UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2003

OR

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

For the transition period from to

Commission file number: 000–27127

iBasis, Inc.

(Exact name of registrant as specified in its charter)

Delaware		04-3332534
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

20 Second Avenue, Burlington, MA 01803
(Address of 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 ý No o

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

As of May 10, 2003, there were 44,649,942 shares of the Registrant’s Common Stock, par value $0.001 per share, outstanding.

iBASIS, INC.

Index

		Page
PART I — FINANCIAL IFORMATION

Item 1 —	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets at March 31, 2003 (unaudited) and December 31, 2002	3

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 (unaudited)	5-6

	Notes to Condensed Consolidated Financial Statements (unaudited)	7-15

Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15-32

Item 3 —	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4 —	Controls and Procedures	32

PART II — OTHER INFORMATION

Item 1 —	Legal Proceedings	32

Item 6 —	Exhibits and Reports on Form 8-K	33

	Signature	34

	Certifications	35-36

iBasis, Inc.

Consolidated Balance Sheets

	March 31, 2003			December 31, 2002
	(unaudited)
Assets
Cash and cash equivalents	$	24,120,222		$	32,316,609
Accounts receivable, net of allowance for doubtful accounts of approximately $8.1 million and $7.8 million, respectively	17,796,017			20,853,573
Prepaid expenses and other current assets	5,413,128			5,374,390
Total current assets	47,329,367			58,544,572
Property and equipment, at cost:
Equipment under capital lease	15,099,641			19,480,591
Network equipment	59,062,880			54,548,467
Computer software	6,639,762			6,624,530
Leasehold improvements	6,304,039			6,272,493
Furniture and fixtures	1,044,761			1,047,249
	88,151,083			87,973,330
Less: Accumulated depreciation and amortization	(61,729,674		)	(55,615,839		)
Property and equipment, net	26,421,409			32,357,491

Deferred debt financing costs, net	697,389			1,381,927
Long term investment in non-marketable security	5,000,000			5,000,000
Other assets	1,380,321			1,240,321

Total assets	$	80,828,486		$	98,524,311

Liabilities and Stockholders’ Deficit
Accounts payable	$	10,456,687		$	13,142,280
Accrued expenses	18,308,239			18,147,455
Current portion of long-term debt	4,736,282			5,348,852
Total current liabilities	33,501,208			36,638,587

Long term debt, net of current portion	73,039,119			93,589,694
Other long term liabilities	3,657,944			2,268,455
Total liabilities	110,198,271			132,496,736

Stockholders’ deficit
Common stock	45,785			45,785
Preferred stock	—			—
Treasury stock; 1,135,113 shares at cost	(340,534		)	(340,534		)
Additional paid-in capital	369,468,853			368,927,164
Deferred compensation	(57,171		)	(85,756		)
Accumulated deficit	(398,486,718		)	(402,519,084		)

Total stockholders’ deficit	(29,369,785		)	(33,972,425		)

	$	80,828,486		$	98,524,311

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

iBasis, Inc.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended March 31,
	2003			2002
Net revenue	$	41,841,267		$	41,726,210
Costs and operating expenses:
Data communications and telecommunications	34,926,620			35,587,961
Research and development	3,682,781			5,475,694
Selling and marketing	1,993,767			3,588,677
General and administrative	2,509,256			5,534,134
Depreciation and amortization	6,113,242			9,907,974
Non-cash stock-based compensation	28,585			334,265
Loss on sale of messaging business	—			2,180,540
Total cost and operating expenses	49,254,251			62,609,245

Loss from operations	(7,412,984		)	(20,883,035		)
Interest income	70,151			360,571
Interest expense	(1,427,090		)	(3,903,024		)
Gains on bond repurchases and exchanges	12,899,789			10,394,431
Other expenses, net	(97,500		)	(93,110		)
Income (loss) from continuing operations	4,032,366			(14,124,167		)
Loss from discontinued operations	—			(3,838,512		)
Net income (loss) applicable to common stockholders	$	4,032,366		$	(17,962,679	)

Basic and diluted net income (loss) per share:
Income (loss) from continuing operations	$	0.09		$	(0.31	)
Loss from discontinued operations	—			(0.09		)

Basic and diluted net income (loss) per share	$	0.09		$	(0.40	)

Weighted average common shares outstanding
Basic	44,649,942			45,121,759
Diluted	44,738,329			45,121,759

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

iBasis, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2003			2002
Cash flows from operating activities:
Income (loss) from continuing operations	$	4,032,366		$	(14,124,167	)
Adjustments to reconcile net loss to net cash used in operating activities, net of acquired assets and liabilities —
Gain on bond exchange and repurchases	(12,899,789		)	(10,394,431		)
Depreciation and amortization	6,113,242			9,907,974
Loss on sale of messaging business	—			2,180,540
Amortization of deferred debt financing costs	116,183			199,320
Amortization of deferred compensation	28,585			334,265
Bad debt expense	300,000			1,200,000
Changes in assets and liabilities, net of effect from acquisition—
Accounts receivable, net	2,757,556			(8,609,487		)
Prepaid expenses and other current assets	284,297			641,686
Other assets	(140,000		)	45,994
Accounts payable	(2,685,593		)	5,009,278
Accrued expenses	(1,845,029		)	(6,999,745		)
Other long term liabilities	(255,730		)	—

