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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                    to


Commission file number: 000-27127



iBasis, Inc.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

04-3332534(I.R.S. Employer
Identification No.)20 Second Avenue, Burlington, MA 01803(Address of principal executive offices, including zip code)(781) 505-7500(Registrant's telephone number, including area code)




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

Title of Class

Name of each exchange on which registeredCommon Stock, par value $0.001 per share

The NASDAQ Stock Market LLC
(NASDAQ Global Market)


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

None

(Title
of Class)



Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes o    No ý

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ý Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

The aggregate market value of the registrant's common stock, $0.001 par value per share, held by non-affiliates of the registrant as of
June 30, 2008 was approximately $102,242,000 based on 31,171,405 shares held by such non-affiliates at the closing price of a share of common stock of $3.28 as reported on The
NASDAQ Global Market on such date. Affiliates of the Company (defined as officers, directors and owners of 10% or more of the outstanding share of common stock) owned 42,470,503 shares of common stock
outstanding on such date.

Indicate
the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

Common
Stock, par value $0.001 per share, as of February 28,
2009                                    71,228,328

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference into the following parts of this
Form 10-K: Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the Registrant's Proxy Statement for the 2009
Annual Meeting of Stockholders.



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Table of Contents

iBASIS, INC.    ANNUAL REPORT ON FORM 10-K  For the Year Ended December 31, 2008    Table of Contents



PagePART IItem 1.

Business


1Item 1A.

Risk Factors


16Item 1B.

Unresolved Staff Comments


33Item 2.

Properties


33Item 3.

Legal Proceedings


33Item 4.

Submission of Matters to a Vote of Security Holders


36PART IIItem 5.

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


37Item 6.

Selected Financial Data


39Item 7.

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


41Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


62Item 8.

Financial Statements and Supplementary Data


63Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


108Item 9A.

Controls and Procedures


108Item 9B.

Other Information


108PART IIIItem 10.

Directors, Executive Officers and Corporate Governance


109Item 11.

Executive Compensation


109Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


109Item 13.

Certain Relationships and Related Transactions and Director Independence


109Item 14.

Principal Accounting Fees and Services


109PART IVItem 15.

Exhibits, Financial Statement Schedules


110Signatures


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PART I

Item 1.    Business

iBasis is a leading wholesale carrier of international long distance telephone calls and a provider of retail prepaid calling services
and enhanced services for mobile operators.

Company Overview

Our operations consist of our wholesale trading business ("Trading"), in which we connect buyers and sellers of international
telecommunications services, and our retail services business ("Retail"). Our Trading business also includes Outsourcing revenue which we generate as the exclusive provider of wholesale international
voice services for specific carrier customers. In the Trading business we receive voice traffic from buyersoriginating telecommunications carriers who are interconnected to our network
via Voice over Internet Protocol ("VoIP") or traditional time division multiplexing ('TDM") connections, and we route that traffic over our network to sellerslocal service providers and
telecommunications carriers in the destination countries with whom we have established agreements to manage the completion or termination of calls.

As
a result of the combination with KPN Global Carrier Services B.V. (KPN GCS) in October 2007 (described below), more than half of our traffic utilizes our VoIP network, while
the balance is carried over our TDM network. The continued migration of the TDM traffic to our lower cost VoIP network is expected to be a significant source of synergies from the KPN transaction over
the next several years.

We
use proprietary, patented and patent-pending technology to automate the selection of routes and termination partners based on a variety of performance, quality, and business metrics.
We offer this Trading service on a wholesale basis to carriers, mobile operators, consumer VoIP companies, telephony resellers and other service providers worldwide. We have call termination
agreements with local service providers in more than 100 countries in North America, Europe, Asia, the Middle East, Latin America, Africa and Australia.

We
continue to expand our market share in our Trading business by expanding our customer base, developing termination capacity, and by offering a comprehensive portfolio of
cost-effective international voice solutions, including complete outsourcing of international voice traffic.

Our
Trading products comprise a comprehensive voice product portfolio. We have retained the leading product from both iBasis and KPN GCSDirect Voice and Premium Voice
respectively, and we completed the portfolio with two new mid-range productsValue Voice and Certified Voice. The four products offer a progression of code coverage, pricing
and features formulated to meet the varied requirements of fixed carriers, mobile operators, consumer voice over broadband carriers, and prepaid calling card service providers. Our product portfolio
enables us to compete effectively in all international voice markets and gives us particular strengths in the fastest-growing segments of VoIP and mobile.

In
targeting the emerging consumer VoIP providers, we offer our DirectVoIP and DirectSIP IP interconnection services, which address a range of requirements that
are
specific to the growing consumer VoIP market, including support for Session Initiation Protocol interconnection, which is becoming the standard for voice over broadband services. DirectSIP also
includes our media normalization, or transcoding, solution, which enables us to provide greater interoperability among devices and voice applications, as well as deliver high quality service even over
sub-optimal network connections.

In
the mobile market, in addition to meeting mobile operators' requirements for premium quality voice service and advanced voice features, iBasis offers a portfolio of value-added mobile
data services,

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called
Mobile Matrix, which includes global signaling, mobile messaging and roaming to enhance mobile operators' average revenue per user and customer loyalty.

Outsourcing
offers carriers a strategic solution to the commoditization of international voice. By outsourcing their international voice operations to iBasis, carriers take advantage of
our efficiencies of scale, our specialization, and our highly efficient global infrastructure, which supports both VoIP and TDM traffic. Moreover, they leverage our termination agreements with
hundreds of providers in more than 100 countries. Our Outsourcing customers are better able to focus their resources on higher margin, differentiating consumer services.

Our
Retail business consists of retail prepaid calling cards, which are marketed through distributors primarily to ethnic communities within major metropolitan markets in the United
States, and Pingo®, a prepaid calling service that we offer and sell directly to consumers via an eCommerce model. Both can be private-labeled for other service providers. The prepaid
calling card business and Pingo leverage our existing international network and have the potential to deliver higher margins than are typically achieved in the Trading business. In addition, the
retail prepaid calling card business typically has a faster cash collection cycle than the Trading business. In 2007, we launched PingoBusiness, enhancements that enable businesses to manage multiple
Pingo accounts through a single administrative account. To date, revenues from our Pingo services have not been material.

We
were incorporated as a Delaware corporation in 1996. Our principal executive offices are located at 20 Second Avenue, Burlington, Massachusetts 01803 and our telephone number is
(781) 505-7500. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports, are available free of charge through the Securities and Exchange Commission's ("SEC") website atwww.sec.govor on our
investor relations section of our website athttp://investor.ibasis.comas soon as reasonably practicable after such materials have been electronically
filed with, or furnished to, the SEC.

KPN Transaction

On October 1, 2007, iBasis, Inc. and KPN B.V. ("KPN"), a subsidiary of Royal KPN N.V. ("Royal KPN"),
completed transactions ("KPN Transaction") pursuant to which iBasis issued 40,121,074 shares of its common stock to KPN and acquired the outstanding shares of two subsidiaries of KPN ("KPN GCS"),
which encompassed KPN' international wholesale voice business. The Company also received $55 million in cash from KPN, subject to post-closing adjustments based on the working
capital and debt of iBasis and KPN GCS. Immediately after issuance on October 1, 2007, the shares of iBasis common stock issued to KPN represented 51% of the issued and outstanding shares of
iBasis common stock on a fully-diluted basis (which includes all of the issued and outstanding common stock and the common stock underlying outstanding "in-the-money" stock
options, as adjusted, and warrants to purchase common stock). As of December 31, 2008, the 40,121,074 shares owned by KPN represent 56% of the issued and outstanding common stock of iBasis and
56% on a fully-diluted basis, as defined above.

On
October 8, 2007, iBasis paid a dividend in the amount of $113 million at a rate of $3.28 per share to each of its shareholders on the record date of September 28,
2007, the trading date immediately prior to the closing date of the KPN Transaction. In addition, holders of outstanding warrants to purchase our common stock will be entitled to receive a cash
payment upon the future exercise of these warrants in an amount equal to the dividend amount that would have been payable if the warrants had been exercised immediately prior to the dividend record
date. Cumulatively through December 31, 2008, we have paid holders of warrants a total $0.8 million in dividends upon the exercise of their warrants. As of December 31, 2008, we
have unexercised warrants representing 432,000 shares, at exercise prices ranging from $6.30 to $9.00 per share, and have $1.4 million accrued for dividends to be paid upon the potential future
exercise of these warrants. In connection with the

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payment
of the dividend to shareholders, we also increased the number of shares subject to unexercised stock options and decreased the exercise price of these stock option grants to preserve their
value.

The
officers of iBasis immediately prior to the closing of the KPN Transaction have continued to serve as the officers of the combined company and one executive of KPN GCS,
Mr. Edwin Van Ierland, was appointed as the Company's Senior Vice President Worldwide Sales. Upon closing of the KPN Transaction, Messrs. Charles Skibo and David Lee, two independent
members of iBasis' board of directors, resigned as members of the board of directors and the board of directors of iBasis appointed Messrs. Eelco Blok and Joost Farwerck, two executives of
Royal KPN, as directors to fill the vacancies created by the resignations of Messrs. Skibo and Lee.

Although
iBasis acquired all of the outstanding capital stock of KPN GCS, after the closing of the transaction, KPN holds a majority of the outstanding common stock of iBasis and KPN'
designees are expected to represent, at a future date, a majority of the Company's board of directors. Accordingly,
for accounting and financial statement purposes, the KPN Transaction has been treated as a reverse acquisition of iBasis by KPN GCS under the purchase method of accounting and the financial results of
KPN GCS have become the historical financial results of the combined company and replace the historical financial results of iBasis as a stand-alone company. Thus, the financial results reported for
the full year 2007 include the results of KPN GCS stand-alone for the first nine months of 2007 and the financial results of the combined company for the fourth quarter of 2007 only.

The
presentation of the Statement of Stockholders' Equity reflects the historical stockholders' equity of KPN GCS through September 30, 2007. The effect of the issuance of shares
of iBasis common stock to KPN and the inclusion of iBasis' stockholders' equity as a result of the closing of the KPN Transaction on October 1, 2007 is reflected in the year ended
December 31, 2007.

Prior
to October 1, 2007, KPN GCS operated as an integrated part of KPN since inception and the historical financial statements of KPN GCS have been derived from the accounting
records of KPN using the historical bases of assets and liabilities. Because KPN GCS did not operate as a stand-alone business the historical financial statements may not necessarily be representative
of amounts that would have been reflected in the financial statements presented had KPN GCS operated independently of KPN.

KPN
GCS benefited from certain related party revenue and purchase agreements with KPN that included sales prices per minute and costs per minute. KPN GCS also relied on KPN for a
substantial part of its operational and administrative support, for which it was allocated costs primarily consisting of selling, general and administrative expenses, such as costs for centralized
research, legal, human resources, payroll, accounting, employee benefits, real estate, insurance, information technology, telecommunications, treasury and other corporate and infrastructure costs. In
anticipation of the closing of the transaction with iBasis, KPN GCS entered into a Framework Services Agreement with KPN in 2006, which replaced the related party revenue and purchase agreements and
operational and administrative support arrangements described above.

In
2008, we changed the name of our Netherlands operations from KPN GCS to iBasis Netherlands.

TDC Transaction

On April 1, 2008, we acquired certain assets from TDC, the leading telecommunications carrier in Denmark, as well as certain
assets, contracts and four employees of TDC' subsidiary in the U.S., TDC Carrier Services U.S., for approximately $11 million in cash ("TDC Transaction"). Pursuant to the TDC Transaction, we
became the exclusive provider of international voice services for TDC under a five-year strategic outsourcing arrangement, and TDC will be a preferred partner for terminating traffic sent
by us into the Nordic region, consisting of Denmark, Finland, Iceland, Norway and Sweden.

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Approximately
130 non-Nordic international wholesale voice customers, as well as all of TDC' interconnection and bilateral agreements for inbound and outbound international
phone calls have been transferred to us. TDC will retain its Nordic customer base and its pan-Nordic reach.

Industry Overview

Market Overview.Based on the most current information available, the international voice market was estimated by TeleGeography, a
market research
firm, to be approximately $78 billion in 2007, and international voice minutes grew approximately 14% over 2006. International wholesale voice traffic represented approximately
$11 billion in 2007, and minutes of traffic grew 17% over 2006 as more traffic is originated by carriers such as mobile operators, that lack international networks. We believe that wholesale
traffic will continue to grow faster than the overall international voice market due to important trends. These trends involve the migration of voice traffic:



Moreover,
direct connections between incumbents from different countries are only cost-effective for very large traffic flows. Wholesale carriers offer call termination to
many destinations through a single connection and enable carriers to retain revenue while reducing cost of operations.

Global
deregulation combined with rapid technological advances has enabled the emergence of many new communications service providers in dozens of local markets. In their efforts to
remain competitive, national carriers are focusing their capital spending on "last-mile" retail services and technology initiatives such as fixed-to-mobile
convergence, wireless, and cable, which deliver or promise to deliver margins that are several times greater than that of international voice service. Consequently, communications service providers
are looking for ways to expand their ability to serve all of their customers' telecommunication needs, while simultaneously reducing the cost of providing international services. As the international
voice business becomes increasingly commoditized, the critical success factor is the efficiency of scale. For the vast majority of carriers, international traffic represents a very small portion of
their overall business. Therefore, many of the world's carriers are seeking to leverage efficient wholesale networks, such as The iBasis Network, with lower infrastructure and transport
costs that can help improve a carrier's competitiveness and bottom line, without compromising service quality. Some carrier customers turn to us for their biggest routes, some for their smallest
routes, and others for all routes, effectively outsourcing their international voice traffic to iBasis.

The Mainstreaming of VoIP.Although the consumer adoption of VoIP services is a recent development, we have been transmitting VoIP calls
for many of
the world's largest carriers for several years. Managing quality of service at the core of the network, which we pioneered and mastered, has allowed phone-to-phone calls to be
transmitted over the Internet with quality nearly indistinguishable from that of traditional voice networks. Enabled by the quality of VoIP service from providers like us, international VoIP traffic
has grown rapidly and continues to grow much faster than international TDM traffic. According to industry analyst, TeleGeography, international VoIP traffic grew 36% to 32 billion minutes in
2004, 42% to 45 billion minutes in 2005, 31% to 61 billion minutes in 2006, 28% to 78 billion minutes in 2007, and is expected to have reached nearly 95 billion minutes in
2008, which is approximately 25% of projected international traffic worldwide.

Unlike
fixed-line telecommunication networks and managed internet protocol ("IP") networks, the Internet has many potential points of congestion where information, in the
form of data packets, can be delayed or dropped. For non-real-time communications, such as email, a slight delay in the receipt of a message is not significant. However, for
real-time communications, such as telephone calls, the

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result
of a delay in transmitting the call, or losing the call altogether, is significant. To minimize the risk of delays or losing calls over the Internet, we utilize complex and proprietary
performance monitoring and call routing technology to ensure consistently high call completion and voice quality. We have
developed patented and patent-pending quality management technologies that enable us to deliver call completion rates and average call durations (the standard metrics that carriers use for measuring
quality) that we believe are comparable to or better than those achieved by traditional fixed-line carriers.

VoIP's
principal benefits are:



Outsourcing International Voice.Given the advantages of VoIP, many carriers have announced plans to migrate to IP and have begun to
carry some
portion of their voice traffic over IP networks. However, most such projects are focused on domestic infrastructure only, where the investment may not only reduce cost of voice services but will also
enable the development of innovative high margin services. Most carriers' international voice business has not achieved sufficient scale to justify the capital investment required to deploy a new
international IP network for voice. Lacking necessary scale to achieve the required efficiency and unable to justify an investment in new lower cost infrastructure, carriers are exploring the
outsourcing of international traffic to providers such as iBasis. The reasons these carriers prefer to outsource international traffic include:



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Wholesale Trading Business

Our wholesale Trading business enables carriers and other communications service providers to outsource international voice and fax
traffic, substantially lowering their transport and service support costs, without compromising quality. Our carrier customers access The iBasis Network by establishing an interconnection through one
of our "Internet central offices" or "ICOs" strategically located in major telecommunications hubs in the U.S., Asia, and Europe. Calls are transported over the Internet, or over TDM connections, and
terminated by our terminating partnersfixed and mobile operatorsin more than 100 countries. In this way, our originating customers receive a single point of interconnection
to a global network of termination points without the burden of managing the international network logistics and interconnection agreements on the far end. Likewise, our partners, who sell us
termination capacity in their countries, receive a substantial source of traffic revenue without having to negotiate individual agreements and interconnections with originating carriers. Our services
provide the following key benefits to our customers:

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

Cost Effective Services.We are able to maintain one of the lowest cost structures in the international voice industry because of our
very large
scale, which provides efficiencies and leverage when negotiating termination rates. Also, our call transport costs are lower because packet switching is more efficient than traditional
circuit-switching. Because we use the Internet, rather than a private IP network, to deliver much of our international voice traffic, we have greater infrastructure flexibility and lower capital costs
than service providers that employ dedicated point-to-point connections. VoIP equipment is less costly and incurs lower facilities costs (due to its smaller physical footprint)
than equivalent capacity circuit-switched equipment. We offer an open, scalable architecture that enables carriers and communications service providers to connect quickly and without investment or
technical expertise. We are also able to bypass many of the international settlement rates associated with some international traffic carried over circuit-switched voice networks, which produces
additional cost savings.



Our Outsourcing revenue currently consists of international voice traffic we terminate for Royal KPN and its affiliates (KPN Mobile,
Telfort, E-Plus and Base) and for TDC, the leading telecommunications carrier in Denmark. We are a preferred supplier of mobile services for Royal KPN

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and
its affiliates and we are the exclusive provider for international direct dialing, ISDN and Inmarsat services for all international telephone and fax traffic originating from or carried over the
Royal KPN fixed network.

Pursuant
to the TDC Transaction, we became the exclusive provider of international voice services for TDC under a five-year strategic outsourcing arrangement, and TDC became
a preferred partner for terminating traffic sent by us into the Nordic region, consisting of Denmark, Finland, Iceland, Norway and Sweden. Approximately 130 non-Nordic international
wholesale voice customers, as well as all of TDC' interconnection and bilateral agreements for inbound and outbound international phone calls were transferred to us. TDC retained its Nordic customer
base and its pan-Nordic reach.

Retail Business

Our Retail business consists primarily of our prepaid calling card services and Pingo, our prepaid calling service sold directly to
consumers through an Internet website. Our prepaid calling card business leverages our global VoIP network and back-office systems, including a sophisticated prepaid rating and billing
platform. We sell more than 200 brands of retail prepaid calling cards through established distributors to retail outlets in major metropolitan markets across the U.S. Many of the calling card brands
are owned (trademarked) by us and feature our component branding, "Quality Calls from iBasis", on the cards. We also enable established carriers to leverage the strength of their brands by taking
advantage of our prepaid calling card platform, production and distribution. The Oi brand calling card from Brazilian carrier Telemar is one example. We have established a dedicated operation to sell
and service our prepaid retail calling card services. Typically, our Retail business delivers higher gross margins and has a faster cash collection cycle than our Trading business.

In
September 2004, we launched Pingo®, our retail calling service offered directly to consumers and businesses through our eCommerce web interface. Pingo customers in the
United States and 35 additional countries use credit cards or alternative web-based payment methods, such as PayPal® to purchase calling time over The iBasis Network. Customers
are provided with toll-free or local access numbers, a unique account number and a personal identification number to access the service. Pingo's enhanced convenience features include
access to on-line call and billing history, automatic recharging to maintain a balance in the customer's Pingo account, and
PINpass PIN-less dialing, which enables a customer to avoid keying in their account number and PIN when calling from any fixed
or mobile phone they have registered on the Pingo site. These features are designed to increase the customer's convenience and loyalty to the service. In 2007, we launched PingoBusiness, which
features enhancements that enable businesses to manage multiple Pingo accounts through a single administrative account.

Our
Retail services build upon the underlying iBasis network and systems and give us opportunities to capture retail traffic directly from consumers, which may provide higher margins
than traffic received through other carriers. In offering these services, we can take advantage of our high quality call completion and cost effective services.

The iBasis Network

Overview

We transported 23.5 billion minutes of traffic over the iBasis Network in 2008, a volume of traffic that positions us among the
three largest carriers of international traffic in the world, based on global traffic statistics contained in the industry analyst publication TeleGeography 2009.

The
iBasis network is comprised of a global VoIP infrastructure, which is the legacy iBasis network, and an international TDM infrastructure, which is the legacy KPN GCS network.

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Our
VoIP infrastructure includes Internet Central Offices ("ICO") located in the major telecommunications markets around the worldNew York, Los Angeles, Amsterdam, London,
Frankfurt, Paris, Hong Kong, Tokyo, and Sydneyand more than 1,000 Internet Branch Offices ("IBO") located in the facilities of termination partners in more than 100 countries. Each ICO
includes high capacity gateways, routers, session border controllers, and multiple IP backbone connections. Carrier customers send traffic to us by interconnecting via TDM or IP to one or more of the
ICOs. Their calls are then sent as VoIP from the iBasis ICO to a termination partner's IBO over the Internet. Some traffic is sent to third-party providers whom we use to supplement our direct routes.

Our
TDM infrastructure uses ICOs containing TDM switches in Amsterdam, Rotterdam, Frankfurt and New York connected to a network of termination partners via the Public Switched Telephone
Network ("PSTN"). Customers can connect directly to the TDM ICOs or through our Transmission Points of Presence ("PoP") in Miami, Hong Kong and Singapore, or through many more Euro-Ring
PoPs owned by KPN. Traffic is transported from Transmission PoPs to ICOs via the PSTN.

Today,
our VoIP and TDM networks are combined through a high capacity connection that enables traffic originating on either side to terminate with a supplier connected to the other side
if that supplier offers us lower costs and acceptable quality. As a result, an interconnection to one network gives iBasis customers access to both. For example, calls that come in to the TDM
infrastructure can be terminated over the VoIP infrastructure. The VoIP network is primarily managed through our NOCs in Burlington, Massachusetts and Hong Kong, and the TDM network is managed through
our NOC in Hilversum, The Netherlands.

During
the second half of 2008, we began the process of converting a number of our customers from our TDM network to our all-IP network. Over the next three to five years we
intend to convert our remaining customers from our TDM network to our all-IP network. This will enable us to take full advantage of the superior cost efficiencies of VoIP and is an
additional source of synergies we expect from the transaction with KPN.

iBasis VoIP Leadership

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

We
have deployed specialized transcoding equipment that enables our network to accept traffic in a wider variety of formats associated with codecscompression/decompression
algorithms used by consumer VoIP providers to support different devices, applications and networks. As part of our DirectVoIP Broadband offering, the transcoding solution gives iBasis an
advantage in meeting the interoperability requirements of emerging service providers.

The
iBasis Network consists of four principal elements:



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

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



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

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



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Engineering and Network Operations

Our engineering and network operations activities are primarily focused on developing, improving and expanding The iBasis VoIP Network
and increasing the efficiency of our interconnections with buyers and sellers of telecommunications services. These activities include the development of specific tools for our networks, such as our
patent-pending Assured Quality Routing and patented PathEngine technologies, as well as specialized interconnection technologies like our DirectVoIP Broadband service, which is designed to meet the
needs of providers of consumer VoIP services. In addition, our engineering personnel contribute to the support and operation of our global network operations centers, which oversee and coordinate the
operation of our ICOs and IBOs. Engineering and network operations activities for the support of our TDM network has to-date been provided by KPN under a service level agreement.

Markets and Customers

According to TeleGeography, the global market for international phone service was estimated to be approximately a $78 billion
market in 2007 and international voice minutes grew 14% from 2006 to 2007. As a subset, international VoIP traffic grew 28% in that same period to approximately 78 billion minutes. The portion
of international traffic carried by wholesalers like us grew 17% over the same period as more carriers turned to wholesalers to handle their international business. In all but two of the
16 years from 1992 to 2007 the rate of increase in traffic volume has outstripped the rate of decline in pricing, providing the opportunity for continued revenue growth. With the increasing
migration of international traffic to VoIP and the growth in calls that are originating as IP through incumbent and emerging providers, including cable operators, growth of international VoIP traffic
is likely to continue. This reinforces the growth opportunities for us, as it is natural for providers who are originating their traffic on IP to turn to VoIP carriers, like us, to avoid unnecessary
conversions to TDM to complete their international calls.

As
of December 31, 2008, we provided services to approximately 800 carriers worldwide. Other than revenue from Royal KPN and its affiliates, no one carrier accounted for 10% or
more of revenue in 2008, 2007 or 2006. For further discussion of geographic revenues, refer to Note 5 in our Notes to Consolidated Financial Statements.

In
countries where we terminate our traffic, we have established relationships with large national carriers and other local service providers that have strong local market expertise and
relationships.

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

Deregulation
and increased competition in the telecommunications industry has caused prices for long distance telephone services to steadily decline, particularly in the U.S. and Western
Europe. Regulatory pressure on mobile operators, particularly in the European Union, are lowering mobile termination rates. As a wholesale provider of long distance telephone services, our margins in
this business reflect the effect of these lower prices. We attempt to offset the effect of these lower prices by negotiating lower costs from our call termination partners and by increasing the cost
efficiency and utilization of our network. We have implemented a strategy to leverage retail traffic originating from both our Trading customers and our own Retail services to attempt to drive higher
margins than we might typically realize from our Trading business. With our prepaid calling cards and Pingo, we are able to charge per-minute rates that can exceed our wholesale long
distance rates, as well as generate revenue from fees typically associated with the use of prepaid services.

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Sales and Marketing

Trading

Sales Strategy.Our sales efforts for the wholesale Trading business target leading fixed line and wireless telecommunications carriers
globally as
both buyers of international minutes and sellers of termination capacity, as well as emerging providers of consumer VoIP services over broadband connections. Our sales force is comprised of
experienced personnel with well-established relationships in the telecommunications industry, based in key markets worldwide and typically responsible for business development in a small
number of countries regionally. Our sales process often involves a test of our services by potential originating customers in which they route traffic over our network to a particular country. Our
experience to date has been that once a carrier has begun to use our network for a single country and finds our quality to be acceptable, the sales process for increasing the volume of traffic they
send to us and increasing the number of destinations for which they use our network becomes incrementally easier. We also seek to cultivate relationships with service providers that can terminate the
local leg of international calls. Our country managers actively pursue connections with capable termination partners in their regions. Our ability to deliver a high volume of traffic, due to our
interconnections with more than 800 carriers with international minutes, makes us an attractive potential partner for local service providers.

After
the closing of the KPN Transaction, we trained our sales people on the Company's total product portfolio to enable our sales personnel to be able to sell all of our products.

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

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

Marketing Strategy.In our wholesale Trading business, we seek to attract termination partners as well as customers and therefore
address our
marketing efforts to both. A very large portion of retail origination continues to be controlled by large incumbent retail carriers. We believe that we have largely achieved our primary marketing
objectives of awareness and acceptance among incumbent retail carriers, as evidenced by our penetration of these carriers in the major developed regions of the world. We continue to reinforce our
brand presence with incumbent retail carriers to help increase our share of international traffic. We also concentrate on state-owned carriers, known as PTTs, in Asia and in developing economies
generally, who we view as natural customers. In addition, we have focused marketing efforts on raising awareness of our business among emerging consumer VoIP companies, cable operators, prepaid
calling card providers, and mobile operators, which represent significant growth opportunities for us.

While
we increasingly expect our customers to also be our termination partners, local circumstances in many countries still are such that we also look to partner with ISPs, new
Competitive Local Exchange
Carriers ("CLECs") and specialist termination providers, many of which are start-ups formed specifically to terminate international traffic. Connecting with multiple terminating providers
in a given destination provides us with greater capacity and leverage in negotiations to reduce costs.

Our
marketing activities include sponsoring, exhibiting and presenting at industry trade shows and conferences, media and industry analyst relations, a comprehensive website, and regular
communications with our existing customer base.

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Retail

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



In
developing our own calling card brands, in addition to supporting established brands of our distributors, we are building the presence of select brands in multiple markets across
multiple distributors. These brands leverage a common rate and fee structure and are able to leverage common design and advertising, which enhances both administrative and marketing efficiency while
building distributor and customer loyalty.

In
late 2007, we launched the iBasis TruePrompts campaign, which we believe enhanced consumers' trust in our prepaid calling cards by guaranteeing delivery of the minutes
advertised or prompted on each call. In 2008, we believe TruePrompts temporarily slowed our growth in Retail as not all competitors throughout the segment implemented similar measures as we did. As a
result, it may have appeared to less sophisticated consumers that iBasis provided fewer minutes on its calling cards when compared to a competitor's calling card. In the future, we believe that clear
disclosure and greater transparency in pricing are positive developments for the prepaid calling card industry overall and in particular for us as they will enhance the competitive advantage of our
lower cost structure.

