses will not be realized. As of December 31, 2005, we had net operatingloss carryforwards of approximately $313 million, and tax creditcarryforwards of approximately $1 million, available to reduce future federaland state income taxes, if any. If not utilized, these carryforwards expire between2020 and 2025. If substantial changes in our ownership should occur, as definedby Section 382 of the Internal Revenue Code (the “Code”), there could beannual limitations on the amount of carryforwards which can be

58

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(8) IncomeTaxes (Continued)**

realized in future periods. The Company has completedmultiple convertible debt and equity financings and an acquisition since itsinception and an ownership change, as defined under the Code, may haveoccurred.

Theapproximate income tax effects of temporary differences and carryforwards areas follows:

| ** **                                       | ** ** | **December 31,**   | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Net operating loss and  tax credit carryforwards |       | $                       | 123,898    |   | $ | 97,616 |   |
| Accruals                                         |       | 1,015                   |       | 956 |   |
| Depreciation                                     |       | —                  |       | 8,280 |   |
| Accounts receivable                              |       | 1,003                   |       | 1,120 |   |
| Capital loss  carry-forward                      |       | 2,000                   |       | 1,700 |   |
| Total deferred tax  assets                       |       | 127,916                 |       | 109,672 |   |
| Valuation allowance                              |       | (127,916                | )          | (109,672 | ) |
|                                             |       | $                       | —     |   | $ | — |   |

 

The major components ofthe changes in our temporary differences and carryforwards are as follows:

| ** **                        | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                        | ** ** | **(in thousands)** | ** ** |
| Net operating loss  carryforwards |       | $                       | (26,282    | )        | $          | (14,028  | )          | $ | (11,667 | ) |
| Deferred tax items                |       | 8,038                   |       | (189     | )          | (20,888  | )          |
| Valuation allowance               |       | 18,244                  |       | 14,217   |       | 32,555   |       |
|                              |       | $                       | —     |     | $          | —   |       | $ | — |   |

 

We have recorded a 100% valuation allowance againstthe net deferred tax asset as of December 31, 2005 and 2004, as we havedetermined that it is more likely than not that such assets will not berealized. We had income tax expense of $93,000, $50,000, and $157,000 relatedto taxes on earnings of our foreign subsidiaries in 2005, 2004 and 2003,respectively.

Areconciliation between the statutory federal income tax rate and our effectivetax rate for the years ended December 31, is as follows:

| ** **                              | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                              | ** ** | **(in thousands)** | ** ** |
| Statutory federal income  tax (benefit) |       | $                       | (554       | )        | $          | (6,771   | )          | $ | (3,773 | ) |
| State taxes, net of  federal benefit    |       | (79                     | )          | (967     | )          | (755     | )          |
| Valuation allowance                     |       | 633                     |       | 7,738    |       | 4,528    |       |
| Foreign income taxes                    |       | 93                      |       | 50       |       | 157      |       |
| Tax expense                             |       | $                       | 93         |     | $          | 50       |       | $ | 157 |   |

 

On October 22, 2004, the American Jobs CreationAct of 2004 (the “Act”) was signed into law. The Act contains a one-timeforeign dividend repatriation provision, which provides for a special deductionwith respect to certain qualifying dividends from foreign subsidiaries for alimited period. The deduction is subject to a number of limitations anduncertainty remains as to the interpretation of numerous provisions in the Act.We have no plans to repatriate any earnings of our foreign subsidiaries underthe foreign dividend repatriation provisions of the Act.

59

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(9) Long-Term Debt**

Long-termdebt consists of the following as of December 31:

| ** **                                                   | ** ** | **2005**                | ** ** | **2004** | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                   | ** ** | **(In thousands)** | ** ** |
| Capital lease  obligations                                   |       | $                       | 3,814      |     | $          | 1,869 |   |
| 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      |       |
| Total                                                        |       | 3,814                   |       | 67,708   |       |
| Less: Current  portion                                       |       | 1,598                   |       | 1,775    |       |
|                                                         |       | $                       | 2,216      |     | $          | 65,933 |   |

 

***(a) Convertible Notes***

From mid-August 2005 through early September 2005,all of our remaining $32,599,000 of 63⁄4% Convertible Subordinated Notes dueJune 2009 were converted to 17.6 million shares of our common stockat the stated conversion price of $1.85 per share. In mid-August 2005, weannounced our intention to redeem all of these outstanding notes for cash atthe face value of the notes, plus accrued interest, with a planned redemptiondate of September 6, 2005. Prior to the redemption date, all of theholders elected to convert their notes to common stock at the stated conversionprice of $1.85 per share. We were not required to pay any accrued interest uponconversion of these notes.

In July 2005, we negotiated the early conversionof the remaining $19,900,000 of our 8% Secured Convertible Notes due June 2007into 10.8 million shares of common stock at the stated conversion price of$1.85 per share. We paid a total premium of $1,194,000 in cash to thenoteholders to encourage the early conversion of these notes. In addition,transactions costs associated with this early conversion were $0.1 million andconsisted primarily of investment banking fees.