Net cash used in continuing operating activities	(4,193,912		)	(20,608,772		)
Net cash used in operating activities of discontinued operations	—			(2,517,112		)
Net cash used in operating activities	(4,193,912		)	(23,125,884		)

Cash flows from investing activities:
Purchases of property and equipment	(500,195		)	(2,373,776		)
Adjustment to proceeds from sale of Speech Solutions business	(736,218		)	—
Decrease in current marketable securities	—			25,613,530
Decrease in long-term marketable securities	—			357,900
Proceeds from the sale of messaging business	—			168,000
Net cash (used in) provided by investing activities	(1,236,413		)	23,765,654

Cash flows from financing activities:
Borrowings of long term debt	2,300,000			—
Payments of principal of long term debt	(2,300,000		)	(400,000		)
Payments of principal on capital lease obligations	(2,088,145		)	(2,438,847		)
Professional fees paid for exchange of bonds	(677,917		)	—
Decrease in restricted cash	—			400,000
Repurchase of Convertible Subordinated Notes	—			(5,623,655		)
Proceeds from issuance of shares related to employee stock purchase plan	—			240,918
Proceeds from exercise of common stock options	—			86,862
Net cash used in financing activities	(2,766,062		)	(7,734,722		)

Net decrease in cash and cash equivalents	(8,196,387		)	(7,094,952		)
Cash and cash equivalents, beginning of period	32,316,609			75,798,935

Cash and cash equivalents, end of period	$	24,120,222		$	68,703,983

Supplemental disclosure of cash flow information:

During the three months ended March 31, 2003 and 2002, iBasis paid cash of $2.8 million and $4.0 million, respectively, for interest on its 5.75% Convertible Subordinated Notes and outstanding capital leases.

Non-cash transactions:

Operations:

With those customers who are also suppliers, the Company continues to negotiate offset agreements for the amounts owed to each party. The results of this program has been the reduction in the value of accounts receivable and accounts payable by approximately $7.1 million and $2.6 million for the three months ended March 31, 2003 and 2002, respectively.

Investing:

During the three months ended March 31, 2003, the Company completed a non-cash sale of equipment with a net book value of $0.3 million.

Financing:

During the three months ended March 31, 2003, as a part of the exchange of the Company’s 5.75% Convertible Subordinated Notes the Company issued warrants with a fair value of $541,689. Such warrants allow the holders to acquire 3,798,811 shares of the Company’s common stock at an initial exercise price of $0.65 per share and are exercisable for a term of five years.

Also as part of the exchange and repurchase of the Company’s 5.75% Convertible Subordinated Notes, the Company reduced its deferred financing fees by $568,355 and $339,914 for the three months ended March 31, 2003 and 2002, respectively.

As part of the exchange of the Company’s Convertible Subordinated Notes, and in accordance with FAS 15, “Accounting by Debtors and Creditors Regarding Troubled Debt Restructuring”, the Company included $4,387,250 of interest within accrued expenses on the accompanying balance sheet as of March 31, 2003. This amount represents the future payments of interest on the Company’s newly issued 11.5% Senior Secured Notes.

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

iBasis, Inc.

Notes to Consolidated Financial Statements

(1) Business, Management Plans and Presentation

Business—iBasis, Inc. (the “Company”) is an international telecommunications carrier that utilizes the Internet to provide economical international telecommunications services to carriers and telephony resellers around the world. The Company’s continuing operations consists of its Voice-Over-Internet-Protocol (“VoIP”) business. The Company currently operates through various service agreements with local service providers in the United States, Europe, Asia, the Middle East, Latin America, Africa and Australia.

Management Plans—As shown in the consolidated financial statements, the Company has incurred cumulative net losses of $398.5 million since inception and used $4.2 of cash in continuing operations during the three months ended March 31, 2003. These results are primarily attributable to the expenditures necessary to develop and expand our market.

Throughout 2002 and 2003, management has taken a series of actions to reduce operating expenses, restructure the Company’s operations, reduce outstanding debt and provide additional liquidity. Such actions primarily included the:

• reductions in workforce,

• consolidation of Internet central offices,

• sale of the messaging business,

• sale of the assets associated with the Speech Solutions business,

• settlement of certain capital lease agreements,

• the repurchase of a portion of the Company’s 5.75% Convertible Subordinated Notes for cash,

• the exchange of a portion of the Company’s 5.75% Convertible Subordinated Notes for new 11.5% Senior Secured Notes, and

• the establishment of a new credit facility with a bank .

Moreover, management continues to implement plans 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.