To
broaden our calling card distribution we identify the leading established distributors in major urban markets in the U.S. and work to establish mutually beneficial relationships.
These distributors possess the local market knowledge and relationships with retail outlets required to effectively build market presence for our calling cards. Some of our distributors operate as
master distributors supporting smaller sub-distributors that help to broaden and reinforce their market share within various territories or types of outlets. We expand distribution into
new ethnic and geographic markets by leveraging existing relationships and by pursuing new distributors as necessary. Expanding gross margins in the prepaid calling card business is a function of
managing card lifecycles. Typically, new cards are introduced with very aggressive promotional pricing to build distributor and retailer enthusiasm and consumer interest. Once the card has proven its
quality and reliability we move beyond the promotional stage into production, enabling us to realize higher margins. As we establish our presence in the calling card market, the overall age of our
product portfolio will increase, essentially resulting in more products having graduated from the promotional phase into producing higher margins.

The
sales and marketing strategy for our Pingo service leverages the cost-efficiency and tracking capabilities of on-line paid placement advertising on major
search engines, such as Google and Yahoo, as well as opportunistic online banner advertising and editorial placement, particularly on ethnic and travel-oriented websites, and occasional print
advertising in well-targeted publications. We also drive business though a web-based affiliate sales program, and promotion of free trial cards at events and through
distribution partners. In addition, we leverage search engine optimization techniques on the Pingo.com website to maximize natural search results. We have retained a search engine marketing firm and
an online creative firm with specific expertise and proprietary technology designed to optimize our online advertising investments. When prospects visit the Pingo website, we utilize special bonus
awards and promotions to encourage initial purchase. We also maintain communication with our existing Pingo customers through frequent email announcements to encourage use of the service, recharges,
and referrals, as well as provide rewards for their loyalty.

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Strategic Technology Relationships

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

The
iBasis Network is a Cisco Powered network and we have continued to maintain a strong technology and business relationship with Cisco Systems. This designation means that
The iBasis Network is built predominantly with Cisco products and technologies and meets a high standard of reliability and performance. As a Cisco Powered network, we have enhanced
access to Cisco technical resources and are able to more quickly deliver new capabilities and service features. We also have formed relationships with GenBand (formerly NexTone and NextPoint), a
leading provider of session border controllers, which are deployed in our ICOs and provide interoperability and protocol conversion capabilities, and with Digium, the supplier of our transcoding
platform, which is deployed as part of our DirectVoIP Broadband offering.

Competition

We compete in two markets: international voice termination services, which we sell on a wholesale basis to other carriers, and retail
prepaid calling services which we sell to consumers directly and through distributors. As described more completely in Item 1A "Risk Factors," the market for voice services is highly
competitive. We compete with other wholesale trading carriers worldwide. Many of these carriers have more resources, longer operating histories and more established positions in the communications
marketplace, and, in some cases, have begun to develop VoIP capabilities. We also compete with smaller companies, including those that may be specialists in just one or two routes. We compete with our
own customers, including retail carriers who develop their own international networks or interconnect with one another and exchange international traffic by "meeting" in a major telecom hub. We
compete principally on quality of service and price. In the overall international long distance market, which was approximately 343 billion minutes in 2007, based on current information, we are
among the three largest carriers with approximately 7% market share.

In
the retail prepaid calling card business, we compete with major telecommunications carriers and many smaller telecommunications providers. Many of our competitors have a longer
operating history and a more established market presence in the retail prepaid calling card business than we do. Also, many of these competitors have greater resources. Our Pingo business competes
with other on-line sellers of prepaid calling cards and services. Many of these operate on-line catalogs, selling the same cards that are available in physical form in retail
stores. Because we terminate our retail traffic on our own VoIP network, we believe we enjoy a competitive advantage over the majority of competing calling card companies and online retailers.

Although
the market for wholesale international traffic and retail prepaid calling services is highly competitive and will almost certainly remain so, we believe that our scale,
comprehensive voice product portfolio, global footprint, sophisticated and automated back-office systems, and our patent-pending ability to manage traffic across the low-cost
Internet while maintaining required quality, collectively represent a competitive advantage that will allow us to expand both volume and margins.

Government Regulation

As more fully described in Item 1A "Risk Factors," our business is subject to U.S. and foreign laws, which may include those
relating to telecommunications.

We
hold a license to provide interstate and international telecommunications services from the Federal Communications Commission ("FCC") and we have obtained or are in the process of
obtaining appropriate regulatory authority, and filing appropriate tariffs, regarding the Retail business

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in
certain states. Additional aspects of our operations may currently be, or become, subject to state or federal regulations governing licensing, universal service funding ("USF"), advertising,
disclosure of confidential communications or other information, excise taxes, U.S. embargos and other reporting or compliance requirements.

While
the FCC has maintained that information service providers, including VoIP providers, are not telecommunications carriers for regulatory purposes, various entities have challenged
this premise, both before the FCC and at various state government agencies. The FCC has ruled that certain communications carried in part utilizing the IP format, including prepaid calling card
services such as those we provide, are regulated telecommunications services for which certain regulatory obligations, such as federal USF payments and access charge payments, apply. The FCC is
presiding over several proceedings related to VoIP services and the extent that IP capabilities insulate such offerings from traditional regulation such as access charges, universal service, and
interconnection rights for VoIP
providers. Adverse rulings or rulemakings could subject us to licensing and reporting requirements and additional fees and charges.

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

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

Intellectual Property

We regard our copyrights, service marks, trademarks, trade dress, trade secrets, patents, patent applications and similar intellectual
property as critical to our success and we rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners, and
others to protect our proprietary rights. Our policy is to seek patent protection of the technology, inventions and improvements that we consider important to the development of our business. In March
2008, we were granted our first patent for our methods of monitoring the quality of various routes to send calls through the Internet, PathEngine. As of December 31, 2008, we had several
pending U.S. patent applications for The iBasis Network and other inventions related to our business. We have also entered into a licensing arrangement with Royal KPN granting us rights to Royal KPN'
portfolio of patents, and Royal KPN has been granted a cross-license to our patent portfolio. We pursue the registration of our trademarks and service marks in the United States and overseas. We have
been granted trademark registration for various marks related to our business, includingiBasis, Pingo, Assured Quality Routing, PremiumCertified, The last calling card you'll
ever need!, and several marks related to our prepaid calling card products in the United States, and the European community. In addition, we have pending registration
applications for other service marks. We also rely on trade secrets, technical know-how and continuing innovation to develop and maintain our competitive position. We have granted licenses
in the ordinary course of business for occasional use of our name, logo, trademarks and/or service marks to certain marketing partners pursuant to joint marketing and/or other agreements. Likewise, we
have been granted certain licenses for use in the ordinary course of business.

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Employees

As of December 31, 2008, we employed 372 people. Our employees are not represented by a labor union, except that approximately
70 employees of KPN GCS are subject to the Royal KPN Collective Labor Agreement.

Geographic Areas

For financial information about geographic areas, see Note 5, "Business Segment and Geographic Information" to our Consolidated
Financial Statements.

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Item 1A.Risk Factors

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

Factors That May Affect Future Results and Financial Condition

Risks Related to our Historical Stock Option Granting Practices

The investigation by the SEC has had, and may continue to have, a material adverse effect on us. We cannot predict the outcome of the SEC's formal
investigation of our past stock option granting practices. The investigation has required, and may continue to require, significant management time and attention, as well as additional accounting and
legal expense, and could result in civil and/or criminal actions seeking, among other things, injunctive and monetary relief from us.

We announced on October 20, 2006, that we were contacted by the SEC as part of an informal inquiry and we further disclosed on
March 29, 2007, on our Current Report on Form 8-K, that the SEC had notified us that we would be receiving a formal order of investigation relating to our stock option
practices. On April 13, 2007, we received the formal order of investigation. The SEC investigation sought documents and information from us relating to the grant of our options from 1999
through 2006. The SEC has taken testimony from individuals including certain of our current and former officers and directors. We have cooperated fully with the SEC investigation and we are in
communication with the SEC staff regarding the outcome of the investigation. There is no assurance that we will be able to resolve the SEC investigation on acceptable terms without the institution of
enforcement proceedings by the SEC against us or one or more of our senior executive officers or that other inquiries will not be commenced by other U.S. federal, state or other regulatory agencies.
An SEC enforcement proceeding could seek an injunction against future violations of the securities laws, a civil penalty and, as to individual executives, disgorgement and a bar order against serving
as an officer or director of a publicly traded company. A bar order as to any of our senior executive officers would deprive us of any such executive's services and could have a material adverse
affect on our business.

The
SEC investigation and requests for information have required significant management attention and resources. The period of time necessary to resolve the SEC investigation is
uncertain, and these matters could require significant additional attention and resources which could otherwise be devoted to the operation of our business. We have incurred substantial expenses with
third parties for legal, accounting, tax and other professional services in connection with these matters and expect to continue to incur significant expenses in the future, which may adversely affect
our results of operations and cash flows.

Following the Special Committee investigation, two derivative civil action lawsuits were brought, purportedly on our behalf, which have required and
may continue to require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome against our management, which could require us to
pay substantial judgments or settlements pursuant to any indemnification obligations that we may have with them, and which could have a material adverse effect on our business, financial condition and
results of operations.

Following
the Special Committee investigation, two derivative civil claims were filed, purportedly on our behalf, against certain of our current and former
officers and directors. The suits were consolidated into a single suit on June 15, 2007, alleging violations of Section 14(a) of the Securities Exchange Act of 1934 and
Section 304 of the Sarbanes Oxley Act of 2002 (SOX) and raising state law claims including unjust enrichment, breaches of fiduciary trust and waste of corporate assets. The court dismissed the
case in December 2007, holding that the plaintiffs failed to assert viable federal claims under either Section 14(a) or SOX Section 304. The court also dismissed the remaining state law
claims

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on
jurisdictional grounds. Plaintiffs filed a motion for reconsideration in late December 2007 which has been denied. Although plaintiffs filed an appeal of the denial of reconsideration, the appeal
was dismissed, on plaintiffs' motion, on February 18, 2009. Plaintiffs could still re-file the state law claims in state court or in federal court asserting diversity jurisdiction.

The
amount of time to resolve any lawsuits or other proceedings related to our past option granting practices is unpredictable, and in defending themselves, our management's attention
may be diverted from the day-to-day operations of our business, which could adversely affect our business, financial condition and results of operations. In addition, an
unfavorable outcome of such litigation could require us to incur significant legal expenses and substantial judgments or settlements pursuant to any indemnification obligations that we may have with
our officers and directors, which could also have a material adverse effect on our business, financial position, results of operations or cash flows.

Our
insurance coverage may not be sufficient to cover our total liabilities in any such actions if we are obligated to indemnify (and advance legal expenses to) former or current
directors or officers in accordance with the terms of our certificate of incorporation, bylaws, other applicable agreements, and Delaware law. We currently hold insurance policies for the benefit of
our directors and officers, although our insurance coverage may not be sufficient in either of these matters. Furthermore, the underwriters of our directors and officer's insurance policy may seek to
rescind or otherwise deny coverage in some or all of these matters, in which case we may have to self-fund the indemnification amounts owed to such directors and officers.

Risks Related to Our Business

Political and economic conditions and the current financial crisis in the U.S. and global capital and credit markets may adversely affect our revenue
and results of operations and overall financial growth.

Our business can be affected by a number of factors that are beyond our control such as general geopolitical economic and business
conditions, conditions in the financial services markets, and general political and economic developments. Recent turmoil in the U.S. financial markets, the present economic slowdown and the
uncertainty over the breadth, depth and duration of the slowdown may continue to adversely impact the global economy and have a negative effect on our business. In particular, a decline in traffic
from migrant workers using prepaid calling cards has undermined and may continue to undermine our Trading and Retail businesses.

Further,
the recent worldwide financial and credit crisis has reduced the availability of liquidity and credit to fund the continuation and expansion of business operations worldwide.
The shortage of liquidity and credit combined with recent substantial losses in worldwide equity markets could lead to an extended economic recession in the United States or worldwide. As widely
reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent months, including, among other things, extreme volatility in security prices,
severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Governments have taken unprecedented actions to stimulate their
local economies and address extreme market conditions that include severely restricted credit and declines in real estate values. While this challenging economic environment has not yet impaired our
ability to access credit markets and finance our operations, there can be no assurance that the deterioration in financial markets will not impair our ability to obtain financing in the future,
including, but not limited to, our ability to draw on funds under our existing credit facilities and our ability to incur additional indebtedness. If conditions in the global economy, U.S. economy or
other key vertical or geographic markets remain uncertain or weaken further, we could experience material effects on our business, financial condition, results of operations, cash flow, capital
resources and liquidity.

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

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



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

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We may not be able to generate sufficient revenue and gross profit to achieve our revenue and profitability goals in the long term if
telecommunications carriers and other communications service providers are reluctant to use our services in sufficient volume.

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

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



The
growth of our core wholesale Trading business depends on carriers and other communications service providers generating an increased volume of international voice and fax traffic and
selecting our network to carry at least some of this traffic. Similarly, the growth of Retail services we offer depends on these factors as well as acceptance in the market of the brands that we
service, including their respective rates, terms and conditions.

We may not be able to maintain our NASDAQ Global Market listing.

Our common stock is listed on the NASDAQ Global Market. There is no assurance that we will be able to satisfy
the NASDAQ Global Market's continued listing standards, which includes, among others, a minimum per share sales price and a minimum market value of publicly held shares. In December 2008, NASDAQ
announced the suspension of the rules requiring a minimum $1 closing bid price per share and minimum market value of publicly held shares until April 20, 2009. On March 6, 2009, the
closing price of our common stock was $0.61 per share. If our common stock is delisted from the NASDAQ Global Market, we would be forced to list our common stock on the OTC Bulletin Board or some
other quotation medium. Selling our common stock would be more difficult because smaller quantities of shares would likely be bought and sold and transactions could be delayed. These factors could
result in lower prices and larger spreads in the bid and ask prices for shares of our common stock. If this happens, we will have greater difficulty accessing the capital markets to raise any
additional necessary capital.

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

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

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enforce
the payment provisions of our contracts. Our cash position will be reduced and our results of operations will be materially adversely affected if we are unable to collect amounts from our
customers.

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

We may not be able to obtain sufficient or cost-effective termination capacity to particular destinations.

In order to support our growth and geographic expansion, we may need to obtain additional termination capacity or destinations. As the
world becomes smaller and more closely knit due to advancements in speed and access due to advancements in communications industries, our ability to extend our reach beyond our competitors' to new or
remote destinations is increasingly critical. We may not be able to obtain sufficient termination capacity from high-quality vendors to particular destinations or may have to pay
significant amounts to obtain such capacity. A lack of sufficient or cost-effective termination capacity to certain destinations could result in our not being able to terminate all of the
traffic we receive from our customers, or incur a higher cost-per-minute to terminate traffic to particular destinations, which could adversely affect our business.

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

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

Parties that Maintain Phone and Data Lines and Other Telecommunications Services.Our business model depends on the availability of the
public
Internet and traditional telephone networks to transmit voice and fax calls. Third parties maintain and own these networks, other components that comprise the public Internet, and business
relationships that allow telephone calls to be terminated over the public switched telephone network. Some of these third parties are telephone companies. They may increase their charges for using
these lines at any time and thereby increase our expenses. They may also fail to maintain their lines properly, fail to maintain the ability to terminate calls, or otherwise disrupt our ability to
provide service to our customers. Any such failure that leads to a material disruption of our ability to complete calls or provide other services could discourage our customers from using our network,
which could adversely affect our results of operations.

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

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the
public switched telephone network, could affect our ability to transmit calls to the countries that those providers help serve.

Strategic Relationships.We depend in part on our strategic relationships to expand our distribution channels and develop and market
our services.
Strategic relationship partners may choose not to renew existing arrangements on commercially acceptable terms, if at all. In general, if we lose these key strategic relationships, or if we fail to
maintain or develop new relationships in the future, our ability to expand the scope and capacity of our network and services provided, and to maintain
state-of-the-art technology, would be materially adversely affected.

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

We may not be able to succeed in the intensely competitive market for our wholesale Trading services, prepaid calling and mobile operator enhanced
services.

We compete in our wholesale Trading business principally on quality of service and price. In recent years, prices for international
long distance telephone services have been declining as a result of deregulation and increased competition. We face competition from the wholesale service operations of major telecommunications
carriers, including AT&T, British Telecom, Deutsche Telekom, Verizon and Qwest, as well as new emerging carriers. We also compete with Internet protocol and other VoIP service providers who route
traffic to destinations worldwide. VoIP service providers that presently focus on retail customers may in the future enter the wholesale market and compete with us. If we can not offer competitive
prices and quality of service our business could be materially adversely affected.

The
market for prepaid calling services is extremely competitive. Hundreds of providers offer calling card products and services. We have relatively recently begun offering prepaid
calling card and related web-based services and have little prior experience in these businesses. Advertising and pricing practices by some providers in the prepaid calling card industry
are aggressive and can be misleading which may put us at a competitive disadvantage. Many of our prepaid calling services are marketed primarily to immigrant communities. If changes in immigration
policy or other factors, including general economic conditions cause a reduction in the foreign born population living in the U.S. our business may suffer. If we do not successfully maintain and
expand our distribution channel and enter geographic markets in which our rates, fees, surcharges, country services, and our other products and service characteristics can successfully compete, our
business could be materially adversely affected.

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

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

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enough,
to allow us to continue to offer services in a particular country on a cost-effective basis. The continued downward pressure on prices and our failure to
renegotiate favorable terms in a particular country could have a material adverse effect on our ability to operate our network and business profitably.

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

Because we provide many of our services internationally, we are subject to additional risks related to operating in foreign countries.
In particular, in order to provide services and operate facilities in some countries, we have established subsidiaries or other legal entities or may have forged relationships with service partners or
entities set up by our employees. We also rely on our own employees to maintain certain functions of our Internet central offices and, in some cases, to deploy and operate our smaller points of
presence installations. Associated risks include:



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

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We may enter into strategic outsourcing transactions and undertake acquisitions or dispositions, or may be the target of similar strategic
initiatives, that could be difficult to integrate or could damage our business.

We may enter into strategic outsourcing transactions and acquire businesses and technologies in an attempt to complement or augment our
existing businesses, services and technologies. The success of these transactions will depend, in part, on our ability to: identify suitable businesses and assets to buy; complete the transactions on
terms acceptable to us and in the timeframes we expect; improve the financial results and operations of the businesses we buy; and avoid or overcome potential antitrust or other concerns expressed by
regulators. We may also be subject to, or participate in, strategic activities by others that result in a transfer of control of our assets or control of our outstanding shares of stock. We may need
to raise additional funds through public or private debt, equity financing or issue more shares to affect such activities, which may result in dilution for shareholders and the incurrence of
indebtedness. We may have difficulty integrating any additional businesses into our existing business and the process of any acquisitions or subsequent integration could divert management's attention
and expend our resources. We may not be able to operate acquired businesses profitably or otherwise implement our growth strategy successfully.

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

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

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

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

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

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

We may not be able to maintain our routing, reporting, and billing systems and related databases adequately and cost-effectively to
accommodate our continuing needs.

Our business requires that we track enormous volumes of data so that we can manage traffic, and assess margin, revenue, and customer
accounts. We constantly measure and upgrade our technical capabilities, and develop new tools to address our needs. If we do not maintain these systems or modify

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them
in an appropriate manner, analyze service pricing methodologies effectively, or bill our customers properly, our business will be negatively affected.

Single points of failure on our network may make our business vulnerable.

We operate three Network Operations Centers as well as numerous Internet central offices and other points of presence throughout the
world. In some cases, we have designed redundant systems, provided for excess capacity, and taken other precautions against platform and network failures as well as facility failures relating to
power, air conditioning, destruction, or theft. Nonetheless, some of our infrastructure and functionality, including those associated with certain components of our Retail business, operate as a
single point of failure, meaning, failures of the type described may prohibit us from offering services at all at any given time. The potential of such a failure may discourage others from using our
network, which may adversely impact our business.

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

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

We will need to retain skilled personnel to execute our plans.

Our future success will also depend on our ability to attract, retain and motivate highly skilled employees, particularly engineering
and technical personnel. Recent reductions in our workforce, a temporary salary freeze and a freeze on new hiring instituted at the beginning of 2009 may make it difficult to motivate and retain
employees and contractors, which could affect our ability to deliver our services in a timely fashion and otherwise negatively affect our business.

We cannot ensure that our existing capital will be sufficient to meet our requirements for the future and a failure to obtain necessary additional
capital could jeopardize our operations.

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

Risks Related to Regulatory Matters

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

Under FCC rules, services classified as telecommunications services have been subject to regulation, whereas services classified as
information or enhanced services have been largely exempt from regulation, including the requirement to pay access charges. We have taken the position that our wholesale Trading services are enhanced
services that are exempt from traditional regulation that applies to telecommunications services. While the FCC has traditionally maintained that information service providers, including VoIP
providers, do not provide telecommunications services for regulatory

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purposes,
various entities have challenged this policy at the state and federal levels and the FCC has begun to regulate certain aspects of various types of VoIP services. For example, in 2004, the
FCC concluded that long distance calls that begin and end as regular calls but use IP to transport some portion of the call are telecommunications services. As indicated above, the FCC also concluded
that prepaid calling card services that utilize IP-transport are telecommunications services, not information services. However, in making this ruling the FCC did not clarify what
intercarrier compensation payments are owed by the different carriers in the prepaid calling card context when long distance calls are made using local access. There has been increasing controversy
over this issue. Some carriers have taken the position that the prepaid calling card providers that purchase these local numbers owe access charges over and above the amounts already paid to the
provider that sells the access numbers. We believe that we are not responsible for any additional charges. There are pending proceedings at the FCC designed to clarify and resolve this issue. However,
recent industry activity suggests that lawsuits could be initiated by certain carriers against prepaid calling card providers for recovery of arrearages of access charges prior to any clarification of
the issue by the FCC. Accordingly, there is a risk of additional litigation associated with this issue. This intercarrier compensation controversy is also increasing the cost of local access numbers
because many carriers that provide this service are increasing their rates to cover the costs and/or risks associated with providing the service to prepaid calling card providers in the event that
they are found responsible for additional charges. These cost increases have materially increased the costs of our retail prepaid business.

Additionally,
the FCC has issued a variety of orders that have imposed additional regulatory obligations on certain VoIP providers. For example, the FCC found that certain VoIP services
that interconnect with the traditional public telephone network ("Interconnected VoIP Services") must begin making Universal Service Fund, or USF, contributions, provide 911 and Telecommunications
Relay Services, comply with certain law enforcement intercept obligations, and also comply with other regulatory reporting requirements. To date, however, the agency has declined to determine whether
Interconnected VoIP Service is a telecommunications service or an information service.

As
a result of these and other rulings, aspects of our operations may currently be, or may become, subject to state or federal regulations governing licensing, USF funding, interstate or
intrastate access
charges, advertising, disclosure of confidential communications or other information, excise and other fees, taxes and surcharges, U.S. embargos and other reporting or compliance requirements.

We
hold a license to provide interstate and international telecommunications services from the Federal Communications Commission ("FCC") and we have obtained or are in the process of
obtaining appropriate regulatory authority, and filing appropriate tariffs, regarding the Retail business in certain states. Additional aspects of our operations may currently be, or become, subject
to state or federal regulations governing licensing, universal service funding, advertising, disclosure of confidential communications or other information, excise taxes, U.S. embargos and other
reporting or compliance requirements.

In
the event of an audit from the federal Universal Service Administrator or complaint from a local exchange or local access provider, we could be subject to arrearages for USF
contributions or access charges.

Although
we believe that our interstate wholesale Trading products qualify as information services that are exempt from federal USF contributions, we have, as of January 1, 2005,
reported our wholesale Trading revenues to the FCC as telecommunications revenues, while reserving our rights.

We
have offered our prepaid international calling card services on a wholesale basis to international carrier customers, and others, some of which provide these services to
end-user customers, enabling them to call internationally over the iBasis Network. We participate in selling and marketing of calling cards through a network of distributors on a retail
basis. We also offer a web-based retail prepaid calling card offering. Although the calling cards are primarily used for international calling, we

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have
not blocked the ability of users to place interstate and intrastate calls and we have not in every instance required our wholesale customers or distributors to provide evidence of their
compliance with U.S. and state regulations.

The
Federal Telecommunications Act of 1996 requires that payphone service providers be compensated for all completed calls originating from payphones in the United States. The FCC's
rules require the last switched-based carrier to compensate payphone providers, and further require that all carriers in the call chain implement a call-tracking system, utilize it to
identify such calls, provide an independent audit of the adequacy of such system, and provide a report on these matters to the FCC and others in the call chain, unless alternative contractual
arrangements have been made. We have indirectly paid, and intend to continue paying, payphone service providers as part of our prepaid calling card business. We have contracted with a clearinghouse to
remit funds directly to payphone service providers for calls originating from payphones utilizing our prepaid calling cards. For all other types of traffic related to our wholesale Trading business,
we believe that we are not responsible for
payphone compensation, but rather that the carrier that precedes us bears that responsibility. In accordance therewith, for traffic related to our wholesale Trading business, we have in most cases
sought to apportion such responsibility by contract.

We
have also been questioned by regulators about our offerings. Under current standards and recent FCC decisions, the FCC and state regulatory authorities may not agree with our
positions. If they do not, we could be penalized, become subject to regulation at the federal and state level for our wholesale Trading business, in addition to our Retail business, and could become
subject to licensing and bonding requirements, federal and state fees and taxes, and other laws, all of which could materially affect our business.

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

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

Foreign government telecommunications regulation could also affect our costs.

Our Retail and wholesale Trading services are offered in foreign jurisdictions. The regulation of VoIP differs from jurisdiction to
jurisdiction. We cannot be certain that we or our partners and distributors are in compliance with all of the relevant regulations and laws in each of the foreign jurisdictions in which we operate at
any given point in time. As a result, changes in regulation in foreign jurisdictions or failure to comply with applicable foreign laws and regulations can subject us to enforcement action and
penalties that could negatively affect our business and ability to continue to provide services in these foreign jurisdictions. In addition, in numerous countries where we operate or plan to operate,
we may be subject to many local laws and regulations that, among other things, may

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restrict
or limit the ability of telecommunications companies to provide telecommunications services in competition with state-owned or state-sanctioned dominant carriers.

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

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

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



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

The
termination cost for the termination of calls to mobile networks in many countries are increasingly becoming subject to regulatory control. Recent decisions by the German, Belgium
and Portuguese regulatory authorities to reduce the mobile termination rates, or MTRs, have been challenged by the affected mobile network operators, or MNOs, in the courts of such countries. Although
we are not a party to these proceedings, under our contracts with these MNOs, a decision by a court to repeal the reduction of the MTR on a retroactive basis would permit the MNOs to retroactively
increase the MTR charged to us for the termination of calls to their networks. Although we have taken steps to allow us to pass these potential cost increase on to our customers, there can be no
assurance that we will be successful in doing so in all cases. We can not at this time assess the likelihood that the courts will retroactively repeal the reduction in the MTRs or the amount of any
potential loss that we might suffer as a result.

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Risks Related to Our Intellectual Property

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

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

Our services might be found to infringe the intellectual property rights of others.

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

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

Continued use of certain technology by us requires that we purchase new or additional licenses from third parties or, in some cases,
avail ourselves of "shareware" or otherwise available open source code. We may not be able to obtain those third-party licenses needed for our business or the technology and software that we do have
may not continue to be available to us on commercially reasonable terms or at all. The loss or inability to maintain or obtain upgrades to any such technology or software could result in delays or
breakdowns in our ability to continue developing and providing our services or to enhance and upgrade our services.

Risks Related to the Internet and Internet Telephony Industry

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

Our future success will depend upon the maintenance of the public Internet infrastructure, including a reliable network backbone with
the necessary speed, data capacity and security for providing reliability and timely Internet access and services. To the extent that the Internet continues to experience increased numbers of users,
frequency of use or bandwidth requirements, the Internet may become congested and be unable to support the demands placed on it and its performance or reliability may decline thereby impairing our
ability to complete calls and provide other services using the

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Internet
at consistently high quality. The Internet has experienced a variety of outages and other delays as a result of failures of portions of its infrastructure or otherwise. Future outages or
delays could adversely affect our ability to complete calls and provide other services. Moreover, critical issues concerning the commercial use of the Internet, including security, cost, ease of use
and access, intellectual property ownership and other legal liability issues, remain unresolved and could materially and adversely affect both the growth of Internet usage generally and our business
in particular. Finally, important opportunities to increase traffic on The iBasis Network will not be realized if the underlying infrastructure of the Internet does not continue to be expanded to more
locations worldwide.

Network security breaches could adversely affect our operations.

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

Undetected defects in our technology could adversely affect our operations.

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

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

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

Risks Related to the KPN Transaction

We may not be able to timely and successfully integrate KPN' international wholesale voice business with our operations, and thus we may fail to
realize all of the anticipated benefits of the KPN Transaction.

Integration of KPN' international wholesale voice business into our business is a complex, time consuming and costly process. While
most of the work associated with this integration has been completed, remaining projects include the integration of back office systems used in billing, market analysis, routing, rating and financial
and management reporting. Difficulties we may encounter include:



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We
are also exposed to other risks that are commonly associated with similar transactions, such as unanticipated liabilities and costs, some of which may be material, and diversion of
management's attention. As a result, the anticipated benefits of the KPN Transaction, including anticipated synergies, may not be fully realized and our business may be materially and adversely
affected.

