IBASIS INC - 10-Q Quarterly Report

Back to GetFilings.com

================================================================================

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-27127

----------

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 executive offices, including zip code)

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

----------

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 /X/ No / /

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

As of October 29, 2004, there were 62,470,856 shares of the Registrant's Common
Stock, par value $0.001 per share, outstanding.

================================================================================

iBASIS, INC.
INDEX

2

PART I - FINANCIAL INFORMATION

iBASIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

3

iBASIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

4

iBASIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

5

iBASIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

6

iBASIS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BUSINESS, MANAGEMENT PLANS AND PRESENTATION

BUSINESS

We are a leading wholesale carrier of international long distance telephone
calls and a provider of retail prepaid calling services. Our continuing
operations consist primarily of our Voice-Over-Internet-Protocol, or "VoIP",
business. We offer wholesale services through our worldwide network to
carriers, telephony resellers and others around the world by operating
through various service agreements with local service providers in the United
States, Europe, Asia, the Middle East, Latin America, Africa and Australia.
During the third quarter of 2003, we introduced our retail prepaid calling
card services and have marketed such services primarily to ethnic communities
within major domestic markets through distributors.

Beginning in the second quarter of 2004, our recently created operating segment,
retail prepaid calling card services and other enhanced services ("Retail")
became a reportable business segment, in addition to our international wholesale
VoIP services ("Wholesale"). Since we introduced our retail prepaid calling card
services, revenue from our Retail business had been less than 10% of total
revenue. Beginning in the second quarter of 2004, revenue from our Retail
business has exceeded 10% of total net revenue. In September 2004, we
launched a prepaid calling service as part of our Retail business segment,
Pingo, offered directly to consumers through an eCommerce web interface.
Revenue from Pingo in the third quarter of 2004 was insignificant.

We have a history of operating losses and, as of September 30, 2004, our
accumulated deficit was $428.5 million and our stockholders' deficit was $24.6
million. We used $1.8 million and $3.2 million in cash from operations in the
nine months ended September 30, 2004 and the year ended December 31, 2003,
respectively. These results are primarily attributable to the expenditures
necessary to build our network and develop and expand our market.

In June 2004, we completed a refinancing of our outstanding debt obligations. As
part of the refinancing, we completed an exchange offer (the "Exchange Offer"),
pursuant to which $37.3 million of our outstanding 5 3/4% Convertible
Subordinated Notes due in March 2005, representing approximately 98% of the
total amount of the notes outstanding, were tendered for the same principal
amount of new 6 3/4% Convertible Subordinated Notes due in June 2009.
Approximately $0.9 million of the 5 3/4% Convertible Subordinated Notes due in
March 2005 remain outstanding after the Exchange Offer. Simultaneously with the
Exchange Offer, we prepaid all $25.2 million of our 11 1/2% Senior Secured Notes
due in January 2005 for cash equal to the principal amount plus accrued but
unpaid interest and the issuance of warrants exercisable for an aggregate of
5,176,065 shares of our common stock, at $1.85 per share. We issued $29.0
million of new 8% Secured Convertible Notes due in June 2007 of which $25.2
million was used to prepay the 11 1/2% Senior Secured Notes due in January 2005.
The new 6 3/4% Convertible Subordinated Notes and the new 8% Secured Convertible
Notes due in June 2007 are convertible into shares of common stock at $1.85 per
share.

In September 2004, we completed a private equity placement of 15,000,000 shares
of our common stock at $2.10 per share, for total gross proceeds of $31.5
million, to a group of institutional and accredited investors. Investment
banking fees and other costs of the transaction were approximately $1.5 million,
resulting in net proceeds to us from the private equity placement of
approximately $30.0 million. The net proceeds from the private equity placement
will be used for working capital requirements, capital asset purchases and
general corporate purposes.

MANAGEMENT PLANS

We continue to expand our market share in international wholesale VoIP
services by expanding our customer base and by introducing cost-effective
solutions for our customers to interconnect with our network. During the
first quarter of 2004, we introduced our DirectVoIP service which eliminates
the need for certain switches for our customers to interconnect to our
network, thus reducing capital equipment costs for both us and our customers.
Our strategy is to continue the deployment of our Retail calling services
which leverage our international VoIP network with our real time back office
systems, and have the potential to deliver higher margins and improve cash
flow. In addition, we continue to increase the traffic we terminate to mobile
phones, which generally delivers higher average revenue per minute and
margins than typical fixed-line traffic. We also continue to control
operating expenses and capital expenditures, as well as to monitor and manage
accounts payable and accounts receivable, and restructure existing debt to
enhance cash flow.

Our plans include:
- expanding our market share for our Retail calling services;
- increasing revenues generated through mobile phone terminations;
- increasing our customer base by introducing cost-effective solutions to
interconnect with our network;
- use of our switchless architecture, which eliminates the need for costly
telecommunication switches and other equipment; and
- aggressive management of credit risk.

From 2001 to date, we took a series of actions to reduce operating expenses,
restructure operations, reduce outstanding debt

7

and provide additional liquidity. Such actions primarily included:

- reductions in workforce and consolidation of Internet Central Offices.
As a result of our restructuring programs and our continued focus on
controlling expenses, our research and development, selling and marketing
and general and administrative expenses, in total, declined to $28.6
million in 2003 from $53.2 million in 2002;

- sale of our previous messaging business and the assets associated with
our previous Speech Solutions Business;

- settlement of certain capital lease obligations;

- repurchase of a portion of our 5 3/4% Convertible Subordinated Notes due
in March 2005 for cash;

- exchange of a portion of our 5 3/4% Convertible Subordinated Notes due
in March 2005 for 11 1/2% Senior Secured Notes due in January 2005 and
warrants to purchase common stock;

- establishment of a new credit facility with a bank; and

- completion of our refinancing plan, pursuant to which $37.3 million (98%
of the total outstanding) of our 5 3/4% Convertible Subordinated Notes due
in March 2005 were tendered for the same principal amount of our new 6 3/4%
Convertible Subordinated Notes due in June 2009 and we issued $29.0 million
of 8% Secured Convertible Notes due in June 2007 to finance the prepayment
of all $25.2 million of our 11 1/2% Senior Secured Notes due in January
2005.

- completion of a private equity placement in September 2004 that resulted
in net proceeds to us of approximately $30.0 million.

We anticipate that the September 30, 2004 balance of $46.6 million in cash and
cash equivalents, together with cash flow generated from operations, will be
sufficient to fund our operations and debt service requirements for at least the
next twelve months.

8

PRESENTATION

The unaudited condensed consolidated financial statements presented herein have
been prepared by us and, in the opinion of management, reflect all adjustments
of a normal recurring nature necessary for a fair presentation. Interim results
are not necessarily indicative of results for a full year.

The unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to those rules and regulations, but we
believe that the disclosures are adequate to make the information presented not
misleading. The condensed consolidated financial statements and notes included
herein should be read in conjunction with the consolidated financial statements
and notes in our Annual Report on Form 10-K for the year ended December 31,
2003.

(2) STOCK BASED COMPENSATION

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

At September 30, 2004, we had one stock-based employee compensation plan. The
following table illustrates the effect on net income or net loss, and net income
or net loss per share, if we had applied the fair value recognition provisions
of SFAS No. 123.

9

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

(3) BUSINESS SEGMENT INFORMATION

Beginning in the second quarter of 2004, our recently created operating segment,
retail prepaid calling card services and other enhanced services ("Retail")
became a reportable business segment, in addition to our international wholesale
VoIP services ("Wholesale"). Since we introduced our retail prepaid calling
card services, revenue from our Retail business had been less than 10% of
total revenue. Beginning in the second quarter of 2004, revenue from our
Retail business has exceeded 10% of total net revenue.

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

Our Retail business consists of our retail prepaid calling card services and
other enhanced services. To date, we have marketed our retail prepaid calling
card services primarily to ethnic communities within major domestic markets
through distributors. Revenue from our retail prepaid calling card services were
92% and 83% of our total Retail revenue in the three and nine months ended
September 30, 2004, respectively. We expect that revenue from our retail prepaid
calling card services will continue to be an increasingly large percentage of
our total Retail revenue in the future. Our other enhanced services primarily
consist of revenue derived from the outsourcing of our retail prepaid calling
card platform.