Management’s plans include:

• aggressive management of credit risk

• monitoring and reduction of capital expenditures

• monitoring and reduction of selling, general and administrative expenses

• offsetting of accounts receivable and accounts payable balances with carriers

• reduction in circuit costs reflecting efforts to further improve network operations and make it more cost efficient

• use of our new switchless architecture which eliminates the need for costly telecommunications switches and other equipment.

In order to assure that adequate cash balances are available, the Company has entered into, and will continue to explore, alternative financing arrangements to partially replace or supplement those currently in place in order to provide the Company with long-term financing to support its funding needs.

In addition, on December 30, 2002, the Company entered into two secured line of credit agreements (the “2002 Credit Lines”) with Silicon Valley Bank (the “Bank”) providing a total available line of credit of $15 million which replaced all other outstanding credit agreements with the Bank. The maximum aggregate borrowings outstanding at any one time is limited to the lesser of $15 million or the specified borrowing base. The borrowing base is equal to 75% or 70% of eligible receivables, as defined in the agreements. Outstanding Letters of Credit drawn by the Company will reduce the maximum borrowings under this agreement at any time. Borrowings under these lines of credit bear interest at the Bank’s prime rate plus 1% and are collateralized by substantially all assets of the Company. The credit lines require the Company to comply with various financial and non-financial covenants, including the maintenance of certain minimum financial ratios and restrictions on the payment of cash dividends. As a result of the agreements to exchange the Company’s outstanding Convertible Subordinated Notes for new Senior Secured Notes (as described in note 4), the Bank has amended, effective February 27, 2003, certain financial covenants associated with the 2002 Credit Lines. At March 31, 2003, the Company was in compliance with the amended covenant requirements. These agreements mature on December 29, 2004. At March 31, 2003, $2,300,000 was borrowed under the 2002 Credit Lines and $4.3 million was available for borrowings. These agreements mature on December 29, 2004. On December 30, 2002, in conjunction with these agreements, the Company issued a five-year warrant to the Bank for the purchase of 337,500 shares of its common stock at an exercise price of $0.337 per share.

As described in Note 4, during the first quarter of 2003 the Company entered into agreements with principal holders of the Company’s 5.75% Convertible Subordinated Notes which resulted in the retirement of $38.2 million of the notes in exchange for a new debt instrument at 50% of the face value of the retired notes. Under the terms of the agreements, the bond holders surrendered an aggregate principal amount of $38.2 million of iBasis’ outstanding 5.75% Convertible Subordinated Notes in exchange for $19.1 million aggregate principal amount of new 11.5% Senior Secured Notes issued by iBasis and warrants for 3,798,811 shares of iBasis common stock. Each warrant will have an initial exercise price of $0.65 per share of Common Stock and an exercisable term of five years. The new Notes, which mature on January 15, 2005, share in a second priority lien on the Company’s assets and are subordinated to iBasis’ senior bank debt.

The Company has recorded a gain on this exchange of approximately $12.9 million in 2003.

We anticipate that the March 31, 2003 balance of $24.1 million in cash and cash equivalents will be sufficient to fund operations for the next twelve months. However, in the event we fail to execute on our plan, we experience events described in "Risk Factors", or that circumstances currently unknown for unforeseen by us arise, we cannot assure you that we will not require additional financings within this time frame or that any additional financings, if needed, will be available to us on terms acceptable to us, if at all.

Presentation— The unaudited condensed consolidated financial statements presented herein have been prepared by iBasis, Inc. 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 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, 2002.

(2) Discontinued Operations

On July 15, 2002, the Company completed the sale of substantially all of the assets of its Speech Solutions Business for $18.5 million in cash of which $1.5 million of this amount was placed in escrow until December 31, 2003, and up to $8 million in earn-out payments that may be earned upon the achievement of certain revenue milestones of the Speech Solutions Business in 2003. No earn-out payments have been earned through March 31, 2003. During the first quarter of 2003, the proceeds from the sale were reduced by $0.7 million in accordance with certain purchase price adjustments as defined within the purchase and sale agreement. Such purchase price reduction was previously accrued at December 31, 2002

The Company has reported its Speech Solutions Business as a discontinued operation within its statement of operations for the three months ended March 31, 2002 under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets.”

(3) Long-Term Debt

Long-term debt consists of the following:

	March 31, 2003		December 31, 2002
5.75% Convertible Subordinated Notes, due in March, 2005	$	50,380,000	$	88,530,000
11.5% Senior Secured Notes, due in January, 2005	19,075,000		—
Capital lease obligations	6,020,401		8,108,546
Revolving line of credit	2,300,000		2,300,000