KPN owns a majority of the shares of our common stock, and we are a controlled company within the meaning of NASDAQ Marketplace Rules.

Because KPN is deemed to beneficially own, in the aggregate, more than 50% of our common stock, we are a "controlled company" within
the meaning of NASDAQ Marketplace Rule 4350(c)(5). As a result, the Company is exempt from NASDAQ rules that require listed companies to have (i) a majority of independent directors on
the Board of Directors, (ii) the compensation of executive officers determined by a majority of independent directors or a compensation committee composed solely of independent directors, and
(iii) a majority of the independent directors or a nominating committee composed solely of independent directors elect or recommend director nominees for selection by the Board of Directors.
Furthermore, as part of the transaction, our by-laws were amended to provide KPN certain board representation rights and certain veto rights. As a result of these changes, and KPN'
majority holdings, KPN has the ability to control the outcome of all matters submitted to our stockholders for approval. We cannot make assurances that the interests of KPN will be consistent with the
interests of other holders of our common stock, or that KPN will vote its shares of common stock, or exercise its veto rights, in a manner that benefits other holders of our common stock.

Finally,
KPN' ownership of 56% of the shares of our issued and outstanding shares of common stock as of December 31, 2008 could discourage the acquisition of our common stock by
potential investors and could have an anti-takeover effect, possibly depressing the trading price of our common stock.

KPN may sell all or a substantial portion of its shares at any time in the future, which could cause the market price of our common stock to decline.

We have not entered into any lock-up agreement with KPN. As a result, the sale, or the possibility of a sale, by KPN of all
or a substantial number of its shares in the public market could cause the market price of our common stock to decline. The sale of a substantial number of shares or the possibility of such a sale
also could make it more difficult for us to sell our common stock or other equity securities in the future at a time and at a price that we deem appropriate.

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

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



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In
addition, provisions of Delaware law and our stock incentive plans may discourage, delay or prevent a change of control of our company or an unsolicited acquisition proposal.

Our business could be adversely affected by changes in our commercial dealings with Royal KPN and its subsidiaries.

Pursuant to a framework services agreement negotiated as part of the consideration for the KPN Transaction (the "Framework Services
Agreement"), we are the exclusive provider of international direct dialing, ISDN and Immarsat services for all international telephone and fax traffic originating from or carried over the fixed
networks of Royal KPN, KPN and all their affiliates and subsidiaries (the "Royal KPN Group"). We carry this traffic at the expected cost of providing services plus a margin as set forth in the
Framework Services Agreement at declining rates through the year 2010. Thereafter, margins will be negotiated each year. The Framework Services Agreement has a ten year term; however, there can be no
assurance after 2010 that we will be able to negotiate margins on this traffic on terms and conditions that are favorable to us.

We
were also appointed as a preferred supplier of mobile services for the Royal KPN Group pursuant to the Framework Services Agreement. While we are confident that we will continue to
provide mobiles services for the Royal KPN Group, there can be no assurance that this will occur on terms and conditions that are favorable to us.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and, in particular, the description of our Business set forth in Item 1, the
Risk Factors set forth in this Item 1A and our Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 contain or incorporate a number
of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding:



Any
or all of our forward-looking statements in this Annual Report on Form 10-K may turn out to be wrong. They can be affected by inaccurate assumptions we might make
or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this Annual Report on Form 10-K will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially.

We
also provide a cautionary discussion of risks and uncertainties under "Risk Factors" in Item 1A. These are factors that we think could cause our actual results to differ
materially from expected results. Other factors besides those listed there could also adversely affect us.

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Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. There are a number of
factors that could cause actual events or results to differ materially from those indicated by such forward-looking statements, many of which are beyond our control, including the Risk Factors set
forth under Item 1A. In addition, the forward-looking statements contained herein represent our estimate only as of the date of this filing and should not be relied upon as representing our
estimate as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so to reflect actual
results, changes in assumptions or changes in other factors affecting such forward-looking statements.

Item 1B.Unresolved Staff Comments

Not applicable.

Item 2.Properties

The following is a summary of our primary facilities:

Location

Square Footage

Expiration of Lease

Facility UseBurlington, MA


59,265

April 2010

Headquarters and global network operations centerThe Hague, The Netherlands


16,250

Rented from KPN

OfficeNew York, NY


4,372

Various, 2009-2018

Internet central officeLos Angeles, CA


3,156

April 2009

Internet central office


Our
office space in The Hague is rented from KPN under a service level agreement. In addition to the facilities listed above, we lease office space, or space to house network equipment,
in various locations around the world, including London, Paris, Frankfurt, Sydney, Buenos Aires, Hong Kong, Beijing and Tokyo. We believe that our existing facilities are adequate for our current
needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms.

Item 3.Legal Proceedings

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

Class Action Pursuant to 1999 Initial Public Offering

In 2001, we were served with several class action complaints that were filed in the United States District Court for the Southern
District of New York against us and several of our officers, directors, and former officers and directors, as well as against the investment banking firms that underwrote our November 10, 1999
initial public offering of common stock and our March 9, 2000 secondary offering of common stock. The complaints were filed on behalf of a class of persons who purchased our common stock
between November 10, 1999 and December 6, 2000.

The
complaints are similar to each other and to hundreds of other complaints filed against other issuers and their underwriters, and allege violations of the Securities Act of 1933, as
amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), primarily based on the assertion that there was undisclosed compensation received by our
underwriters in connection with our public offerings and that there were understandings with customers to make purchases in the aftermarket.

In
September 2001, the complaints were consolidated and allege that our prospectuses failed to disclose these arrangements. The consolidated complaint seeks an unspecified amount of
monetary

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damages
and other relief. In October 2002, the individual defendants were dismissed from the litigation by stipulation and without prejudice and subject to an agreement to toll the running of
time-based defenses. In February 2003, the district court denied our motion to dismiss.

In
June 2004, we and the individual defendants, as well as many other issuers named as defendants in the class action proceeding, entered into an
agreement-in-principle to settle this matter, and this settlement was presented to the court. The district court granted a preliminary approval of the settlement in February
2005, subject to certain modifications to the proposed bar order, to which plaintiffs and issuers agreed. In August 2005, the district court issued a preliminary order further approving the
modifications to the settlement, certifying the settlement classes and scheduled a fairness hearing, after notice to the class. Plaintiffs have continued to pursue their claims against the
underwriters. The district court established a procedure whereby six "focus" cases are being pursued initially and has certified a class of purchasers in those cases. The underwriters appealed the
certification order in each of the six cases and in December 2006, the United States Court of Appeals for the Second Circuit reversed the certification orders. Motions to dismiss amended complaints
filed in the six focus cases have been denied.

We
anticipate additional settlement negotiations will occur, but there can be no assurance that those negotiations will result in a revised settlement. We believe that if this matter is
not settled, we have meritorious defenses which we intend to vigorously assert.

We
cannot estimate potential losses, if any, from these matters or whether, in light of our insurance coverage, any loss would be material to our financial condition, results of
operations or cash flows. As such, no amounts have been accrued as of December 31, 2008.

SEC Option Investigation

We announced on October 20, 2006, that we were contacted by the SEC as part of an informal inquiry and we further disclosed on
March 29, 2007, on our Current Report on Form 8-K, that the SEC had notified us that we would be receiving a formal order of investigation relating to our stock option
practices. On April 13, 2007, we received the formal order of investigation. The SEC investigation sought documents and information from us relating to the grant of our options from 1999
through 2006. The SEC has taken testimony from individuals including certain of our current and former officers and directors. We have cooperated fully with the SEC investigation and we are in
communication with the SEC staff regarding the outcome of the investigation. There is no assurance that we will be able to resolve the SEC investigation on acceptable terms without the institution of
enforcement proceedings by the SEC against us or one or more of our senior executive officers or that other inquiries will not be commenced by other U.S. federal, state or other regulatory agencies.
An SEC enforcement proceeding could seek an injunction against future violations of the securities laws, a civil penalty and, as to individual executives, disgorgement and a bar order against serving
as an officer or director of a publicly traded company. A bar order as to any of our senior executive officers would deprive us of any such executive's services and could have a material adverse
affect on our business.

We
cannot estimate the amount of losses, if any, from the SEC investigation, or whether any loss would be material to our financial condition, results of operations or cash flows. As
such, no amounts have been accrued as of December 31, 2008.

Sub-Distributor Action

On September 20, 2007, J & J Communications ("J & J"), a sub-distributor of calling cards distributed
through iBasis distributor Abdul Communications ("Abdul"), amended a complaint filed in the United States District Court for the District of Maryland against Abdul, to add iBasis and PCI, a wholesale
calling-card provider ("PCI"), as defendants in the matter. The complaint asserts that J & J has lost and continues to lose money because iBasis and PCI deactivated calling cards
for which J & J

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allegedly
paid. J & J is seeking in excess of $1.0 million dollars, plus punitive damages, attorneys fees and litigation costs based on a variety of claims against Abdul, iBasis, and
PCI, predicated on contractual theories, various torts, conspiracy and an alleged violation of § 201 of the Telecommunications Act. With respect to iBasis, J & J alleges both
direct liability and vicarious liability, for its alleged status as principal in an alleged agency relationship with Abdul. iBasis responded to the amended complaint through an answer and motion to
dismiss on February 8, 2008. On June 2, 2008, the
Court dismissed the conspiracy and Telecommunications Act claims. Discovery is proceeding as to the remaining claims.

We
cannot estimate the amount of losses, if any, from this matter, or whether any loss would be material to our financial condition, results of operations or cash flows. As such, no
amount has been accrued as of December 31, 2008.

Bankruptcy Preference Claim

On April 24, 2001 (the "Petition Date"), World Access, Inc. ("World Access"), WorldxChange Communications, Inc.
("WorldxChange"), and Facilicom International, LLC ("Facilicom"), together with other related debtors (collectively, the "Debtors"), filed voluntary petitions for relief under chapter 11
of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Northern District of Illinois (Eastern Division). The Debtors' cases are jointly
administered but have not been substantively consolidated. Prior to the Petition Date, we and the Debtors engaged in a reciprocal business relationship. On or about April 21, 2003 the Debtors
initiated a large number of avoidance actions, including an adversary proceeding in which the Debtors asserted claims against us for allegedly preferential transfers and nonpayment of overdue amounts
owed by iBasis to the Debtors totaling approximately $2.1 million. We have asserted defenses to the claims, invoked statutory defenses and filed proofs of claim for approximately
$0.5 million to which the trustee for the Debtors has objected. We expect to engage in a mediation to attempt to resolve these claims during the first quarter of 2009 and have determined that
it is probable that we will incur a liability of approximately $0.5 million and, accordingly, we have accrued that amount as of December 31, 2008.

Consumer Class Action

We were named in a putative consumer class action complaint, filed in the United States District Court for the District of New Jersey.
We were served on May 27, 2008. The putative class action plaintiff, Orlando Ramirez, asserted violations of consumer protection statutes in New Jersey and other states on behalf of an asserted
nationwide class of purchasers due to an alleged failure to adequately disclose the actual calling time available on iBasis' prepaid calling cards. We filed a motion to change venue to the Eastern
District of New York where named plaintiff resides and purchased the card. Plaintiffs were granted a voluntary dismissal, without prejudice, on July 9, 2008. On December 19, 2008, a
substantially similar complaint was filed against us on behalf of Mr. Ramirez in the United States District Court for the Eastern District of New York. As of March 6, 2009, we have not
been served with this complaint. We believe that we have substantial defenses to the claims alleged in the complaint and, if served, we intend to vigorously defend against the claims asserted. We
cannot estimate the amount of losses, if any, from this matter, or whether any loss would be material to our
financial condition, results of operations or cash flows. As such, no amount has been accrued as of December 31, 2008.

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Other Matters

We are also subject to suits for collection, related commercial disputes, claims by former employees, claims related to certain taxes,
claims from carriers and foreign service partners over reconciliation of payments for circuits, Internet bandwidth and/or access to the public switched telephone network, and claims from estates of
bankrupt companies alleging that we received preferential payments from such companies prior to their bankruptcy filings. We cannot estimate the amount of losses, if any, from these matters, or
whether any loss would be material to our financial condition, results of operations or cash flows. As such, no amount has been accrued as of December 31, 2008.

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

No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2008.

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PART II

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

Market Information

Our common stock is traded on The NASDAQ Global Market under the symbol "IBAS." The following table sets forth the high and low sales
prices of our common stock, as reported by The NASDAQ Global Market for the periods indicated.

High

LowFiscal 2008:Fourth Quarter

$
3.38

$
1.20Third Quarter

$
4.32

$
3.06Second Quarter

$
4.26

$
3.05First Quarter

$
5.70

$
3.54Fiscal 2007:Fourth Quarter

$
10.65

$
4.90Third Quarter

$
10.75

$
8.67Second Quarter

$
10.99

$
9.88First Quarter

$
10.99

$
8.54


Stockholders

As of February 28, 2009, we had 185 stockholders of record. This does not reflect persons or entities that hold their shares of
common stock in nominee or "street" name through various brokerage firms.

Dividends

Following the closing of the KPN Transaction, we paid to our shareholders of record as of September 28, 2007, the business day
immediately preceding the closing, a dividend in an aggregate amount of $113 million, or $3.28 per share of common stock. The funds used to pay the dividend came from cash on hand, proceeds of
$55 million received from KPN in connection with the transaction, and bank borrowings. Also, under the terms of outstanding warrants for our common stock, upon exercise of such warrants after
the closing of the KPN Transaction, the holders of the warrants are entitled to receive payment of an amount in cash equal to the amount such holder would have received in connection with the dividend
payment if such warrants had been exercised immediately prior to the closing of the KPN Transaction, in addition to the number of shares of common stock issuable upon such exercise. Cumulatively
through December 31, 2008, we have paid holders of warrants a total $0.8 million in dividends upon the exercise of their warrants. As of December 31, 2008, we have unexercised
warrants representing 432,000 shares, at exercise prices ranging from $6.30 to $9.00 per share, and have $1.4 million accrued for dividends to be paid upon the potential future exercise of
these warrants.

Other
than as disclosed above, we have no current intention of declaring or paying cash dividends on our common stock in the future.

Stock Repurchase Program

In April 2008, we announced that our board of directors had approved a stock repurchase program, authorizing us to purchase up to
$15.0 million of our common stock over the next six months. Between May and August 2008, we completed this program by purchasing 3.9 million shares of our

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common
stock for a total cost of $15.0 million, as set forth in the table below. The repurchases were made in the open market and in privately negotiated purchases. The timing and amount of the
shares we purchased were be determined by our management based on our evaluation of market conditions and other factors. No shares were purchased from KPN as part of this program.

Period

Total Shares
Purchased

Average Price
Paid per ShareMay 1, 2008May 31, 2008


886,300

$
3.33June 1, 2008June 30, 2008


536,100

$
3.58July 1, 2008July 31, 2008


331,400

$
3.71August 1, 2008August 31, 2008


2,153,140

$
4.14Total


3,906,940

$
3.84


Securities Authorized for Issuance Under Equity Compensation Plans

The information required by this item is included under the caption "Equity Compensation Plan Information" in the 2009 Proxy Statement
and is incorporated herein by reference.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among iBasis, Inc., The NASDAQ Composite Index
And The NASDAQ Telecommunications Index

LOGO



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Item 6.Selected Financial Data

The following selected consolidated financial data should be read in conjunction with Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Although iBasis acquired all of the outstanding capital stock of KPN GCS on October 1, 2007, for accounting and financial statement purposes, the KPN Transaction has been treated as a reverse
acquisition of iBasis by KPN GCS under the purchase method of accounting and the financial results of KPN GCS have become the historical financial results of the combined company and replace the
historical financial results of iBasis as a stand-alone company. As a result, revenue and operating expenses for the years ended December 31, 2008 and 2007 increased substantially, as more
fully discussed in Item 7. The consolidated statement of operations for the year ended December 31, 2007, reflects the results of KPN GCS only for the first nine months of 2007 and the
results of the combined company, following the closing of the KPN Transaction on October 1, 2007, for the fourth quarter of 2007. This selected financial data has been derived from our audited
consolidated financial statements. The consolidated statement of operations data for each of the three years ended December 31, 2006, 2005, and 2004 and the balance sheet data at
December 31, 2006 and 2005 are derived from the audited consolidated financial statements of KPN GCS. The balance sheet data at December 31, 2004 has been derived from KPN GCS' unaudited
consolidated financial statements.

From
inception until October 1, 2007, KPN GCS operated as integrated part of KPN and within the Royal KPN infrastructure. As a consequence, KPN GCS has not operated as a
stand-alone business. The KPN GCS combined financial statements were derived from the accounting records of KPN using the historical bases of assets and liabilities. However, these historical
financial statements may not necessarily be representative of amounts that would have been reflected in such combined financial statements had KPN GCS operated independently of KPN. For example, KPN
GCS benefited from certain related party revenue and purchase agreements with KPN that included sale prices per minute and costs per minute that were not necessarily representative of the amounts that
would have been reflected in the financial statements had KPN GCS operated independently of KPN.

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Year Ended December 31,2008

2007

2006

2005

2004(In thousands)Statement of Operations Data:Net revenue from external parties

$
1,097,515

$
741,293

$
605,031

$
540,574

$
498,357Net revenue from related parties


226,070


197,265


209,158


249,502


216,559Total revenue


1,323,585


938,558


814,189


790,076


714,916Costs and operating expenses:Data communications and telecommunications costsexternal parties


1,081,460


733,160


573,966


533,055


475,814Data communications and telecommunications costsrelated parties


105,840


114,242


134,347


138,584


161,347Engineering and network operations


23,320


13,222


8,895


11,438


Selling, general and administrative


74,849


38,368


29,812


34,468


18,569Merger related expenses





2,019








Depreciation and amortization


31,998


12,743


5,693


11,415


13,665Impairment of goodwill


214,651











Total costs and operating expenses


1,532,118


913,754


752,713


728,960


669,395Income (loss) from operations


(208,533
)

24,804


61,476


61,116


45,521Interest income (expense), net


(982
)

949


237


(107
)

(101
)Foreign exchange gain (loss)


3,089


(1,101
)

(1,339
)

(1,545
)

(4,291
)Other income


1,779











Income (loss) before income taxes


(204,647
)

24,652


60,374


59,464


41,129Income tax expense


26,342


8,529


17,884


18,848


13,546Net income (loss)

$
(230,989
)
$
16,123

$
42,490

$
40,616

$
27,583Basic and diluted net income (loss) per share

$
(3.15
)
$
0.33

$
1.06

$
1.01

$
0.69Weighted average shares:Basic


73,260


48,778


40,121


40,121


40,121Diluted


73,260


49,186


40,121


40,121


40,121Balance Sheet Data:Cash, cash equivalents and short-term marketable securities

$
56,912

$
65,735

$
22,411

$
20,630

$
29,903Working capital (deficit)


(21,444
)

(20,756
)

12,967


(3,633
)

3,860Total assets


441,327


659,873


233,269


223,999


285,256Long-term debt, net of current portion


27,380


25,000








1,087Stockholders' equity


88,518


334,490


23,978


7,709


20,626


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

Company Overview

We are a leading wholesale carrier of international long distance telephone calls and a provider of retail prepaid calling services and
enhanced services for mobile operators.

Our
operations consist of our wholesale trading business ("Trading"), in which we connect buyers and sellers of international telecommunications services, and our retail services
business ("Retail"). Our Trading business also includes Outsourcing revenue which we generate as the exclusive provider of wholesale international voice services for specific carrier customers.

In
the Trading business we receive voice traffic from buyersoriginating telecommunications carriers who are interconnected to our network via Voice over Internet Protocol
("VoIP") or traditional time division multiplexing ("TDM") connections, and we route that traffic over our network to sellerslocal service providers and telecommunications carriers in the
destination countries with whom we have established agreements to manage the completion or termination of calls. We offer our Trading service on a wholesale basis to carriers, mobile operators,
consumer VoIP companies, telephony resellers and other service providers worldwide. Our Outsourcing revenue currently consists of international voice traffic we terminate for Royal KPN and its
affiliates (KPN Mobile, E-Plus and Base) and for TDC, the leading telecommunications carrier in Denmark. We seek to expand our market share in our Trading business by expanding our
customer base and by introducing cost-effective international voice solutions for our customers, including complete outsourcing of international operations.

As
a result of the combination with KPN GCS in October 2007 (described below), more than half of our traffic utilizes our VoIP network, while the balance is carried over our TDM network.
The continued migration of the TDM traffic to our lower cost VoIP network is expected to be a significant source of synergies from the KPN transaction over the next several years.

Our
Retail business consists of retail prepaid calling cards, which are marketed through distributors primarily to ethnic communities within major metropolitan markets in the United
States, and Pingo®, a prepaid calling service that we offer and sell directly to consumers via an eCommerce model. Both can be private-labeled for other service providers. The prepaid
calling card business and Pingo leverage our existing international network and have the potential to deliver higher margins than are typically achieved in the wholesale Trading business. In addition,
the retail prepaid calling card business typically has a faster cash collection cycle than the wholesale Trading business. In 2007 we launched PingoBusiness, enhancements that enable businesses to
manage multiple Pingo accounts through a single administrative account.

We
use proprietary, patented and patent-pending technology in our global VoIP network to automate the selection of routes and termination partners based on a variety of performance,
quality, and business metrics. We have call termination agreements with local service providers in more than 100 countries in North America, Europe, Asia, the Middle East, Latin America, Africa and
Australia.

KPN Transaction

On October 1, 2007, iBasis, Inc. and KPN completed transactions ("KPN Transaction") pursuant to which iBasis issued
40,121,074 shares of its common stock to KPN and acquired the outstanding shares of two subsidiaries of KPN ("KPN GCS"), which encompassed KPN' international wholesale voice business. The Company also
received $55 million in cash from KPN, subject to post-closing adjustments based on the working capital and debt of iBasis and KPN GCS. Immediately after issuance on
October 1, 2007, the shares of iBasis common stock issued to KPN represented 51% of the issued and outstanding shares of iBasis common stock on a fully-diluted basis (which includes all of the
issued and outstanding common stock and the common stock underlying outstanding "in-the-money" stock

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options,
as adjusted, and warrants to purchase common stock). As of December 31, 2008, the 40,121,074 shares owned by KPN represent 56% of the issued and outstanding common stock of iBasis and
56% on a fully-diluted basis, as defined above.

On
October 8, 2007, iBasis paid a dividend in the amount of $113 million at a rate of $3.28 per share to each of its shareholders on the record date of September 28,
2007, the trading date immediately prior to the closing date of the KPN Transaction. In addition, holders of outstanding warrants to purchase our common stock will be entitled to receive a cash
payment upon the future exercise of these warrants in an amount equal to the dividend amount that would have been payable if the warrants had been exercised immediately prior to the record date of the
dividend. Cumulatively through December 31, 2008, we have paid holders of warrants a total $0.8 million in dividends upon the exercise of their warrants. As of December 31, 2008,
we have unexercised warrants representing 432,000 shares, at exercise prices ranging from $6.30 to $9.00 per share, and have $1.4 million accrued for dividends to be paid upon the potential
future exercise of these warrants. In connection with the payment of the dividend to shareholders, we also increased the number of shares subject to unexercised stock options and decreased the
exercise price of these stock option grants to preserve their value.

The
officers of iBasis immediately prior to the closing of the KPN Transaction have continued to serve as the officers of the combined company and one executive of KPN GCS,
Mr. Edwin Van Ierland, was appointed as the Company's Senior Vice President Worldwide Sales. Upon closing of the KPN Transaction, Messrs. Charles Skibo and David Lee, two independent
members of iBasis' board of directors, resigned as members of the board of directors and the board of directors of iBasis appointed Messrs. Eelco Blok and Joost Farwerck, two executives of
Royal KPN N.V., as directors to fill the vacancies created by the resignations of Messrs. Skibo and Lee.

Although
iBasis acquired all of the outstanding capital stock of KPN GCS, after the closing of the transaction, KPN holds a majority of the outstanding common stock of iBasis and KPN'
designees are expected to represent, at a future date, a majority of the Company's board of directors. Accordingly,
for accounting and financial statement purposes, the KPN Transaction has been treated as a reverse acquisition of iBasis by KPN GCS under the purchase method of accounting and the financial results of
KPN GCS have become the historical financial results of the combined company and replace the historical financial results of iBasis as a stand-alone company. Thus, the financial results reported for
the full year 2007 include the results of KPN GCS alone for the first nine months of 2007 and the financial results of the combined company for the fourth quarter of 2007 only.

The
presentation of the Statement of Stockholders' Equity reflects the historical stockholders' equity of KPN GCS through September 30, 2007. The effect of the issuance of shares
of iBasis common stock to KPN and the inclusion of iBasis' stockholders' equity as a result of the closing of the KPN Transaction on October 1, 2007 are reflected in the year ended
December 31, 2007.

Prior
to October 1, 2007, KPN GCS operated as an integrated part of KPN since inception and the historical financial statements of KPN GCS have been derived from the accounting
records of KPN using the historical bases of assets and liabilities. Because KPN GCS did not operate as a stand-alone business the historical financial statements may not necessarily be representative
of amounts that would have been reflected in the financial statements presented had KPN GCS operated independently of KPN.

KPN
GCS benefited from certain related party revenue and purchase agreements with KPN that included sales prices per minute and costs per minute. KPN GCS also relied on KPN for a
substantial part of its operational and administrative support, for which it was allocated costs primarily consisting of selling, general and administrative expenses, such as costs for centralized
research, legal, human resources, payroll, accounting, employee benefits, real estate, insurance, information technology, telecommunications, treasury and other corporate and infrastructure costs. In
anticipation of the closing of the transaction with iBasis, KPN GCS entered into a Framework Services Agreement with KPN in

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2006,
which replaced the related party revenue and purchase agreements and operational and administrative support arrangements described above.

Purchase Accounting and Goodwill Impairment

KPN GCS has been designated as the accounting acquirer because immediately following the completion of the transaction, the former
shareholder of KPN GCS, KPN, held 51% of the common stock of the combined company on a fully-diluted basis and KPN' designees are expected to represent, at a future date, a majority of the combined
company's board of directors. As a result, the transaction has been accounted for as a reverse acquisition under the purchase method
of accounting. Under this accounting, KPN GCS is considered the acquiring entity and iBasis is considered the acquired entity for financial reporting purposes.

Under
the purchase method of accounting, the purchase price was allocated to the tangible and identifiable intangible assets and liabilities of iBasis on the basis of their fair values
on October 1, 2007, the closing date of the transaction. As KPN GCS was not a publicly traded entity, the purchase price for this transaction was based, in part, on the fair market value of
iBasis' common stock. The market price used to value iBasis' shares of $10.75 was the closing price of the stock on September 28, 2007, the business day immediately prior to the closing of the
KPN Transaction.

The
total purchase price for this transaction consisted of the following:

(In thousands)iBasis outstanding shares on October 1, 2007 of 34,451 at $10.75 per share

$
370,353Fair value of outstanding vested and unvested stock options, less unearned compensation


13,425Fair value of outstanding warrants to purchase common shares


4,624Direct acquisition costs


2,453Dividend to iBasis shareholders paid from existing iBasis cash and short-term marketable securities


(58,000
)Accrued dividend payable for outstanding warrants to purchase common shares


(2,468
)Amount payable to KPN for iBasis working capital adjustment


(11,577
)Accrued severance


(135
)Total purchase price

$
318,675


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The allocation of the purchase to the fair values of iBasis' assets and liabilities on October 1, 2007, which resulted in the recording of
$248.8 million in goodwill, was as follows:

(In thousands)Current assets

$
128,875Property and equipment


23,258Other assets


520Trade names and trademarks


21,800Customer relationships


34,200Termination partner relationships


8,400Technology


33,300Total assets


250,353Deferred revenue


11,331Dividend payable


60,468Other current liabilities


103,469Deferred tax liabilities, long term


3,556Other non-current liabilities


1,649Total liabilities


180,473Net assets


69,880Goodwill


248,795Total purchase price

$
318,675


The
total $248.8 million of goodwill was assigned to the Company's wholesale Trading reporting unit. In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets," this goodwill has not been amortized. In the fourth quarter of 2008, the Company determined that the carrying value of goodwill was impaired. As a result, the Company recorded a charge for
the impairment of goodwill in the amount of $214.7 million. As a result of this impairment charge and a further reduction to the carrying value of goodwill of $16.8 million for the
utilization of previously reserved pre acquisition net operating losses, the carrying value of goodwill has been reduced to $17.3 million as of December 31, 2008. See further discussion
of the goodwill impairment charge recorded in 2008 in the Results of Operations section of the Management's Discussion and Analysis of Financial Condition and in Note 8 to the Consolidated
Financial Statements.

Working Capital and Debt Adjustments

In accordance with the Share Purchase Agreement for the KPN Transaction, a post-closing adjustment was required if
(i) iBasis' working capital was lower than or exceeded $37,100,000; (ii) iBasis' debt exceeded or was lower than $2,900,000; (iii) the combined working capital of KPN GCS was
lower than or exceeded ($6,100,000); and/or (iv) the combined debt of KPN GCS exceeded $0, as of the date of the closing of the KPN Transaction. Based on iBasis' balance sheet position on the
date of the closing of the KPN Transaction, working capital was $13,353,000 less than the specified level of $37,100,000, and debt was $1,776,000 less than the specified level of $2,900,000. As a
result, a payment of $11,577,000 was due to KPN from iBasis. Based on KPN GCS's balance sheet position on the date of the closing of the KPN Transaction, working capital exceeded the specified level
of ($6,100,000) by $3,945,000 and debt was at the specified level of $0. As a result, payment of $3,945,000 was due to KPN from iBasis.