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

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

(4) DISCONTINUED OPERATIONS

LOSS FROM DISCONTINUED OPERATIONS. On July 15, 2002 we completed the sale of
substantially all the assets of our Speech Solutions Business for $18.5
million in cash ($1.5 million of this amount was held in escrow until March
2004). The loss from discontinued operations has been recorded under the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long Lived Assets." In the fourth quarter of 2003, we recognized additional
consideration of $1.3 million for an earn-out payment based on the
achievement of certain 2003 revenue-based milestones associated with this
business. The cash payment associated with the earn-out was $1.1 million and
was received in February 2004. In addition, in March 2004, we received the
$1.5 million escrow balance that had been held in escrow from the sale of
this business since July 2002. In the third quarter of 2004, we recognized
income from discontinued operations of $1.9 million resulting from the
expiration of certain contingent obligations.

(5) LONG-TERM INVESTMENT IN NON-MARKETABLE SECURITY

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

The process of assessing whether the equity investment's net realizable value is
less than its carrying cost requires a significant amount of judgment due to the
lack of a mature and stable public market for investments of this type. In
making this judgment, we carefully considered the investee's most recent
financial results, cash position, recent cash flow data, projected cash flows
(both short and long-term), financing needs, recent financing rounds, most
recent valuation data, the current investing

10

environment, management or ownership changes, and competition. This valuation
process is based primarily on information that we request, receive and discuss
with the investees' management on a quarterly basis. Such evaluation is
performed on a quarterly basis.

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

(6) ACCRUED RESTRUCTURING COSTS

During 2001 and 2002, the Company announced a restructuring plan to better align
the organization with its corporate strategy and recorded a charge to its
Statements of Operations in those periods in accordance with the criteria set
forth in EITF 94-3 and SEC Staff Accounting Bulletin 100. The restructuring
included the write-off of property and equipment, the termination of certain
contractual obligations, exiting certain leased facilities and the reduction in
the Company's workforce resulting in employee benefit costs.

As of September 30, 2004, the accrued restructuring costs consisted of costs
accrued for certain leased facilities obligations. A summary of the accrued
restructuring costs for the nine months ended September 30, 2004 is as follows:

(IN THOUSANDS)

11

(7) LONG-TERM DEBT

Long-term debt consists of the following:

In June 2004, we completed a refinancing of our outstanding debt obligations. As
part of the refinancing, we completed an exchange offer, pursuant to which $37.3
million of our 5 3/4% Convertible Subordinated Notes due in March 2005,
representing approximately 98% of the total amount outstanding, were tendered
for the same principal amount of new 6 3/4% Convertible Subordinated Notes due
in June 2009. Approximately $0.9 million of the 5 3/4% Convertible Subordinated
Notes due in March 2005 remain outstanding after the exchange offer.
Simultaneously with the exchange offer, we prepaid all $25.2 million of our 11
1/2% Senior Secured Notes due in January 2005 for cash equal to the principal
amount plus accrued but unpaid interest and the issuance of warrants exercisable
for an aggregate of 5,176,065 shares of our common stock at $1.85 per share. We
issued $29.0 million of new 8% Secured Convertible Notes due in June 2007, of
which $25.2 million was used to prepay the 11 1/2% Senior Secured Notes due in
January 2005. The 8% Secured Convertible Notes due in June 2007 are convertible
into shares of common stock at $1.85 per share. In the third quarter of 2004,
holders of $35,000 of 6 3/4% Convertible Subordinated Notes due in June 2009
voluntarily converted their notes into 18,918 shares of common stock at the
conversion price of $1.85 per share.

In December 2003, we amended and extended our revolving line of credit with our
bank. The new $15.0 million revolving line of credit replaced two secured lines
of credit that totaled $15.0 million. The revolving line of credit bears
interest at the bank's prime rate plus 1%, matures on January 5, 2005 and is
collateralized by substantially all of our assets. Borrowings under the
revolving line of credit are on a formula basis and are limited to eligible
accounts receivable. The revolving line of credit requires us to comply with
various non-financial covenants and financial covenants, including minimum
profitability. At December 31, 2003, we had $2.3 million in borrowings
outstanding under this line. At September 30, 2004, we had no borrowings
outstanding under this line. At September 30, 2004 we had outstanding letters of
credit totaling $2.8 million and unused borrowing capacity of $6.1 million under
this line.

In the three months ended September 30, 2004, we entered into capital lease
agreements to finance $1.8 million in equipment purchases for The iBasis
Network. The capital lease agreements have a term of three years.

(8) GAIN ON EXCHANGES OF 5 3/4% CONVERTIBLE SUBORDINATED NOTES

During the year ended December 31, 2003, we entered into agreements with
principal holders of our 5 3/4% Convertible Subordinated Notes which resulted in
the retirement of $50.4 million of such notes in exchange for new debt
instruments at 50% of the face value of the retired notes. Under the terms of
the agreement, the holders of the retired notes received $25.2 million of 11
1/2% Senior Secured Notes and warrants to purchase 4,915,416 shares of our
common stock. Each warrant has an initial exercise price of $0.65 per share and
is exercisable over a five-year term. The 11 1/2% Senior Secured Notes had a
maturity date of January 15, 2005 and shared in a

12

second priority lien on our assets and were subordinated to our revolving line
of credit with our bank.

In accordance with SFAS No. 15, "Accounting by Debtors and Creditors
Regarding Troubled Debt Restructuring," we recorded a gain on the exchange of
approximately $16.6 million during the nine months ended September 30, 2003,
of which $12.9 million related to the first quarter of 2003 and $3.7 million
related to the second quarter of 2003. SFAS No. 15 requires that the gain on
the exchange be recorded net of the accrual for future interest payments on
the 11 1/2% Senior Secured Notes, the fair value of the warrants issued, the
reduction of the net book value of the deferred financing costs originally
capitalized with the issuance of our 5 3/4% Convertible Subordinated Notes
and any other fees or costs.

The gain recognized for the debt exchanges that occurred in the nine months
ended September 30, 2003 was calculated as follows:

(9) NET (LOSS) INCOME PER SHARE

Basic and diluted net loss per common share is determined by dividing net loss
by the weighted average common shares outstanding during the period. Basic net
loss per share and diluted net loss per share are the same, as outstanding stock
options, shares issuable upon conversion of the 6 3/4% Convertible Subordinated
Notes, shares issuable upon conversion of the remaining 5 3/4% Convertible
Subordinated Notes, shares issuable upon conversion of the 8% Secured
Convertible Notes, and warrants to purchase common shares are anti-dilutive.
Basic net income per common share is determined by dividing net income by the
weighted average common shares outstanding during the period. Diluted net income
per common share is determined by dividing the net income by the weighted
average common shares, which includes weighted average common shares outstanding
and weighted average outstanding stock options, shares issuable upon conversion
of the 6 3/4% Convertible Subordinated Notes, shares issuable upon conversion of
the remaining 5 3/4% Convertible Subordinated Notes, shares issuable upon
conversion of the 8% Secured Convertible Notes and warrants to purchase common
shares.

The following common shares have been excluded from the computation of basic net
income or loss for the periods presented:

13

(10) CONTINGENCIES

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

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

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

On June 11, 2004, we and the individual defendants, as well as many other
issuers named as defendants in the class action proceeding, entered into an
agreement-in-principle to settle this matter, and on June 14, 2004, this
settlement was presented to the court. A motion for preliminary approval of the
settlement was filed on June 25, 2004 and is pending. Once the court
preliminarily approves the settlement and notice has been mailed, there will be
an objection period, followed by a hearing for final approval of the settlement.
Although we believe

14

that we and the individual defendants have meritorious defenses to the claims
made in the complaints, in deciding to pursue settlement, we considered, among
other factors, the substantial costs and the diversion of our management's
attention and resources that would be required by litigation.

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

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

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

(11) SUBSIDIARY GUARANTORS

In June 2004, we completed a refinancing of our outstanding debt obligations. As
part of the refinancing, we prepaid all $25.2 million of our 11 1/2% Senior
Secured Notes due in January 2005 ("Existing Senior Notes") plus accrued but
unpaid interest and issued warrants exercisable for an aggregate of 5,176,065
shares of our common stock at $1.85 per share (the "Warrants"). In conjunction
with the refinancing we issued $29.0 million of new 8% Secured Convertible Notes
("New Secured Notes") due in June 2007, proceeds of $25.2 million were used to
prepay the Existing Senior Notes. The New Secured Notes are convertible into
shares of common stock at $1.85 per share. Our New Secured Notes due in June
2007 are fully and unconditionally guaranteed, jointly and severally, by our
wholly-owned subsidiaries, iBasis Global, Inc., iBasis Holdings, Inc. and iBasis
Securities Corporation.