In June 2005, we negotiated (i) the earlyconversion of $9,100,000 of our 8% Secured Convertible Notes due June 2007into 4.9 million shares of common stock at the stated conversion price of $1.85per common share and (ii) the  earlyconversion of  $2,000,000 of our 63⁄4%Convertible Subordinated Notes due June 2009 into 1.1 million shares ofcommon stock at the stated conversion price of $1.85 per common share.  We paid a total of $661,000 in premiums to thenoteholders to encourage the early conversion of these notes, of which $546,000was paid in cash and the remaining amount was paid in the form of 43,736 sharesof the Company’s common stock that had a fair value of $115,000.  In addition, $1,150,000 of our 63⁄4% ConvertibleSubordinated Notes due June 2009 voluntarily converted into 0.6 millionshares of common stock at the conversion price of $1.85 per share. In total,$12,250,000 of notes were converted into 6.6 million shares of common stock.

In the first quarter of2005, holders of $0.2 million of 63⁄4% Convertible Subordinated Notes due June 2009voluntarily converted their notes into 0.1 million shares of common stock atthe conversion price of $1.85 per share.  In March 2005, we redeemed the remaining$895,000 of our outstanding 53⁄4% Convertible Subordinated Notes for cash on thematurity date of these notes.

***(b) Bank Line of Credit***

In January 2005, we amended and extended ourrevolving line of credit with our bank. The new $15.0 million revolvingline of credit has a two-year term, bears interest at the bank’s prime rate plus1¤2%

60

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(9) Long-TermDebt (Continued)**

and is collateralized by substantially all of ourassets. Borrowings under the line may also be used for letters of credit andforeign exchange contracts and are no longer on a borrowing formula. The newrevolving line of credit requires us to comply with various non-financial andfinancial covenants, including minimum profitability and liquidity and requiresus to maintain a minimum cash balance of $15.0 million with the bank, orbe subject to certain additional fees. At December 31, 2005, we had noborrowings under this agreement. Our previous $15.0 million revolving lineof credit, which commenced in December 2003, bore interest at the bank’sprime rate plus 1%, matured on January 5, 2005 and was also collateralizedby substantially all of our assets. Borrowings under this previous revolvingline of credit were on a formula basis and were limited to eligible accountsreceivable. At December 31, 2004, we had no borrowings under our previousrevolving line of credit. At December 31, 2005 and 2004, we had $2.4million and  $3.0 million in lettersof credit outstanding, respectively.

In June 2004, wecompleted a refinancing of our outstanding debt obligations. As part of therefinancing, 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 tenderedfor 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 2005remained outstanding after the exchange offer. Simultaneously with the exchangeoffer, we prepaid all $25.2 million of our 111⁄2% Senior Secured Notes due January 2005 forcash equal to the principal amount plus accrued but unpaid interest and theissuance of warrants exercisable for an aggregate of 5,176,065 shares of ourcommon 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 Notesdue January 2005. The 63⁄4% Convertible Subordinated Notes due June 2009and the 8% Secured Convertible Notes due June 2007 were convertibleinto 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 2009voluntarily converted their notes into 0.7 million shares of common stockat the conversion price of $1.85 per share.

***(c) Capital Lease Obligations***

During 2005 and 2004, we entered into capital leaseagreements to finance $3.2 million and $1.8 million in equipment purchasesfor The iBasis Network, respectively. The capital lease agreements primarilyhave a term of three years.

***Gains on Exchangesand Repurchases of  53⁄4% ConvertibleSubordinated Notes—******During***2003,we entered into agreements with principal holders of our 53⁄4% Convertible Subordinated Notes whichresulted in the retirement of $50.4 million of such notes in exchange fornew debt instruments at 50% of the face value of the retired Notes. Under theterms of the agreement, the holders of the retired Notes received$25.2 million of new, 111⁄2% Senior Secured Notes and warrants to purchase4..9 million shares of our common stock. Each warrant has an initial exerciseprice 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 andshared in a second priority lien on our assets and were subordinated to ourrevolving line of credit with our bank.

In accordance with SFAS No. 15, “Accounting byDebtors and Creditors Regarding Troubled Debt Restructuring,” we recorded again on the exchange of debt of approximately $16.6 million during theyear ended December 31, 2003. SFAS No. 15 requires that the gain onthe exchange be recorded net of the accrual for future interest payments on the111⁄2% Senior Secured Notes, the fair value of the warrants issued, the reductionof the net book value of the deferred financing costs originally capitalizedwith the 

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(9) Long-TermDebt (Continued)**

issuance of our 53⁄4% Convertible Subordinated Notes andany other fees or costs. The fair value of $1,375,000 of the detachablewarrants was estimated utilizing a valuation method similar to the Black-Scholesmodel. Assumptions utilized within the pricing model included a) a usefullife of 5 years; b) volatility of 46%; c) no dividends; andd) a discount rate of 3%. While our future cash flows relating to interestpayments will not be affected by the exchange, our future Statement of Operationswill show, as required, a reduction of interest expense due to the accrual ofthe future interest payments on the 111⁄2% Senior Secured Notes within the gain.