In
2008, KPN forgave $1.3 million in expenses incurred by KPN GCS since the closing of the KPN Transaction. As a result, the amount due to KPN has been reduced by this amount and
was recorded as a contribution to equity. These expenses have been recorded in our results of operations. The total

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amount
of $14.7 million due to KPN was scheduled to be paid by iBasis in three successive quarterly installments through the third quarter of 2008, with interest at the rate of 6% per annum. In
May 2008, we made the first payment of $5.2 million, including interest, to KPN. In September 2008, we revised the terms of the remaining balance of $10.3 million due to KPN to extend
the payment date on the second installment payment to March 2009 and the final installment to June 2009. In addition, the interest rate was increased to 7% on the principal amount due, effective
October 1, 2008, and we paid additional interest of $60,000 relating to the extension of the second installment that was due June 30, 2008.

As
of December 31, 2008 and 2007, unpaid principal and accrued interest due KPN was $10.5 million and $15.5 million, respectively.

TDC Transaction

On April 1, 2008, we acquired certain assets from TDC, the leading telecommunications carrier in Denmark, as well as certain
assets, contracts and four employees of TDC' subsidiary in the U.S., TDC Carrier Services U.S., for approximately $11 million in cash ("TDC Transaction"). Pursuant to the TDC Transaction, we
became the exclusive provider of international voice services for TDC under a five-year strategic outsourcing arrangement, and TDC will be a preferred partner for terminating traffic sent
by us into the Nordic region, consisting of Denmark, Finland, Iceland, Norway and Sweden.

Approximately
130 non-Nordic international wholesale voice customers, as well as all of TDC' interconnection and bilateral agreements for inbound and outbound international
phone calls have been transferred to us. TDC will retain its Nordic customer base and its pan-Nordic reach.

In
connection with the closing of the TDC transaction, we recorded $10.1 million of intangible assets, primarily wholesale customer relationships. The wholesale customer
relationships are being amortized over a 5 to 10 year period using the economic consumption method to reflect the diminishing cash flows from these relationships in the future.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements.
The preparation of these financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to (i) make
judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenue and expenses; and (ii) disclose contingent assets and liabilities. A critical accounting
estimate is an assumption that could have a material effect on our consolidated financial statements if another, also reasonable, amount were used or a change in the estimates is reasonably likely
from period to period. We base our accounting estimates on historical experience and other factors that we consider reasonable under the circumstances. However, actual results may differ from these
estimates. To the extent there are material differences between our estimates and the actual results, our future financial condition and results of operations will be affected. The following is a
summary of our critical accounting policies and estimates.

Revenue Recognition.For our Trading business, revenue is derived from the sale of minutes of calling time. We recognize revenue in the
period the
service is provided, net of estimates for incentive rebates, customer disputes and other allowances. These estimates are based upon contracted terms, historical experience and information currently
available to management with respect to business and economic trends. Revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. In cases
where we have to estimate the monthly revenues related to traffic terminated in that month, we record a receivable that is based upon internal traffic reporting which will then be billed and collected
in the subsequent months. For our Retail business, revenue is

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deferred
upon activation of the calling cards, or purchase of our web-based calling services, and is only recognized as the prepaid balances are reduced based upon minute usage and service
charges.

Allowance for Doubtful Accounts.We perform ongoing credit evaluations of our customers and adjust credit limits based upon their
payment history and
current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and record a provision for estimated
credit losses based upon our historical experience and any specific customer collection issues that we have identified. We believe that the allowance for doubtful accounts is adequate to cover
estimated losses in customer accounts receivable balances under current conditions. However, changes in the allowance for doubtful accounts may be necessary in the event that the financial condition
of our customers improves or deteriorates. In addition, changes may be necessary if we adjust credit limits for new customers or change our collection practices. Either of these situations may result
in write-off patterns that differ from our experience. We have been able to mitigate our credit risk, in part, by using reciprocal arrangements with customers, who are also our suppliers,
to offset our outstanding receivables.

Intangible Assets.Our intangible assets consist of goodwill, which has an indefinite life and is not being amortized, and identifiable
intangible
assets, consisting of trade name and trade marks, customer relationships, termination partner relationships and technology. The estimated useful life of trade name and trademarks is 15 years
and is being amortized on a straight-line basis. The estimated useful life of customer relationships is 10 years for wholesale customers and 5 years for retail distributor
relationships, and these intangible assets are being amortized using an economic consumption method to reflect diminishing cash flows from these relationships in the future. The estimated useful life
of termination partner relationships is 5 years and is being amortized using an economic consumption method. The estimated useful life of technology is 5 years and is being amortized on
a straight-line basis.

Valuation of Long-lived Assets.Valuation of certain long-lived assets including property and equipment, intangible assets,
and goodwill requires significant judgment. Assumptions and estimates are used in determining the fair value of assets acquired and liabilities assumed in a business combination. A significant portion
of the purchase price in the KPN Transaction was assigned to intangible assets and goodwill. Assigning value to intangible assets requires that we use significant judgment in determining
(i) the fair value; and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible assets will be
amortized. We utilize commonly accepted valuation techniques, such as the income approach and the cost approach, as appropriate, in establishing the fair value of long-lived assets.
Typically, key assumptions include projected revenue and expense levels used in establishing the fair value of business acquisitions as well as discount rates based on an analysis of our weighted
average cost of capital, adjusted for specific risks associated with the assets. Changes in the initial assumptions could lead to changes in amortization expense recorded in our future financial
statements.

For
intangible assets and property and equipment, we assess the carrying value of these assets whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment review include but are not limited to the following:



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Should
we determine that the carrying value of long-lived assets and intangible assets may not be recoverable, we will measure any impairment based on the current fair value
of the assets calculated using a projected discounted cash flow with the discount rate determined by management to be commensurate with the risk inherent in our current business model. Significant
judgments are required to estimate future cash flows, including the selection of appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect
the determination of fair value for these assets.

We
perform annual reviews for impairment of goodwill, or whenever events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its
carrying value. We also perform reviews for impairment for other long-lived assets whenever events or changes in circumstances indicate that the carrying value of these other
long-lived assets may not be recoverable. Goodwill may be considered to be impaired if we determine that the carrying value of the reporting unit, including goodwill, exceeds the reporting
unit's fair value. Assessing the impairment of goodwill requires us to make certain significant assumptions, estimates and judgments including future revenue, expenses and cash flows, discount rates
and control premiums relative to the fair value of the net assets of our reporting units. We estimate the fair value of our reporting units using a combination of valuation techniques, including
discounted cash flows, and compare the values to our estimated overall market capitalization. The actual results may differ from these assumptions and estimates and it is possible that such
differences could have a material impact on our financial statements. We based the valuation of our Trading reporting unit, in part, on i) our actual historical performance; ii) our
estimate of the future performance of our Trading reporting unit and iii) projections developed by an independent analyst. For further information regarding our impairment analysis of goodwill
and other intangible assets, see Note 8,Goodwill and Other Intangible Assets, in the Notes to Consolidated Financial Statements.

Income Taxes.We utilize the liability method of accounting for income taxes in accordance with Statement of Financial Accounting
Standards
No. 109, Accounting for Income Taxes ("SFAS 109"), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences
between the book and tax bases of recorded assets and liabilities.

We
record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance,
we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance.
Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. As a result of our cumulative losses in the U.S.
and the inavailability of loss carryback
opportunities, we have concluded that a valuation allowance against the full amount of our net deferred tax assets is appropriate in such jurisdictions. In addition, we have a valuation allowance
related to tax benefits from stock option exercises which will increase equity when recognized, and loss carry forwards acquired in the acquisition of KPN GCS (a reverse acquisition), the recognition
of which will reduce goodwill.

In
certain other foreign jurisdictions where we do not have cumulative losses, we may record valuation allowances to reduce our net deferred tax assets to the amount we believe is more
likely than not to be realized. In the future, if we realize a deferred tax asset that currently carries a valuation allowance, we may record a reduction to income tax expense in the period of such
realization.

In
July 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, "Accounting for Uncertainty in Income TaxesAn
Interpretation of FASB Statement No. 109"("FIN 48"), which requires income tax positions to meet a more-likely-than-not
recognition threshold to be recognized in the financial statements. Under FIN 48, tax positions that previously failed to meet the more-likely-than-not
threshold should be recognized in the first subsequent financial reporting period in

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which
that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is no longer met. Prior to 2007 we recorded estimated income tax liabilities to the extent they were probable and could be reasonably
estimated.

Judgment
is required in determining our income tax provision. In the ordinary course of conducting a global business enterprise, there are many transactions and calculations undertaken
whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transactions and arrangements made among related parties, transfer pricing for transactions with our
subsidiaries, and potential challenges to nexus and credit estimates. As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities
involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. Although we believe our judgments are reasonable, no assurance can be given
that the final tax outcome of these matters will not be different from what is reflected in our historical income tax provisions, returns and accruals. Such differences, or changes in estimates
relating to potential differences, could have a material impact, unfavorable or favorable, on our income tax provision and operating results in the period in which such a determination is made. If we
ultimately determine that the payment of a liability will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no longer applies.
Conversely, we record additional tax charges in a period in which we determine that an assessment is greater than the recorded liability.

Results of Operations

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

Year Ended December 31,2008

2007

2006Net revenue from external parties


82.9
%

79.0
%

74.3
%Net revenue from related parties


17.1


21.0


25.7Total net revenue


100.0


100.0


100.0Costs and operating expenses:Data communications and telecommunications costsexternal parties


81.7


78.1


70.5Data communications and telecommunications costsrelated parties


8.0


12.2


16.5Engineering and network operations expenses


1.8


1.4


1.1Selling, general and administrative expenses


5.6


4.1


3.6Merger related expenses





0.2


Depreciation and amortization


2.5


1.4


0.7Impairment of goodwill


16.2





Total costs and operating expenses


115.8


97.4


92.4Income (loss) from operations


(15.8
)

2.6


7.6Interest income (expense), net


(0.1
)

0.1


0.0Foreign exchange gain (loss)


0.2


(0.1
)

(0.2
)Other income


0.1





Income (loss) before income taxes


(15.5
)

2.6


7.4Income tax expense


2.0


0.9


2.2Net income (loss)


(17.5
)%

1.7
%

5.2
%


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Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Results of operations for the year ended December 31, 2008 includes the results of the combined company following the closing of
the KPN Transaction on October 1, 2007. Results of operations for the year ended December 31, 2007 includes the results of operations of KPN GCS only for the first nine months of 2007
and the results of the combined company for the fourth quarter of 2007. As a result, revenue and operating expenses for the year ended December 31, 2008 increased substantially over the year
ended December 31, 2007.

Net revenue.Our primary source of revenue from external parties are the fees that we charge customers for completing voice and fax
calls over our
network. We charge our customers fees, per minute of traffic, that are dependent on the length and destination of the call and recognize this revenue in the period in which the call is completed.
Revenue from related parties consists of fees that we charge KPN and its affiliates for the traffic they send to us to complete over our network. The fees that we charge KPN and its affiliates are
based on the pricing in established service level agreements or other pricing arrangements. Our average revenue per minute ("ARPM") is based upon our total net revenue divided by the number of minutes
of traffic over our network for the applicable period. ARPM is a key telecommunications industry financial measurement. We believe this measurement is useful in understanding our financial
performance, as well as industry trends. Although the long distance telecommunications industry has been experiencing declining prices in recent years due to the effects of deregulation and increased
competition, our average revenue per minute can fluctuate from period to period as a result of shifts in traffic over our network to higher priced, or lower priced, destinations.

Total
revenue was $1,323.6 million for 2008 compared to $938.6 million for 2007. Revenue from external parties was $1,097.5 million in 2008 compared to
$741.3 million in 2007. The significant increase in revenue from external parties reflects the combination of iBasis and KPN GCS for all of 2008,
compared to 2007, where the first nine months included only the revenue of KPN GCS. The strengthening of the euro against the US dollar during 2008 resulted in a 6.5% increase, or approximately
$36 million, in the US dollar amount of our euro-based revenue. In addition, the TDC Transaction contributed to revenue from external parties in 2008.

During
the second half of 2008, we saw a decline in our Trading revenue from external customers relative to the first half of the year. We believe this decline reflected the downturn in
the U.S. prepaid calling card market as traffic we receive from prepaid calling card providers and certain wholesale Trading customers whose traffic comes from prepaid calling card providers, declined
significantly. The downturn in the U.S. prepaid calling card market is primarily a result of the effect of the current adverse economic conditions in the U.S. on immigrant communities that comprise
the majority of this market.

Revenue
from related parties in 2008 was $226.1 million, compared to $197.3 million in 2007. The higher revenue primarily reflects an increase in traffic from KPN' mobile
entities, as well as the effect of the stronger euro against the U.S. dollar, during 2008.

Minutes
of traffic in 2008 were 23.5 billion minutes compared to 13.1 billion minutes for 2007. Average revenue per minute was 5.63 cents per minute in 2008 compared to
7.18 cents per minute in 2007.

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For the year ended December 31, 2008, the breakdown of minutes, total revenue and gross profit, which is total revenue less data communications and
telecommunications costs, and gross margin percent is as follows:

Revenue

Gross
Profit

Gross
Margin

Minutes(In millions)

(%)

(In billions)Trading

$
985.0

$
80.6


8.2
%

18.6Outsourcing


242.0


42.9


17.7
%

2.6Retail


96.6


12.8


13.3
%

2.3Total

$
1,323.6

$
136.3


10.3
%

23.5


Data communications and telecommunications costs.Data communications and telecommunications costs are composed primarily of
termination and circuit
costs. Termination costs are paid to local service providers, or to KPN and its affiliates, to terminate voice and fax calls received from our network. Termination costs are negotiated with the local
service providers and termination costs for traffic we send to KPN and its affiliates are based primarily on pricing in service level agreements. Circuit costs primarily include fees for connections
between our network and our customers and/or service provider partners and charges for Internet access at our Internet Central Offices.

Total
data communications and telecommunications costs were $1,187.3 million in 2008, compared to $847.4 million in 2007. Data communications and telecommunications costs
from external parties were $1,081.5 million in 2008, compared to $733.2 million in 2007. The increase primarily relates to the increase in total revenue in 2008 compared to 2007. Data
communications and telecommunications costs from related parties were $105.8 million in 2008, compared to $114.2 million in 2007. The lower costs from related parties were primarily due
to the closing of an interconnection with a KPN affiliate and lower pricing associated with the service level agreements established with KPN for 2007. As a percentage of total net revenue, total data
communications and telecommunications costs were 89.7% in 2008 compared to 90.3% in 2007.

Engineering and network operations expenses.Engineering and network operations expenses include the
expenses associated with developing, operating and supporting our network and expenses for operating our network operations centers. Also included in this category are engineering expenses incurred in
developing, enhancing and supporting our network and our proprietary software applications. Engineering and network operations support of our TDM network are provided by KPN and charged to us under a
service level agreement.

Engineering
and network operations expenses were $23.3 million for 2008 compared to $13.2 million for 2007. The significant increase in expenses in 2008 reflects the
combination of iBasis and KPN GCS for all of 2008, compared to 2007 where the first nine months included only the expenses of KPN GCS. Costs related to our service level agreement with KPN in 2008
were $2.2 million lower compared to 2007.

Selling, general and administrative expenses.Selling, general and administrative expenses include salaries, payroll tax and benefit
expenses, and
other costs for sales and marketing functions and general corporate functions, including executive management, finance, legal, facilities, information technology and human resources. KPN has
historically provided certain corporate functions, including finance, information technology and human resources, and charged KPN GCS for this support under a service level agreement.

Selling,
general and administrative expenses were $74.8 million in 2008, compared to $38.4 million in 2007. The significant increase in expenses in 2008 reflects the
combination of iBasis and KPN GCS

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for
all of 2008, compared to 2007 where the first nine months included only the expenses of KPN GCS. This increase was partially offset by lower costs related to service level agreement with KPN
during 2008. Since the date of the KPN transaction, as part of our integration process, we have reduced the level of services and support required from KPN for our Netherlands operations. In certain
cases, such as audit fees, we are now directly responsible for these costs. As a result of our integration efforts to-date, selling, general and administrative costs incurred directly from
KPN in 2008 were reduced by $10.8 million from 2007. In 2008, we capitalized approximately $1.2 million in costs associated with the development of software used internally by the
Company. In 2007, costs associated with the development of software used internally by the Company which were capitalized were insignificant. In addition, we incurred $1.0 million in costs in
2008 related to a potential transaction that we discontinued pursuing.

In
the fourth quarter of 2007, we took a charge of $2.6 million related to retroactive Universal Service fund and other regulatory fees, relating to our prepaid calling service
revenue prior to July 2006. This charge resulted from a decision by the U.S. Court of Appeals, in early December 2007, which denied our appeal of the retroactive aspect of a Federal Communications
Commission order issued in June 2006.

Merger related expenses.There were no merger related expenses in 2008. Merger related expenses of $2.0 million in 2007 primarily
relate to
costs incurred for the preparation and review of the historical financial statements of KPN GCS in anticipation of the transaction with iBasis. These costs were paid by KPN but are reflected in our
results of operations for 2007.

Depreciation and amortization expenses.Depreciation and amortization expenses were $32.0 million in 2008, compared to
$12.7 million in
2007. Amortization expense in 2008 includes $16.7 million in amortization of identified intangible assets, including $15.4 million for identified intangible assets resulted from the
allocation of the purchase price of iBasis to the fair value of iBasis' net assets as of October 1, 2007 and $1.3 million for intangible assets resulting from the TDC Transaction in
2008. Depreciation and amortization expense in 2007 also included a $1.8 million charge in the fourth quarter of 2007 for the write-off of certain costs previously capitalized by
KPN GCS.

Impairment of goodwill.Subsequent to the end of the third quarter of 2008, we experienced a sharp decline in our stock price. We
believe this
decline was principally driven by circumstances that occurred subsequent to the end of the third quarter including, but not limited to, an extraordinary decline in the stock market as a whole and
other factors specific to our stock price. As a result, when we performed our annual impairment test as of December 31, 2008, we determined that we had an impairment loss on goodwill of
$214.7 million. Since December 31, 2008, our market capitalization has continued to decline. As a result, it is reasonably possible that there could be an impairment of our intangible
assets and/or our remaining goodwill in the near term and the amounts could be material. For further information on our annual impairment test of goodwill, see Note 8, Goodwill and Other Intangible Assets,in the Notes to Consolidated Financial Statements.

Interest income.Interest income was $2.1 million in 2008, compared to $1.7 million in 2007. The increase in interest income
primarily
relates to higher average cash balances in 2008, partially offset by lower interest rates.

Interest expense.Interest expense was $3.0 million in 2008, compared to $0.7 million in 2007. Interest expense in 2008
includes
interest on bank borrowings and capital leases, as well as interest of $1.0 million on the amount due to KPN for the post-closing working capital adjustment.

Foreign exchange gain (loss), net.Foreign exchange gain, net was $3.1 million in 2008, compared to a foreign exchange loss of
$1.1 million in 2007. The foreign exchange gain in 2008, as well as the

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foreign
exchange loss in 2007, was primarily a result of the change in exchange rates between the euro and U.S. dollar on our euro-denominated assets and liabilities.

Other income.Other income of $1.8 million in 2008 reflects a one-time benefit relating to the reversal of a liability for which
the statute of limitations had expired. This liability related to traffic termination costs claimed by a bankrupt carrier.

Income taxes.Income tax expense was $26.3 million in 2008 compared to $8.5 million in 2007. In 2008, we recorded an
additional
non-cash income tax expense of $16.8 million as a result of the utilization of previously reserved pre-acquisition net operating loss carry-forwards. The use of these
pre-acquisition net operating losses cannot reduce income tax expense but, instead, must reduce the carrying value of goodwill. This additional income tax expense does not represent income
tax payments we will have to make now, or at any time in the future. Effective January 1, 2009, with the adoption of FAS 141R, such pre-acquisition net operating losses will
reduce income tax expense, when utilized or when the valuation allowance for such net operating losses is released.

The
balance of the 2008 income tax expense of $9.5 million, and the tax expense of $8.5 million in 2007, primarily relates to income taxes on the taxable income of our
Netherlands operations.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Results of operations for the year ended December 31, 2007 includes the results of operations of KPN GCS only for the first nine
months of 2007 and the results of the combined company following the closing of KPN Transaction on October 1, 2007, for the fourth quarter of 2007. Results of operations for the year ended
December 31, 2006 are the results of operations of KPN GCS only. As a result, revenue and operating expenses for the year ended December 31, 2007 increased substantially.

Net revenue.Total revenue was $938.6 million for 2007 compared to $814.2 million for 2006. Revenue from external parties was
$741.3 million in 2007 compared to $605.0 million in 2006. The increase in revenue from external parties reflects a combination of the strengthening of the euro against the US dollar and
the inclusion of iBasis revenue of $143.9 million for the fourth quarter of 2007. As the revenue of KPN GCS is primarily denominated in euros, the stronger euro in 2007 resulted in an increase
in revenue from external parties of approximately 8% in U.S. dollars in 2007. Excluding the effect of the stronger euro in 2007 and the inclusion of iBasis revenue for the fourth quarter of 2007,
revenue from external parties declined approximately 9% from 2006. The decrease was primarily due to the focus on maximizing margins in 2007, which resulted in a decrease in revenue and minutes from
lower margin traffic.

Revenue
from related parties in 2007 was $197.3 million, compared to $209.2 million in 2006. The lower revenue primarily reflects the pricing in service level agreements
established between KPN GCS and KPN in mid 2006, in anticipation of the completion of the KPN Transaction. Prior to these new service level agreements, KPN GCS had more favorable pricing arrangements
with KPN.

Minutes
of traffic in 2007 were 13.1 billion minutes compared to 9.0 billion minutes in 2006. Excluding the effect of the inclusion of iBasis traffic for the fourth quarter
of 2007, minutes of traffic increased by 0.5 billion minutes, or 5%, in 2007 over 2006. Average revenue per minute was 7.18 cents per minute in 2007 compared to 9.02 cents per minute in 2006.

Data communications and telecommunications costs.Total data communications and telecommunications costs were $847.4 million in
2007, compared
to $708.3 million in 2006. Data communications and telecommunications costs from external parties were $733.2 million in 2007, compared to $574.0 million in 2006. This increase
was primarily due to the effect of the stronger euro, compared to the U.S. dollar, in 2007 on KPN GCS's euro-denominated costs and the inclusion of iBasis costs of $126.4 million
for the fourth quarter of 2007. Data communications and

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telecommunications
costs from related parties were $114.2 million in 2007, compared to $134.3 million in 2006. The lower costs from related parties were primarily due to the closing of
an interconnection with a KPN affiliate and lower pricing associated with the service level agreements established with KPN for 2007. As a percentage of total net revenue, total data communications
and telecommunications costs were 90.3% in 2007 compared to 87.0% in 2006.

Engineering and network operations expenses.Engineering and network operations expenses were
$13.2 million for 2007 compared to $8.9 million for 2006. The higher expenses in 2007 relate to the costs of iBasis' engineering and network operations expenses of $4.8 million
for the fourth quarter of 2007, partially offset by lower charges under the service level agreement between KPN and KPN GCS in 2007, compared to 2006.

Selling, general and administrative expenses.Selling, general and administrative expenses were $38.4 million in 2007, compared to
$29.8 million in 2006. The increase in 2007 primarily reflects the inclusion of the selling, general and administrative costs of iBasis of $16.9 million for the fourth quarter of 2007.
In addition, the stronger euro compared to the U.S. dollar resulted in an increase in the euro-denominated expenses of KPN GCS. These increases were partially offset by lower costs in the
2007 service level agreement for support from KPN. In addition, in the fourth quarter of 2007, we took a charge of $2.6 million related to retroactive Universal Service fund and other
regulatory fees, relating to our prepaid calling service revenue prior to July 2006. This charge resulted from a decision by the U.S. Court of Appeals, in early December 2007, which denied our appeal
of the retroactive aspect of a Federal Communications Commission order issued in June 2006.

Merger related expenses.Merger related expenses of $2.0 million in 2007 primarily relate to costs incurred for the preparation
and review of
the historical financial statements of KPN GCS in anticipation of the transaction with iBasis. These costs have been paid by KPN but are reflected in our results of operations for 2007.

Depreciation and amortization expenses.Depreciation and amortization expenses were $12.7 million in 2007, compared to
$5.7 million in
2006. Amortization expense in 2007 includes $3.9 million in amortization of identified intangible assets. These identified intangible assets resulted from the allocation of the purchase price
of iBasis to the fair value of iBasis' net assets as of October 1, 2007. Depreciation and amortization expense in 2007 also included a $1.8 million charge in the fourth quarter of 2007
for the write-off of certain costs previously capitalized by KPN GCS.

Interest income.Interest income was $1.7 million for 2007, compared to $0.3 million in 2006. The increase in interest income
primarily
relates to higher average cash balances in 2007.

Interest expense.Interest expense was $0.7 million in 2007, compared to $32,000 in 2006. Interest expense in 2007 includes
interest of
$0.5 million on bank borrowings of $25.0 million early in the fourth quarter of 2007 under our line of credit with Silicon Valley Bank.

Foreign exchange loss, net.Foreign exchange loss, net was $1.1 million in 2007, compared to $1.3 million in 2006. These
foreign
exchange losses are primarily a result of the change in exchange rates between the euro and U.S. dollar on foreign currency contracts.

Income taxes.The income tax provision of $8.5 million in 2007 and $17.9 million in 2006 primarily relates to income taxes on
the
taxable income of The Netherlands operations of KPN GCS. The effective tax rate in 2007 and 2006 was 34.6% and 29.6%, respectively. The higher effective tax rate in 2007 is due to U.S. operating
losses for which there is no current tax benefit. The effective tax rate in 2006 approximates the statutory rate in The Netherlands.

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Liquidity and Capital Resources

Prior to October 1, 2007, KPN GCS operated from inception as an integrated part of KPN and within the KPN infrastructure. KPN
uses a centralized approach to cash management and financing of its operations. Historically, cash was remitted to KPN on a regular basis and cash disbursements were funded from KPN cash accounts on
behalf of KPN GCS. Cash remittances to KPN, net of disbursements by KPN on behalf of KPN GCS, are reflected as net distributions to related parties in the Consolidated Statements of Stockholders'
Equity.

Cash
provided by operating activities of $33.0 million in 2008 was primarily the result of the net loss of $231.0 million, offset by non-cash charges of
$267.5 million. Non-cash charges in 2008 included impairment of goodwill of $214.7 million, depreciation and amortization of $32.0 million, non-cash income
tax expense relating to the utilization of pre acquisition net operating losses of $16.8 million, stock-based compensation of $2.5 million and a provision for doubtful accounts
receivable of $1.6 million. During 2008, cash was used in operating activities for changes in other assets and liabilities of $3.5 million. Changes in other assets and liabilities
included a payment of $7.6 million related to 2007 income taxes due for KPN GCS. Excluding the prior year tax payment of $7.6 million, changes in operating assets and liabilities
provided $4.1 million in cash and cash flow from operating activities for 2008 was $40.6 million.

Cash
provided by operating activities of $58.1 million in 2007 was primarily the result of net income of $16.1 million, non-cash charges of
$13.2 million, primarily depreciation and amortization, and changes in other assets and liabilities of $28.8 million. Changes in other assets and liabilities included a decline in
accounts receivableexternal parties of $22.7 million and in accounts receivablerelated parties of $33.8 million, partially offset by a decline in accounts
payable of $32.2 million.

Cash
provided by operating activities in 2006 of $32.5 million was the result of net income of $42.5 million, non-cash charges of $5.7 million for
depreciation and amortization, and changes in other assets and liabilities of $(15.7) million. Changes in other assets and liabilities in 2006 included an increase in accounts
receivablerelated parties of $25.1 million and a decrease in accounts payable of $43.6 million, partially offset by a decrease in accounts receivableexternal
parties of $37.0 million.

Cash
used in investing activities in 2008 was $20.0 million. Additions to property and equipment were $16.0 million in 2008. On April 1, 2008, we acquired certain
assets from TDC, the leading telecommunications carrier in Denmark, as well as certain assets, contracts and employees of TDC's subsidiary in the U.S., TDC Carrier Services U.S., for approximately
$11.0 million in cash. Cash provided by investing activities included a reduction in other assets, relating to investing activities, of $5.0 million and maturities of
short-term marketable securities of $2.0 million.

Cash
provided by investing activities in 2007 of $42.1 million included the acquisition of $54.7 million of existing cash and cash equivalents of iBasis on the date of the
closing of the KPN Transaction. Additions to property and equipment were $9.6 million in 2007 and maturities of short-term marketable securities were $2.0 million. The
increase of $5.0 million in other assets relates to other investing activities.

Cash
used in investing activities in 2006 of $3.9 million relate to additions to property and equipment.