	77,775,401		98,938,546
Less-current portion	4,736,282		5,348,852

	$	73,039,119	$	93,589,694

On December 30, 2002, the Company entered into two secured line of credit agreements (the “2002 Credit Lines”) with Silicon Valley Bank (the “Bank”) providing a total available line of credit of $15 million which replaced all other outstanding credit agreements with the Bank. The maximum aggregate borrowings outstanding at any one time is limited to the lesser of $15 million or the specified borrowing base. The borrowing base is equal to 75% or 70% of eligible receivables, as defined in the agreements. Outstanding Letters of Credit drawn by the Company will reduce the maximum borrowings under this agreement at any time. Borrowings under these lines of credit bear interest at the Bank’s prime rate plus 1% and are collateralized by substantially all assets of the Company. The credit lines require the Company to comply with various financial and non-financial covenants, including the maintenance of certain minimum financial ratios and restrictions on the payment of cash dividends. As a result of the agreements to exchange the Company’s outstanding Convertible Subordinated Notes for new Senior Secured Notes (as described in note 4), the Bank has amended, effective February 27, 2003, certain financial covenants associated with the 2002 Credit Lines. At March 31, 2003, the Company was in compliance with the amended covenant requirements. These agreements mature on December 29, 2004. At March 31, 2003, $2,300,000 was borrowed under the 2002 Credit Lines and $4.3 million was available for borrowings.

At March 31, 2003, the Company had outstanding letters of credit aggregating $2.9 million.

(4) Gains on Exchange and Repurchase of Convertible Subordinated Notes

During the first quarter of 2003, the Company entered into agreements with principal holders of the Company’s 5.75% Convertible Subordinated Notes which resulted in the retirement of $38.2 million of the 5.75% Convertible Subordinated Notes in exchange for a new

debt instrument at 50% of the face value of the retired Notes. Under the terms of the agreements, the bond holders surrendered an aggregate principal amount of $38.2 million of iBasis’ outstanding 5.75% Convertible Subordinated Notes in exchange for $19.1 million aggregate principal amount of new 11.5% Senior Secured Notes issued by iBasis and warrants for 3,798,811 shares of iBasis common stock. Each warrant will have an initial exercise price of $0.65 per share of Common Stock and an exercisable term of five years. The new notes, which mature on January 15, 2005, share in a second priority lien on the Company’s assets and are subordinated to iBasis’ senior bank debt.

In accordance with SFAS No. 15, “Accounting by Debtors and Creditors Regarding Troubled Debt Restructuring”, the Company recorded a gain on the exchange of approximately $12.9 million in the first quarter of 2003. SFAS No. 15 requires that the gain on the exchange be recorded net of the future payments on the new 11.5% Senior Secured Notes, the fair value of the warrants issued, the reduction of the net book value of the deferred financing costs originally capitalized with the issuance of the 5.75% Convertible Subordinated Notes and any other fees or costs. While the Company’s future cash flows relating to interest payments will not be affected by the exchange, the Company’s future Statement of Operations will show a reduction of interest expense due to the inclusion of the future interest payments on the 11.5% Senior Secured Notes within the gain.

As such, the gain was calculated as follows:

	Face value of surrendered 5.75% Convertible Subordinated Notes	$	38,150,000

Less:	Face value of issued 11.5% Senior Secured Notes	(19,075,000		)
	Future interest payments on 11.5% Senior Secured Notes	(4,387,250		)
	Fair value of warrants issued	(541,689		)
	Reduction of deferred debt financing costs	(568,355		)
	Professional fees	(677,917		)

	Gain	$	12,899,789

During the quarter ended March 31, 2002, we recognized a gain of approximately $10.4 million (or $0.23 per weighted average common share) in connection with the early extinguishment of approximately $16.4 million of our 5.75% Convertible Subordinated Notes. The gain was calculated as follows:

	Face value of repurchased 5.75% Convertible Subordinated Notes	$	16,358,000

Less:	Cost of repurchase of Notes	(5,623,655		)
	Reduction of deferred debt financing costs	(339,914		)
	Gain	$	10,394,431

The gains resulting from the exchange and early extinguishment of the convertible subordinated Notes were classified in 2002 as an extraordinary item but have been classified as a component of income from continuing operations within the consolidated statements of operations, in accordance with the adoption of Statement of Financial Accounting Standard (SFAS) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” in January 2003.

(5) Loss on Sale of Messaging Business

In March 2002, we completed the sale of our messaging line of business to Call Sciences, an enhanced communications service provider. Included within the sale was equipment and other assets with a net book value of $2.4 million, our customers, revenue streams and customer prospects. In exchange for these assets, we received $168,000 in cash plus a royalty stream from Call Sciences through March 2003. We

recorded a loss on this sale of $3.0 million which was adjusted by $0.8 million in subsequent quarters to account for the royalty stream. No royalties were recognized during the quarter ended March 31, 2003

(6) Net Income (Loss) Per Share

In accordance with SFAS No. 128, “Earnings per Share,” basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. The calculation of diluted net income (loss) per share is consistent with that of basic net income (loss) per share but gives effect to all potential common shares (that is, securities such as options, warrants or convertible securities) that were outstanding during the period, unless the effect is antidilutive.