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

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

15

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

16

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
(UNAUDITED)

17

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
(UNAUDITED)

18

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
(UNAUDITED)

19

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
(UNAUDITED)

20

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

OVERVIEW

We are a leading wholesale carrier of international long distance telephone
calls and a provider of retail prepaid calling services. Our continuing
operations consist primarily of our Voice-Over-Internet-Protocol ("VoIP")
business. We offer wholesale services through our worldwide network to carriers,
telephony resellers and others around the world by operating through various
service agreements with local service providers in the United States, Europe,
Asia, the Middle East, Latin America, Africa and Australia.

During 2003, many major telecommunications carriers announced plans to deploy
VoIP technology in their networks, to migrate their traffic to VoIP, and to
introduce VoIP-based services to their retail customers. In addition, new
providers of retail telephony services based on VoIP emerged during 2003. We
believe this trend may have a positive impact on our business in the future by
lowering the level of capital investment required for our network and
potentially positioning us to receive a larger volume of international traffic
in the future. Telephone calls that enter The iBasis Network as traditional PSTN
(TDM) calls must be converted into Internet protocol (IP) for transport through
our VoIP infrastructure and over the public Internet. In contrast, telephone
calls that enter our network already in the form of IP do not require conversion
from traditional PSTN to IP through a VoIP gateway. Thus, VoIP-based traffic we
receive require a lower capital investment in our network. These major carriers
have initially focused their VoIP plans on their U.S. networks, rather than
their international network. We believe that it may be more economical for these
major carriers to send their VoIP-based international traffic to our network
rather than making the capital investment necessary in their international
network infrastructure. Many of the new providers of VoIP-based telephony
services do not have an international infrastructure in place and, similarly, we
believe it may be more economical for these emerging carriers to send their
VoIP-based international traffic to us.

During the third quarter of 2003, we introduced our retail prepaid calling card
services and have marketed such services primarily to ethnic communities within
major domestic markets through distributors. Our entry into the retail prepaid
calling card business is based on our strategy to leverage our existing
international VoIP network with additional services that have the potential to
deliver higher margins than our wholesale international VoIP services. In
addition, the retail prepaid calling card business typically has a faster
cash collection cycle than wholesale international VoIP services. Beginning
in the second quarter of 2004, our recently created operating segment, retail
prepaid calling card services and other enhanced services ("Retail") became a
reportable business segment, in addition to our international wholesale VoIP
services. Since we introduced our retail prepaid calling card services,
revenue from our Retail business had been less than 10% of total revenue.
Beginning in the second quarter of 2004, revenue from our Retail business has
exceeded 10% of our total net revenue. In September 2004, we launched a
prepaid calling service as part of our Retail business segment, Pingo,
offered directly to consumers through an eCommerce web interface. Revenue
from Pingo in the third quarter of 2004 was insignificant.

We have a history of operating losses and, as of September 30, 2004, our
accumulated deficit was $428.5 million and our stockholders' deficit was $24.6
million. We used $1.8 million and $3.2 million in cash from operations in the
nine months ended September 30, 2004 and the year ended December 31, 2003,
respectively.

In June 2004, we completed a refinancing of our outstanding debt obligations.
As part of the refinancing, we completed an exchange offer pursuant to which
$37.3 million of our outstanding 5 3/4% Convertible Subordinated Notes due in
March 2005, representing approximately 98% of the total amount of the notes
outstanding, were tendered for the same principal amount of new 6 3/4%
Convertible Subordinated Notes due in June 2009. Approximately $0.9 million
of the 5 3/4% Convertible Subordinated Notes due in March 2005 remain
outstanding after the exchange offer. Simultaneously with the exchange offer,
we prepaid all $25.2 million of our 11 1/2% Senior Secured Notes due in
January 2005 for cash equal to the principal amount plus accrued but unpaid
interest and the issuance of warrants exercisable for an aggregate of
5,176,065 shares of our common stock at $1.85 per share. We issued $29.0
million of new 8% Secured Convertible Notes due in June 2007 of which $25.2
million was used to prepay the 11 1/2% Senior Secured Notes due in January
2005. The new 6 3/4% Convertible Subordinated Notes due in June 2009 and the
new 8% Secured Convertible Notes due in June 2007 are convertible into shares
of common stock at $1.85 per share.

21

In September 2004, we completed a private equity placement of 15,000,000 shares
of our common stock at $2.10 per share, for total gross proceeds of $31.5
million, to a group of institutional and accredited investors. Investment
banking fees and other costs of the transaction were approximately $1.5 million,
resulting in net proceeds to us from the private equity placement of
approximately $30.0 million. The net proceeds from the private equity placement
will be used for working capital requirements, capital asset purchases and
general corporate purposes.

MANAGEMENT PLANS

We continue to expand our market share in international wholesale VoIP
services by expanding our customer base and by introducing cost-effective
solutions for our customers to interconnect with our network. During the
first quarter of 2004, we introduced our DirectVoIP service which eliminates
the need for certain switches for our customers to interconnect to our
network, thus reducing capital equipment costs for both us and our customers.
Our strategy is to continue the deployment of our Retail calling services
which leverage our international VoIP network with our real time back office
systems, and have the potential to deliver higher margins and improve cash
flow. In addition, we continue to increase the traffic we terminate to mobile
phones, which generally delivers higher average revenue per minute and
margins than typical fixed-line traffic. We also continue to control
operating expenses and capital expenditures, as well as to monitor and manage
accounts payable and accounts receivable and restructure existing debt to
enhance cash flow.

Our plans include:

- expanding our market share for our Retail calling services;

- increasing revenues generated through mobile phone terminations;

- increasing our customer base by introducing cost-effective solutions to
interconnect with our network;

- use of our switchless architecture, which eliminates the need for costly
telecommunications switches and other equipment; and

- aggressive management of credit risk.

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

- reductions in workforce and consolidation of Internet Central Offices.
As a result of our restructuring programs and our continued focus on
controlling expenses, our research and development; selling and marketing
and general and administrative expenses, in total, declined to $28.6
million in 2003 from $53.2 million in 2002;

- sale of our previous messaging business and the assets associated with
our previous Speech Solutions Business;

- settlement of certain capital lease obligations;

- repurchase of a portion of our 5 3/4% Convertible Subordinated Notes for
cash;

- exchange of a portion of our 5 3/4% Convertible Subordinated Notes for
11 1/2% Senior Secured Notes and warrants to purchase common stock;

- establishment of a new credit facility with a bank; and

- completion of our refinancing plan, pursuant to which $37.3 million (98%
of the total outstanding) of our 5 3/4% Convertible Subordinated Notes due
in March 2005 were tendered for the same principal amount of our new 6 3/4%
Convertible Subordinated Notes due in June 2009 and $29.0 million of 8%
Secured Convertible Notes due in June 2007 were issued to finance the
prepayment of all $25.2 million of our 11 1/2% Senior Secured Notes due in
January 2005.

22

- completion of a private equity placement in September 2004 that resulted
in net proceeds to us of approximately $30.0 million.

We anticipate that the September 30, 2004 balance of $46.6 million in cash and
cash equivalents, together with cash flow generated from operations, will be
sufficient to fund our operations and debt service requirements for at least the
next twelve months.

The following discussion and analysis of our financial condition and results of
operations for the three months and nine months ended September 30, 2004 and
2003 should be read in conjunction with the unaudited condensed consolidated
financial statements and footnotes for the three months and nine months ended
September 30, 2004 included herein, and the year ended December 31, 2003,
included in our Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

REVENUE RECOGNITION.

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

ACCOUNTS RECEIVABLE. We perform ongoing credit evaluations of our customers and
adjust credit limits based upon payment history and the customer's current
credit worthiness, as determined by our review of their current credit
information. We continuously monitor collections and payments from our customers
and maintain a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified.
We have been able to mitigate our credit risk by using reciprocal arrangements
with customers, who are also iBasis suppliers, to offset our outstanding
receivables. A majority of our accounts receivable are from international
carriers.

23

IMPAIRMENT OF LONG LIVED ASSETS. Our long lived assets consist primarily of
property and equipment. We have assessed the realizability of these assets and
determined that there was no asset impairment as of September 30, 2004 for these
assets. Any future impairment would not impact cash flow but would result in an
additional charge in our statement of operations.