Cash
used in financing activities in 2008 was $19.0 million. We used $15.0 million in cash for the purchase of our common stock under a stock repurchase program,
$1.6 million in payments of capital lease obligations and $0.3 million in dividend payments on the exercise of warrants. During 2008, we borrowed, net, an additional $2.1 million
under our Loan Agreement with Silicon Valley Bank and received $0.6 million in proceeds on the exercise of stock options. In addition, we paid $4.7 million of the $14.7 million
due to KPN for the post closing working capital adjustment.

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Cash
used in financing activities in 2007 was $61.1 million and included $55.0 million paid by KPN as partial consideration for the acquisition of 51% of the outstanding
shares of iBasis on October 1, 2007. In early October, following the completion of the KPN Transaction, we paid a $113.0 million dividend to iBasis shareholders of record immediately
preceding the closing of the KPN Transaction. In addition, we paid $0.5 million in dividends to warrant holders who exercised their warrants during the fourth quarter of 2007. Net distributions
to KPN in 2007 were $27.8 million. In the fourth quarter of 2007, we borrowed $25.0 million under our second amended and restated loan and security agreement with Silicon Valley Bank.
Proceeds from exercises of stock options and warrants were $0.5 million in 2007 and payments of capital lease obligations were $0.4 million.

Cash
used in financing activities in 2006 was $28.9 million and consisted of net distributions to KPN of $27.9 million and payment of a note payable to a KPN affiliate of
$1.0 million.

In
April 2008, we announced that our board of directors had approved a stock repurchase program, authorizing us to purchase up to $15.0 million of our common stock over the next
six months. Between May and August 2008, we completed this program by purchasing 3.9 million shares of our common stock for a total cost of $15.0 million, as set forth in the table
below. The repurchases were made in the open market and in privately negotiated purchases. The timing and amount of the shares we purchased were be determined by our management based on our evaluation
of market conditions and other factors. No shares were purchased from KPN as part of this program.

Period

Total Shares
Purchased

Average Price
Paid per ShareMay 1, 2008May 31, 2008


886,300

$
3.33June 1, 2008June 30, 2008


536,100

$
3.58July 1, 2008July 31, 2008


331,400

$
3.71August 1, 2008August 31, 2008


2,153,140

$
4.14Total


3,906,940

$
3.84


In
accordance with the Share Purchase Agreement for the KPN Transaction, a post-closing adjustment was required if (i) iBasis' working capital was lower than or
exceeded $37,100,000; (ii) iBasis' debt exceeded or was lower than $2,900,000; (iii) the combined working capital of KPN GCS was lower than or exceeded ($6,100,000); and/or
(iv) the combined debt of KPN GCS exceeded $0, as of the date of the closing of the KPN Transaction. Based on iBasis' balance sheet position on the date of the closing of the KPN Transaction,
working capital was $13,353,000 less than the specified level of $37,100,000, and debt was $1,776,000 less than the specified level of $2,900,000. As a result, a payment of $11,577,000 is due to KPN
from iBasis. Based on KPN GCS's balance sheet position on the date of the closing of the KPN Transaction, working capital exceeded the specified level of ($6,100,000) by $3,945,000 and debt was at the
specified level of $0. As a result, payment of $3,945,000 was due to KPN from iBasis.

In
2008, KPN forgave $0.8 million in expenses incurred by KPN GCS since the closing of the KPN Transaction. As a result, the amount due to KPN has been reduced by this amount and
was recorded as a contribution to equity. These expenses have been recorded in our results of operations. The total amount of $14.7 million due to KPN was scheduled to be paid by iBasis in
three successive quarterly installments through the third quarter of 2008, with interest at the rate of 6% per annum. In May 2008, we made the first payment of $5.2 million, including interest,
to KPN. In September 2008, we revised the terms of the remaining balance of $10.3 million due to KPN to extend the payment date on the second installment payment to March 2009 and the final
installment to June 2009. In addition, the interest rate was increased to 7% on the principal amount due, effective October 1, 2008, and we paid additional interest of $60,000 relating to the
extension of the second installment that was due June 30, 2008.

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As
of December 31, 2008 and 2007, unpaid principal and accrued interest due to KPN was $10.5 million and $15.5 million, respectively.

In
October 2007, we entered into a Second Amended and Restated Loan and Security Agreement (the "Loan Agreement") with Silicon Valley Bank, which amended and restated a certain Amended
and Restated Loan and Security Agreement dated as of December 29, 2003. We entered into the Loan Agreement to obtain funding for working capital purposes and in support of the KPN Transaction.
Pursuant to the Loan Agreement, which was subsequently amended as described below, we could borrow up to $35.0 million from time to time under a secured revolving credit facility for a
two-year period. Except as described below, borrowings under the Loan Agreement are on a formula basis, based on eligible domestic and foreign accounts receivable. The Loan Agreement
contains quarterly financial covenants, consisting primarily of minimum profitability and minimum liquidity requirements. Interest on borrowings under our Loan Agreement were based, in part, on our
quarterly profitability, with the maximum interest rate being the bank's prime rate, plus 0.5%, or LIBOR, plus 2.75%. The Loan Agreement has a quarterly commitment fee of 0.63% on any unused portion
of the line of credit and we paid an up-front, one-time facility fee of 0.75%, or $263,000. The Loan Agreement is also guaranteed by all our domestic wholly-owned subsidiaries
and is collateralized by a first priority lien and security interest on our and such guarantor's assets. In addition, we pledged 66.2% of all of our ownership in KPN Global Carrier Services (now known
as iBasis Netherlands), a wholly-owned subsidiary based in The Netherlands, as collateral. Pursuant to the terms of the Loan Agreement, we may use the proceeds solely (i) for working capital,
(ii) to fund our general business requirements, and (iii) to fund the dividend paid by us in connection with the KPN Transaction.

In
April 2008, we modified the Loan Agreement to increase our maximum borrowing availability from $35.0 million to $50.0 million. In addition, to reflect our current
operating results and financial position, we modified the minimum profitability financial covenant and added a minimum cash flow financial requirement pursuant to a sliding scale that decreases over
time. A portion of the additional $15.0 million in funds is subject to a non-formula borrowing base through February 2009. The modification also permitted us to repurchase up to
$15 million shares of our common stock under a stock repurchase program approved by our board of directors in April 2008. We paid an up-front, one-time supplemental
commitment fee of $150,000 and an up-front, one-time modification fee of $75,000.

In
September 2008, we modified the financial covenants under the Loan Agreement to reflect our current operating results and financial position as follows:



In
addition, the interest rate on borrowings under the Loan Agreement was increased by 1% per annum and we paid an up-front, one-time modification fee of
$125,000. At September 30, 2008, we were in compliance with all of the financial covenants, as modified in September 2008, under the Loan Agreement.

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On
January 26, 2009, the Company and Silicon Valley Bank modified the Loan Agreement, effective as of December 30, 2008. The modification to the Loan Agreement contains the
following amendments, among others:



As
of December 31, 2008, we were in violation of our minimum profitability covenant under the Loan Agreement. However, Silicon Valley Bank subsequently waived
non-compliance of this covenant in the form of the modification to the Loan Agreement executed on January 26, 2009. In connection with this modification, we paid Silicon Valley Bank
a modification fee of $52,500 and a revolving line renewal fee of $175,000.

At
December 31, 2008 and 2007, we had $27.1 million and $25.0 million, respectively, in borrowings outstanding, and had issued outstanding standby letters of credit
of $2.6 million and $2.9 million, respectively, under the Loan Agreement.

To
further capture cost savings from our integration efforts, we are restructuring our operations in The Netherlands. We expect that our operations in The Netherlands will become
primarily sales and product management, with strategic support from locations outside The Netherlands. As this plan has not yet been finalized, we cannot yet determine the amount of any future
restructuring charges we may incur and the timing of such charges. In addition, in the future, we will be further reducing the operational services we purchase from KPN as integration projects are
completed.

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We
anticipate that the December 31, 2008 balance of $56.9 million in cash and cash equivalents, together with expected net cash flow generated from operations and bank
borrowing availability, will be sufficient to fund our operations and capital asset expenditures for the next twelve months. We expect capital asset expenditures to be approximately
$15.0 million in 2009.

Year Ended December 31, 2008 Compared to Unaudited Pro Forma Year Ended December 31, 2007

The following table presents our results of operations for the year ended December 31, 2008 compared to our pro forma combined
results of operations for the year ended December 31, 2007. The comparison of our results of operations for the year ended December 31, 2008 compared to pro forma combined results of
operations for the year ended December 31, 2007 is being provided as supplemental information. We believe the comparison of our results of operations for the year ended December 31, 2008
to the pro forma combined results of operations for the year ended December 31, 2007 is a more meaningful comparison than the comparison to our actual results of operations for the year ended
December 31, 2007, as these results contain the historical results of KPN GCS for the first nine months of 2007 and the results of the combined company for the fourth quarter of 2007.

The
pro forma results of operations for the year ended December 31, 2007 reflect the combined historical results of iBasis and KPN GCS as if the KPN Transaction had occurred as of
the beginning of this period, including certain pro forma adjustments. These pro forma adjustments include amortization expense of $11.0 million related to certain intangible assets resulting
from the KPN Transaction, and the elimination of $2.9 million in revenue and data communications and telecommunications costs for revenue transactions between iBasis and KPN GCS during the
period of 2007 prior to the KPN Transaction.

Year Ended
December 31,
2008

Unaudited
Pro Forma
Year Ended
December 31,
2007(In millions,
except per share data)Total net revenue

$
1,323.6

$
1,390.6Data communications and telecommunications costs


1,187.3


1,248.2Gross profit*


136.3


142.4Gross margin


10.3
%

10.2
%Engineering and network operations and selling, general and administrative expenses


98.2


101.4Depreciation and amortization


32.0


30.1Impairment of goodwill


214.7


Income (loss) from operations


(208.6
)

10.9Net income (loss)

$
(231.0
)
$
3.9Basic and diluted net income (loss) per share

$
(3.15
)
$
0.10


---

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Total
revenue for the year ended December 31, 2008 of $1,323.6 million was 5% lower than pro forma revenue of $1,390.6 million for 2007. The breakdown of total
revenue for the year ended December 31, 2008 compared to pro forma year ended December 31, 2008 is as follows:

Year Ended
December 31,
2008

Unaudited
Pro Forma
Year Ended
December 31,
2007(In millions)Trading

$
985.0

$
1,082.8Outsourcing


242.0


197.3Retail


96.6


110.5Total

$
1,323.6

$
1,390.6


The
decrease in Trading revenue reflects, in part, the current downturn in the U.S. prepaid calling card market. Traffic we receive from prepaid calling card providers and certain
wholesale Trading customers whose traffic comes from prepaid calling card providers, declined significantly in the second half of 2008. The downturn in the U.S. prepaid calling card market is
primarily a result of the effect of the current adverse economic conditions in the U.S. on immigrant communities that comprise the majority of this market. Our Outsourcing revenue increased to
$242.0 million for the year ended December 31, 2008 from pro forma $197.3 million in 2007. The year-over-year increase is due to increased traffic from KPN
and its affiliates and the inclusion of the TDC traffic, which began in the second quarter of 2008. Retail revenue declined to $96.6 million in the year ended December 31, 2008 from pro
forma $110.5 million in 2007. Our Retail revenue was impacted by our transparent pricing initiative in the first half of 2008. In addition, the U.S. recession and changes in immigration
patterns flattened our growth year-over-year.

Minutes
of traffic were 23.5 billion in the year ended December 31, 2008, approximately flat with pro forma combined minutes of 23.6 billion in 2007. Average revenue
per minute was 5.63 cents for the year ended December 31, 2008, compared to pro forma 5.88 cents in 2007. Average cost per minute, defined as total data communications and telecommunications
costs divided by minutes of traffic, was 5.05 cents for the year ended December 31, 2008, compared to pro forma 5.28 cents in 2007. Average margin per minute, defined as total revenue less
total data communications and telecommunications costs divided by minutes of traffic, was 0.58 cents for year ended December 31, 2008, compared to pro forma 0.60 cents in 2007.

Total
operating expenses were $98.2 million in the year ended December 31, 2008, compared to pro forma $101.4 million in 2007. Pro forma results for 2007 include
$4.5 million in one-time charges, which included retroactive regulatory fees of $2.6 million, stock option analysis expenses of $0.7 million, merger related and
purchase accounting adjustments of $0.9 million and other adjustments of $0.3 million. Excluding one-time charges in 2007, operating expenses increased slightly in the year
ended December 31, 2008 compared to pro forma 2007. The year-to-year increase in expenses primarily reflects investments we have made to integrate the operations of the
combined company to achieve operational synergies.

Depreciation
and amortization was $32.0 million in the year ended December 31, 2008, compared to pro forma $30.1 million in 2007. The increase primarily relates to
additions to property and equipment to support our integration efforts, as well as additional amortization of tangible and intangible assets acquired in the TDC transaction on April 1, 2008.

Subsequent
to the end of the third quarter of 2008, we experienced a sharp decline in our stock price. We believe this decline was principally driven by circumstances that occurred
subsequent to the end of the third quarter including, but not limited to, an extraordinary decline in the stock market as a

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whole
and other factors specific to our stock price. As a result, when we performed our annual impairment test as of December 31, 2008, we determined that we had an impairment loss on goodwill
of $214.7 million.

Since
December 31, 2008, our market capitalization has continued to decline. As a result, it is reasonably possible that there could be an impairment of our intangible assets
and/or our remaining goodwill in the near term and the amounts could be material.

Off-Balance Sheet Arrangements

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

Contractual Obligations

The following table summarizes our future contractual obligations as of December 31, 2008:

Payment Due DatesTotal

Less than
1 Year

1 to 2
Years

2 to 3
Years

3 to 5
Years

After
5 Years(In thousands)Bank borrowings

$
27,080

$


$
27,080

$


$


$
Interest on bank borrowings(1)


2,369


1,354


1,015








Capital lease obligations


877


577


300








Operating leases


6,140


2,784


877


392


570


1,517Purchase commitments for termination of minutes


20,543


20,543











Total

$
57,009

$
25,258

$
29,272

$
392

$
570

$
1,517


---

We
adopted FIN 48 as of January 1, 2007. As of December 31, 2008, the total amount of net unrecognized tax benefits for uncertain tax positions and the accrual for
the related interest and penalties was $0.9 million. We are unable to make a reasonably reliable estimate of when cash settlement, if any, will occur with a tax authority as the timing of
examinations and ultimate resolution of those examinations is uncertain.

As
of December 31, 2008 and 2007, we did not have any material purchase obligations, or other material long-term commitments reflected on our consolidated balance
sheet.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, "Fair Value
Measurements", ("SFAS No. 157"). SFAS No. 157 establishes a framework for measuring fair value and requires expanded disclosures regarding fair value
measurements. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. However, in

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January
2008, the FASB issued FASB Staff Position FAS 157-b,Effective Date of FASB Statement No. 157("FSP
FAS 157-b"). FSP FAS 157-b permits entities to elect to defer the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We have elected to defer the adoption of SFAS No. 157 for those assets and
liabilities included in FSP FAS 157-b. The adoption of SFAS No. 157 did not have a material effect on our financial position, results of operations and cash flows for the
year ended December 31, 2008.

On
January 1, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, Including
an amendment of FASB Statement No. 115" (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, which
are not otherwise currently required to be measured at fair value. Under SFAS No. 159, the decision to measure items at fair value is made at specified election dates on an
instrument-by-instrument basis and is irrevocable. Entities electing the fair value option are required to recognize changes in fair value in earnings and to expense upfront
costs and fees associated with the item for which the fair value option is elected. The adoption of SFAS No. 159 did not have a material effect on our financial position, results of operations
and cash flows for the year ended December 31, 2008.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007) ("SFAS No. 141R"), "Business Combinations"and SFAS
No. 160 ("SFAS No. 160"), "Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51."SFAS No. 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent
periods. SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS
No. 141R and SFAS No. 160 are effective beginning the first fiscal quarter of 2009. Early adoption is not permitted. SFAS No. 141R may give rise to more volatility in our results of
operations for future acquisitions.

In
March 2008, the FASB issued SFAS No. 161 ("SFAS No. 161"), "Disclosures about Derivative Instruments and Hedging Activitiesan
amendment of FASB Statement No. 133." The standard is intended to enhance the current disclosure framework in Statement 133, Accounting for
Derivative Instruments and Hedging Activities. The standard requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. SFAS
No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We do not expect the adoption of SFAS No. 161 will
have a material effect on our financial position, results of operations and cash flows.

In
April 2008, the FASB issued FASB Staff Position No. FAS 142-3,"Determination of the Useful Life of Intangible
Assets"("FSP 142-3"). FSP 142-3 is effective for financial statement issued for fiscal years beginning after December 15, 2008 and interim
period within those years. FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset, under SFAS No. 142,"Goodwill and Other Intangible Assets"("SFAS No. 142"). FSP 142-3 is intended to
improve the consistency between the useful life of an intangible asset determined under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS
No. 141R and other generally accepted accounting principles. We do not expect the adoption of FSP 142-3 to have a material effect on our financial position, results of operations
and cash flows.

In
May 2008, the FASB issued SFAS ("SFAS No. 162"),"The Hierarchy of Generally Accepted Accounting Principles."SFAS
No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with
generally accepted accounting principles. SFAS No. 162 becomes effective 60 days

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following
the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411,"The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles."We do not expect that the adoption of SFAS No. 162 to have a material effect on our financial position,
results of operations and cash flows.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk exposure is related to interest rates and foreign currency exchange rates. We are exposed to foreign currency
risk which can create volatility in earnings and cash flows from period to period. Historically, KPN GCS sought to economically hedge a portion of its foreign currency risk arising from foreign
exchange receivables and foreign currency-denominated forecasted transactions. Foreign exchange contracts were used to fix or protect the exchange rate to be used for foreign currency-denominated
transactions. Hedge accounting was not applied in the historical financial statements of KPN GCS. We do not currently engage in trading market risk sensitive instruments or purchasing hedging
instruments, whether interest rate, foreign
currency exchange, commodity price or equity price risk and have not purchased options or entered into swaps or forward or futures contracts.

Our
revenues are primarily denominated in U.S. dollars or euros. Thus, we are exposed to foreign currency exchange rate fluctuations as the financial results and balances of our foreign
entities are translated into U.S. dollars. As exchange rates vary, these results, when translated, may vary from expectations and may adversely impact our results of operations and financial
condition. For example, if the dollar weakens relative to the euro, our euro denominated revenues and expenses would increase when stated in U.S. dollars. Conversely, if the U.S. dollar strengthens
relative to the euro, our euro denominated revenues and expenses would decrease.

Our
primary interest rate risk is the risk on borrowings under our bank line of credit, which is subject to interest rates based on the bank's prime rate or LIBOR, plus a margin. We had
$27.1 million in borrowings under our bank line of credit at December 31, 2008. A change in the applicable interest rates would also affect the rate at which we could borrow funds or
finance equipment purchases. Our capital lease obligations are fixed rate debt.

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Item 8.    Financial Statements and Supplementary Data

Index to Consolidated Financial Statements



PageConsolidated Financial Statements:Reports of Independent Registered Public Accounting Firms

64Consolidated Balance Sheets as of December 31, 2008 and 2007

66Consolidated Statements of Operations for the Three Years Ended December 31, 2008

67Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 2008

68Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2008

69Notes to Consolidated Financial Statements

70


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the
financial position of iBasis, Inc. and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A.
Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As
discussed in Notes 1 and 15 to the consolidated financial statements, the Company has entered into significant transactions with Royal KPN N.V. (parent company), a
related party.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Boston, Massachusetts
March 13, 2009

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In
our opinion, the accompanying combined statements of operations, of stockholders equity and of cash flows present fairly, in all material respects, the financial position of KPN GCS
(predecessor to iBasis, Inc.) and its subsidiaries, at December 31, 2006, and the results of their operations and their cash flows for the year in the period then ended, in conformity
with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As
discussed in Notes 1 and 15 to the consolidated financial statements, the Company has entered into significant transactions with Royal KPN N.V. (the parent company), a
related party.

June 19,
2007, except for Note 2 "Net income (loss) per share" and Note 17 "Foreign currency translation of historical KPN GCS financial statements", as to which the
date is March 14, 2008.

PricewaterhouseCoopers Accountants N.V./s/ H.C. WÜST RA H.C. Wüst RA


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iBasis, Inc.        Consolidated Balance Sheets

December 31,2008

2007(In thousands, except per share data)AssetsCurrent assets:Cash and cash equivalents

$
56,912

$
63,735Short-term marketable securities





1,999Accounts receivable and unbilled revenueexternal parties, net of allowance for doubtful accounts of $5,178 and $12,924, respectively


234,946


204,883Accounts receivablerelated parties


2,053


Prepaid expenses and other current assets


6,477


4,687Total current assets


300,388


275,304Property and equipment, net


34,836


34,966Other assets


1,573


7,008Intangible assets, net


87,206


93,800Goodwill


17,324


248,795Total assets

$
441,327

$
659,873Liabilities and Stockholders' EquityCurrent liabilities:Accounts payableexternal parties

$
155,676

$
135,060Accounts payablerelated parties





11,839Accrued expenses


151,685


136,903Deferred revenue


13,894


11,503Current portion of long-term debt


577


755Total current liabilities


321,832


296,060Long-term debt, net of current portion


27,380


25,000Deferred income taxes


2,534


2,942Other long-term liabilities


1,063


1,381Total liabilities


352,809


325,383Commitments and contingencies (Note 14)Stockholders' equityPreferred stock, $0.001 par value, authorized15,000 shares; issued and outstanding;none





Common stock, $0.001 par value, authorized170,000 shares; issued76,204 shares and 75,912 shares, respectively; outstanding71,228 shares
and 74,843 shares, respectively


76


76Treasury stock, 4,976 and 1,069 shares, respectively, at cost


(15,000
)

Additional paid-in capital


337,590


333,278Accumulated other comprehensive income (loss)


(1,140
)

3,155Contributed capital/retained earnings (accumulated deficit)


(233,008
)

(2,019
)Total stockholders' equity


88,518


334,490Total liabilities and stockholders' equity

$
441,327

$
659,873


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 31,2008

2007

2006(In thousands, except per share data)Net revenue from external parties

$
1,097,515

$
741,293

$
605,031Net revenue from related parties


226,070


197,265


209,158Total net revenue

$
1,323,585


938,558


814,189Costs and operating expenses:Data communications and telecommunications costsexternal parties (excluding depreciation and amortization)


1,081,460


733,160


573,966Data communications and telecommunications costsrelated parties (excluding depreciation and amortization)


105,840


114,242


134,347Engineering and network operations expenses


23,320


13,222


8,895Selling, general and administrative expenses


74,849


38,368


29,812Merger related expenses





2,019


Depreciation and amortization


31,998


12,743


5,693Impairment of goodwill


214,651





Total costs and operating expenses


1,532,118


913,754


752,713Income (loss) from operations


(208,533
)

24,804


61,476Interest income


2,067


1,680


269Interest expense


(3,049
)

(731
)

(32
)Foreign exchange gain (loss)


3,089


(1,101
)

(1,339
)Other income


1,779





Income (loss) before income taxes


(204,647
)

24,652


60,374Income tax expense


26,342


8,529


17,884Net income (loss)

$
(230,989
)
$
16,123

$
42,490Net income (loss) per share:Basic

$
(3.15
)
$
0.33

$
1.06Diluted

$
(3.15
)
$
0.33

$
1.06Weighted average common shares outstanding:Basic


73,260


48,778


40,121Diluted


73,260


49,186


40,121


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

67

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Table of Contents

iBasis, Inc.    Consolidated Statements of Stockholders' Equity

Contributed
Capital/
Retained
Earnings
(Accumulated
Deficit)Common Stock

Treasury StockAccumulated
Other
Comprehensive
Income (Loss)Number
of
Shares

$0.001
Par
Value

Number
of
Shares

Amount

Additional
Paid-In
Capital

Total
Stockholders'
Equity(In thousands)Balance, December 31, 2005
















$
8,417

$
(708
)
$
7,709Foreign currency translation adjustments




















1,087


1,087Adoption of FAS 158




















520


520Net income

















42,490





42,490Comprehensive income























44,097Stock-based compensation

















65





65Net distributions to related parties

















(27,893
)




(27,893
)Balance, December 31, 2006

















23,079


899


23,978Net income of KPN GCS for the nine months ended September 30, 2007

















18,142





18,142Net distributions to related parties

















(27,799
)




(27,799
)Stock-based compensation

















63





63Balance, September 30, 2007

















13,485


899


14,384KPN Transaction (see Note 3)


75,641

$
76


(1,069
)



$
332,084


(13,485
)




318,675Exercise of stock options


123











323








323Exercise of warrants


148











433








433Stock-based compensation














438








438Net loss post October 1, 2007

















(2,019
)




(2,019
)Foreign currency translation adjustments




















2,250


2,250Unrealized gain on short-term marketable securities




















6


6Comprehensive income(1)























18,379Balance, December 31, 2007


75,912


76


(1,069
)




333,278


(2,019
)

3,155


334,490Stock repurchases








(3,907
)

(15,000
)










(15,000
)Exercise of stock options and warrants


292











563








563Stock-based compensation














2,450








2,450Related party contribution to equity, net of tax effects














1,299








1,299Net loss

















(230,989
)




(230,989
)Foreign currency translation adjustments




















(4,295
)

(4,295
)Comprehensive loss























(235,284
)Balance, December 31, 2008


76,204

$
76


(4,976
)
$
(15,000
)
$
337,590

$
(233,008
)
$
(1,140
)
$
88,518


---

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

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Table of Contents

iBasis, Inc.        Consolidated Statements of Cash Flows

Years ended December 31,2008

2007

2006(In thousands)Cash flows from operating activitiesNet income (loss)

$
(230,989
)
$
16,123

$
42,490Adjustments to reconcile net income (loss) to net cash provided by operating activities:Impairment of goodwill


214,651





Depreciation and amortization


31,998


12,743


5,693Tax provision related to utilization of pre acquisition net operating losses


16,820





Stock-based compensation


2,450


501


65Provision for doubtful accounts receivable


1,622





Changes in assets and liabilities, excluding the effect of acquisitions:Accounts receivable and unbilled revenueexternal parties


(31,685
)

22,736


36,962Accounts receivablerelated parties


(2,053
)

33,807


(25,058
)Prepaid expenses and other current assets


(1,790
)

2,944


1,343Other assets


435


(462
)

Accounts payableexternal parties


20,616


(32,206
)

(43,627
)Accounts payablerelated parties


(5,798
)

(926
)

Deferred revenue


2,391


172


Accrued expenses


15,105


3,475


14,682Deferred income taxes


(408
)

(614
)

Other long-term liabilities


(318
)

(207
)

Net cash provided by operating activities


33,047


58,086


32,550Cash flows from investing activities:Cash and cash equivalents of iBasis on October 1, 2007 acquired in KPN Transaction





54,711


Purchases of property and equipment


(15,955
)

(9,605
)

(3,854
)Purchase of certain assets from TDC


(11,050
)




Maturities of available-for-sale short-term marketable investments


1,999


1,994


Increase (decrease) in other long-term assets


5,000


(5,000
)

Net cash provided by (used in) investing activities


(20,006
)

42,100


(3,854
)Cash flows from financing activities:Purchases of common stock


(15,000
)




Partial payment of working capital loan to related party


(4,742
)




Payment from KPN related to KPN Transaction





55,000


Dividend payment to iBasis shareholders





(113,000
)

Dividend payment related to warrant exercises


(323
)

(468
)

Bank borrowings


5,000


25,000


Repayment of bank borrowings


(2,920
)




Payments of principal on capital lease obligations


(1,609
)

(369
)

Net distributions to related party





(27,799
)

(27,893
)Payments on note payable to affiliate








(1,016
)Proceeds from exercise of warrants





195


Proceeds from exercise of common stock options


563


323


Net cash used in financing activities


(19,031
)

(61,118
)

(28,909
)Effect of changes in exchange rates on cash and cash equivalents


(833
)

2,256


1,994Net increase (decrease) in cash and cash equivalents


(6,823
)

41,324


1,781Cash and cash equivalents, beginning of year


63,735


22,411


20,630Cash and cash equivalents, end of year

$
56,912

$
63,735

$
22,411Supplemental disclosure of cash flow information:Cash paid during the year for interest

$
2,604

$
731

$
32Cash paid during the year for income taxes

$
20,549

$
14,608

$
281Supplemental disclosure of non-cash investing and financing activities:Shares issued in KPN Transaction

$


$
376,675

$
Exercise of warrants on a net basis

$
64

$
760

$
Purchases of property and equipment under capital leases

$
1,731

$


$
Related party contribution to equity

$
1,299

$


$



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

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Table of Contents

iBasis, Inc.        Notes to Consolidated Financial Statements

(1)   Business

Business

We are a leading wholesale carrier of international long distance telephone calls and a provider of retail prepaid calling services and
enhanced services for mobile operators.

Our
operations consist of our wholesale trading business ("Trading"), in which we connect buyers and sellers of international telecommunications services, and our retail services
business ("Retail"). Our Trading business also includes Outsourcing revenue which we generate as the exclusive provider of wholesale international voice services for specific carrier customers.