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

	Three Months Ended March 31,
	2003	2002
Weighted average common shares outstanding	44,649,942	45,540,078
Less: Weighted average unvested restricted common shares outstanding	—	(418,319	)

Basic weighted average common shares outstanding	44,649,942	45,121,759

Add: Weighted average of outstanding potential common shares	88,387	—

Diluted weighted average common shares outstanding	44,738,329	45,121,759

The following common shares have been excluded form the computation of diluted weighted average common shares outstanding:

	Three Months Ended March 31,
	2003	2002
Options to purchase common shares	2,275,884	1,195,933
Shares to be issued upon conversion of 5.75% Convertible Subordinated Notes	584,862	1,389,801
Warrants to purchase common shares, issued in connection with 2002 Credit Lines and 11.5% Senior Secured Notes	3,798,811	—

Total shares excluded	6,659,557	2,585,734

(7) Stock Based Compensation

In accordance with SFAS No. 123, the Company applies Accounting Principles Board Opinion No. 25 and related Interpretations for expense recognition. No compensation expense has been recorded in the accompanying Statements of Operations for the three months ended March 31, 2003 and 2002 because the exercise price of all granted options and warrants equaled or exceeded the market price of the underlying stock on the date of grant. Had compensation expense for these options and warrants been determined consistent with the provisions of SFAS No. 123, the effect on the Company’s basic and diluted net income (loss) and per share data would have been as follows:

	Three months ended March 31,
	2003			2002
Basic and diluted net income (loss):
As reported	$	4,032,366		$	(17,962,679	)
Stock-based employee compensation expense included in reported net loss		28,585			334,265
Total stock-based employee compensation expense determined under fair value based method for all awards	(53,449		)	(2,754,663		)
Basic and diluted net income (loss), pro forma	$	4,007,502		$	(20,383,077	)

Basic and diluted net income (loss) per share:
As reported	$	0.09		$	(0.40	)
Total stock-based employee compensation expense determined under fair value based method for all awards	—			(0.06		)
Basic and diluted net income (loss) per share, pro forma	$	0.09		$	(0.46	)

(7) Revenue Recognition

The Company’s sales transactions are derived from the resale of international minutes of calling time. Revenue from the resale of minutes 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. The Company recognizes revenue in the period the service is provided, net of revenue reserves for potential billing credits.

(8) Recently Adopted Accounting Pronouncements

In January 2003, we adopted the following accounting pronouncements:

• SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of leases. This statement applies to all entities and is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have an impact on our consolidated balance sheet or statement of operations.

• SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement amends, among others, the classification on the statement of operations for gains and losses from the extinguishment of debt. Previously such gains and losses were reported as extraordinary items. The gain resulting from the exchange and early extinguishment of the convertible Subordinated Notes, originally recorded as extraordinary in our Consolidated Statements of Operations (see Note 4), have been reclassified to a component of operating loss within the Consolidated Statements of Operations.

• SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement supersedes Emerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” Under this statement, a liability for a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity’s commitment to an exit plan as required under EITF 94-3. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. The adoption of SFAS No. 146 did not have an impact on our consolidated balance sheet or statement of operations.

(9) 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 August 1, 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 11, 1999 initial public offering of common stock and our March 9, 2000 secondary offering of common stock. The complaints were filed on behalf of persons who purchased our 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 recently 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. The plaintiffs are seeking an as-yet undetermined amount of monetary damages in relation to these claims. On September 4, 2001, the cases against iBasis were consolidated. On October 9, 2002, the individual defendants were dismissed from the litigation by stipulation and without prejudice. iBasis believes that it and the individual defendants have meritorious defenses to the claims made in the complaints and intends to contest the lawsuits vigorously. In doing so or deciding whether to pursue a settlement, we will consider, among other factors, the substantial costs and the diversion of our management’s attention and resources that would be required by litigation. We cannot assure you that we will be successful should we decide to litigate. 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 have also received claims including lawsuits from estates of bankrupt companies alleging that we received preferential payments from such companies prior to their bankruptcy filings. We intend to employ all available defenses in contesting such claims. The results of any suit may have a material adverse affect on our business.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-

Overview

We are an international telecommunications carrier that utilizes the Internet to provide economical international telecommunications services to carriers and telephony resellers around the world. Our continuing operations consists of our VoIP business including incorporated subsidiaries around the world designed to enhance our global operations. We currently operate through various service agreements with local service providers in the United States, Europe, Asia, the Middle East, Latin America, Africa and Australia.

The Company has reported its Speech Solutions Business, which was sold during July 2002, as a discontinued operation within the statement of operations for the three months ended March 31, 2002 under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets.”

During the first quarter of 2003 the Company entered into agreements with principal holders of the Company’s 5.75% Convertible Subordinated Notes which resulted in the retirement of $38.2 million of the 5.75% Convertible Subordinated Notes in exchange for a new debt instrument at 50% of the face value of the retired Notes. Under the terms of the agreements, the bond holders surrendered an aggregate principal amount of $38.2 million of iBasis’ outstanding 5.75% Convertible Subordinated Notes in exchange for $19.1 million aggregate principal amount of new 11.5% Senior Secured Notes issued by iBasis and warrants for 3,798,811 shares of iBasis common stock. Each warrant will have an initial exercise price of $0.65 per share of Common Stock and an exercisable term of five years. The new notes, which mature on January 15, 2005, share in a second priority lien on the Company’s assets and are subordinated to iBasis’ senior bank debt. The Company recorded a gain on this exchange of approximately $12.9 million (or $0.29 per weighted average common share) on this exchange.