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

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

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

RESTRUCTURING CHARGES. During 2002 and 2001, we recorded significant charges to
operations in connection with our restructuring programs. The related reserves
reflect estimates, including those pertaining to severance costs and facility
exit costs. We assess the reserve requirements to complete each restructuring
program at the end of each reporting period. Actual experience may be different
from these estimates. We had no restructuring charges in 2003, or the three and
nine months ended September 30, 2004.

RESULTS FROM CONTINUING OPERATIONS

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

24

THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO SEPTEMBER 30, 2003

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

Net revenue increased by approximately $26.4 million, or 60%, to $70.4 million
for 2004 from $44.0 million for 2003. Traffic carried over our network increased
49% to approximately 1.3 billion minutes for 2004 from 866 million minutes for
2003 and our average revenue per minute was 5.5 cents in 2004 compared to 5.1
cents per minute in 2003. Revenue from our international wholesale VoIP services
("Wholesale") increased $16.0 million, or 38%, to $58.6 million for 2004 from
$42.6 million in 2003. Revenues for our retail prepaid calling card services and
other enhanced services ("Retail"), were $11.8 million in 2004 compared to $1.4
million in 2003. This increase reflects the rapid growth we have achieved with
our retail prepaid calling card services, which we introduced in the third
quarter of 2003. Revenue from our Pingo calling services, which we launched in
September 2004, were insignificant in the third quarter of 2004.

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

Data communications and telecommunications expenses increased by $21.5 million,
or 56%, to $60.0 million for 2004 from $38.5 million for 2003. Data
communications and telecommunications expenses were $50.0 million and $10.0
million for our Wholesale and Retail business segments, respectively. The
increase in data communications and telecommunications expense primarily
reflects the increase in traffic, as discussed above. The largest component of
this expense, termination costs, increased to $58.4 million for 2004 from $36.9
million for 2003 while circuit costs remained flat at $1.6 million for 2004 and
2003. As a percentage of net revenues, data

25

communications and telecommunications expenses decreased to 85.3% for 2004 from
87.4% in 2003. We expect data communications and telecommunications expenses to
decrease as a percentage of net revenue to continue to decrease over the balance
of 2004 as we further increase utilization and efficiency of our network and
achieve economies of scale and we increase our revenues from our higher-margin
retail prepaid calling card services.

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

Research and development expenses increased by $0.7 million to $3.6 million for
2004 from $2.9 million for 2003. The increase in research and development
expenses is due to expenditures related to the support of The iBasis Network,
including network hardware and software maintenance. As a percentage of net
revenue, research and development expenses decreased to 5.1% for 2004 from 6.6%
for 2003. We expect that research and development expenses will remain
relatively level and continue to decrease as a percentage of net revenue over
the balance of 2004.

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

Selling and marketing expenses increased by $0.4 million, to $2.3 million in
2004, from $1.9 million in 2003. The increase in expenses primarily relates to
additional investments we have made in sales and marketing to support our
growing Retail business. As a percentage of net revenue, selling and marketing
expenses decreased to 3.3% for 2004 from 4.3% for 2003. We anticipate that
selling and marketing expenses will remain relatively level and will continue to
decrease as a percentage of net revenue over the balance of 2004.

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

General and administrative expenses increased by $2.3 million to $3.5 million
for 2004 from $1.2 million for 2003. In 2003, general and administrative
expenses were reduced by $2.2 million for the recovery of a previously reserved
customer accounts receivable balance. As a percentage of net revenue, general
and administrative expenses were 4.9% for 2004 and 2.8% for 2003. We expect
general and administrative expenses to remain relatively level and decrease as a
percentage of net revenue over the balance of 2004.

DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
decreased by $2.2 million to $2.1 million for 2004 from $4.3 million for 2003.
This decrease was primarily due to the end of the useful life of certain
networking equipment. As a percentage of net revenue, depreciation and
amortization expenses decreased to 3.1% for 2004 from 9.7% for 2003. We expect
depreciation and amortization expenses to continue to decrease over the balance
of 2004, both in absolute dollars and as a percentage of net revenue.

NON-CASH STOCK-BASED COMPENSATION. Non-cash stock-based compensation represents
compensation expense incurred in connection with the grant of stock options to
our employees with exercise prices less than the fair value of our common stock
at the respective dates of grant. Such grants were made prior to our initial
public stock offering and are being expensed over the vesting periods of the
options granted. Non-cash stock-based

26

compensation was $29,000 in 2003. There was no non-cash stock-based compensation
expense in 2004 as these options became fully vested in 2003.

INTEREST INCOME. Interest income was $13,000 and $30,000 for 2004 and 2003,
respectively. The decrease in interest income reflects our lower average cash
balance in 2004.

INTEREST EXPENSE. Interest expense in 2004 is primarily composed of interest
expense on the new 6 3/4% Convertible Subordinated Notes due in June 2009 and
the new 8% Secured Convertible Notes due in June 2007, as well as capital
leases. Interest expense increased by $0.6 million to $1.4 million in 2004 from
$0.8 million in 2003. As a result of the completion of the refinancing of our
debt in June 2004, interest expense includes interest on the new 8% Secured
Convertible Notes due in June 2007. Previously, all of the interest on our 11
1/2% Senior Secured Notes due in January 2005 had been charged to the gain on
bond exchanges in 2003. As a result, prior to the third quarter of 2004,
interest expense did not include interest on the 11 1/2% Senior Secured Notes
due in January 2005.

OTHER EXPENSES, NET. Other expenses, net were $71,000 and $98,000 in 2004 and
2003, respectively, and relate mostly to state excise and franchise taxes.

REFINANCING TRANSACTION COSTS. Transaction costs of $0.2 million in the third
quarter of 2004 relate to the refinancing of our debt in June 2004 and include
costs to register shares underlying the debt securities.

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

INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued operations of $1.9
million in 2004 relates to the expiration of certain contingent obligations
associated with the sale of our former Speech Solutions Business in 2002.

NET LOSS. Loss from continuing operations was $2.9 million in 2004 compared to a
loss of $5.6 million in 2003. Excluding refinancing charges of $0.2 million, the
loss in 2004 was $2.7 million. The reduction in the loss from operations in 2004
compared to 2003 of $2.9 million, excluding refinancing charges, primarily
relates to the proportionately lower level of costs and operating expenses on
the higher level of revenues year-to-year.

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO SEPTEMBER 30, 2003

NET REVENUE. Net revenue increased by approximately $63.5 million, or 51%, to
$188.5 million for 2004 from $125.0 million for 2003. Traffic carried over our
network increased 36% to approximately 3.4 billion minutes for 2004 from
approximately 2.5 billion minutes for 2003 and our average revenue per minute
was 5.5 cents in 2004 compared to 5.0 cents per minute in 2003. Revenues from
our international wholesale VoIP services increased $43.5 million, or 36%, to
$165.3 million for 2004 from $121.8 million in 2003. Revenues for our retail
prepaid calling card services and other enhanced services, were $23.2 million in
2004 compared to $3.2 million in 2003. This increase reflects the rapid growth
we have achieved with our retail prepaid calling card services,

27

which we introduced in the third quarter of 2003.

DATA COMMUNICATIONS AND TELECOMMUNICATION COSTS. Data communications and
telecommunications expenses increased by $53.9 million, or 50%, to $160.7
million for 2004 from $106.8 million for 2003. Data communications and
telecommunications expenses were $141.5 million and $19.2 million for our
Wholesale and Retail business segments, respectively. The increase in data
communications and telecommunications expense primarily reflects the increase in
traffic, as discussed above. The largest component of this expense, termination
costs, increased to $156.5 million for 2004 from $102.7 million for 2003 while
circuit costs were $4.2 million for 2004 and $4.1 million for 2003. As a
percentage of net revenues, data communications and telecommunications expenses
increased to 85.2% for 2004 from 84.4% in 2003.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
$0.7 million to $10.7 million for 2004 from $10.0 million in 2003. The increase
in research and development expenses is due to expenditures related to the
support of The iBasis Network, including network hardware and software
maintenance. As a percentage of net revenue, research and development expenses
decreased to 5.7% for 2004 from 8.0% for 2003.

SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased by $0.6
million, to $6.4 million in 2004, from $5.8 million in 2003. The increase in
expenses primarily relates to additional investments we have made in sales and
marketing to support our growing Retail business. As a percentage of net
revenue, selling and marketing expenses decreased to 3.4% for 2004 from 4.6% for
2003.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $3.1 million to $9.7 million for 2004 from $6.6 million for 2003.
In 2003, general and administrative expenses were reduced by $2.2 million for
the recovery of a previously reserved customer accounts receivable balance. The
increase in expenses in 2004 also relates to costs associated with complying
with the Sarbanes-Oxley Act. As a percentage of net revenue, general and
administrative expenses decreased to 5.1% for 2004 from 5.3% for 2003.

DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
decreased by $7.6 million to $8.5 million for 2004 from $16.1 million for 2003.
This decrease was primarily due to the end of the useful life of certain
networking equipment. As a percentage of net revenue, depreciation and
amortization expenses decreased to 4.5% for 2004 from 12.9% for 2003.

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

INTEREST INCOME. Interest income was $41,000 and $111,000 for 2004 and 2003,
respectively. The decrease in interest income reflects our lower average cash
balance in 2004.

INTEREST EXPENSE. Interest expense for 2004 is primarily composed of interest
expense on the 5 3/4% Convertible Subordinated Notes due in March 2005, the new
6 3/4% Convertible Subordinated Notes due in June 2009 and the new 8% Secured
Convertible Notes due in June 2007, as well as capital leases. Interest expense
decreased by $0.2 million to $3.0 million in 2004 from $3.2 million in 2003.
This decrease primarily relates to the bond exchanges in 2003, which reduced our
debt level by $25.2 million, as well as reduced interest expense relating to a
lower level of capital leases. This reduction was partially offset by the
inclusion in 2004 of interest on the new 8% Secured Convertible Notes due in
June 2007. Interest associated with the 11 1/2% Senior Secured Notes due in
January 2005, which were repaid in full as part of the debt refinancing, had
been charged to the gain on the bond exchanges in 2003.

OTHER EXPENSES, NET. Other expenses, net were $156,000 and $292,000 in 2004 and
2003, respectively, and relate mostly to state excise and franchise taxes.

GAIN ON BOND EXCHANGES. In 2003, we recognized a gain of $16.6 million in
connection with the early extinguishment of $50.4 million of the 5 3/4%
Convertible Subordinated Notes due in March 2005.

LOSS ON LONG TERM NON-MARKETABLE SECURITY. In the first quarter of 2003, we
determined that our equity investment in a privately-held company had been other
than temporarily impaired, and, as a result, recorded a non-cash $5.0 million
charge. Our decision was based on our evaluation of the privately-held company's
current cash position and recent operating results, as well as the perceived
inability of that company to obtain additional financing at a level, and in a
timely manner, to support its continued operations.

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

28

REFINANCING RELATED INTEREST EXPENSE. We issued warrants to purchase a total of
5.2 million shares of our common stock, at $1.85 per share, to the holders of
the 11 1/2% Senior Secured Notes due in January 2005 as partial consideration
for the prepayment of these notes. The fair value of $2.1 million for these
warrants has been charged to the statement of operations as additional interest
expense. Future interest on the 11 1/2% Senior Secured Notes due in January 2005
of $1.6 million, that had originally been charged to the gain on bond exchanges
in 2003 and will not be paid as a result of the prepayment of these notes, was
recorded as a reduction to the additional interest expense associated with the
refinancing. As a result, refinancing related interest expense, net was $0.5
million in 2004.

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

INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued operations of $1.9
million in 2004 relates to the expiration of certain contingent obligations
associated with the sale of our former Speech Solutions Business in 2002.

NET LOSS. Loss from continuing operations was $18.2 million in 2004 compared to
a loss of $7.1 million in 2003. Excluding refinancing charges of $2.6 million
and the loss on a long-term non-marketable security of $5.0 million, the loss
from continuing operations in 2004 was $10.5 million. Excluding the gain on bond
exchanges of $16.6 million, the loss in 2003 was $23.7 million. The reduction in
the net loss in 2004 compared to 2003 of $13.2 million, excluding refinancing
charges, loss on a non-marketable security and gain on bond exchanges, primarily
relates to the proportionately lower level of costs and operating expenses on
the higher level of revenues year-to-year.

LIQUIDITY AND CAPITAL RESOURCES

Our principal capital and liquidity needs historically have related to the
development of our network infrastructure, our sales and marketing
activities, research and development expenses, and general capital needs. Our
capital needs have been met, in large part, from the net proceeds from our
public offerings of common stock and the issuance of our 5 3/4% Convertible
Subordinated Notes due March 2005. In addition, we have also historically met
our capital needs through vendor capital leases and other equipment
financings. We expect to continue to utilize equipment financing in the
future to partially fund our capital equipment needs.

Net cash used in continuing operating activities for the nine months ended
September 30, 2004 declined to $1.8 million from $5.3 million for the same
period in 2003. For the three months ended September 30, 2004, operating
activities provided $0.6 million in cash. Cash used in continuing operating
activities for both nine month periods was primarily related to the cash
necessary to fund our operating losses. In addition, the reduction in cash used
in operating activities in 2004 was also a result of strong collections of
accounts receivable which reduced our days sales outstanding to 37 days at
September 30, 2004 compared to 39 days at September 30, 2003.

Net cash used in investing activities was $0.2 million for the nine months ended
September 30, 2004 compared to $4.5 million for the same period in 2003. The
cash used in investing activities in 2004 relates to $2.8 million used for
purchases of capital assets, partially offset by the proceeds from an earn-out
receivable and escrow payment of $1.1 million and $1.5 million, respectively,
relating to the sale of our former Speech Solutions Business. The cash used in
investing activities in 2003 relates to purchases of equipment of $3.8 million
and $0.7 million relating to an adjustment to the proceeds from the sale of our
former Speech Solutions Business.

In June 2004, we completed a refinancing of our outstanding debt obligations. As
part of the refinancing, we completed an exchange offer, pursuant to which $37.3
million of our 5 3/4% Convertible Subordinated Notes due in March 2005,
representing approximately 98% of the total amount of the notes outstanding,
were tendered for the same principal amount of new 6 3/4% Convertible
Subordinated Notes due in June 2009. Approximately $0.9 million of the 5 3/4%
Convertible Subordinated Notes due in March 2005 remain outstanding after the
exchange offer. Simultaneously with the exchange offer, we prepaid all $25.2
million of our 11 1/2% Senior Secured Notes due in January 2005 for cash equal
to the principal amount plus accrued but unpaid interest and the issuance of
warrants exercisable for an aggregate of 5,176,065 shares of our common stock at
$1.85 per share. We issued $29.0 million of new 8% Secured Convertible Notes due
in June 2007 of which $25.2 million was used to prepay the 11 1/2% Senior
Secured Notes due in January 2005. The new 6 3/4% Convertible Subordinated Notes
due in June 2009 and the new 8% Secured Convertible Notes due in June 2007 are
convertible into shares of common stock at $1.85 per share. As a result of the
refinancing, we have extended the maturity of $62.5 million in debt from the
first quarter of 2005 until 2007 and 2009. This refinancing will also reduce our
future annual cash interest payments by $0.2 million. In the third quarter of
2004, holders of $35,000 of 6 3/4% Convertible Subordinated Notes due in June
2009 voluntarily converted their notes into 18,918 shares of common stock at the
conversion price of $1.85 per share.

29

In September 2004, we completed a private equity placement of 15,000,000 shares
of our common stock at $2.10 per share, for total gross proceeds of $31.5
million, to a group of institutional and accredited investors. Investment
banking fees and other costs of the transaction were approximately $1.5 million,
resulting in net proceeds to us from the private equity placement of
approximately $30.0 million. The net proceeds from the private equity placement
will be used for working capital requirements, capital asset purchases and
general corporate purposes.

Net cash provided by financing activities was $31.3 million for the nine
months ended September 30, 2004 compared to cash used in financing activities
of $5.6 million for 2003. Cash provided by financing activities in 2004
included gross proceeds of $31.5 million, less transaction costs paid of $1.0
million, from the private equity placement in September 2004, and an
additional $3.8 million in proceeds from the issuance of the 8% Secured
Convertible Notes due June 2007 net of the amount used to finance the
prepayment of the 11 1/2% Senior Secured Notes due in January 2005. Cash
paid for transactions costs associated with the debt refinancing were $2.0
million. In addition, we received proceeds of $1.1 million from the holders
of the Existing Senior Notes who exercised previously issued warrants for 1.7
million shares in 2004. Proceeds from capital lease financing on equipment
purchases was $1.8 million, and payments on capital leases were $1.9 million
in 2004. We also paid down our bank borrowings of $2.3 million in the three
months ended September 30, 2004.

Net cash used in financing activities for the nine months ended September 30,
2003 primarily consisted of payments on capital leases of $4.7 million and
transaction costs of $0.9 million associated with our bond exchanges in 2003.