In
the Trading business we receive voice traffic from buyersoriginating telecommunications carriers who are interconnected to our network via Voice over Internet Protocol
("VoIP") or traditional time division multiplexing ('TDM") connections, and we route that traffic over our network to sellerslocal service providers and telecommunications carriers in the
destination countries with whom we have established agreements to manage the completion or termination of calls. We offer our Trading service on a wholesale basis to carriers, mobile operators,
consumer VoIP companies, telephony resellers and other service providers worldwide. Our Outsourcing revenue currently consists of international voice traffic we terminate for Royal KPN and its
affiliates
(KPN Mobile, E-Plus and Base) and for TDC, the leading telecommunications carrier in Denmark.

As
a result of the combination with KPN GCS in October 2007 (described below), more than half of our traffic utilizes our VoIP network, while the balance is carried over our TDM network.
The continued migration of the TDM traffic to our lower cost VoIP network is expected to be a significant source of synergies from the KPN transaction over the next several years.

Our
Retail business consists of retail prepaid calling cards, which are marketed through distributors primarily to ethnic communities within major metropolitan markets in the United
States, and Pingo®, a prepaid calling service that we offer and sell directly to consumers via an eCommerce model. Both can be private-labeled for other service providers. The prepaid
calling card business and Pingo leverage our existing international network and have the potential to deliver higher margins than are typically achieved in the wholesale Trading business. In addition,
the retail prepaid calling card business typically has a faster cash collection cycle than the wholesale Trading business. In 2007 we launched PingoBusiness, enhancements that enable businesses to
manage multiple Pingo accounts through a single administrative account.

We
use proprietary, patented and patent-pending technology in our global VoIP network to automate the selection of routes and termination partners based on a variety of performance,
quality, and business metrics. We have call termination agreements with local service providers in more than 100 countries in North America, Europe, Asia, the Middle East, Latin America, Africa and
Australia.

KPN Transaction

On October 1, 2007, iBasis, Inc. and KPN B.V. ("KPN"), a subsidiary of Royal KPN N.V. ("Royal KPN"),
completed transactions ("KPN Transaction") pursuant to which iBasis issued 40,121,074 shares of its common stock to KPN and acquired the outstanding shares of two subsidiaries of KPN ("KPN GCS"),
which encompassed KPN' international wholesale voice business. The Company also received $55 million in cash from KPN, subject to post-closing adjustments based on the working
capital and debt of iBasis and KPN GCS. Immediately after issuance on October 1, 2007, the shares of iBasis

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(1)   Business (Continued)

common
stock issued to KPN represented 51% of the issued and outstanding shares of iBasis common stock on a fully-diluted basis (which included all of the issued and outstanding common stock and the
common stock underlying outstanding "in-the-money" stock options, as adjusted, and warrants to purchase common stock).

On
October 8, 2007, iBasis paid a dividend in the amount of $113 million at a rate of $3.28 per share to each of its shareholders on the record date of September 28,
2007, the trading date immediately prior to the closing date of the KPN Transaction. In addition, holders of outstanding warrants to purchase our common stock will be entitled to receive a cash
payment upon the future exercise of these warrants equal to the dividend amount that would have been payable if the warrants had been exercised immediately prior to the record date of the dividend. As
of December 31, 2008, we have unexercised warrants representing 432,000 shares, at exercise prices ranging from $6.30 to $9.00 per share, and have $1.4 million accrued for dividends to
be paid upon the potential future exercise of these warrants. In connection with the payment of the dividend to shareholders, we also increased the number of shares subject to unexercised stock
options and decreased the exercise price of these stock option grants to preserve their value.

The
officers of iBasis immediately prior to the closing of the KPN Transaction have continued to serve as the officers of the combined company and one executive of KPN GCS,
Mr. Edwin Van Ierland, was appointed as the Company's Senior Vice President Worldwide Sales. Upon closing of the KPN Transaction, Messrs. Charles Skibo and David Lee, two independent
members of iBasis' board of directors, resigned as members of the board of directors and the board of directors of iBasis appointed Messrs. Eelco Blok and Joost Farwerck, two executives of
Royal KPN N.V., as directors to fill the vacancies created by the resignations of Messrs. Skibo and Lee.

Although
iBasis acquired all of the outstanding capital stock of KPN GCS, after the closing of the transaction, KPN holds a majority of the outstanding common stock of iBasis and KPN'
designees are expected to represent, at a future date, a majority of the Company's board of directors. Accordingly, for accounting and financial statement purposes, the KPN Transaction has been
treated as a reverse acquisition of iBasis by KPN GCS under the purchase method of accounting and the financial results of KPN GCS have become the historical financial results of the combined company
and replace the historical financial results of iBasis as a stand-alone company. Thus, the financial results reported for the full year 2007 include the results of KPN GCS alone for the first nine
months of 2007 and the financial results of the combined company for the fourth quarter of 2007 only.

The
presentation of the Statement of Stockholders' Equity reflects the historical stockholders' equity of KPN GCS through September 30, 2007. The effect of the issuance of shares
of iBasis common stock to KPN and the inclusion of iBasis' stockholders' equity as a result of the closing of the KPN Transaction on October 1, 2007 is reflected in the year ended
December 31, 2007.

Prior
to October 1, 2007, KPN GCS operated as an integrated part of KPN since inception and the historical financial statements of KPN GCS have been derived from the accounting
records of KPN using the historical basis of assets and liabilities. As a result, KPN GCS did not operate as a stand-alone business and the historical combined financial statements may not necessarily
be representative of amounts that would have been reflected in the financial statements presented had KPN GCS operated independently of KPN.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(1)   Business (Continued)

KPN
GCS benefited from certain related party revenue and purchase agreements with KPN that included sales prices per minute and costs per minute. KPN GCS also relied on KPN for a
substantial part of its operational and administrative support, for which it was allocated costs primarily consisting of selling, general and administrative expenses, such as costs for centralized
research, legal, human resources, payroll, accounting, employee benefits, real estate, insurance, information technology, telecommunications, treasury and other corporate and infrastructure costs. In
anticipation of the closing of the transaction with iBasis, KPN GCS entered into a Framework Services Agreement with KPN in 2006, which replaced the revenue and purchase agreements and operational and
administrative support arrangements described above.

TDC Transaction

On April 1, 2008, we acquired certain assets from TDC, the leading telecommunications carrier in Denmark, as well as certain
assets, contracts and four employees of TDC' subsidiary in the U.S., TDC Carrier Services U.S., for approximately $11 million in cash ("TDC Transaction"). Pursuant to the TDC Transaction, we
became the exclusive provider of international voice services for TDC under a five-year strategic outsourcing arrangement, and TDC will be a preferred partner for terminating traffic sent
by us into the Nordic region, consisting of Denmark, Finland, Iceland, Norway and Sweden.

Approximately
130 non-Nordic international wholesale voice customers, as well as all of TDC' interconnection and bilateral agreements for inbound and outbound international
phone calls have been transferred to us. TDC will retain its Nordic customer base and its pan-Nordic reach.

In
connection with the closing of the TDC transaction, we recorded $10.1 million of intangible assets, primarily wholesale customer relationships. The wholesale customer
relationships are being amortized over a 5 to 10 year period using the economic consumption method to reflect the diminishing cash flows from these relationships in the future.

(2)   Summary of Significant Accounting Policies

Principles of ConsolidationThe accompanying consolidated financial statements as of and for the year ended December 31,
2008, include the
accounts of iBasis, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated on consolidation. The accompanying consolidated financial statements as of and for
the year ended December 31, 2007 include the accounts of KPN GCS for the full year and the accounts of iBasis, Inc. since October 1, 2007. All intercompany balances and
transactions between KPN GCS and iBasis since October 1, 2007 have been eliminated in consolidation. The consolidated financial statements for the year ended December 31, 2006 are the
combined accounts of KPN GCS, which include KPN Global Carrier Services B.V., a Netherlands company, and KPN INS, Inc., a Delaware corporation, both of which were wholly-owned by KPN
prior to October 1, 2007. All significant intercompany balances and transactions within these combined entities have been eliminated. Intercompany balances and transactions with KPN and its
other subsidiaries ("related parties" or "affiliates") have not been eliminated, but are presented herein as balances and transactions with related parties.

Use of EstimatesThe preparation of these financial statements and related disclosures in conformity with accounting principles
generally accepted in
the United States of America requires us to (i) make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities,

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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(2)   Summary of Significant Accounting Policies (Continued)

revenue
and expenses; and (ii) disclose contingent assets and liabilities. A critical accounting estimate is an assumption that could have a material effect on our consolidated financial
statements if another, also reasonable, amount were used or a change in the estimates is reasonably likely from period to period. We base our accounting estimates on historical experience and other
factors that we consider reasonable under the circumstances. However, actual results may differ from these estimates. To the
extent there are material differences between our estimates and the actual results, our future financial condition and results of operations will be affected.

Foreign Currency Translation and TransactionsThe functional currency of KPN GCS is the euro. For the purposes of presenting the
consolidated
financial statements, the functional currency of KPN GCS has been converted into U.S. dollars for balance sheet accounts using the exchange rate in effect on the balance sheet date. Revenue and
expenses are translated into U.S. dollars at the weighted average exchange rates in effect during the period. The effect of these translation adjustments are reported within Accumulated Other
Comprehensive Income, a component of stockholders' equity. Transactions in foreign currency are recorded at the original rates of exchange in force at the time the transactions are effected. Exchange
differences arising on (i) settlement of transactions and (ii) translation of such transactions, given that no settlement has occurred, are recognized in results of operations.

We
have, in the past, entered into foreign currency forward contracts to manage foreign currency exposures related to sales to foreign customers. We do not have designated hedges in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", and
accordingly, any unrealized gains and losses are recorded in the Consolidated Statements of Operations and in the Consolidated Balance Sheets within Prepaid expenses and other current assets or
Accrued expenses and other current liabilities.

Other Comprehensive Income (Loss)Other comprehensive income (loss) primarily relates to foreign currency translation
adjustments from entities with
functional currencies other than the U.S. dollar. Components of other comprehensive income (loss) are included within the Consolidated Statements of Stockholders' Equity.

Cash and Cash EquivalentsCash and cash equivalents consist of all highly liquid investments that are readily convertible into
cash and have original
maturities of three months or less.

Short-term Marketable SecuritiesShort-term marketable securities at December 31, 2007 were classified as
available-for-sale and carried at fair value and consist of corporate bonds, with original maturities at the date of acquisition ranging from 90 days to one year.

Accounts Receivable and Unbilled RevenueAccounts receivable and unbilled revenue are stated at face value, less an allowance for
doubtful accounts.
Collectibility of accounts receivable is reviewed regularly and is based upon our knowledge of customers and compliance with credit terms. The allowance for doubtful accounts is adjusted based on such
evaluation, with a corresponding charge included in selling, general and administrative expense. Accounts receivable and their related allowance balances are written-off when we deem them
uncollectible.

Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation and any recognized impairment
loss. Additions and
improvements that extend the useful life of an asset

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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(2)   Summary of Significant Accounting Policies (Continued)

are
capitalized; maintenance and repairs are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the balance sheet and the
resulting gain or loss, if any, is reflected in the Consolidated Statements of Operations. In accordance with Statement of Position 98-1,"Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use"("SOP 98-1"), costs associated developing software for internal use are capitalized when both
the preliminary project stage is completed and management has authorized further funding for the project which it deems probable of being completed. Capitalization of such costs ceases no later than
the point at which the project is substantially complete and ready for its intended use.

The
cost of property and equipment is depreciated using the straight-line method over the following estimated useful lives of the respective assets:

Asset Classification

Estimated Useful LifeNetwork equipment

37 yearsSoftware

3 yearsLeasehold improvements

Lesser of Useful Life or Lease TermOther tangible fixed assets

37 years


Goodwill and Other Intangible AssetsIntangible assets consist of goodwill, which has an indefinite life and is not amortized,
and identifiable
intangible assets, consisting of trade name and trademarks, customer relationships, termination partner relationships and technology.

Identifiable
intangible assets are being amortized using either the straight-line method or economic consumption method over the following estimated useful lives:

Intangible Asset

Amortization Method

Estimated Useful LifeTrade name and trademarks

Straight-line

15 yearsCustomer relationships

Economic consumption

510 yearsTermination partner relationships

Economic consumption

5 yearsTechnology

Straight-line

5 years


Impairment of Property and Equipment and Intangible AssetsIn accordance with SFAS No. 144 ("SFAS No. 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets", we review the value of our property and equipment and intangible assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Recoverability of assets to be held and used is measured by
comparing the carrying amount of an asset group to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized
is measured as the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to
sell.

Impairment of GoodwillSFAS No. 142,"Goodwill and Other Intangible Assets"("SFAS
No. 142"), requires goodwill to be tested for impairment on an annual basis and between annual tests when events or circumstances would more likely than not reduce the fair value of a reporting
unit below its carrying value. We test our goodwill for impairment annually as of the end of the fiscal year. SFAS No. 142 requires that the impairment test be performed through the application
of a two-step process. The first

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(2)   Summary of Significant Accounting Policies (Continued)

step
compares the carrying value of our reporting units, which are our Trading and Retail operating segments, to their estimated fair values as of the test date. If fair value is less than carrying
value, a second step must be performed to quantify the amount of the impairment, if any. The amount of any impairment is measured by the excess of the implied fair value of goodwill over its carrying
value.

Revenue RecognitionIn accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 104,
"Revenue Recognition"("SAB 104"), we recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable
and earned when there is persuasive evidence of an arrangement, delivery has occurred or the service has been provided, the sales price is fixed or determinable and collectibility is reasonably
assured.

For
our Trading business, traffic fees are charged at an agreed price for a fixed duration of time or capacity and are recognized as revenue based upon usage of our network and
facilities. Estimates for incentive rebates, customer disputes and other allowances are recorded as a reduction of revenues in the period the related revenues are recorded. These estimates are based
upon contracted terms, historical experience and information currently available to management with respect to business and economic trends. Revisions to these estimates are recorded in the period in
which the facts that give rise to the revision become known.

For
our Retail business, revenue is deferred upon activation of the prepaid calling cards, or purchase of our web-based calling services, and is recognized as the prepaid
balances are reduced based upon minute usage and service charges.

Concentration of Credit Risk and Significant CustomersFinancial instruments that potentially subject us to significant
concentrations of credit risk
are primarily cash equivalents, short-term marketable securities and accounts receivable. No external customers represented 10% or more of our total accounts receivable or net revenues for
the periods presented. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion across
different industries and geographies.

Fair Value of Financial InstrumentsFinancial instruments consist principally of cash and cash equivalents, short-term
marketable
securities, accounts receivable, accounts payable, accrued expenses and long-term debt. The estimated fair value of these instruments approximates their carrying value.

Stock-based CompensationWe account for equity awards to our employees under the provisions of SFAS No. 123R, "Share-Based Payment,"which requires us to record compensation expense based on the fair value of our stock-based compensation awards.

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

Net Income (Loss) Per ShareBasic and diluted net loss per common share is determined by dividing net loss by the weighted
average common shares
outstanding during the period. Basic and

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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(2)   Summary of Significant Accounting Policies (Continued)

diluted
net income per common share is determined by dividing net income by the weighted average common shares and common equivalent shares outstanding during the period. In 2007, as KPN GCS was
wholly-owned by KPN prior to October 1, 2007, basic weighted average shares outstanding was based on the 40.1 million shares issued by iBasis to KPN on the closing of the KPN Transaction
for the first nine months of 2007, and the total weighted average shares outstanding of the Company of 74.7 million shares for the fourth quarter of 2007. Diluted weighted average shares in
2007 includes the dilutive effect of iBasis outstanding stock options and warrants for the fourth quarter of 2007 only. In 2006, basic and diluted weighted average shares represent the
40.1 million shares issued by iBasis to KPN.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, "Fair Value
Measurements", ("SFAS No. 157"). SFAS No. 157 establishes a framework for measuring fair value and requires expanded disclosures regarding fair value
measurements. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. However, in January 2008, the FASB issued FASB Staff
Position FAS 157-b,Effective Date of FASB Statement No. 157("FSP FAS 157-b"). FSP
FAS 157-b permits entities to elect to defer the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis. We have elected to defer the adoption of SFAS No. 157 for those assets and liabilities included in FSP
FAS 157-b. The adoption of SFAS No. 157 did not have a material effect on our financial position, results of operations and cash flows for the year ended December 31,
2008.

On
January 1, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, Including
an amendment of FASB Statement No. 115" (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, which
are not otherwise currently required to be measured at fair value. Under SFAS No. 159, the decision to measure items at fair value is made at specified election dates on an
instrument-by-instrument basis and is irrevocable. Entities electing the fair value option are required to recognize changes in fair value in earnings and to expense upfront
costs and fees associated with the item for which the fair value option is elected. The adoption of SFAS No. 159 did not have a material effect on our financial position, results of operations
and cash flows for the year ended December 31, 2008.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007) ("SFAS No. 141R"), "Business Combinations"and SFAS
No. 160 ("SFAS No. 160"), "Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51."SFAS No. 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent
periods. SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS
No. 141R and SFAS No. 160 are effective beginning the first fiscal quarter of 2009. Early adoption is not permitted. SFAS No. 141R may give rise to more volatility in our
results of operations for future acquisitions.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(2)   Summary of Significant Accounting Policies (Continued)

In
March 2008, the FASB issued SFAS No. 161 ("SFAS No. 161"), "Disclosures about Derivative Instruments and Hedging Activitiesan
amendment of FASB Statement No. 133." The standard is intended to enhance the current disclosure framework in Statement 133, Accounting for Derivative Instruments and
Hedging Activities. The standard requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. SFAS No. 161 is effective for
fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We do not expect the adoption of SFAS No. 161 will have a material effect on our
financial position, results of operations and cash flows.

In
April 2008, the FASB issued FASB Staff Position No. FAS 142-3,"Determination of the Useful Life of Intangible
Assets"("FSP 142-3"). FSP 142-3 is effective for financial statement issued for fiscal years beginning after December 15, 2008 and interim
period within those years. FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset, under SFAS No. 142,"Goodwill and Other Intangible Assets"("SFAS No. 142"). FSP 142-3 is intended to
improve the consistency between the useful life of an intangible asset determined under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS
No. 141R and other generally accepted accounting principles. We do not expect the adoption of FSP 142-3 to have a material effect on our financial position, results of operations
and cash flows.

In
May 2008, the FASB issued SFAS ("SFAS No. 162"),"The Hierarchy of Generally Accepted Accounting Principles."SFAS
No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with
generally accepted accounting principles. SFAS No. 162 becomes effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight
Board amendments to AU Section 411,"The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles."We do not expect
that the adoption of SFAS No. 162 to have a material effect on our financial position, results of operations and cash flows.

(3)   Purchase Accounting for KPN Transaction

Under the purchase method of accounting, the purchase price for the KPN Transaction was allocated to the tangible and identifiable intangible assets and liabilities of iBasis on the
basis of their fair values on October 1, 2007, the closing date of the transaction. As KPN GCS was not a publicly traded entity, the purchase price for this transaction was based, in part, on
the fair market value of iBasis' common stock. The market price used to value iBasis' shares of $10.75 was the closing price of the stock on September 28, 2007, the business day immediately
prior to the closing of the KPN Transaction.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(3)   Purchase Accounting for KPN Transaction (Continued)

The total purchase price for this transaction consisted of the following:

(In thousands)iBasis outstanding shares on October 1, 2007 of 34,451 at $10.75 per share

$
370,353Fair value of outstanding vested and unvested stock options, less unearned compensation


13,425Fair value of outstanding warrants to purchase common shares


4,624Direct acquisition costs


2,453Dividend to iBasis shareholders paid from existing iBasis cash and short-term marketable securities


(58,000
)Accrued dividend payable for outstanding warrants to purchase common shares


(2,468
)Amount payable to KPN for iBasis working capital adjustment


(11,577
)Accrued severance


(135
)Total purchase price

$
318,675


In
determining the fair value of iBasis' identifiable assets and liabilities as of October 1, 2007, we recorded $97.7 million of amortizing intangible assets, including
trade names and trademarks, customer relationships, termination partner relationships, and technology. The estimated useful life of trade names and trademarks is 15 years and is being amortized
on a straight-line basis. The estimated useful life of customer relationships is 10 years for wholesale customers and 5 years for retail distributor relationships and these
intangible assets are being amortized using an economic consumption method to reflect diminishing cash flows from these relationships in the future. The estimated useful life of termination partner
relationships is 5 years and is being amortized using an economic consumption method. The estimated useful life of technology is 5 years and is being amortized on a
straight-line basis.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(3)   Purchase Accounting for KPN Transaction (Continued)

The
allocation of the purchase price to the fair values of iBasis' assets and liabilities on October 1, 2007, which resulted in the recording of $248.8 million in goodwill,
was as follows:

(In thousands)Current assets

$
128,875Property and equipment


23,258Other assets


520Trade names and trademarks


21,800Customer relationships


34,200Termination partner relationships


8,400Technology


33,300Total assets


250,353Deferred revenue


11,331Dividend payable


60,468Other current liabilities


103,469Deferred tax liabilities, long term


3,556Other non-current liabilities


1,649Total liabilities


180,473Net assets


69,880Goodwill


248,795Total purchase price

$
318,675


The
total $248.8 million of goodwill has been assigned to the Company's wholesale Trading reporting unit. In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets," goodwill is not being amortized. In the fourth quarter of 2008, the Company determined that the carrying value of goodwill was impaired. As a result, the Company recorded a charge for the
impairment of goodwill in the amount of $214.7 million. As a result of this impairment charge and a further reduction to the carrying value of $16.8 million for the utilization of
previously reserved pre-acquisition net operating losses, the carrying value of goodwill has been reduced to $17.3 million as of December 31, 2008. See further discussion of the goodwill
impairment charge recorded in 2008 in Note 8 to the Consolidated Financial Statements.

Working Capital and Debt Adjustments

In accordance with the Share Purchase Agreement for the KPN Transaction, a post-closing adjustment was required if
(i) iBasis' working capital was lower than or exceeded $37,100,000; (ii) iBasis' debt exceeded or was lower than $2,900,000; (iii) the combined working capital of KPN GCS was
lower than or exceeded ($6,100,000); and/or (iv) the combined debt of KPN GCS exceeded $0, as of the date of the closing of the KPN Transaction. Based on iBasis' balance sheet position on the
date of the closing of the KPN Transaction, working capital was $13,353,000 less than the specified level of $37,100,000, and debt was $1,776,000 less than the specified level of $2,900,000. As a
result, a payment of $11,577,000 was due to KPN from iBasis. Based on KPN GCS's balance sheet position on the date of the closing of the KPN Transaction, working capital exceeded the specified level
of ($6,100,000) by

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(3)   Purchase Accounting for KPN Transaction (Continued)

$3,945,000
and debt was at the specified level of $0. As a result, payment of $3,945,000 was due to KPN from iBasis.

In
2008, KPN forgave $0.8 million in expenses incurred by KPN GCS since the closing of the KPN Transaction. As a result, the amount due to KPN has been reduced by this amount and
was recorded as a contribution to equity. These expenses have been recorded in our results of operations. The total amount of $14.7 million due to KPN was scheduled to be paid by iBasis in
three successive quarterly installments through the third quarter of 2008, with interest at the rate of 6% per annum. In May 2008, we made the first payment of $5.2 million, including interest,
to KPN. In September 2008, we revised the terms of the remaining balance of $10.3 million due to KPN to extend the payment date on the second installment payment to March 2009 and the final
installment to June 2009. In addition, the interest rate was increased to 7% on the principal amount due, effective October 1, 2008, and we paid additional interest of $60,000 relating to the
extension of the second installment that was due June 30, 2008.

As
of December 31, 2008 and 2007, unpaid principal and accrued interest due to KPN was $10.5 million and $15.5 million, respectively.

Pro Forma Disclosures (Unaudited)

The following unaudited pro forma consolidated results of operations for the years ended December 31, 2007 and 2006 assumes that
the KPN Transaction occurred as of the beginning of each year.

Year Ended
December 31,
2007

Year Ended
December 31,
2006(In thousands, except
per share data)Total net revenue

$
1,390,580

$
1,296,651Total costs and expenses


1,379,654


1,271,625Income from operations


10,926


25,026Net income

$
3,854

$
14,331Basic net income per share

$
0.05

$
0.20Diluted net income per share

$
0.05

$
0.19


These
pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the transaction had occurred as of the beginning of the period presented
or that may be obtained in the future.

(4)   Stock Based Compensation

We issue stock options as an equity incentive to employees and outside directors under our 2007 Stock Plan (the "2007 Plan"). The stock options we issue under our 2007 Plan are for a
fixed number of shares with an exercise price equal to the fair market value of our stock on the date of grant. The employee stock option grants under the 2007 Plan typically vest quarterly in equal
installments over four years, provided that no options shall vest during the employees' first year of employment, and have a term of ten years.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(4)   Stock Based Compensation (Continued)

The
2007 Stock Plan replaced the 1997 Stock Incentive Plan, which expired on August 11, 2007. All outstanding stock options under this plan will remain in effect until they expire
by their terms.

As
of the date of the closing of the KPN Transaction, we had 2.4 million shares of vested and unvested outstanding stock options, almost all of which had been granted under a
prior stock option plan, and these outstanding stock options were fair valued as of that date. The aggregate fair value of $4.0 million relating to 0.6 million shares of unvested stock
options as of that date is being charged to results of operations on a straight-line basis over the remaining vesting period for these stock options. The fair value of these outstanding
unvested stock options, as of the date of the KPN Transaction and of newly issued grants since that date, was estimated using the Black-Scholes model and the following assumptions:

Year Ended December 31,2008

2007Risk free interest rate


2.89%


4.88%Dividend yield


0.0%


0.0%Expected volatility


100%


60%100%Expected life


6.25 years


2.38 to 6.25 years


Our
estimate of the expected life was determined using the simplified method as our stock options qualify as "plain vanilla" options.

Stock-based
compensation expense charged to engineering and network operations expenses and selling, general and administrative expenses related to these stock options was
$1.8 million and $0.7 million, respectively, for 2008, and $0.1 million and $0.3 million, respectively, for 2007.

Dividend-Related Adjustment to Stock Options

Upon closing of the KPN Transaction, and in conjunction with the $113 million dividend we paid to iBasis shareholders on
October 8, 2007, we increased the number of shares subject to unexercised stock option grants and reduced the exercise price of these stock option grants to preserve their value, as required by
the anti-dilution provision of our stock option plan. The adjustment to the number of shares and exercise price was based on the closing price of $10.75 per share of iBasis common stock on
September 28, 2007, the trading date immediately preceding the closing of the merger, reduced by the dividend per share amount of $3.28 per share. Shares underlying outstanding stock options
were increased by a factor of 1.4391, which reflected the ratio of $10.75 per share divided by $7.47 per share ($10.75 per share less the dividend of $3.28 per share) and the per share exercise price
of outstanding stock options was reduced by dividing the exercise price by this same factor. As a result, the number of shares underlying outstanding stock options, as of the date of this adjustment,
increased from 2.4 million shares to 3.5 million shares and the average exercise price of outstanding stock options was reduced from $6.07 per share to $4.22 per share.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(4)   Stock Based Compensation (Continued)

Stock Option Activity

The following table presents the stock option activity for year ended December 31, 2008:

Shares

Weighted Average
Exercise Price(In thousands)Outstanding at December 31, 2007


3,426

$
4.30Granted


1,337


4.46Exercised


(233
)

2.42Cancelled


(284
)

5.94Outstanding at December 31, 2008


4,246

$
4.34Vested and unvested expected to vest at December 31, 2008


3,971

$
4.32Exercisable at December 31, 2008


2,793

$
4.10Available for future grants at December 31, 2008


2,384


The
following table presents weighted average price and contract life information about significant option groups outstanding and exercisable as of December 31, 2008:

OutstandingExercisableWeighted Average
Remaining
Contractual Life
(in Years)Range of Exercise Prices

Outstanding
Options

Weighted Average
Exercise Price

Options
Outstanding

Weighted Average
Exercise Price(In thousands)





(In thousands)$  0.52$  1.50


265


2.92

$
1.44


265

$
1.441.83    2.21


391


4.69


2.01


384


2.012.44    3.98


839


5.03


2.94


778


2.884.25    4.54


1,915


8.28


4.51


791


4.504.71    5.87


263


6.67


5.13


247


5.096.02    6.88


482


7.96


6.55


237


6.637.73  10.42


52


1.20


9.18


52


9.18$22.93$59.93


39


1.40


30.21


39


30.214,246


6.69

$
4.34


2,793

$
4.10


The
aggregate intrinsic value of exercisable options outstanding as of December 31, 2008, which represents the amount option holders would have received had they exercised their
options as of that date, was less than $0.1 million. The intrinsic value is the difference between our closing stock price on the last trading day of the year ended December 31, 2008 and
the stock option exercise price, multiplied by the number of stock option shares.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(4)   Stock Based Compensation (Continued)

The
following table presents the non-vested shares for the year ended December 31, 2008.