During the first quarter of 2002, we recognized a gain of approximately $10.4 million in connection with the early extinguishment of approximately $16.4 million of our 5.25% Convertible Subordinated Notes.

The gain resulting from the exchange and early extinguishment of the 5.75% Convertible Subordinated Notes, originally recorded as extraordinary in our Consolidated Statements of Operations (see Note 4), have been reclassified to a component of operating loss within the Consolidated Statements of Operations.

The following discussion and analysis of the our financial condition and results of operations for the three months ended March 31, 2003 and 2002 should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes for the three months ended March 31, 2003 included herein, and the year ended December 31, 2002, included in our Annual Report on Form 10-K.

This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Factors That May Affect Future Results and Financial Condition” below. The following discussion should be read in conjunction with the our Annual Report on Form 10-K and the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. All information is based on our company’s fiscal year.

Critical Accounting Policies

Revenue Recognition. Net revenue, which is derived from fees charged to terminate voice and fax services over our network, is recognized, net of reserves, when services are rendered and future collection of such amounts is reasonably assured. We reserve for potential billing disputes at the time revenue is recognized. This is a standard practice in the industry. Such disputes can result from disagreements with customers regarding the duration, destination or rates charged for each call.

Increased competition from other providers of telephony services could materially adversely affect revenue in future periods. The loss of a major customer could have a material adverse affect on our business, financial condition, operating results and future prospects.

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. A significant change in the liquidity or financial position of our customers, or a change in the telecommunications industry, could have a material adverse impact on the collectability of our accounts receivables and our future operating results.

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 March 31, 2003 for these assets. We do not anticipate impairment losses related to the assets in the future.

Results from Operations — Three Months Ended March 31, 2003 Compared to March 31, 2002

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 net revenue increased by approximately $0.1 million to $41.8 million for 2003 from $41.7 million for 2002. Our revenue for 2002 included $2.9 million relating to our messaging business which was sold during

the first quarter of 2002. The increase in revenue from 2002 was the result of an increase in traffic carried over our network to 792 million minutes for 2003 from 555 million minutes for 2002, offset by the decline in the average rate per minute.

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

Data communications and telecommunications expenses decreased by $0.7 million to $34.9 million for 2003 from $35.6 million for 2002. Our communications and telecommunications expenses for 2002 included $0.5 million relating to our messaging business which was sold during the first quarter of 2002. The decrease in data communications and telecommunications expense was primarily driven by the decline in the average rate per minute and the reduction in our circuit costs. The largest component of the expense, termination costs, increased to $33.8 million for 2003 from $31.8 million for 2002 while circuit costs decreased to $1.1 million for 2003 from $3.8 million for 2002. The decrease in these circuit costs was due to our efforts to further improve our network operations and make it more cost efficient. We achieved cost savings by renegotiating prices with vendors and service provider partners, entering into more variable rather than fixed cost arrangements, reducing the number of service providers, conducting extensive studies of our circuit needs and eliminating under-utilized circuits by re-engineering more cost-effective solutions. As a percentage of net revenue, data communications and telecommunications expenses decreased to 83% for 2003 from 85% for 2002. We expect data communications and telecommunications expenses to continue to decrease as a percentage of net revenue as we further increase utilization and efficiency of our network and achieve economies of scale.

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 decreased by $1.8 million to $3.7 million for 2003 from $5.5 million for 2002. This decrease in research and development expenses is due to the decreased expenditures related to the support of The iBasis Network, as well as a reduction in personnel costs due to workforce reductions in the first and second quarter of 2002. As a percentage of net revenue, research and development expenses decreased to 9% for 2003 from 13% for 2002. We expect that research and development expenses will remain constant and continue to decrease as a percentage of net revenue.

Selling and marketing expenses. Selling and marketing expenses include expenses relating to the salaries, payroll taxes, benefits and commissions that we pay for sales personnel and the expenses associated with the development and implementation of our promotion and marketing campaigns. Selling and marketing expenses decreased by $1.6 million to $2.0 million for 2003 from $3.6 million for 2002. This decrease is primarily attributable to decreasing expenditures for selling, promotional and marketing activities, as well as workforce reductions in the first and second quarter of 2002. As a percentage of net revenue, selling and marketing expenses decreased to 5% for 2003 from 9% for 2002. We anticipate that selling and marketing expenses will remain relatively level in 2003 and will continue to decrease as a percentage of net revenue.

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 decreased by $3.0 million to $2.5 million for 2003 from $5.5 million for 2002. The decrease is primarily due to the workforce reductions in the first and second quarter of 2002 as well as a reduction in bad debt expense. As a percentage of net revenue, general and administrative expenses decreased to 6% for 2003 from 13% for 2002. We expect general and administrative expenses to decrease as a percentage of revenues as we leverage our current employee base through automation and other efficiency improvement projects.