At September 30, 2004, we had no borrowings under our bank line of credit. At
September 30, 2004, we had unused borrowing capacity of $6.1 million and we had
outstanding letters of credit of $2.8 million. At December 31, 2003, we had $2.3
million in borrowings outstanding under our bank line of credit.

In June 2004, our stockholders approved an increase in the level of our
authorized common stock from 85 million shares to 170 million shares.

We anticipate that the September 30, 2004 balance of $46.6 million in cash and
cash equivalents, together with cash flow generated from operations, will be
sufficient to fund our operations and debt service requirements for at least the
next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

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

CONTRACTUAL OBLIGATIONS

The following table summarizes our future contractual obligations as of
September 30, 2004 and displays our future contractual obligations:

30

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

RISK FACTORS

ANY INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, WHICH WE BELIEVE ARE ALL THE
MATERIAL RISKS TO OUR BUSINESS, TOGETHER WITH THE INFORMATION CONTAINED
ELSEWHERE IN THIS REPORT, BEFORE YOU MAKE A DECISION TO INVEST IN OUR COMPANY.

RISKS RELATED TO OUR COMPANY

A FAILURE TO OBTAIN NECESSARY ADDITIONAL CAPITAL IN THE FUTURE COULD JEOPARDIZE
OUR OPERATIONS.

We will need additional capital in the future to fund our operations, finance
investments in equipment and corporate infrastructure, expand our network,
increase the range of services we offer and respond to competitive pressures
and perceived opportunities. We have had a history of negative cash flows
from operations. For the nine months ended September 30, 2004 and for the
year ended December 31, 2003, our negative cash flow from continuing
operations was $1.8 million and $3.2 million, respectively. Cash flow from
operations and cash on hand may not be sufficient to cover our operating
expenses, working capital, interest on and repayment of our debt and capital
investment needs. We may not be able to obtain additional financing on terms
acceptable to us, if at all. If we raise additional funds by selling equity
securities, the relative equity ownership of our existing investors could be
diluted or the new investors could obtain terms more favorable than previous
investors. A failure to obtain additional funding could prevent us from
making expenditures that are needed to allow us to grow or maintain our
operations.

OUR FINANCIAL CONDITION, AND THE RESTRICTIVE COVENANTS CONTAINED IN OUR CREDIT
FACILITY MAY LIMIT OUR ABILITY TO BORROW ADDITIONAL FUNDS OR RAISE ADDITIONAL
EQUITY AS MAY BE REQUIRED TO FUND OUR FUTURE OPERATIONS.

We incurred significant losses from continuing operations of $18.2 million for
the nine months ended September 30, 2004 and $10.9 million for the year ended
December 31, 2003. Our accumulated deficit, and stockholders' deficit was
approximately $428.5 million and $24.6 million, respectively, as of September
30, 2004. Moreover, the terms of our $15 million revolving credit facility and
our new debt may limit our ability to, among other things:

- incur additional debt;
- retire or exchange outstanding debt;
- pay cash dividends, redeem, retire or repurchase our stock or change our
capital structure;
- acquire assets or businesses or make investments in other entities;
- enter into certain transactions with affiliates;
- merge or consolidate with other entities;
- sell or otherwise dispose of assets or use the proceeds from any asset
sale or other disposition;
- create additional liens on our assets; or
- issue certain types of redeemable preferred stock.

31

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

WE MAY NOT BE ABLE TO PAY OUR DEBT AND OTHER OBLIGATIONS AND OUR ASSETS MAY BE
SEIZED AS A RESULT.

We may not generate the cash flow required to pay our liabilities as they
become due. As of September 30, 2004, our outstanding debt included
approximately $0.9 million of our 5 3/4% Convertible Subordinated Notes due
in March 2005, $37.3 million of our 6 3/4% Convertible Subordinated Notes due
in June 2009 and $29.0 million of our 8% Secured Convertible Notes due in
June 2007. The 8% Secured Convertible Notes due in June 2007 are secured by a
second security interest in substantially all of our assets. We must pay
interest on all of the 5 3/4% Convertible Subordinated Notes due in March
2005, the 6 3/4% Convertible Subordinated Notes due in June 2009 and the
8% Secured Convertible Notes due in June 2007 twice a year. If our cash flow is
inadequate to meet these obligations, we will default on the notes. Any
default of the 5 3/4% Convertible Subordinated Notes due in March 2005, the
6 3/4% Convertible Subordinated Notes due in June 2009 or the 8% Secured
Convertible Notes due in June 2007 could allow our note holders to foreclose
upon our assets or try to force us into bankruptcy.

As of September 30, 2004, we had no outstanding borrowings on our bank revolving
line of credit totaling $15.0 million. We had approximately $2.8 million of
outstanding letters of credit issued under this agreement. The bank holds a
senior security interest in substantially all of our assets. If we fail to pay
our liabilities under this credit line, the bank may enforce all available
remedies and foreclose upon our assets to satisfy any amounts owed. There are
certain cross-default provisions among our bank and other debt instruments
whereby a default under one such instrument could result in a default under
other such instruments.

WE MAY BE UNABLE TO REPAY OR REPURCHASE THE 8% SECURED CONVERTIBLE NOTES DUE
IN JUNE 2007, 5 3/4% CONVERTIBLE SUBORDINATED NOTES DUE IN MARCH 2005 OR
6 3/4% CONVERTIBLE SUBORDINATED NOTES DUE IN JUNE 2009 UPON A REPURCHASE EVENT
AND BE FORCED INTO BANKRUPTCY.

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

The holders of the 5 3/4% Convertible Subordinated Notes due in March 2005
and 6 3/4% Convertible Subordinated Notes due in June 2009 may require us to
repurchase all or any portion of the outstanding 5 3/4% Convertible
Subordinated Notes due in March 2005 or 6 3/4% Convertible Subordinated Notes
due in June 2009 upon a "repurchase event", as defined in such instruments. A
repurchase event under the 5 3/4% Convertible Subordinated Notes due in March
2005 and 6 3/4% Convertible Subordinated Notes due in June 2009 includes a
change in control under certain circumstances or a termination of listing of
our common stock on a U.S. national securities exchange or trading on an
established over-the-counter trading market in the U.S. We may not have
sufficient cash reserves to repurchase the 5 3/4% Convertible Subordinated
Notes due in March 2005 or 6 3/4% Convertible Subordinated Notes due in June
2009 at such time, which would cause an event of default under the 5 3/4%
Convertible Subordinated Notes due in March 2005 Indenture or the 6 3/4%
Convertible Subordinated Notes due in June 2009 Indenture and under our other
debt obligations and may force us to declare bankruptcy.

INVESTOR INTEREST IN THE COMMON STOCK MAY BE NEGATIVELY AFFECTED BY OUR
CONTINUED TRADING ON THE OVER-THE-COUNTER BULLETIN BOARD.

On November 13, 2002, we received a determination from the Nasdaq National
Market that shares of our common stock would no longer trade on the Nasdaq
National Market because we failed to meet certain minimum listing
requirements. Our common stock began trading on the NASD-operated
Over-the-Counter Bulletin Board on November 14, 2002. The Over-the-Counter
Bulletin Board market is generally considered to be less efficient and not as
liquid as the Nasdaq National Market (now known as the Nasdaq Stock Market).
Trading in this market may decrease the market value and liquidity of our

32

common stock, which could materially and adversely affect our ability to attract
additional investment to finance our operations.

PROVISIONS OF OUR GOVERNING DOCUMENTS AND DELAWARE LAW COULD ALSO DISCOURAGE
ACQUISITION PROPOSALS OR DELAY A CHANGE IN CONTROL.

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

- - our board of directors has the authority to issue Common Stock and preferred
stock, and to determine the price, rights and preferences of any new series
of preferred stock, without stockholder approval;
- - our board of directors is divided into three classes, each serving three-year
terms;
- - a supermajority of votes of our stockholders is required to amend key
provisions of our certificate of incorporation and by-laws;
- - our bylaws contain provisions limiting who can call special meetings of
stockholders;
- - our stockholders may not take action by written consent; and
- - our stockholders must provide specified advance notice to nominate directors
or submit stockholder proposals.

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

INTERNATIONAL GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES AND OTHER LAWS
COULD LIMIT OUR ABILITY TO PROVIDE OUR SERVICES, MAKE THEM MORE EXPENSIVE, OR
SUBJECT US TO LEGAL OR CRIMINAL LIABILITY.