Thegain recognized in 2003 was calculated as follows:

| ** **                                                                | ** ** | **(In thousands)** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|
| Face value of surrendered  5 3⁄4%  Convertible Subordinated Notes |       |                    | $          | 50,350 |   |   |
| Less: Face value  of issued 111⁄2% Senior Secured Notes                |       |                    | (25,175    | ) |   |
| Future interest payments on 111⁄2% 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 |   |   |

 

Scheduledmaturities of capital lease obligations as of December 31, 2005 are asfollows:

| **Year**                             | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------|------------|
| 2006                                 |       |       | $          | 1,866                   |       |   |
| 2007                                 |       |       | 1,604      |                    |       |
| 2008                                 |       |       | 795        |                    |       |
| 2009                                 |       |       | —     |                    |       |
| 2010                                 |       |       | —     |                    |       |
| Thereafter                           |       |       | —     |                    |       |
| Total future  minimum payments       |       |       | 4,265      |                    |       |
| Less: Amounts  representing interest |       |       | 451        |                    |       |
| Present value of  minimum repayments |       |       | 3,814      |                    |       |
| Less: Current  portion               |       |       | 1,598      |                    |       |
| Long-term portion                    |       |       | $          | 2,216                   |       |   |

 

62

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(10) Commitments andContingencies**

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

| **Year**                             | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------|------------|
| 2006                                 |       |       | $          | 2,669                   |       |   |
| 2007                                 |       |       | 2,136      |                    |       |
| 2008                                 |       |       | 1,834      |                    |       |
| 2009                                 |       |       | 1,514      |                    |       |
| 2010                                 |       |       | 629        |                    |       |
| Thereafter                           |       |       | —     |                    |       |
| Total future minimum  lease payments |       |       | $          | 8,782                   |       |   |

 

Total rent expense included in the consolidatedstatements of operations was $2,954,000, $3,818,000, and $3,669,000 for theyears ended December 31, 2005, 2004, and 2003, respectively.

**Litigation—****In**addition tolitigation that we have initiated or responded to in the ordinary course ofbusiness, we are currently party to the following potentially material legalproceedings:

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

The complaints are similar to each other and tohundreds of other complaints filed against other issuers and theirunderwriters, and allege violations of the Securities Act of 1933 and theSecurities Exchange Act of 1934 primarily based on the assertion that there wasundisclosed compensation received by our underwriters in connection with ourpublic offerings and that there were understandings with customers to makepurchases in the aftermarket. The plaintiffs have sought an undetermined amountof monetary damages in relation to these claims. On September 4, 2001, thecases against us were consolidated. On October 9, 2002, the individualdefendants were dismissed from the litigation by stipulation and withoutprejudice.

On June 11, 2004, we and the individualdefendants, as well as many other issuers named as defendants in the classaction proceeding, entered into an agreement-in-principle to settle thismatter, and on June 14, 2004, this settlement was presented to the court.The district court granted a preliminary approval of the issuers’ settlement onFebruary 15, 2005, subject to certain modifications to the proposed barorder, to which plaintiffs and issuers agreed. On August 31, 2005, thecourt issued a preliminary order further approving the modifications to thesettlement and certifying the settlement classes. The court appointed GardenCity Group as the notice administrator for the settlement and ordered thatnotice of the settlement be distributed to all settlement class membersbeginning on November 15, 2005 and completed by January 15, 2006. Thedeadline for filing objections to the settlement is March 24, 2006, andthe fairness hearing has been set for April 26, 2006. Although we believethat we and the individual defendants have meritorious defenses to the claimsmade in the complaints, in deciding to pursue settlement, we 

63

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(10) Commitmentsand Contingencies (Continued)**

considered, among other factors, the substantial costsand the diversion of our management’s attention and resources that would berequired by litigation.

Pursuant to the terms of the proposed settlement, inexchange for a termination and release of all claims against us and theindividual defendants and certain protections against third-party claims, wewill assign to the plaintiffs certain claims we may have as an issuer againstthe underwriters, and our insurance carriers, along with the insurance carriersof the other issuers, will ensure a floor of $1 billion for anyunderwriter-plaintiff settlement. Although the financial effect of thesettlement on us will not be material, our insurance carriers’ exposure in thisconnection will range from zero to a few hundred thousand dollars, and will bereduced proportionately by any amounts recovered by plaintiffs directly fromthe underwriters.

We cannot assure you that the settlement which hasbeen finalized will be accepted by the court, or that we will be fully coveredby collateral or related claims from underwriters, and that we would besuccessful in resulting litigation. In addition, even though we have insuranceand contractual protections that could cover some or all of the potentialdamages in these cases, or amounts that we might have to pay in settlement ofthese cases, an adverse resolution of one or more of these lawsuits could havea material adverse affect on our financial position and results of operationsin the period in which the lawsuits are resolved. We are not presently able toestimate potential losses, if any, related to the lawsuits.

We are also party to suits for collection, relatedcommercial disputes, claims by former employees, claims related to certaintaxes, claims from carriers and foreign service partners over reconciliation ofpayments for circuits, Internet bandwidth and/or access to the public switchedtelephone network, and claims from estates of bankrupt companies alleging thatwe received preferential payments from such companies prior to their bankruptcyfilings. Our employees have also been named in proceedings arising out ofbusiness activities in foreign countries. We intend to prosecute vigorouslyclaims that we have brought and employ all available defenses in contestingclaims against us, or our employees. Nevertheless, in deciding whether topursue settlement, we will consider, among other factors, the substantial costsand the diversion of management’s attention and resources that would berequired in litigation. In light of such costs, we have settled various and insome cases similar matters on what we believe have been favorable terms whichdid 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 adverseaffect on our business.