Depreciation and amortization expenses. Depreciation and amortization expenses decreased by $3.8 million to $6.1 million for 2003 from $9.9 million for 2002. This decrease was due to the reduction in historical cost value of our network equipment due to our agreement to settle the majority of our capital lease obligations with our primary equipment vendor in August 2002, the write-off of property and equipment as a part of our restructuring plans which were executed in 2002 as well as the end of the useful life of certain networking equipment. As a percentage of net revenue, depreciation and amortization expenses decreased to 15% for 2003 from 24% for 2002. We expect depreciation and amortization expenses to decrease as a percentage of net revenues due to an expected increase in revenues, a decrease in future capital expenditures, an increase in fully depreciated assets and the decrease in the historical value of the underlying assets as a result of the reduction in capital lease obligations with our primary equipment vendor.

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 either made prior to our initial public stock offering or were assumed in connection with our acquisition of PriceInteractive, Inc. in 2001, and are being expensed over the vesting periods of the options granted. The decrease in non-cash stock-based compensation from $334,265 in 2002 to $28,585 in 2003 was due to the expiration of certain option agreements issued in connection with acquisition of PriceInteractive, Inc. in 2001 as well our stock option exchange program which was completed in December 2002.

Loss on disposal of messaging business. In March 2002, we sold our messaging line of business to Call Sciences, an enhanced communications service provider. The sale included all of our messaging business, including, among other items, our Santa Clara, California data center, our customers, revenue streams, and customer prospects in exchange for $168,000 and a future royalty stream. During 2002, we recognized a loss on the sale of $2.2 million, net of the royalty stream.

Interest income. Interest income is primarily composed of income earned on our cash and cash equivalents, restricted cash and marketable securities. Interest income decreased by $290,420 to $70,151 in 2003 and $360,571 million in 2002. This decrease was primarily attributable to a decrease in our cash and cash equivalents, restricted cash and marketable securities as well as a decline in interest rates.

Interest expense. Interest expense is primarily composed of interest paid on the Convertible Subordinated Notes and various capital lease agreements established to finance a substantial majority of the hardware and software components of our network. Interest expense decreased by $2.5 million to $1.4 million in 2003 from $3.9 million in 2002. This decrease was attributable to reduced interest paid on capital equipment financing, the early extinguishment of $40.6 million of our 5.75% Convertible Subordinated Notes throughout calendar year 2002 and the early extinguishment of $50.8 million of our capital lease obligations in August 2002. Our interest expense for the first quarter of 2003 was also reduced as a result of the exchange of our debt securities as discussed in Note 4.

In accordance with SFAS No. 15, “Accounting by Debtors and Creditors Regarding Troubled Debt Restructuring”, the Company recorded a gain on the exchange of approximately $12.9 million (or $0.29 per weighted average common share) in the first quarter of 2003. SFAS No. 15 requires that the gain on the exchange be recorded net of the future payments on the new 11.5% Senior Secured Notes, the fair value of the warrants issued, the write off of the net book value of the deferred financing costs originally capitalized with the

issuance of the 5.75% Convertible Subordinated Notes and any other fees or costs. While the Company’s future cash flows relating to interest payments will not be affected by the exchange, the Company’s future Statements of Operations will show a reduction of interest expense due to the inclusion of the interest payments on the Senior Secured Notes within the gain. We expect interest expense to decrease in 2003 as current capital lease obligations mature and due to the impact of the early extinguishment of our convertible subordinated notes and capital lease obligations in 2003 and 2002.

Gain on bond repurchases and exchanges. During the first quarter of 2003 the Company entered into agreements with principal holders of the Company’s 5.75% Convertible Subordinated Notes which resulted in the retirement of $38.2 million of the 5.75% Convertible Subordinated Notes in exchange for a new debt instrument at 50% of the face value of the retired Notes. Under the terms of the agreements, the bond holders surrendered an aggregate principal amount of $38.2 million of iBasis’ outstanding 5.75% Convertible Subordinated Notes in exchange for $19.1 million aggregate principal amount of new 11.5% Senior Secured Notes issued by iBasis and warrants for 3,798,811 shares of iBasis common stock. Each warrant will have an initial exercise price of $0.65 per share of Common Stock and an exercisable term of five years. The new notes, which mature on January 15, 2005, share in a second priority lien on the Company’s assets and are subordinated to iBasis’ senior bank debt. The Company recorded a gain on this exchange of approximately $12.9 million (or $0.29 per weighted average common share) in the first quarter of 2003.

Loss from discontinued operations. On July 15, 2002 we completed the sale of substantially all the assets of our Speech Solutions Business for $18.5 million in cash ($1.5 million of this amount is in escrow). Additionally, $8 million in earn-out payments may be earned upon the achievement of certain revenue milestones by the Speech Solutions Business in 2003, when the earn-out agreement terminates. The Company cannot be certain that any amounts will be earned in 2003 related to the earn-out. No earn-out payments were earned during 2002. The loss from discontinued operations, recorded in 2002, represents the operating loss of the Speech Solutions Business for the three months ended March 31, 2002.