A number of countries currently prohibit or limit competition in the provision
of traditional voice telephony services. In some of those countries, licensed
telephony carriers as well as government regulators 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 otherwise
relating to services provided over the Internet, including laws governing:

- - sales and other taxes, including payroll-withholding applications;
- - user privacy;
- - pricing controls and termination costs;
- - characteristics and quality of products and services;
- - qualification to do business;
- - consumer protection;
- - cross-border commerce, including laws that would impose tariffs, duties and
other import restrictions;
- - copyright, trademark and patent infringement; and
- - claims based on the nature and content of Internet materials, including
defamation, negligence and the failure to meet necessary obligations.

If foreign governments or other regulatory agencies begin to impose related
restrictions on Internet telephony or our other

33

services or otherwise enforce criminal or other laws against us, our
affiliates or employees, such actions could have a material adverse effect on
our ability to attain and maintain profitability.

THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO DOMESTIC GOVERNMENTAL REGULATION
AND LEGAL UNCERTAINTIES AND OTHER LAWS THAT COULD MATERIALLY INCREASE OUR COSTS
AND PREVENT US FROM EXECUTING OUR BUSINESS PLAN.

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

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

While the FCC to date has maintained an informal policy that information service
providers, including Internet telephony providers, are not telecommunications
carriers for regulatory purposes, various entities have challenged this idea,
before the FCC and at various state government agencies. The FCC recently ruled
against AT&T, finding that certain traffic AT&T carried in part utilizing an
Internet protocol format was nonetheless regulated telecommunications for which
terminating access charges were due. The FCC has also held hearings and
announced a Notice of Proposed Rulemaking on IP-enabled services. Adverse
rulings or rulemakings could subject us to licensing requirements and additional
fees and subsidies.

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

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

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

The Telecommunications Act of 1996 requires that payphone service providers be
compensated for all completed calls originating from payphones in the United
States. When calling cards are used, the FCC's prior rules required the first
switch-based carrier to compensate the payphone service provider, but newly
adopted rules require the last switched-based carrier to do so, and further
require that all carriers in the call chain implement a call-tracking system,
utilize it to identify such calls, provide an independent audit of the adequacy
of such system, and provide a report on these matters to the FCC and others in
the call chain. We maintain that as an international Internet telephony
provider, we sell an information service. We therefore claim that we are not a
"carrier" for regulatory purposes and, in any case, our Internet-based systems
do not rely on traditional long distance switches.

34

Nonetheless, we have indirectly paid, and intend to continue paying, payphone
service providers as part of our prepaid calling card business. To date, we have
reimbursed certain of our toll-free access vendors - facilities-based long
distance carriers from which we have received payphone calls that could be
construed to be compensable under the payphone compensation rules - who have
indeed paid payphone compensation for such calls. We have contracted with a
clearinghouse to remit funds directly to payphone service providers for calls
originating from payphones utilizing our prepaid calling cards. For all other
types of traffic related to our wholesale transport business, we believe that we
are not responsible for payphone compensation, but rather that the carrier that
precedes us is.

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

RISKS RELATED TO OUR OPERATIONS

WE MAY NEVER ACHIEVE SUSTAINED PROFITABILITY AND THE MARKET PRICE OF OUR COMMON
STOCK MAY FALL.

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

- - the amount of traffic we are able to sell to our customers, and their
decisions on whether to route traffic over our network;
- - increased competitive pricing pressure in the international long distance
market;
- - the percentage of traffic that we are able to carry over the Internet rather
than over the more costly traditional public-switched telephone network;
- - loss of arbitrage opportunities resulting from declines in international
settlement rates or tariffs;
- - our ability to negotiate lower termination fees charged by our local
providers if our pricing deteriorates;
- - our continuing ability to negotiate competitive costs to interconnect our
network with those of other carriers and Internet backbone providers;
- - capital expenditures required to expand or upgrade our network;
- - changes in call volume among the countries to which we complete calls;
- - the portion of our total traffic that we carry over more profitable routes
could fall, independent of route-specific price, cost or volume changes;
- - technical difficulties or failures of our network systems or third party
delays in expansion or provisioning system components;
- - our ability to manage distribution arrangements and provision of retail
offerings, including card printing, marketing, usage tracking, web-based
offerings and customer service requirements, and resolution of associated
disputes;
- - our ability to manage our traffic on a constant basis so that routes are
profitable;
- - our ability to collect from our customers; and
- - currency fluctuations and restrictions in countries where we operate.

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

35

WE MAY NEVER GENERATE SUFFICIENT REVENUE TO ATTAIN PROFITABILITY IF
TELECOMMUNICATIONS CARRIERS AND OTHER COMMUNICATIONS SERVICE PROVIDERS OR OTHERS
ARE RELUCTANT TO USE OUR SERVICES OR DO NOT USE OUR SERVICES, INCLUDING ANY NEW
SERVICES, IN SUFFICIENT VOLUME.

If the market for Internet 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 Internet telephony services for a
number of reasons, including:

- - perceptions that the quality of voice transmitted over the Internet is low;
- - perceptions that Internet telephony is unreliable;
- - our inability to deliver traffic over the Internet with significant cost
advantages;
- - development of their own capacity on routes served by us;
- - an increase in termination costs of international calls.

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

WE MAY NOT BE ABLE TO COLLECT AMOUNTS DUE TO US FROM OUR CUSTOMERS AND WE MAY
HAVE TO DISGORGE AMOUNTS ALREADY PAID.

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

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

WE MAY INCREASE COSTS AND RISKS IN OUR BUSINESS BY RELYING ON THIRD PARTIES.

VENDORS. We rely upon third-party vendors to provide us with the equipment,
software, circuits, and other facilities that we use to provide our services.
For example, we purchase a substantial portion of our Internet telephony
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 to become profitable.

PARTIES THAT MAINTAIN PHONE AND DATA LINES AND OTHER TELECOMMUNICATIONS
SERVICES. Our business model

36

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

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

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

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

WE MAY NOT BE ABLE TO SUCCEED IN THE INTENSELY COMPETITIVE MARKET FOR OUR
VARIOUS SERVICES.

We compete in our wholesale business principally on quality of service and
price. In recent years, prices for long distance telephone services have been
declining as a result of deregulation and increased competition. We face
competition from major telecommunications carriers, such as AT&T, British
Telecom, Deutsche Telekom, MCI WorldCom and Qwest Communications, as well as new
emerging carriers. We also compete with Internet protocol and other Internet
telephony service providers who route traffic to destinations worldwide. Also,
Internet telephony 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.

WE MAY NOT BE ABLE TO SUCCEED IN THE INTENSELY COMPETITIVE MARKET FOR PREPAID
CALLING SERVICES.

The market for prepaid calling services is extremely competitive. We have just
recently begun offering prepaid calling card services and have little prior
experience in this business and no established distribution channel for these
services. If we do not successfully

37

establish a distribution channel and enter geographic markets in which our
rates, fees, surcharges, country services, and our other products and service
characteristics, can successfully compete, our business could be materially
adversely affected.

WE ARE SUBJECT TO DOWNWARD PRICING PRESSURES AND A CONTINUING NEED TO
RENEGOTIATE OVERSEAS RATES, WHICH COULD DELAY OR PREVENT OUR PROFITABILITY.

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

A VARIETY OF RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS.

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

- - unexpected changes in tariffs, trade barriers and regulatory requirements
relating to Internet access or Internet telephony;
- - economic weakness, including inflation, or political instability in
particular foreign economies and markets;
- - difficulty in collecting accounts receivable;
- - tax, consumer protection, telecommunications, and other laws;
- - compliance with tax, employment, securities, immigration, labor and other
laws for employees living and traveling, or conducting business, abroad,
which may subject them or us to criminal or civil penalties;
- - foreign taxes including withholding of payroll taxes;
- - foreign currency fluctuations, which could result in increased operating
expenses and reduced revenues;
- - political or economic instability;
- - exposure to liability under the Foreign Corrupt Practices Act;
- - other obligations or restrictions, including, but not limited to, criminal
penalties incident to doing business or operating a subsidiary or other
entity in another country;
- - the personal safety of our employees and their families who at times have
received threats of, or who may in any case be subject to, violence, and who
may not be adequately protected by legal authorities or other means, and
- - inadequate insurance coverage to address these risks.

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

IF WE ARE NOT ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE IN A
COST-EFFECTIVE WAY, THE RELATIVE QUALITY OF OUR SERVICES COULD SUFFER.