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(11) Stockholders’ Equity(Deficit)**

***(a) AuthorizedCapital Stock***   We have authorized forissuance 170,000,000 shares of common stock, $0.001 par value per share (“CommonStock”) and 15,000,000 shares of preferred stock, $0.001 par value per share (“PreferredStock”).

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

***(b) ReverseStock Split***   In February 2006, weannounced our intention to seek shareholder approval to authorize our Board ofDirectors to implement a reverse stock split based on a range of possibleexchange ratios.

***(c) TreasuryStock***   InOctober 2005, we announced a program to repurchase up to $5.0 million ofour common stock. The stock repurchases under this program may be made over thenext year through open market and privately negotiated transactions at timesand in such amounts as we deem appropriate.  The stock repurchase program may be limited orterminated at any point in time. During the fourth quarter of 2005, werepurchased 983,050 shares of Common Stock at a total cost of $1,865,000. In February 2006, we expanded our stockrepurchase program to allow for the repurchase of up to a total of $15.0million. Through March 10, 2006, we had repurchased an additional1,131,300 shares of Common Stock in 2006 at a total cost of $2,268,000, leaving$10,867,000 remaining for repurchases under this program.

In addition, during 2005, we reissued 43,736 sharesfrom our treasury stock as partial payment of our debt conversion premium.

***(d) StockIncentive Plan***   Our 1997 Stock Incentive Plan(the “Plan”) provides for the granting of restricted stock awards and incentivestock options (“ISOs”) and nonqualified options to purchase shares of CommonStock to key employees, directors and consultants. Under the terms of the Plan,the exercise price of options granted shall be determined by the Board ofDirectors and for ISOs shall not be less than fair market value of our CommonStock on the date of grant. Options vest quarterly in equal installments overtwo to four years, provided that no options shall vest during the employees’first year of employment. The expiration date of each stock option shall bedetermined by the Board of Directors, but shall not exceed 10 years fromthe date of grant. At our May 2005 annual meeting, our stockholdersapproved an additional 5.0 million shares of Common Stock to be granted underthe Plan.

65

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(11) Stockholders’Equity (Deficit) (Continued)**

The following tablesummarizes the option activity for the years ended December 31, 2005, 2004and 2003:

| ** **                           | ** ** | **Number of  Shares** | ** ** | **Exercise  Price Per  Share** | ** ** | **Weighted  Average  Exercise Price** | ** **  |
|--------------------------------------|------------|----------------------------|------------|-------------------------------------|------------|--------------------------------------------|-------------|
| ** **                           | ** ** | **(In thousands)**    | ** ** | ** **                          | ** ** | ** **                                 | ** **  |
| Outstanding,  January 1, 2003   |       |                       | 2,257      |                                |       | $                                          | 0.25-$28.75 |   |   | $ | 2.02 |   |   |
| Granted                              |       |                       | 4,710      |                                |       | 0.38-1.54                                  |        |   | 1.02 |   |   |
| Exercised                            |       |                       | (128       | )                                   |       | 0.86-1.57                                  |        |   | 1.39 |   |   |
| Forfeited                            |       |                       | (507       | )                                   |       | 0.25-14.81                                 |        |   | 1.86 |   |   |
| Outstanding,  December 31, 2003 |       |                       | 6,332      |                                |       | 0.25-28.75                                 |        |   | 1.35 |   |   |
| Granted                              |       |                       | 1,327      |                                |       | 1.17-2.42                                  |        |   | 1.87 |   |   |
| Exercised                            |       |                       | (508       | )                                   |       | 0.25-2.16                                  |        |   | 0.90 |   |   |
| Forfeited                            |       |                       | (582       | )                                   |       | 0.25-14.81                                 |        |   | 1.23 |   |   |
| Outstanding,  December 31, 2004 |       |                       | 6,569      |                                |       | 0.25-28.75                                 |        |   | 1.51 |   |   |
| Granted                              |       |                       | 298        |                                |       | 1.91-2.57                                  |        |   | 2.27 |   |   |
| Exercised                            |       |                       | (238       | )                                   |       | 0.37-2.16                                  |        |   | 1.03 |   |   |
| Forfeited                            |       |                       | (324       | )                                   |       | 0.38-14.82                                 |        |   | 2.02 |   |   |
| Outstanding,  December 31, 2005 |       |                       | 6,305      |                                |       | $                                          | 0.25-$28.75 |   |   | $ | 1.54 |   |   |
| Exercisable,  December 31, 2005 |       |                       | 4,279      |                                |       | $                                          | 0.25-$28.75 |   |   | $ | 1.59 |   |   |
| Exercisable,  December 31, 2004 |       |                       | 3,269      |                                |       | $                                          | 0.25-$28.75 |   |   | $ | 1.73 |   |   |
| Exercisable,  December 31, 2003 |       |                       | 2,216      |                                |       | $                                          | 0.25-$28.75 |   |   | $ | 1.90 |   |   |

 