Non-vested Stock Options

Shares

Weighted Average
Fair Value(in thousands)Non-vested at December 31, 2007


868

$
5.79Granted


1,337


3.59Vested


(689
)

4.97Forfeited


(63
)

3.59Non-vested at December 31, 2008


1,453

$
4.23


As
of December 31, 2008, unrecognized compensation expense related to the unvested portion of our stock options was $5.3 million and is expected to be recognized over a
weighted-average period of approximately 2.8 years.

Stock Options Grants Under KPN Option Plans

Prior to the KPN Transaction, certain employees of KPN GCS were provided with stock options for KPN stock under the terms of KPN' stock
option plans. These stock options provided for a fixed number of shares with an exercise price equal to the fair value of KPN' stock on the date of grant, unless otherwise stated, and vest three years
from the date of grant. There were no grants made to employees of KPN GCS under KPN' stock option plans in 2007 or 2006.

Effective
January 1, 2006, KPN GCS adopted SFAS No. 123(R),"Share-Based-Payment"(SFAS 123(R)) using the modified
prospective method. As KPN GCS had previously applied the fair value recognition provisions of SFAS 123, the adoption of SFAS 123(R) did not have a material impact on its financial
position or results of operations. KPN GCS elected to use the modified prospective transition method as permitted under SFAS 123R and, therefore, did not restate its financial results for the
prior periods to reflect the fair value of stock-based compensation awards in such periods. Under this transition method, stock-based compensation expense for the year ended December 31, 2006
included compensation expense for all stock option awards granted prior to, but not yet vested, as of December 31, 2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123.

Total
share based compensation with respect to these stock option awards amounted to $9,000, $36,000 and $47,000 for the years ended December 31, 2008, 2007 and 2006, respectively
and was charged to selling, general and administrative expenses.

All
options granted are equity settled options and are forfeited when employees leave for reasons other than retirement, disability or death (except for some personnel plans). All
options were granted with exercise prices equal to market value unless otherwise noted below. The profits for options exercisable immediately from any exercise prior to the end of the
3-year vesting period are held in escrow until the shares are vested. The profit will be released to the relevant individuals, provided that the individuals remain employed by us.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(4)   Stock Based Compensation (Continued)

The
following table summarizes stock option activity of our employees under the KPN stock option plans during 2008, 2007 and 2006.

Shares
Under Option

Weighted Average
Per Share
Exercise PriceOutstanding at December 31, 2007


37,250

$
9.62Options exercised





Transfer to and from other KPN entities





Outstanding at December 31, 2008


37,250

$
9.62


The
following is a summary of outstanding and exercisable stock options held by our employees under the KPN stock option plans as of December 31, 2008:

Options Outstanding

Options ExercisableRange of Exercise Prices

Number of
Options

Weighted
Average
Remaining
Contractual Life
(in years)

Weighted
Average
Exercise Price

Number of
Options

Weighted
Average
Remaining
Contractual Life
(in years)

Weighted
Average
Exercise Price5.506.00


5,800




$
8.74


5,800




$
8.746.006.50


9,600


1.2


9.50


9,600


1.2


9.506.507.00


21,850


2.6


9.91


21,850


2.6


9.91Total


37,250


1.8

$
9.62


37,250


1.8

$
9.21


The
aggregate intrinsic value of options outstanding and exercisable as of December 31, 2008 was $0.2 million, which represents the amount option holders would have
received had they exercised their options as of that date. The intrinsic value is the difference between KPN' closing stock price on the last trading day of 2008 and the stock option exercise price,
multiplied by the number of stock option shares. The intrinsic value of options exercised in 2008, 2007 and 2006 was $0, $98,000 and $144,000 respectively. The amount of cash KPN received as a result
of options exercised by KPN GCS employees in 2008, 2007 and 2006 was $0, $104,000, and $180,000.

In
April 2006, KPN GCS granted 5,100 restricted KPN shares to its management which vest over a three-year period depending on KPN' total shareholder return position ranking
relative to a peer group. Once vested the restricted shares have a lock-up period of two years and therefore are not available to be traded from April 2009 through April 2011. The total
compensation expense associated with these awards in 2008, 2007 and 2006 was $0, $27,000 and $18,000, respectively and was charged to selling, general and administrative expenses.

(5)   Business Segment and Geographic Information

During the years ended December 31, 2008 and 2007, we operated in two business segments, Trading and Retail. Our Trading business segment includes revenue from wholesale Trading
and Outsourcing. We consider Outsourcing as part of our Trading segment as the products we sell are primarily the same products that we sell to our wholesale Trading customers and Outsourcing and
wholesale Trading are managed as one business. Our Retail business consists primarily of our prepaid

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(5)   Business Segment and Geographic Information (Continued)

calling
card services and Pingo, our prepaid calling service sold directly to consumers through an Internet website. For the year ended December 31, 2006, we operated in only one business
segment, wholesale Trading.

A
breakdown of our revenue and gross profit, defined as net revenue less data communications and telecommunications costs, for the years ended December 31, 2008 and 2007 is as
follows:

Year Ended
December 31, 2008

Year Ended
December 31, 2007Revenue

Gross Profit

Revenue

Gross ProfitTrading

$
985.0

$
80.6

$
716.1

$
46.2Outsourcing


242.0


42.9


197.3


41.4Retail


96.6


12.8


25.2


3.6Total

$
1,323.6

$
136.3

$
938.6

$
91.2


We
use net revenue and gross profit, which is net revenue less data communications and telecommunications costs, as the basis for measuring profit or loss and making decisions on our
Trading and Retail businesses. We do not allocate our engineering and network operations expenses, selling, general and administrative expenses, and depreciation and amortization between Trading and
Retail.

Operating
results, excluding interest income and expense, foreign exchange gains or losses, and income tax expense for our two business segments are as follows:

Year Ended December 31, 2008Trading

Retail

Total(In thousands)Net revenue from external parties

$
1,000,964

$
96,551

$
1,097,515Net revenue from related parties


226,070





226,070Total net revenue


1,227,034


96,551


1,323,585Data communications and telecommunication costsexternal parties


997,735


83,724


1,081,459Data communications and telecommunication costsrelated parties


105,841





105,841Total data communications and telecommunications costs


1,103,576


83,724


1,187,300Gross profit

$
123,458

$
12,827


136,285Engineering and network operations expenses








23,320Selling, general and administrative expenses








74,849Depreciation and amortization








31,998Impairment of goodwill


214,651





214,651Loss from operations







$
(208,533
)


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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(5)   Business Segment and Geographic Information (Continued)



Year Ended December 31, 2007Trading

Retail

Total(In thousands)Net revenue from external parties

$
716,088

$
25,205

$
741,293Net revenue from related parties


197,265





197,265Total net revenue


913,353


25,205


938,558Data communications and telecommunication costsexternal parties


711,575


21,585


733,160Data communications and telecommunication costsrelated parties


114,242





114,242Total data communications and telecommunications costs


825,817


21,585


847,402Gross profit

$
87,536

$
3,620


91,156Engineering and network operations expenses








13,222Selling, general and administrative expenses








38,368Merger related expenses








2,019Depreciation and amortization








12,743Income from operations







$
24,804


Other
than revenue from Royal KPN and its affiliates, no one customer accounted for 10% or more of total net revenue in the years ended December 31, 2008, 2007 or 2006.

Assets
relating to our Trading and Retail businesses consist of accounts receivable, net of allowance for doubtful accounts, intangible assets related to customer relationships and
goodwill. We do not allocate cash and cash equivalents, short-term marketable investments, prepaid expenses and other current assets, property and equipment, net, other intangible assets
and other assets between Trading and Retail.

As of December 31, 2008Trading

Retail

Total(In thousands)Segment assets:Accounts receivableexternal parties

$
224,883

$
10,063

$
234,946Intangible assetscustomer relationships


26,147


10,420


36,567Goodwill


17,324





17,324$
268,354

$
20,483


288,837Non-segment assets








152,490Total assets







$
441,327


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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(5)   Business Segment and Geographic Information (Continued)

A breakdown of total revenue by geographic region, based on where we terminate the traffic we receive from our customers, for the year ended December 31, 2008 is as follows;

% of Total
Net RevenueEurope


43%Latin America


28%Middle East and Africa


19%Asia Pacific


8%North America


2%Total


100%


A
breakdown of total net revenue by geographic region for the years ended December 31, 2007 and 2006 is not shown as it was impractical to obtain this information. Essentially all
of the Company's long-lived assets are located in the United States.

(6)   Accounts Receivable and Unbilled RevenueExternal Parties

Accounts receivableexternal parties, net, consists of the following at December 31:

2008

2007(In thousands)Accounts receivable

$
183,763

$
168,498Unbilled revenue


56,361


49,309240,124


217,807Allowance for doubtful accounts


(5,178
)

(12,924
)Total accounts receivableexternal parties

$
234,946

$
204,883


The
majority of unbilled revenue relates to the previous month's traffic volume for which an invoice has not yet been sent. The allowance for doubtful accounts reflects our best estimate
of probable losses inherent in the accounts receivable balance. We determine the allowance based on specific known troubled accounts, historical experience, and other currently available evidence.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(7)   Property and Equipment

Property and equipment consists of the following at December 31:

2008

2007(In thousands)Network equipment

$
44,332

$
41,861Software


17,538


8,258Leasehold improvements


1,629


1,591Other tangible fixed assets


3,594


3,798Total at cost


67,093


55,508Accumulated depreciation


(32,257
)

(20,542
)Net book value

$
34,836

$
34,966


Total
depreciation and amortization expense related to property and equipment was $15.3 million, $8.8 million and $5.7 million for the years ended
December 31, 2008, 2007 and 2006, respectively.

(8)   Goodwill and Other Intangible Assets

In conjunction with the closing of the KPN Transaction on October 1, 2007, we recorded $248.8 million of goodwill, which is not being amortized. Additionally, in connection
with the KPN Transaction, we recorded $97.7 million of amortizing intangible assets, including trademarks and trade names, Trading customer and Retail distributor relationships, termination
partner relationships and technology. The estimated useful life of trade mark and trade names is 15 years and is being amortized on a straight-line basis. The estimated useful life
of Trading customer relationships is 10 years and the estimated useful life of Retail distributor relationships is 5 years and these intangible assets are
being amortized using an economic consumption method to reflect the diminishing cash flows from these relationships in the future. The estimated useful life of termination partner relationships is
5 years and is being amortized using an economic consumption method to reflect diminishing cash flows from these relationships in the future. The estimated useful life of technology is
5 years and is being amortized on a straight-line basis.

In
connection with the closing of the TDC transaction on April 1, 2008, we recorded $10.1 million of intangible assets, primarily Trading customer relationships. The
Trading customer relationships are being amortized over a 5 to 10 year period using the economic consumption method to reflect the diminishing cash flows from these relationships in the future.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(8)   Goodwill and Other Intangible Assets (Continued)

The
following table summarizes other intangible assets:

As of December 31, 2008

As of December 31, 2007At Cost

Accumulated
Amortization

At Cost

Accumulated
Amortization(In thousands)Trademarks and trade names

$
21,800

$
(1,817
)
$
21,800

$
(363
)Wholesale customer relationships


30,747


(4,616
)

20,700


(663
)Retail distributor relationships


13,500


(3,080
)

13,500


(621
)Termination partner relationships


8,400


(2,719
)

8,400


(588
)Technology


33,300


(8,325
)

33,300


(1,665
)Other


64


(48
)

$
107,811

$
(20,605
)

97,700

$
(3,900
)


Amortization
expense was $16.7 million and $3.9 million in 2008 and 2007, respectively. There was no amortization of other intangible assets in 2006. We currently expect to
amortize the following remaining amounts of intangible assets as of December 31, 2008 in the fiscal periods as follows:

Year ended December 31,

(In thousands)2009

$
19,3662010


17,9162011


16,3822012


12,5172013


3,875Thereafter


17,150Total

$
87,206


Impairment

We have two operating segments which are also our reporting units: (1) Trading and (2) Retail. As of December 31,
2008 and 2007, all goodwill was assigned to our Trading reporting unit. The Company performs an annual impairment test of its goodwill as required under the provisions of SFAS 142 on
December 31 and whenever events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying value. In fiscal 2007, the Company performed
its annual impairment test for goodwill at the reporting unit level and determined no adjustment to goodwill was necessary. For intangible assets, we assess the carrying value of these assets whenever
events or circumstances indicate that the carrying value may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset, or asset group,
to the future undiscounted cash flows expected to be generated by the asset, or asset group.

Through
September 30, 2008, there were no events or changes in circumstances that indicated the carrying amount of our intangible assets may not be recoverable. However, as a
result of the Company's market capitalization remaining below the Company's book value since the first quarter of 2008, we considered this to be an indication that the carrying value of our goodwill
may be impaired.

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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(8)   Goodwill and Other Intangible Assets (Continued)

Accordingly,
we conducted an analysis to determine if there had been an impairment of the carrying value of goodwill of as of September 30, 2008.

SFAS
No. 142 requires that the impairment test be performed through the application of a two-step process. The first step compares the carrying value of our reporting
units, which are our Trading and Retail operating segments, to their estimated fair values as of the test date. If fair value is less than carrying value, a second step must be performed to quantify
the amount of the impairment, if any. We estimated the fair value of our reporting units using an income approach, which
estimates fair value based upon future cash flows discounted to their present value. We then reconciled the estimated fair value of our reporting units to our overall market capitalization. Based on
the results, we determined our Trading reporting unit's fair value was greater than its carrying value. Assessing the impairment of goodwill requires us to make certain significant assumptions,
estimates and judgments, including future revenue, expenses, cash flows, discount rates and implied control premiums. The actual results may differ from these assumptions and estimates and it is
possible that such differences could have a material impact on our financial statements. We based the valuation of our Trading reporting unit, in part, on i) our actual historical performance;
ii) our estimate of the future performance of our Trading reporting unit and iii) projections developed by an independent analyst. As a result of this analysis, we concluded there had
been no impairment of the carrying value of goodwill as of September 30, 2008.

Since
September 30, 2008, there has been distress in the global economy and our market capitalization declined significantly in the fourth quarter. As noted above, the Company
performed its annual goodwill impairment assessment as of December 31, 2008. This assessment was performed using the same valuation techniques as described above. Step one of this assessment
resulted in the carrying value of the Trading reporting unit exceeding its fair value. The second step then determines the implied fair value of goodwill by comparing the fair value of the Trading
reporting unit to the aggregate fair value of all the assets and liabilities of the unit. In step two of the impairment analysis, the Company compared the implied fair value of goodwill to its
carrying value. We determined the fair value of goodwill was $34.1 million. The carrying value of goodwill was $248.8 million. As a result, we recorded a non cash impairment charge to
our goodwill of $214.7 million. In addition, the carrying value of goodwill was further reduced by $16.8 million, to $17.3 million, as a result of the utilization of previously
reserved pre acquisition net operating losses. The primary reasons for the difference in conclusions that goodwill was not impaired as of September 30, 2008, but was impaired as of
December 31, 2008, were the continued decline in the price of our common stock during the quarter ended December 31, 2008, forecasts of future revenues which were lower than the
forecasts used in the impairment analysis performed as of September 30, 2008, and lower revenues in the quarter ended December 31, 2008 as compared to the quarter ended
September 30, 2008 and compared to the Company's expectations for that quarter. The forecasted revenues and long-term growth rates used in the December 31, 2008 analysis were
lower than those used at September 30, 2008 as a result of the macroeconomic conditions and events that transpired in the global markets during the fourth quarter of 2008.

As
described above, for intangible assets, we assess the carrying value of these assets whenever events or circumstances indicate that the carrying value may not be recoverable. We
determined that the adverse business climate and the significant drop in our market capitalization experienced during the fourth quarter of fiscal 2008 were significant events that indicated that the
carrying amount of our intangible assets might not be recoverable. SFAS No. 144 is a two-step test which is required to be

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(8)   Goodwill and Other Intangible Assets (Continued)

performed
prior to assessing the impairment of goodwill. The first step compares the carrying value of the asset, or asset group, to the undiscounted cash flows of the asset, or asset group. If the
asset, or asset group's, carrying value exceeds the undiscounted cash flows, step two of the test is required to measure the impairment loss, if any. An asset, or asset group, cannot be impaired below
the asset or asset group's fair value.

As
required by SFAS No. 144, we performed our assessment at the asset group level which represented the lowest level of cash flows that are largely independent of cash flows of
other assets and liabilities. For iBasis, this asset grouping is at the reporting unit level. When performing this test at the reporting unit level, goodwill is included in the carrying value of the
asset group. The carrying value of the trading reporting unit, including goodwill (prior to the goodwill impairment charge described above), was greater than the undiscounted cash flows while the
retail reporting unit's undiscounted cash flows exceeded the carrying value. For our trading reporting unit, we performed step two of the impairment test and determined there was no impairment of our
intangible assets as the fair value of the asset group, excluding goodwill, was greater than the carrying value. The projections and assumptions used in calculating the fair value of the assets were
consistent with the projections used in the goodwill impairment test. The Company also reassessed the amortization method and remaining amortization period for the assets, and determined that no
changes to the amortization period or method were necessary.

Since
December 31, 2008, our market capitalization has continued to decline. As a result, it is reasonably possible that there could be an impairment of our intangible assets
and/or our remaining goodwill in the near term and the amounts could be material.

(9)   Accrued Expenses

Accrued expenses consist of the following at December 31:

2008

2007(In thousands)Termination fees and circuit costs

$
136,655

$
109,883Compensation


3,224


3,644Dividend payable


1,421


1,744Accrued other


10,385


21,632Total accrued expenses

$
151,685

$
136,903


(10)   Income Taxes

The components of income (loss) before provision for income taxes are as follows for the years ended December 31:

2008

2007

2006(In thousands)Domestic

$
(239,265
)
$
(13,479
)
$
430Foreign


34,618


38,131


59,944Total

$
(204,647
)
$
24,652

$
60,374


91

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(10)   Income Taxes (Continued)

The
components of the provision for income taxes are as follows for the years ended December 31:

2008

2007

2006(In thousands)Current:Federal

$
15,637

$
89

$
93State


1,127


18


18Foreign


9,387


10,114


19,194Current


26,151


10,221


19,305Deferred:Federal


(208
)

16


26State


205


(612
)

3Foreign


194


(1,096
)

(1,450
)Deferred


191


(1,692
)

(1,421
)Provision for income taxes

$
26,342

$
8,529

$
17,884


In
2008, our income tax provision includes a non-cash expense of $16.8 million related to the utilization of our previously reserved net operating loss carry-forwards.
The use of these pre-acquisition net operating losses can not reduce income tax expense but, instead, must reduce the book value of goodwill. The income tax expense of $16.8 million
does not represent income tax payments we will have to make now, or at any time in the future. Effective January 1, 2009, with the adoption of FAS 141R, such pre-acquisition
net operating losses will reduce income tax expense, when utilized or when the valuation allowance for such net operating losses is released.

The
effective income tax rate differed from the statutory federal income tax rate due to the following for the years ended December 31:

2008

2007

2006(In thousands)Statutory federal income tax

$
(71,589
)
$
8,628

$
21,131State income taxes, there is no federal tax benefit


866


13


20Goodwill impairment


75,128Intercompany dividends


19,423Other permanent differences


916


146Foreign tax rate differential


(3,296
)

(3,578
)

(3,267
)Losses not benefited


16,032


3,247Tax credits


(13,148
)Change in valuation allowance


6,010Other


(4,000
)

73Provision for income taxes

$
26,342

$
8,529

$
17,884


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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(10)   Income Taxes (Continued)

Deferred
income taxes at December 31, 2008 and 2007 reflect the net tax effects of net operating loss and tax credit carry forwards and temporary differences between the carrying
amounts of assets and liabilities for financial statement purposes and the amounts used for tax purposes.

The
components of our net deferred tax assets (liabilities) are as follow as of December 31:

2008

2007(In thousands)Net operating loss carry forward

$
56,316

$
76,629Acquired intangible assets


(34,467
)

(40,633
)Depreciation


7,725


2,139Tax credits


14,232


793Accruals


(2,754
)

(2,486
)Stock compensation


2,111


1,563Accounts receivables


1,457


769Capital loss carry forward


2,000


2,000Net deferred tax assets


46,620


40,774Less: valuation allowance


(48,124
)

(42,114
)$
(1,504
)
$
(1,340
)


We
have recognized a full valuation allowance to offset the net deferred tax assets as our history of losses does not support that it is more likely than not that these assets will be
realized.

At
December 31, 2008, we have foreign tax and research and experimentation ("R&E") credit carry forwards for federal and state purposes of approximately $14 million,
available to offset future taxable income. The foreign tax credit carry forwards generally expire in 2018. The R&E credit carry forwards generally expire between 2012 and 2028.

As
of December 31, 2008, we had available U.S. and state net operating loss carry forwards ("NOLs") of approximately $146 million. The majority of these NOLs were acquired
through the KPN Transaction. The operating loss carry forwards expire between 2009 and 2027. These carry forwards may be used to offset future income taxes payable at the federal and state levels, if
any, and are subject to review by the U.S. Internal Revenue Service ("IRS") and various state taxing authorities.

In
general, the rules of Section 382 of the Internal Revenue Code ("Code") apply to limit a corporation's ability to utilize existing net operating loss carryovers if the
corporation experiences an Ownership Change. An ownership change results from transactions increasing the ownership of certain existing stockholders and, or, new stockholders in the stock of a
corporation by more than 50 percentage points during a three year testing period.

During
2007, the Company determined that its NOLs were subject to Section 382 limitations. As a result of several ownership changes, the utilization of our NOLs was subject to
annual limitations. The limitation caused approximately $111 million of the federal NOLs to expire unused and therefore not available to be used by the Company. These expired NOLs were not
reflected as deferred tax assets at December 31, 2007.

We
have two annual limitation amounts, computed pursuant to IRC Section 382. The first annual limitation for NOLs generated before August 2005 is approximately $5 million.
The second annual

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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(10)   Income Taxes (Continued)

limitation
for NOLs generated between August 2005 and September 2007 is approximately $16 million. Any unused IRC Section 382 annual loss limitation amount may be carried forward to the
following year. Those unused limitation losses are then added to the current Code Section 382 annual limitation amount.

We
adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109"
("FIN 48"), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB
Statement 109, "Accounting for Income Taxes", and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Prior to 2007 we
recorded estimated income tax liabilities to the extent they were probable and could be reasonably estimated. The adoption of FIN 48 had no effect on our financial statements at
January 1, 2007.

We
file U.S. federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. We are subject to U.S. federal income tax, as well as income tax
in multiple state and
foreign jurisdictions. As of December 31, 2008, we were subject to examination in the U.S. federal and state tax jurisdictions for the 2005 to 2007 tax years. Although we are no longer
generally subject to IRS or state examination for the years prior to 2005, carryforward attributes that were generated prior to 2005 may be adjusted upon examination by the IRS if they either have
been or will be used in a future period. We are also subject to examination in significant foreign jurisdictions for the 2004 to 2007 tax years.

The
following table summarizes the activity related to our unrecognized tax benefits:

2008

2007(In thousands)Balance at January 1 (for 2007 at adoption)

$
476

$
Acquisition of acquired company liability





307Additions or reductions for tax positions related to the current year


64


169Additions or reductions for tax positions related to prior years





Decreases relating to settlements with tax authorities





Reductions in benefits related to lapse of statute of limitations





Balance at December 31

$
540

$
476


At
December 31, 2008, we had approximately $540,000 of unrecognized tax benefits, all of which will impact the effective tax rate, if recognized. In addition we had $367,000 of
accrued interest and penalties. We do not expect the balance of unrecognized tax benefits to change significantly during the next 12 months. We may distribute the current year's earnings of our
non-U.S operations, however it is our intention to permanently reinvest the prior year's earnings indefinitely. Therefore, we have not provided for taxes on these undistributed earnings.
We had approximately $23 million and $19 million in undistributed earnings at December 31, 2008 and 2007, respectively, for which taxes were not provided. It is not practicable to
estimate the amount of the deferred tax liability on such undistributed earnings.

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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(11) Long-Term Debt

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

2008

2007(In thousands)Bank borrowings

$
27,080

$
25,000Capital lease obligations


877


75527,957


25,755Less: Current portion


(577
)

(755
)Long-term portion

$
27,380

$
25,000


In
October 2007, we entered into a Second Amended and Restated Loan and Security Agreement (the "Loan Agreement") with Silicon Valley Bank, which amended and restated a certain Amended
and Restated Loan and Security Agreement dated as of December 29, 2003. We entered into the Loan Agreement to obtain funding for working capital purposes and in support of the KPN Transaction.
Pursuant to the Loan Agreement, which was subsequently amended as described below, we could borrow up to $35.0 million from time to time under a secured revolving credit facility for a
two-year period. Except as described below, borrowings under the Loan Agreement are on a formula basis, based on eligible domestic and foreign accounts receivable. The Loan Agreement
contains quarterly financial covenants, consisting primarily of minimum profitability and minimum liquidity requirements. Interest on borrowings under the Loan Agreement were based, in part, on our
quarterly profitability, with the maximum interest rate being the bank's prime rate, plus 0.5%, or LIBOR, plus 2.75%. The Loan Agreement has a quarterly commitment fee of 0.63% on any unused portion
of the line of credit and we paid an up-front, one-time facility fee of 0.75%, or $263,000. The Loan Agreement is also guaranteed by all our domestic wholly-owned subsidiaries
and is collateralized by a first priority lien and security interest on our and such guarantor's assets. In addition, we pledged 66.2% of all of our ownership in KPN Global Carrier Services (now known
as iBasis Netherlands), a wholly-owned subsidiary based in The Netherlands, as collateral. Pursuant to the terms of the Loan Agreement, we may use the proceeds solely (i) for working capital,
(ii) to fund our general business requirements, and (iii) to fund the dividend paid by us in connection with the KPN Transaction.

In
April 2008, we modified the Loan Agreement to increase our maximum borrowing availability from $35.0 million to $50.0 million. In addition, to reflect our current
operating results and financial position, we modified the minimum profitability financial covenant and added a minimum cash flow financial requirement pursuant to a sliding scale that decreases over
time, a portion of the additional $15.0 million in funds is subject to a non-formula borrowing base through February 2009. The modification also permitted us to repurchase up to
$15 million of our common stock under a stock repurchase program approved by our board of directors in April 2008. We paid an up-front, one-time supplemental commitment
fee of $150,000 and an up-front, one-time modification fee of $75,000.

In
September 2008, we modified the financial covenants under the Loan Agreement to reflect our current operating results and financial position as follows:



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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(11) Long-Term Debt (Continued)



In
addition, the interest rate on borrowings under the Loan Agreement was increased by 1% per annum and we paid an up-front, one-time modification fee of
$125,000. At September 30, 2008, we were in compliance of all of the financial covenants, as modified in September 2008, under the Loan Agreement.

On
January 26, 2009, the Company and Silicon Valley Bank modified the Loan Agreement, effective as of December 30, 2008. The modification to the Loan Agreement contains the
following amendments, among others:



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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(11) Long-Term Debt (Continued)



As
of December 31, 2008, we were in violation of our minimum profitability covenant under the Loan Agreement. However, Silicon Valley Bank subsequently waived
non-compliance of this covenant in the form of the modification to the Loan Agreement executed on January 26, 2009. In connection with this modification, we paid Silicon Valley Bank
a modification fee of $52,500 and a revolving line renewal fee of $175,000.

At
December 31, 2008 and 2007, we had $27.1 million and $25.0 million, respectively, in borrowings outstanding, and had issued outstanding standby letters of credit
of $2.6 million and $2.9 million, respectively, under the Loan Agreement.

During
the year ended December 31, 2008, we purchased certain software licenses for $1.7 million under a 30-month financing agreement, with payments due on a
semi-annual basis through June 2010.

(12) Accrued Restructuring Costs

At December 31, 2008, we had accrued restructuring costs of $1.1 million, which consisted of $0.5 million remaining in future payment obligations relating to a
terminated New York City facility lease and $0.6 million of costs accrued for future lease obligations for certain vacant leased facilities, net of future sublease payments. Payments of these
restructuring costs will be made through February 2011.

A
summary of accrued restructuring costs is as follows:

(In thousands)

Future Payment
Obligation
on Lease
Termination

Contractual Lease
Obligations Relating
to Vacant Facilities

TotalAcquisition of acquired company liability

$
771

$
1,119

$
1,890Cash payments


(51
)

(132
)

(183
)Balance, December 31, 2007


720


987


1,707Additional accrual


11


133


144Cash payments


(241
)

(509
)

(750
)Balance, December 31, 2008

$
490

$
611

$
1,101Current portion, included in accrued expenses







$
758Long-term portion, included in other long-term liabilities








343Total







$
1,101


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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(13) Pensions and Postretirement Plans

Substantially all employees of KPN GCS are participants in various defined benefit pension plans and defined contribution plans administered and sponsored by Royal KPN. Benefits under
the pension plans are based primarily on years of service and employees' compensation. The majority of the pension expenses relate to pension plans in The Netherlands and the United States.

These
consolidated financial statements reflect the defined benefit plans on a multi-employer basis in accordance with SFAS No. 87,"Employers' Accounting
for Pensions". As such, Royal KPN allocated costs associated with the pension plans to KPN GCS based upon a ratio of weighted pensionable income for service costs and allocates
costs associated with other components of pension expense, such as interest costs, amortization of actuarial gains/losses, etc., based on projected benefit obligations relative to the total projected
benefit obligation of the plans.