The technology upon which our services depend is changing rapidly. Significant
technological changes could render the hardware and software that we use
obsolete, and competitors may begin to offer new services that we

38

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

WE DEPEND ON OUR CURRENT PERSONNEL AND MAY HAVE DIFFICULTY ATTRACTING AND
RETAINING THE SKILLED EMPLOYEES WE NEED TO EXECUTE OUR BUSINESS PLAN.

WE DEPEND HEAVILY ON OUR KEY MANAGEMENT. Our future success will depend, in
large part, on the continued service of our key management and technical
personnel, including Ofer Gneezy, our President and Chief Executive Officer,
Gordon VanderBrug, our Executive Vice President, Richard Tennant, our Chief
Financial Officer, Paul Floyd, our Senior Vice President of Research &
Development, Engineering, and Operations, and Dan Powdermaker, our Senior Vice
President of Worldwide Sales. If any of these individuals or others we employ
are unable or unwilling to continue in their present positions, our business,
financial condition and results of operations could suffer. We do not carry key
person life insurance on our personnel. While each of the individuals named
above has entered into an employment agreement with us, these agreements do not
ensure their continued employment with us.

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

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITIVE POSITION
WOULD BE ADVERSELY AFFECTED.

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

We believe that we do not infringe upon the proprietary rights of any third
party. It is possible, however, that such a claim might be asserted successfully
against us in the future. Our ability to provide our services depends on our
freedom to operate. That is, we must ensure that we do not infringe upon the
proprietary rights of others or have licensed all such rights. A party making an
infringement claim could secure a substantial monetary award or obtain
injunctive relief that could effectively block our ability to provide services
in the United States or abroad.

39

We have received letters and other notices claiming that certain of our products
and services may infringe patents or other intellectual property of other
parties. To date, none of these has resulted in a material restriction on any
use of our intellectual property or has had a material adverse impact on our
business. We may be unaware of intellectual property rights of others that may,
or may be claimed, to cover our technology. Current or future claims could
result in costly litigation and divert the attention of management and key
personnel from other business issues. The complexity of the technology involved
and the uncertainty of intellectual property litigation increase these risks.
Claims of intellectual property infringement also might require us to enter into
costly royalty or license agreements to the extent necessary for the conduct of
our business. However, we may be unable to obtain royalty or license agreements
on terms acceptable to us or at all. We also may be subject to significant
damages or an injunction against use of our proprietary or licenses systems. A
successful claim of patent or other intellectual property infringement against
us could materially adversely affect our business and profitability.

WE RELY ON A VARIETY OF TECHNOLOGIES, PRIMARILY SOFTWARE, WHICH IS LICENSED FROM
THIRD PARTIES.

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

WE MAY UNDERTAKE STRATEGIC ACQUISITIONS OR DISPOSITIONS THAT COULD DAMAGE OUR
ABILITY TO ATTAIN OR MAINTAIN PROFITABILITY.

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

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

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

RISKS RELATED TO THE INTERNET AND INTERNET TELEPHONY INDUSTRY

IF THE INTERNET DOES NOT CONTINUE TO GROW AS A MEDIUM FOR VOICE AND FAX
COMMUNICATIONS, OUR BUSINESS WILL SUFFER.

Historically, the sound quality of calls placed over the Internet was
inferior to calls placed over traditional TDM networks. As the Internet
telephony industry has grown, sound quality has improved, but the technology
may require further refinement. Additionally, as a result of the Internet's
capacity constraints, callers could experience delays, errors in
transmissions or other interruptions in service. Transmitting telephone calls
over the Internet, and other uses of the Internet, must also be accepted by
customers as an alternative to traditional services. As the Internet
telephony market is evolving, predicting the size of these markets and their
growth rate is difficult. If our market fails to continue to develop, then we
will be unable to grow our customer base and our results of operations will
be materially adversely affected.

IF THE INTERNET INFRASTRUCTURE IS NOT ADEQUATELY MAINTAINED, WE MAY BE UNABLE TO
MAINTAIN THE QUALITY OF OUR SERVICES AND PROVIDE THEM IN A TIMELY AND CONSISTENT
MANNER.

40

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

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 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.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q, including without limitation Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 194, as amended (the
Exchange Act). We intend the forward-looking statements to be covered by the
safe harbor for forward-looking statements in such sections of the Exchange Act.
These forward-looking statements include, without limitation, statements about
our market opportunity, strategies, competition, expected activities, expected
profitability and investments as we pursue our business plan, and the adequacy
of our available cash resources. These forward-looking statements are usually
accompanied by words such as "believe," "anticipate," "plan," "seek," "expect,"
"intend" and similar expressions. The forward-looking information is based on
various factors and was derived using numerous assumptions.

Forward-looking statements necessarily involve risks and uncertainties, and our
actual results could differ materially from those anticipated in the
forward-looking statements due to a number of factors, including those set forth
below under "Risk Factors" and elsewhere in this report. The factors set forth
below under "Risk Factors" and other cautionary statements made in this
Prospectus should be read and understood as being applicable to all related
forward-looking statements wherever they appear in this report. The
forward-looking statements contained in this report represent our judgment as of
the date of this report. We caution readers not to place undue reliance on such
statements. Except as required by law, we undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.

41

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk exposure is related to interest rates and foreign
currency exchange rates. To date, we have not engaged in trading market risk
sensitive instruments or purchasing hedging instruments, whether interest rate,
foreign currency exchange, commodity price or equity price risk. We have not
purchased options or entered into swaps or forward or futures contracts.

Our investments in commercial paper and debt instruments are subject to
interest rate risk, but due to the short-term nature of these investments,
changes in interest rates would not have a material impact on their value at
September 30, 2004. Our primary interest rate risk is the risk on borrowings
under our line of credit agreements, which are subject to interest rates
based on the bank's prime rate. A change in the applicable interest rates
would also affect the rate at which we could borrow funds or finance
equipment purchases. All other debt, including capital lease obligations, are
fixed rate debt. A 10% change in interest rates would not have a material
impact on interest expense associated with our line of credit agreement. In
addition, a 10% change in interest rates would not significantly impact the
fair value of the 6 3/4% Convertible Subordinated Notes due in June 2009 or
8% Secured Convertible Notes due in June 2007.

We conduct our business in various regions of the world, but most of our
revenues are denominated in U.S. dollars with the remaining being generally
denominated in Euros or British pounds sterling. Although most of our costs are
U.S. dollar denominated, some of our costs are in Euros or British pounds
sterling which partially offsets our risk from revenues denominated in these
currencies.

ITEM 4. CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive
Officer and Chief Financial Officer have reviewed and evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, (the "Exchange Act") as of the end of the period covered
by this quarterly report. Based on the evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our current disclosure controls
and procedures are designed to ensure that the information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective manner.

(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no
significant changes in our internal controls over financial reporting during the
period covered by this quarterly report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

The complaints are similar to each other and to hundreds of other complaints
filed against other issuers and their underwriters, and allege violations of the
Securities Act of 1933 and the Securities Exchange Act of 1934

42

primarily based on the assertion that there was undisclosed compensation
received by our underwriters in connection with our public offerings and that
there were understandings with customers to make purchases in the aftermarket.
The plaintiffs have sought an undetermined amount of monetary damages in
relation to these claims. On September 4, 2001, the cases against us were
consolidated. On October 9, 2002, the individual defendants were dismissed from
the litigation by stipulation and without prejudice.

On June 11, 2004, we and the individual defendants, as well as many other
issuers named as defendants in the class action proceeding, entered into an
agreement-in-principle to settle this matter, and on June 14, 2004, this
settlement was presented to the court. A motion for preliminary approval of the
settlement was filed on June 25, 2004 and is pending. Once the court
preliminarily approves the settlement and notice has been mailed, there will be
an objection period, followed by a hearing for final approval of the settlement.
Although we believe that we and the individual defendants have meritorious
defenses to the claims made in the complaints, in deciding to pursue settlement,
we considered, among other factors, the substantial costs and the diversion of
our management's attention and resources that would be required by litigation.

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

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

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

43

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

31.1 Certificate of iBasis, Inc. Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.

31.2 Certificate of iBasis, Inc. Chief Financial Officer
pursuant to Section 302 of the Sarbanes- Oxley Act of
2002.

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

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

44

SIGNATURE

Pursuant to the requirements 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.

November 8, 2004 By: /s/ Richard Tennant
- ------------------ ------------------------------
Richard Tennant
Vice President and Chief Financial Officer
(Authorized Officer and
Principal Accounting Officer)

45