Thefollowing table summarizes information relating to currently outstanding andexercisable stock options as of December 31, 2005:

| ** **                                  | ** ** | ** **               | ** ** | **Outstanding**                                                              | ** ** | ** **                                 | ** ** | **Exercisable**          | ** ** |
|---------------------------------------------|------------|--------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Outstanding  Options** | ** ** | **Weighted Average  Remaining  Contractual Life  (in Years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| ** **                                  | ** ** | **(In thousands)**  | ** ** | ** **                                                                   | ** ** | ** **                                 | ** ** | **(in thousands)**  | ** ** | ** ** | ** ** |
| $0.25-$0.69                                 |       |                     | 211        |                                                                         |       |                                       | 6.02       |                     |       |   | $ | 0.56 |   |   |   | 193 |   |   |   | $ | 0.57 |   |   |
| 0.72                                        |       |                     | 730        |                                                                         |       |                                       | 5.87       |                     |       |   | $ | 0.72 |   |   |   | 730 |   |   |   | $ | 0.72 |   |   |
| 0.88-1.10                                   |       |                     | 2,272      |                                                                         |       |                                       | 7.26       |                     |       |   | $ | 0.92 |   |   |   | 1,288 |   |   |   | $ | 0.93 |   |   |
| 1.17-1.88                                   |       |                     | 2,271      |                                                                         |       |                                       | 8.01       |                     |       |   | $ | 1.50 |   |   |   | 1,555 |   |   |   | $ | 1.36 |   |   |
| 2.12-3.10                                   |       |                     | 508        |                                                                         |       |                                       | 8.33       |                     |       |   | $ | 2.42 |   |   |   | 200 |   |   |   | $ | 2.58 |   |   |
| 3.71-5.00                                   |       |                     | 220        |                                                                         |       |                                       | 4.13       |                     |       |   | $ | 4.55 |   |   |   | 220 |   |   |   | $ | 4.55 |   |   |
| 11.00-13.50                                 |       |                     | 47         |                                                                         |       |                                       | 4.37       |                     |       |   | $ | 13.39 |   |   |   | 47 |   |   |   | $ | 13.39 |   |   |
| $14.81-$28.75                               |       |                     | 46         |                                                                         |       |                                       | 4.42       |                     |       |   | $ | 15.29 |   |   |   | 46 |   |   |   | $ | 15.29 |   |   |
|                                        |       |                     | 6,305      |                                                                         |       |                                       | 7.26       |                     |       |   | $ | 1.54 |   |   |   | 4,279 |   |   |   | $ | 1.59 |   |   |

 

At December 31, 2005, options to purchase 5.4million shares of Common Stock were available for future grants under the Plan.

***(e) StockOption Exchange Program***   In December 2002we announced an offer to exchange outstanding employee stock options in returnfor 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 issuedexercisable for the 

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(11) Stockholders’Equity (Deficit) (Continued)**

same number of shares of common stock tendered by theoption holder and accepted for exchange. A total of 1,786,950 options wereaccepted for exchange under the exchange offers and, accordingly, were canceledin 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 eachexchange offer terminated and vest quarterly over a two-year period.

***(f) Warrants***   Asdescribed in Note 9, we issued 5,176,065 warrant shares in connection withour debt refinancing in June 2004 (“2004 Warrant”). The 2004 Warrantshares were issued to the holders of our 111⁄2% Senior Secured Notes for theright to prepay the notes. Each 2004 Warrant share is exercisable into ourcommon stock on a one-to-one basis at an exercise price of $1.85 per share andis exercisable over a five-year term. The fair value of $2.1 million ofthe 2004 Warrant was charged to results of operations as additional interestassociated with our debt refinancing**.**

In 2003, we issued 4,915,416 warrant shares inconnection with the exchange of our 53⁄4% Convertible Subordinated Notes for the111⁄2% Senior Secured Notes (“2003 Warrant”). Each 2003 Warrant share is exercisableinto our common stock on a one-to-one basis at an exercise price of $0.65 perwarrant share and are exercisable over a five-year term. The warrant had a fairvalue of $1.4 million and was charged to the gain on the debt exchanges in2003. In connection with our private equity placement in September 2004,we issued a warrant for 1,732,500 shares in partial payment of investmentbanking services. This warrant has an exercise price of $2.10 per share, isexercisable 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 anon-cash transaction cost of the private equity placement. During the yearended December 31, 2005, 2004 Warrants totaling 800,000 shares wereexercised for $1.5 million in cash; 2003 Warrants totaling 1,400,000 shareswere exercised for $0.9 million in cash and warrants totaling 15,000 sharesissued for investment banking services were exercised for $32,000 in cash. Duringthe year ended December 31, 2004, 2003 Warrants totaling 2,249,316 shareswere exercised for $1.5 million in cash.

In December 2002, in conjunction with theinitiation of our bank credit lines, we issued a warrant to the bank for thepurchase of 337,500 shares of our common stock at an exercise price of $0.337per share. In 2004, the bank exercised its warrant in full on a net issuebasis, and received 272,876 shares of our common stock. As a result of the bankexercising its warrant on a net issue basis, no cash was received by us.