Pension
expense allocated to KPN GCS from Royal KPN for its employees participating in Royal KPN pension plans was approximately $0.5 million, $0.1 million, and
$0.4 million, for the years ended December 31, 2008, 2007 and 2006, respectively.

Dutch
employees of Royal KPN are also eligible for early retirement benefits. This plan is accounted for in accordance with SFAS No. 87 (as amended by FAS 158). The early
retirement plan is neither funded nor insured through a third party, but is paid directly by KPN GCS to the early retirement employees. Royal KPN allocated early retirement expenses (service costs,
interest costs, prior service costs, and actuarial gains and losses) to KPN GCS based on a ratio of service costs relating to its employees relative to the Royal KPN early retirement costs. Until
September 30, 2007, Royal KPN allocated the early retirement provision to KPN GCS based on a ratio of the projected benefit obligation relating to its employees relative to Royal KPN' projected
benefit obligation. Early retirement expenses were $0, $2,000, and $62,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

As
a result of the closing of the KPN Transaction on October 1, 2007, the liability relating to early retirement obligations is no longer being allocated to us by Royal KPN.
Accordingly, there was no obligation for early retirement benefits in our consolidated balance sheet as of December 31, 2008 and 2007.

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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(14)   Commitments and Contingencies

Commitments

We lease our administrative and operating facilities, which expire at various dates through 2018. The future approximate minimum lease
payments under such operating leases as of December 31, 2008 consist of the following:

Year ended December 31,

(in thousands)2009

$
2,7842010


8772011


3922012


2772013


293Thereafter


1,517Total future minimum lease payments

$
6,140


At
December 31, 2008, we had commitments with certain telecommunications carriers for the termination of minutes for the year ended December 31, 2008 totaling
$20.5 million. As of December 31, 2008, we did not have any other material purchase obligations, or other material long-term commitments reflected on our consolidated balance
sheet.

Litigation

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

Class Action Pursuant to 1999 Initial Public Offering

In 2001, we were served with several class action complaints that were filed in the United States District Court for the Southern
District of New York against us and several of our officers, directors, and former officers and directors, as well as against the investment banking firms that underwrote our November 10, 1999
initial public offering of common stock and our March 9,
2000 secondary offering of common stock. The complaints were filed on behalf of a class of persons who purchased our common stock between November 10, 1999 and December 6, 2000.

The
complaints are similar to each other and to hundreds of other complaints filed against other issuers and their underwriters, and allege violations of the Securities Act of 1933, as
amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), primarily based on the assertion that there was undisclosed compensation received by our
underwriters in connection with our public offerings and that there were understandings with customers to make purchases in the aftermarket.

In
September 2001, the complaints were consolidated and allege that our prospectuses failed to disclose these arrangements. The consolidated complaint seeks an unspecified amount of
monetary damages and other relief. In October 2002, the individual defendants were dismissed from the litigation by stipulation and without prejudice and subject to an agreement to toll the running of
time-based defenses. In February 2003, the district court denied our motion to dismiss.

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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(14)   Commitments and Contingencies (Continued)

In
June 2004, we and the individual defendants, as well as many other issuers named as defendants in the class action proceeding, entered into an
agreement-in-principle to settle this matter, and this settlement was presented to the court. The district court granted a preliminary approval of the settlement in February
2005, subject to certain modifications to the proposed bar order, to which plaintiffs and issuers agreed. In August 2005, the district court issued a preliminary order further approving the
modifications to the settlement, certifying the settlement classes and scheduled a fairness hearing, after notice to the class. Plaintiffs have continued to pursue their claims against the
underwriters. The district court established a procedure whereby six "focus" cases are being pursued initially and has certified a class of purchasers in those cases. The underwriters appealed the
certification order in each of the six cases and in December 2006, the United States Court of Appeals for the Second Circuit reversed the certification orders. Motions to dismiss amended complaints
filed in the six focus cases have been denied.

We
anticipate additional settlement negotiations will occur, but there can be no assurance that those negotiations will result in a revised settlement. We believe that if this matter is
not settled, we have meritorious defenses which we intend to vigorously assert.

We
cannot estimate potential losses, if any, from these matters or whether, in light of our insurance coverage, any loss would be material to our financial condition, results of
operations or cash flows. As such, no amounts have been accrued as of December 31, 2008.

SEC Option Investigation

We announced on October 20, 2006, that we were contacted by the SEC as part of an informal inquiry and we further disclosed on
March 29, 2007, on our Current Report on Form 8-K, that the SEC had notified us that we would be receiving a formal order of investigation relating to our stock option
practices. On April 13, 2007, we received the formal order of investigation. The SEC investigation sought documents and information from us relating to the grant of our options from 1999
through 2006. The SEC has taken testimony from individuals including certain of our current and former officers and directors. We have cooperated fully with the SEC investigation and we are in
communication with the SEC staff regarding the outcome of the investigation. There is no assurance that we will be able to resolve the SEC investigation on acceptable terms without the institution of
enforcement proceedings by the SEC against us or one or more of our senior executive officers or that other inquiries will not be commenced by other U.S. federal, state or other regulatory agencies.
An SEC enforcement proceeding could seek an injunction against future violations of the securities laws, a civil penalty and, as to individual executives, disgorgement and a bar order against serving
as an officer or director of a publicly traded company. A bar order as to any of our senior executive officers would deprive us of any such executive's services and could have a material adverse
affect on our business.

We
cannot estimate the amount of losses, if any, from the SEC investigation, or whether any loss would be material to our financial condition, results of operations or cash flows. As
such, no amounts have been accrued as of December 31, 2008.

Sub-Distributor Action

On September 20, 2007, J & J Communications ("J & J"), a sub-distributor of calling cards distributed
through iBasis distributor Abdul Communications ("Abdul"), amended a complaint filed in the United States District Court for the District of Maryland against Abdul, to add iBasis and PCI, a

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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(14)   Commitments and Contingencies (Continued)

wholesale
calling-card provider ("PCI"), as defendants in the matter. The complaint asserts that J & J has lost and continues to lose money because iBasis and PCI deactivated
calling cards for which J & J allegedly paid. J & J is seeking in excess of $1.0 million dollars, plus punitive damages, attorneys fees and litigation costs based on a variety of
claims against Abdul, iBasis, and PCI, predicated on contractual theories, various torts, conspiracy and an alleged violation of § 201 of the Telecommunications Act. With respect to
iBasis, J & J alleges both direct liability and vicarious liability, for its alleged status as principal in an alleged agency relationship with
Abdul. iBasis responded to the amended complaint through an answer and motion to dismiss on February 8, 2008. On June 2, 2008, the Court dismissed the conspiracy and Telecommunications
Act claims. Discovery is proceeding as to the remaining claims.

We
cannot estimate the amount of losses, if any, from this matter, or whether any loss would be material to our financial condition, results of operations or cash flows. As such, no
amount has been accrued as of December 31, 2008.

Bankruptcy Preference Claim

On April 24, 2001 (the "Petition Date"), World Access, Inc. ("World Access"), WorldxChange Communications, Inc.
("WorldxChange"), and Facilicom International, LLC ("Facilicom"), together with other related debtors (collectively, the "Debtors"), filed voluntary petitions for relief under chapter 11
of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Northern District of Illinois (Eastern Division). The Debtors' cases are jointly
administered but have not been substantively consolidated. Prior to the Petition Date, we and the Debtors engaged in a reciprocal business relationship. On or about April 21, 2003 the Debtors
initiated a large number of avoidance actions, including an adversary proceeding in which the Debtors asserted claims against us for allegedly preferential transfers and nonpayment of overdue amounts
owed by iBasis to the Debtors totaling approximately $2.1 million. We have asserted defenses to the claims, invoked statutory defenses and filed proofs of claim for approximately
$0.5 million to which the trustee for the Debtors has objected. We expect to engage in a mediation to attempt to resolve these claims during the first quarter of 2009 and have determined that
it is probable that we will incur a liability of approximately $0.5 million and, accordingly, we have accrued that amount as of December 31, 2008.

Consumer Class Action

We were named in a putative consumer class action complaint, filed in the United States District Court for the District of New Jersey.
We were served on May 27, 2008. The putative class action plaintiff, Orlando Ramirez, asserted violations of consumer protection statutes in New Jersey and other states on behalf of an asserted
nationwide class of purchasers due to an alleged failure to adequately disclose the actual calling time available on iBasis' prepaid calling cards. We filed a motion to change venue to the Eastern
District of New York where named plaintiff resides and purchased the card. Plaintiffs were granted a voluntary dismissal, without prejudice, on July 9, 2008. On December 19, 2008, a
substantially similar complaint was filed against us on behalf of Mr. Ramirez in the United States District Court for the Eastern District of New York. As of March    , 2009, we have
not been served with this complaint. We believe that we have substantial defenses to the claims alleged in the complaint and, if served, we intend to vigorously defend against the claims asserted. We
cannot estimate the amount of losses, if any, from this matter, or whether any loss would be material to our financial

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(14)   Commitments and Contingencies (Continued)

condition,
results of operations or cash flows. As such, no amount has been accrued as of December 31, 2008.

Other Matters

We are also subject to suits for collection, related commercial disputes, claims by former employees, claims related to certain taxes,
claims from carriers and foreign service partners over reconciliation of payments for circuits, Internet bandwidth and/or access to the public switched telephone network, and claims from estates of
bankrupt companies alleging that we received preferential payments from such companies prior to their bankruptcy filings. We cannot estimate the amount of losses, if any, from these matters, or
whether any loss would be material to our financial condition, results of operations or cash flows. As such, no amount has been accrued as of December 31, 2008.

(15)   Related Party Transactions

Framework Services Agreement

As required by and in anticipation of the closing of the KPN Transaction, KPN GCS entered into a Framework Services Agreement with KPN
in June 2006. Under these agreements, revenues earned and costs incurred from KPN changed to primarily reflect market prices.

Pursuant
to the Framework Services Agreement:



The
Framework Services Agreement has a ten-year term, which is automatically extended for subsequent one-year periods unless either party provides at least three
months written notice prior to the end of the then current term. The Framework Services Agreement includes:



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iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(15)   Related Party Transactions (Continued)



Prior
to the Framework Services Agreement, KPN GCS entered into agreements with KPN and its affiliates and subsidiaries for the sale of international wholesale minutes and the provision
of corporate administrative services. The agreements for the sale and purchase of traffic from and to KPN and its affiliates and subsidiaries were made annually and reviewed periodically. These
agreements were based on the internal pricing policies of KPN and relevant regulatory requirements. These historical internal pricing policies were not necessarily indicative of the prices KPN GCS
would have paid or received had KPN GCS been a stand alone company.

Intellectual Property Cross-Licenses

In connection with the closing of the KPN Transaction, iBasis entered into an Intellectual Property License Agreement with Royal KPN.
Pursuant to the agreement, iBasis has been granted a worldwide, non-transferable, and non-exclusive license to use Royal KPN' portfolio of patents and certain other Royal KPN
intellectual property, and Royal KPN has been granted a worldwide, non-transferable, and non-exclusive license to use iBasis' portfolio of patents.

Revenue and Data and Telecommunication Costs

Revenue from KPN and its subsidiaries amounted to $226.1 million, $197.3 million, and $209.2 million for the years
ended December 31, 2008, 2007 and 2006, respectively, and is reported in Net revenue from related parties in the Consolidated Statement of Operations.

Under
the Framework Services Agreement that was established in June 2006, there was a reduction in price for the termination of international voice traffic coming from the retail
organization of KPN, compared to the prior pricing model in effect. As a result, net revenue from related parties decreased approximately $31.4 million in the period from June 2006 through
December 31, 2006. Costs also decreased as a result of lower prices for national and international transmission (approximately $0.9 million) and corporate services (approximately
$5.0 million) over the same period due the pricing under the Framework Services Agreement, compared to the prior pricing model in effect. In April 2005, the KPN internal pricing model was
adjusted as a result of organizational changes at Royal KPN,

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(15)   Related Party Transactions (Continued)

resulting
in an increase in Net revenue from related parties, and a decrease in data and telecommunication costsrelated parties.

Data
and telecommunication costs purchased from KPN and its subsidiaries amounted to $105.8 million, $114.2 million and $134.3 million for the years ended
December 31, 2008, 2007 and 2006, respectively, and is reported in Data and telecommunications costsrelated parties in the Consolidated Statement of Operations. These costs relate
to services for the procurement and transmission of sending and receiving traffic (provided to KPN GCS by KPN and its subsidiaries). Agreements between KPN GCS and KPN and its subsidiaries for the
sale of wholesale international minutes were made at various prices and quantities.

Allocated expenses

Historically, KPN GCS relied on KPN for a substantial part of its operational and administrative support, for which it was allocated
costs primarily consisting of costs for centralized research, legal, human resources, payroll, accounting, employee benefits, facilities, insurance, information technology, telecommunications,
treasury and other corporate and infrastructure costs. These expenses were allocated based on the ratio of KPN GCS revenue, operating expenses, and number of employees compared to comparable revenue,
operating expenses, and number of employees of KPN, as appropriate for each cost category. However, these allocated expenses did not necessarily reflect the utilization of services provided to or the
benefits received by KPN GCS.

Since
the date of the KPN Transaction, as part of our integration process, we have reduced the level of services and support required from KPN for our Netherlands operations. In certain
cases, such as audit fees, we are now directly responsible for these costs. As a result of our integration efforts to-date, costs incurred directly from KPN have been substantially reduced
from previous periods. To further capture cost savings from our integration efforts, we are restructuring our operations in The Netherlands. We expect that our operations in The Netherlands will
become primarily sales and product management, with strategic support from locations outside The Netherlands. As this plan has not yet been finalized, we cannot yet determine the amount of any future
restructuring charges we may incur and the timing of such charges. In addition, in the future, we will be further reducing the operational services we purchase from KPN as integration projects are
completed.

Engineering
and network operations expenses include allocated costs from KPN, which were $6.2 million, $8.4 million and $8.9 million for the years ended
December 31, 2008, 2007 and 2006, respectively. The decline in costs in 2008 compared to 2007 reflects less required support from KPN for our TDM network.

Selling,
general and administrative expenses include allocated corporate and divisional costs from KPN, which were $2.5 million, $13.3 million and $20.8 million for
the years ended December 31, 2008, 2007 and 2006, respectively. The significant decline in costs in 2008 compared to 2007 reflects significantly lower costs for information services and other
corporate administrative support.

Prior
to the KPN Transaction, there was no allocation of interest expense from KPN as there was no debt specific to KPN GCS.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(15)   Related Party Transactions (Continued)

Working Capital and Debt Adjustments related to KPN Transaction

In accordance with the Share Purchase Agreement for the KPN Transaction, a post-closing adjustment was required if
(i) iBasis' working capital was lower than or exceeded $37,100,000; (ii) iBasis' debt exceeded or was lower than $2,900,000; (iii) the combined working capital of KPN GCS was
lower than or exceeded ($6,100,000); and/or (iv) the combined debt of KPN GCS exceeded $0, as of the date of the closing of the KPN Transaction. Based on iBasis' balance sheet position on the
date of the closing of the KPN Transaction, working capital was $13,353,000 less than the specified level of $37,100,000, and debt was $1,776,000 less than the specified level of $2,900,000. As a
result, a payment of $11,577,000 is due to KPN from iBasis. Based on KPN GCS's balance sheet position on the date of the closing of the KPN Transaction, working capital exceeded the specified level of
($6,100,000) by $3,945,000 and debt was at the specified level of $0. As a result, payment of $3,945,000 is due to KPN from iBasis.

In
2008, KPN forgave $0.8 million in expenses incurred by KPN GCS since the closing of the KPN Transaction. As a result, the amount due to KPN has been reduced by this amount and
was recorded
as a contribution to equity. These expenses have been recorded in our results of operations. The total amount of $14.7 million due to KPN was scheduled to be paid by iBasis in three successive
quarterly installments through the third quarter of 2008, with interest at the rate of 6% per annum. In May 2008, we made the first payment of $5.2 million, including interest, to KPN. In
September 2008, we revised the terms of the remaining balance of $10.3 million due to KPN to extend the payment date on the second installment payment to March 2009 and the final installment to
June 2009. In addition, the interest rate was increased to 7% on the principal amount due, effective October 1, 2008, and we paid additional interest of $60,000 relating to the extension of the
second installment that was due June 30, 2008.

As
of December 31, 2008 and 2007, unpaid principal and accrued interest due to KPN was $10.5 million and $15.5 million, respectively.

Accounts Payable and Accounts Receivable to Related Parties

As of December 31, 2008, we had accounts receivable due from KPN and its subsidiaries of $2.1 million and this amount is
reflected in Accounts receivablerelated parties on the Consolidated Balance Sheets. This amount is net of $10.5 million outstanding that is due to KPN, including interest, for the
post-closing working capital and debt adjustments of iBasis and KPN GCS. As of December 31, 2007, we had accounts payable to KPN and its subsidiaries of $11.8 million and
this amount is reflected in Accounts payablerelated parties on the Consolidated Balance Sheets. This balance included the $15.5 million due to KPN for the post-closing
working capital and debt adjustments of iBasis and KPN GCS.

(16)   Stockholders' Equity

Authorized Capital Stock

We have authorized for issuance 170 million shares of common stock, $0.001 par value per share.

We
also have authorized for issuance 15 million shares of preferred stock, $0.001 par value per share. There are no shares of preferred stock issued or outstanding.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(16)   Stockholders' Equity (Continued)

Stock Incentive Plan

At the Annual Meeting of Shareholders held on September 27, 2007, the shareholders of iBasis, Inc. approved the adoption
of the iBasis, Inc. 2007 Stock Plan. The 2007 Stock Plan authorizes the grant of up to 3,500,000 shares of common stock for the issuance of stock options, restricted and unrestricted stock
awards and other stock-based awards to employees, consultants and directors of iBasis. Under the terms of the 2007 Stock Plan, the exercise price of options granted shall be determined by the Board of
Directors and for incentive stock options shall not be less than fair market value of our common stock on the date of grant. Options vest quarterly in equal installments over four years, provided that
no options shall vest during the employees' first year of employment. The expiration date of each stock option shall be determined by the Board of Directors, but shall not exceed 10 years from
the date of grant. The 2007 Stock Plan replaces the iBasis, Inc. Amended and Restated 1997 Stock Incentive Plan, which expired on August 11, 2007. Pursuant to the terms of the Amended
and Restated 1997 Stock Incentive Plan, all outstanding options under such plan will remain in effect until they expire by their terms.

Warrants

At December 31, 2008, we had the following warrants to purchase shares of our common stock outstanding:

Shares
Outstanding

Exercise
Price Per
Share(In thousands)Warrant issued for investment banking services in connection with private equity placement of iBasis in September 2004


365

$
6.30Warrant issued for investment banking advisory services for iBasis in 2006


67


9.00Total warrants outstanding


432


(17)   Foreign Currency Translation of Historical KPN GCS Financial Statements

The historical KPN GCS financial statements were denominated in Euros, the reporting currency of KPN GCS. The financial statements were translated into US dollars for inclusion in this
Form 10-K.

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Table of Contents

iBasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(18)   Summary of Quarterly Information (Unaudited)

The following table reflects our quarterly results of operations for the years ended December 31, 2008 and 2007.

Year Ended December 31, 2008

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter(1)

Total
YearTotal net revenue

$
324,903

$
360,840

$
338,023

$
299,819

$
1,323,585Total costs and operating expenses


323,178


357,310


336,820


514,810


1,532,118Income (loss) from operations


1,725


3,530


1,203


(214,991
)

(208,533
)Net income (loss)

$
(2,072
)
$
13

$
3,294

$
(232,224
)
$
(230,989
)Basic and diluted net income (loss) per share

$
(0.03
)
$
0.00

$
0.05

$
(3.26
)
$
(3.15
)




Year Ended December 31, 2007

First Quarter(2)

Second Quarter(2)

Third Quarter

Fourth Quarter

Total YearTotal net revenue

$
178,550

$
193,684

$
215,679

$
350,645

$
938,558Total costs and operating expenses


170,867


182,508


210,002


350,377


913,754Income from operations


7,683


11,176


5,677


268


24,804Net income (loss)

$
5,639

$
8,357

$
4,146

$
(2,019
)
$
16,123Basic and diluted net income (loss) per share

$
0.14

$
0.21

$
0.10

$
(0.03
)
$
0.33


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Item 9.Change in and Disagreements with Accountants on Accounting and Financial Disclosure



Item 9A.Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

(a)   Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the
design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible
controls and procedures relative to their costs.

Based
on management's evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2008, our disclosure controls and procedures are
designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

(b)   Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Exchange Act.

Our
management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making its assessment of internal control over financial
reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") inInternal ControlIntegrated
Framework.Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2008 based on the criteria
set forth by COSO inInternal ControlIntegrated Framework.

Our
independent registered public accounting firm, PricewaterhouseCoopers LLP, that audited the financial statements included in this annual Report on From 10-K has
issued an attestation report on our internal control over financial reporting as of December 31, 2008, which is included in Item 8 of this annual report on Form 10-K.

(c)   Changes in Internal Control

There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during
the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.Other Information



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Table of Contents

PART III

Item 10.Directors, Executive Officers and Corporate Governance

Information required by this item is included under the captions "Management and Corporate Governance Matters," "Section 16(a)
Beneficial Ownership Reporting Compliance," and "Code of Conduct and Ethics" in the iBasis' Proxy Statement for the 2009 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 11.Executive Compensation

The information required by this item is included under the captions "Executive Officer and Director Compensation," "Compensation
Discussion and Analysis," "Management and Corporate governance MattersCompensation Committee Interlocks and Insider Participation," "Compensation Committee Report" in the iBasis' Proxy
Statement for the 2009 Annual Meeting of Stockholders and is incorporated herein by reference.

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

The information required by this item is included under the captions "Security Ownership of Certain Beneficial Owners and Management"
and "Equity Compensation Plan Information" in the iBasis' Proxy Statement for the 2009 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 13.Certain Relationships and Related Transactions, and Director Independence

The information required by this item is included under the captions "Certain Relationships and Related Transactions" and "Management
and Corporate Governance Matters" in the iBasis' Proxy Statement for the 2009 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 14.Principal Accounting Fees and Services

The information required by this item is included under the caption "Independent Public Accountants" in the iBasis' 2009 Proxy
Statement for the 2009 Annual Meeting of Stockholders and is incorporated herein by reference.

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Table of Contents

PART IV

Item 15.Exhibits, Financial Statements and Schedules

(a)   We
have filed the following documents as part of this Annual Report on Form 10-K:



PageConsolidated Financial Statements:Reports of Independent Registered Public Accounting Firms

64Financial StatementsConsolidated Balance Sheets as of December 31, 2008 and 2007

66Consolidated Statements of Operations for the Three Years Ended December 31, 2008, 2007 and 2006

67Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 2008, 2007 and
2006

68Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2008, 2007 and 2006

69Notes to Consolidated Financial Statements

70


(2) Index to Financial Statements Schedules:All financial statement schedules have been omitted because the required information is
included in our
consolidated financial statements, or the related notes, or is not applicable.



Exhibit
Number

Description2.1

Share Purchase and Sale Agreement between the Registrant and KPN B.V. (formerly KPN Telecom B.V.), dated as of June 21, 2006 (incorporated by reference from Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q filed August 9, 2006 (file no. 000-27127)).2.1.1

Amendment No. 1 to Share Purchase and Sale Agreement between the Registrant and KPN B.V. dated as of December 18, 2006 (incorporated by reference from Exhibit 10.1 to the Registration's Current Report
on Form 8-K filed December 18, 2006 (file no. 000-27127)).2.1.2

Amendment No. 2 to Share Purchase and Sale Agreement between the Registrant and KPN B.V. dated as of April 27, 2007 (incorporated by reference from Exhibit 10.1 to the Registration's Current Report on
Form 8-K filed April 27, 2007 (file no. 000-27127)).2.1.3

Amendment No. 3 to Share Purchase and Sale Agreement between the Registrant and KPN B.V. dated as of August 1, 2007 (incorporated by reference from Exhibit 10.1 to the Registration's Current Report on
Form 8-K filed August 7, 2007 (file no. 000-27127)).3.1

First Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference from Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 filed on December 21, 2007 (file
no. 333-148307)).3.2

Second Amended and Restated By-Laws of the Registrant (incorporated by reference from Exhibit 3.01 to the Registrant's Current Report on Form 8-K filed on October 5, 2007 (file no. 000-27127)).3.2.1

Amendment No. 1 to the Second Amended and Restated By-Laws of the Registrant (incorporated by reference from Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on November 14, 2007 (file
no. 000-27127)).


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Table of Contents

Exhibit
Number

Description10.1

Lease, dated January 8, 1999, as amended, between the Registrant and Rodger P. Nordblom and Peter C. Nordblom as Trustees of Northwest Associates under Declaration of Trust dated December 9, 1971 with respect to
property located at 20 Second Avenue, Burlington, Massachusetts (incorporated by reference from Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (file no. 333-85545)).10.2

Lease, dated as of August 7, 1998, between the Registrant and 111 Eighth Avenue LLC, relating to property located at 111 Eighth Avenue, New York, New York (incorporated by reference from Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 (file no. 333-85545)).10.3

Lease, dated December 11, 1998 between the Registrant and Downtown Properties L.L.C., with respect to property located at 611 Wilshire Boulevard, Los Angeles, California (incorporated by reference from
Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (file no. 333-85545)).10.4

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)).10.5

iBasis, Inc. 2007 Stock Plan (incorporated by reference from Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on October 3, 2007 (file no. 000-27127)).10.6

2008 Executive Officer Bonus Plan (incorporated by reference from Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on March 3, 2008 (file no. 000-27127)).10.7*

2009 Executive Officer Bonus Plan.10.8*

Company 409A Policy.10.9

Form of Stock Option Agreement under the iBasis, Inc. 2007 Stock Plan (incorporated by reference from Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on October 3, 2007 (file
no. 000-27127)).10.10

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)).10.11

Employment Agreement between the Registrant and Gordon J. VanderBrug, dated as of August 11, 1997. (incorporated by reference from Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (file
no. 333-85545)).10.12

Offer Letter and Employment Agreement, between the Registrant and Mark S. Flynn, dated January 30, 2007 (incorporated by reference from Exhibit 10.77 to the Registrant's Quarterly Report on Form 10-Q for
the three months ended March 31, 2007 (file no. 000-27127)).10.13

Offer Letter between the Registrant and Edwin van Ierland, dated September 11, 2007 (incorporated by reference from Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the three months ended
September 30, 2007 (file no. 000-27127)).10.14

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)).


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Table of Contents

Exhibit
Number

Description10.15

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)).10.16

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)).10.17

Second Amended and Restated Loan and Security Agreement dated October 2, 2007, between iBasis, Inc. and Silicon Valley Bank (incorporated by reference from Exhibit 10.1 to the Registrant's Current Report on
Form 8-K filed on October 9, 2007 (file no. 000-27127)).10.18

First Loan Modification Agreement dated as of April 28, 2008 between Silicon Valley Bank and iBasis, Inc. (incorporated by reference from Exhibit 99.1 to the Registrant's Current Report on Form 8-K
filed May 2, 2008 (file no. 000-27127)).10.19

Second Loan Modification Agreement dated as of September 30, 2008 between Silicon Valley Bank and iBasis, Inc. (incorporated by reference from Exhibit 99.1 to the Registrant's Current Report on
Form 8-K filed October 6, 2008 (file no. 000-27127)).10.20*

Third Loan Modification Agreement dated as of December 30, 2008 between Silicon Valley Bank and iBasis, Inc. and signed on January 26, 2009.10.21

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 24, 2004 (file no. 000-27127)).10.22

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 Form S-1, filed
October 18, 2004 (file no. 333-119796).10.23

Registration Rights Agreement dated as of October 1, 2007, between iBasis, Inc. and KPN B.V. (incorporated by reference from Exhibit 4.01 to the Registrant's Current Report on Form 8-K, filed
October 5, 2007 (file no. 333-27127)).21.1*

Significant Subsidiaries of the Registrant.23.1*

Consent of Independent Registered Public Accounting Firm.23.2*

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

Certificate of iBasis, Inc Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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SIGNATURES

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

iBASIS, INC.March 13, 2009

By:

/s/ OFER GNEEZY Ofer Gneezy President and Chief Executive Officer


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

Name

Title

Date/s/ OFER GNEEZY Ofer Gneezy

President and Chief Executive Officer and Director (Principal Executive Officer)

March 13, 2009/s/ GORDON VANDERBRUG Gordon J. VanderBrug

Executive Vice President and Director

March 13, 2009/s/ RICHARD TENNANT Richard G. Tennant

Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

March 13, 2009/s/ EELCO BLOK Eelco Blok

Director

March 13, 2009/s/ ROBERT BRUMLEY Robert H. Brumley

Director

March 13, 2009/s/ CHARLES CORFIELD Charles N. Corfield

Director

March 13, 2009/s/ JOOST FARWERCK Joost Farwerck

Director

March 13, 2009/s/ W. FRANK KING W. Frank King

Director

March 13, 2009


---