At December 31,2005 and 2004, outstanding warrants were:

| ** **                                      | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                      | ** ** | **(In thousands)** | ** ** |
| 2004 Warrant                                    |       | 4,376                   |       | 5,176    |       |
| 2003 Warrant                                    |       | 1,266                   |       | 2,666    |       |
| Warrant issued  for investment banking services |       | 1,718                   |       | 1,733    |       |
| Total warrants  outstanding                     |       | 7,360                   |       | 9,575    |       |

** **

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**iBasis, Inc. Notes to Consolidated Financial Statements (Continued)**

**(12) Valuation andQualifying Accounts**

Theallowance for doubtful accounts reflects our best estimate of probable lossesinherent in the account receivable balance. We determine the allowance based onknown troubled accounts, historical experience, and other currently availableevidence. 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)**                      | ** ** |
| 2003                                   |       |                                         | $          | 7,833                                             |       |                           |       | 800                                                 | ** ** |                                       |       | (1,236 | ) |   |   | (4,269 | ) |   |   | $ | 3,128 | ** ** |   |
| 2004                                   |       |                                         | $          | 3,128                                             |       |                           |       | 250                                                 | ** ** |                                       |       | 13 |   |   |   | — |   |   |   | $ | 3,391 | ** ** |   |
| 2005                                   |       |                                         | $          | 3,391                                             |       |                           |       | 850                                                 | ** ** |                                       |       | (1,734 | ) |   |   | — |   |   |   | $ | 2,507 | ** ** |   |

 

**(13)  Summary of Quarterly Information (Unaudited)**

Quarterlyfinancial information for 2005 and 2004 is as follows:

| **2005**                            | ** ** | ** **                                                            | ** ** | **First  Quarter** | ** ** | **Second  Quarter(1)** | ** ** | **Third  Quarter(2)** | ** ** | **Fourth  Quarter** | ** ** | **Total  Year** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|
| ** **                          | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Net revenue                         |       | $                                                                     | 88,672     |               |       | $                      | 94,581     |                  |       |                | $          | 94,644          |       |   | $ | 107,588 |   | $ | 385,485 |   |
| Total costs and  operating expenses |       | 87,193                                                                |       |               | 93,338     |                   |       |                  | 95,002     |                |       | 106,805         |       | 382,338 |   |
| Income (loss) from  operations      |       | 1,479                                                                 |       |               | 1,243      |                   |       |                  | (358       | )                   |       | 783             |       | 3,147 |   |
| Net (loss) income                   |       | $                                                                     | 190        |               |       | $                      | (767       | )                     |       |                | $          | (1,720          | )          |   | $ | 621 |   | $ | (1,676 | ) |
| Net income (loss) per share:        |       |                                                                  |       |               |       |                   |       |                  |       |                |       |            |       |   |   |
| Basic                               |       | $                                                                     | 0.00       |               |       | $                      | (0.01      | )                     |       |                | $          | (0.02           | )          |   | $ | 0.01 |   | $ | (0.02 | ) |
| Diluted                             |       | $                                                                     | 0.00       |               |       | $                      | (0.01      | )                     |       |                | $          | (0.02           | )          |   | $ | 0.01 |   | $ | (0.02 | ) |

 

| **2004**                              | ** ** | ** **                                                            | ** ** | **First  Quarter(3)** | ** ** | **Second  Quarter(4)** | ** ** | **Third  Quarter(5)** | ** ** | **Fourth  Quarter** | ** ** | **Total  Year** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|
| ** **                            | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Net revenue                           |       |                                                                  | $          | 57,008                |       |                   |       | $                     | 61,175     |                |       |            | $          | 70,359 |   |   | $ | 75,136 |   | $ | 263,678 |   |
| Total costs and  operating expenses   |       |                                                                  | 60,791     |                  |       |                   | 63,687     |                  |       |                | 71,773     |            |       | 75,258 |   | 271,509 |   |
| Loss from operations                  |       |                                                                  | (3,783     | )                     |       |                   | (2,512     | )                     |       |                | (1,414     | )               |       | (122 | ) | (7,831 | ) |
| Loss from continuing  operations      |       |                                                                  | (9,342     | )                     |       |                   | (5,913     | )                     |       |                | (2,896     | )               |       | (1,246 | ) | (19,397 | ) |
| Income from discontinued  operations  |       |                                                                  | —     |                  |       |                   | —     |                  |       |                | 1,861      |            |       | — |   | 1,861 |   |
| Net loss                              |       |                                                                  | $          | (9,342                | )          |                   |       | $                     | (5,913     | )                   |       |            | $          | (1,035 | ) |   | $ | (1,246 | ) | $ | (17,536 | ) |
| Basic and diluted net loss per share: |       |                                                                  |       |                  |       |                   |       |                  |       |                |       |            |       |   |   |   |   |
| Loss from continuing  operations      |       |                                                                  | $          | (0.21                 | )          |                   |       | $                     | (0.13      | )                   |       |            | $          | (0.06 | ) |   | $ | (0.02 | ) | $ | (0.38 | ) |
| Income from discontinued  operations  |       |                                                                  | —     |                  |       |                   | —     |                  |       |                | 0.04       |            |       | — |   | 0.03 |   |
| Net loss                              |       |                                                                  | $          | (0.21                 | )          |                   |       | $                     | (0.13      | )                   |       |            | $          | (0.02 | ) |   | $ | (0.02 | ) | $ | (0.35 | ) |

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(1)          Netloss includes $0.7 million in debt conversion premiums and transaction costs

(2)          Netloss includes $1.3 million in debt conversion premiums and transactions costs

(3)          Lossfrom continuing operations includes $5.0 million charge for loss onlong-term non-marketable security.

(4)          Lossfrom continuing operations includes $2.4 million in debt refinancingrelated charges

(5)          Loss from continuingoperations includes $0.2 million in debt refinancing related charges

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**Item 9A.**                *Controls and Procedures*

**Evaluation ofdisclosure controls and procedures**

As of December 31,2005, we carried out an evaluation, under the supervision and with theparticipation of our management, including the our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures. Based upon that evaluation, ourmanagement, including our Chief Executive Officer and the Chief FinancialOfficer, concluded that our disclosure controls and procedures are effective.

**Management’s Reporton Internal Control Over Financial Reporting**

We are responsible for establishing and maintainingadequate internal control over financial reporting, as defined in Rule 13a-15(f) underthe Exchange Act. Our internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of ourfinancial reporting and preparation of our financial statements for externalpurposes in accordance with generally accepted accounting principles in theUnited States. Under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,we conducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the framework in Internal Control IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (“COSO”). Based upon that evaluation, management has concluded thatour internal control over financial reporting was effective on December 31,2005.

Our assessment of the effectiveness of our internalcontrol over financial reporting as of December 31, 2005 has been auditedby Deloitte & Touche LLP, an independent registered public accountingfirm, and has issued an attestation on management’s assertion of our internalcontrol over financial reporting, each as stated Deloitte & Touche’sreport which appears on page 69.

Due to inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions or thatcompliance with the policies or procedures may deteriorate.

Changes in internal controls

During the quarter ended December 31,2005, there have not been any changes in our internal controls over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting, that iBasis, Inc. and subsidiaries (the “Company”) maintainedeffective internal control over financial reporting as of December 31,2005, based on criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). The Company’s management is responsible formaintaining effective internal control over financial reporting and for its assessmentof the effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

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We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company;and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’sassessment that the Company maintained effective internal control overfinancial reporting as of December 31, 2005, is fairly stated, in allmaterial respects, based on the criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as of December 31, 2005, based on the criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as of and for the yearended December 31, 2005 of the Company and our report dated March 15,2006, expressed an unqualified opinion on those financial statements.

/s/ DELOITTE &TOUCHE LLP

Boston, MassachusettsMarch 15, 2006

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**Item 9B.**               *Other Information*

None

**PART III**

**Item10.**                 *Directors and Executive Officers of the Registrant*

Information required by Part III,Item 10, regarding iBasis’ directors may be found in iBasis’ Proxy Statementrelating to iBasis’ annual meeting of stockholders to be held on May 2,2006, and is incorporated herein by reference. Information relating tocompliance with Section 16(a) of the Securities Exchange Act of 1934,as amended, may be found in the Proxy Statement and is incorporated herein byreference.

We have adopted a code of ethics that applies to eachofficer, employee and member of our Board of Directors. This code of ethics isavailable on our website at *www.ibasis.com.*

**Item11.**                 *Executive Compensation*

On March 15, 2006, the Compensation Committee andthe Board of Directors, based on recommendations from the CompensationCommittee, established the following 2006 fiscal year base salaries forthe following named executive officers: Mr. Ofer Gneezy, Chief ExecutiveOfficer, $208,000; Dr. Gordon VanderBrug, Executive Vice President,$187,000; Mr. Richard Tennant, Chief Financial Officer and Senior VicePresident Finance and Administration, $185,000; Mr. Dan Powdermaker,Senior Vice President, Worldwide Sales, $154,500; Mr. Paul Floyd, SeniorVice President of Research & Development, Engineering and Operations,$185,000; and Mr. Tim Enright, Senior Vice President, Retail, $180,000.

The Compensation Committee and the Board of Directorsalso established an executive bonus plan (“Bonus Plan”) with awards that may beearned for fiscal year 2006. The establishment of the Bonus Plan involvedsetting the target amounts of such bonuses and certain of the Corporation-wide,business unit and individual goals upon which the bonuses will be paid. Theactual bonus payments under such awards may, at the discretion of theCompensation Committee, be less than or greater than the target amounts,depending on the Corporation’s business performance, and performance ofindividuals, regardless of whether the goals upon which such bonuses are basedare achieved. Mr. Ofer Gneezy, Dr. Gordon VanderBrug,Mr. Richard Tennant, Mr. Paul Floyd, and Mr. Tim Enright, willbe eligible to receive a year-end discretionary bonus of up to $400,000,$360,000, $200,000, and $90,000, respectively. Mr. Dan Powdermaker will beeligible to receive a year-end discretionary bonus of up to $81,000 plus salescommissions of up to $81,000.

Information required by Part III,Item 11, may be found in iBasis’ Proxy Statement relating to iBasis’ annualmeeting of stockholders to be held on May 2, 2006, and is incorporatedherein by reference.

**Item 12.**                 *Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters*

Information required by Part III,Item 12, may be found in iBasis’ Proxy Statement relating to iBasis’ annualmeeting of stockholders to be held on May 2, 2006, and is incorporatedherein 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’ annualmeeting of stockholders to be held on May 2, 2006, and is incorporatedherein by reference.

**Item 14.**                 *Principal Accounting Fees and Services*

Information relating to fees paid to the Company’sindependent auditors and certain related matters is set forth under the caption“Deloitte & Touche LLP Fees and Services” in the Proxy Statement andis incorporated by reference.

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**PART IV**

**Item 15.**                 *Exhibits,  Financial Statementsand Schedules*

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

**(1) FinancialStatements:**

Report of Independent Registered Public AccountingFirm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Stockholders’ Equity(Deficit)

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

**(2) Indexto Financial Statements Schedules:****  **All financial statement schedules have beenomitted because the required information is included in our consolidatedfinancial statements, or the related notes, or is not applicable.

**(3) Index toExhibits:**

|    Exhibit   Number | ** ** | **Description** | ** ** |
|-------------------------------|------------|-----------------|------------|
|                          | 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)). |   |
|                          | 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)). |   |
|                          | 10.7       |            |       | 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)). |   |

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|        | 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)).                                                                                                                                                                                            |   |
|--------|-------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10.20 |   |   | 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)). |   |
|   | 10.22 |   |   | 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)).                                                                                                                                                                                |   |
|   | 10.27 |   |   | 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)).                                                                                                                                                                                                   |   |
|   | 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)).                                                                                       |   |
|   | 10.58 |   |   | 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)).                                                                                                                                                                                                                                                                          |   |
|   | 10.70 |   |   | 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, (incorporated  by reference from Exhibit 10.72 to the Registrant’s Annual Report on  Form 10-K for year ended December 31, 2004 (file no. 000-27127)).                                          |   |
|   | 10.73 |   |   | Amended  and Restated 1997 Stock Incentive Plan, amended March 2005 (incorporated  by reference from Appendix A to the Registrant’s Proxy Statement dated  April 13, 2005).                                                                                                                                                                                                                                                                                                                                                   |   |
|   | 10.74 |   |   | Letter  Agreement, dated June 21, 2005, by and among the Registrant, JMG Triton  Offshore Fund, Ltd. and JMG Capital Partners (incorporated by reference from  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K  dated June 21, 2005 (file no. 000-27127)).                                                                                                                                                                                                                                              |   |

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|                                                    | 10.75      |   |   | Offer  Letter between the Registrant and Timothy P. Enright, dated as of  December 13, 2005, and Employment Agreement dated December 19, 2005.                                                                                     |   |
|----------------------------------------------------|------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                               | 10.76      |   |   | 2006  Executive Officer Bonus Plan.                                                                                                                                                                                                          |   |
|                                               | 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.                                                                                                                                                                                                 |   |
|                                               | 23.1       |   |   | Consent  of Independent Registered Public Accounting Firm.                                                                                                                                                                                   |   |
|                                               | 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) Material  Contracts filed as Exhibits** | ** ** |
|                                               | 10.75      |   |   | Offer Letter  between the Registrant and Timothy P. Enright, dated as of December 13,  2005, and Employment Agreement dated December 19, 2005.                                                                                     |   |
|                                               | 10.76      |   |   | 2006 Executive Officer  Compensation Plan.                                                                                                                                                                                                   |   |
|                                               | 23.1       |   |   | Consent of Independent  Registered Public Accounting Firm.                                                                                                                                                                                   |   |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this Report to be signedon its behalf by the undersigned, thereunto duly authorized.

|                     | iBASIS, INC. |
|---------------------|--------------|
|                | By:          | /s/  OFER GNEEZY |
|                |         | Ofer Gneezy |
|                |         | *President  and Chief Executive Officer* |
| March 15, 2006 |         |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities indicated.

|                           | **Name**                                              | ** **           |  | **Title** | ** ** |  | **Date** | ** ** |
|---------------------------|-------------------------------------------------------|----------------------|--|-----------|------------|--|----------|------------|
| /s/ OFER  GNEEZY          | President and  Chief Executive Officer and Director   | March 15,  2006 |
| Ofer  Gneezy              | (Principal Executive  Officer)                        |                 |
| /s/ GORDON J.  VANDERBRUG | Executive Vice  President and Director                | March 15,  2006 |
| Gordon  J. VanderBrug     |                                                  |                 |
| /s/ RICHARD G.  TENNANT   | Senior Vice  President, Finance and Chief Financial   | March 15,  2006 |
| Richard  G. Tennant       | Officer (Principal  Financial and Accounting Officer) |                 |
| /s/ ROBERT H.  BRUMLEY    | Director                                              | March 15,  2006 |
| Robert  H. Brumley        |                                                  |                 |
| /s/ CHARLES N.  CORFIELD  | Director                                              | March 15,  2006 |
| Charles  N. Corfield      |                                                  |                 |
| /s/ W. FRANK  KING        | Director                                              | March 15,  2006 |
| W.  Frank King            |                                                  |                 |
| /s/ DAVID LEE             | Director                                              | March 15,  2006 |
| David  Lee                |                                                  |                 |
| /s/ CHARLES M.  SKIBO     | Director                                              | March 15,  2006 |
| Charles M. Skibo          |                                                  |                 |

 

 

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