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

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 public offerings of common stock and 5.75% Convertible Subordinated Notes. In addition, we have also 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 was $4.2 million and $20.6 million for 2003 and 2002, respectively. Cash used in continuing operating activities for both years was principally related to the cash necessary to fund our operating losses. Net cash used in discontinued operating activities was $2.5 million for 2002.

Net cash used in investing activities was $1.2 million for 2003, of which $0.5 million was used for capital expenditures and $0.7 used as a part of an adjustment to the proceeds from the sale of the Company’s Speech Solutions business. Net cash provided by investing activities was $23.8 million for 2002. This primarily

reflected $26.0 million in the sale and maturity of marketable securities offset by $2.4 million for capital expenditures.

Net cash used in financing activities was $2.8 million for 2003, of which $2.1 million was used to repay our capital lease obligations and $0.7 million was paid for fees in connection the exchange of our outstanding bonds. Net cash used in financing activities was $7.7 million for 2002 which was primarily used to repurchase $16.4 million face value of our Convertible Subordinated Notes, and $2.4 million used for payments of our capital lease.

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

On December 30, 2002, we entered into two secured line of credit agreements (the “2002 Credit Lines”) with the Silicon Valley Bank (the “Bank”) providing a total available line of credit of $15 million which replaced our previous credit facilities and $4.0 million term loan. The maximum aggregate borrowings outstanding at any one time is limited to the lesser of $15.0 million or the specified borrowing base. The borrowing base is equal to 75% or 70% of eligible receivables, as defined in the agreements. Letters of credit drawn under this agreement will reduce the maximum borrowings available to us. Borrowings under these lines of credit bear interest at the Bank’s prime rate plus 1% and are collateralized by substantially all of our assets. The credit lines require us to comply with various financial and non-financial covenants, including the maintenance of certain minimum financial ratios and restrictions on the payment of cash dividends. These agreements mature on December 29, 2004. As a result of the agreements to exchange the Company’s outstanding Convertible Subordinated Notes for new Senior Secured Notes (as described in note 4), the Bank has amended, effective February 27, 2003, certain financial covenants associated with the 2002 Credit Lines. At March 31, 2003, the Company was in compliance with the amended covenant requirements. These agreements mature on December 29, 2004. At March 31, 2003, $2,300,000 was borrowed under the 2002 Credit Lines and $4.3 million was available for borrowings. At March 31, 2003, under the 2002 credit lines, we borrowed $2.3 million, had issued and outstanding under these credit lines letters of credit totaling $2.9 million and $4.3 million was available for borrowings based upon our estimate of eligible receivables as defined by the 2002 credit lines agreements. On December 30, 2002, in conjunction with these agreements, we issued a five-year warrant to the Bank for the purchase of 337,500 shares of our common stock at an exercise price of $0.337 per share.

Factors That May Affect Future Results and Financial Condition

RISK FACTORS

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

Risks Related to Our Company

A failure to obtain necessary additional capital in the future on acceptable terms could prevent us from executing our business plan.

We may need additional capital in the future to fund our operations, finance investments in equipment and corporate infrastructure, expand our network, increase the range of services we offer and respond to competitive pressures and perceived opportunities. Cash flow from operations, and cash on hand may not be sufficient to cover our operating expenses, working capital and capital investment needs. We cannot assure you that additional financing will be available on terms acceptable to us, if at all. A failure to obtain additional funding could prevent us from making expenditures that are needed to allow us to grow or maintain our operations.

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. If we raise additional funds through debt financing, we could incur significant borrowing costs. The failure to obtain additional financing when required could result in us being unable to grow as required to attain profitable 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 $7.4 million for the three months ended March 31, 2003 and $20.9 million for the three months ended March 31, 2002. Our accumulated deficit, and stockholders’ deficit was approximately $398 million and $29 million, respectively, as of March 31, 2003. Moreover, the terms of our $15 million revolving credit facility limit our ability to, among other things:

• incur additional debt, particularly unsubordinated 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; and

• create additional liens on our assets.

Although we expect that our available cash, and the remaining borrowing capacity under our credit facility will be sufficient to fund our operating and capital expenditure requirements in the foreseeable future, there can be no assurance that this will be the case. Our ability to borrow additional funds or raise additional equity is limited by the terms of our outstanding debt and/or our financial condition.

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.

The market value and liquidity of our stock may be affected by our transition to the Over-the-Counter Bulletin Board.

On November 13, 2002, we received a determination from Nasdaq that shares of our common stock would no longer trade on the Nasdaq National Market because we failed to meet certain minimum listing requirements. Our stock began trading on the NASD-operated Over-the-Counter Bulletin Board on November 14, 2002. It is unclear what affect this transition will have on our stock; among other things, the market value and liquidity of our common stock could be materially and adversely affected.

We may not be able to pay our debt and other obligations.

We may not generate the cash flow required to pay our liabilities as they become due. As of March 31, 2003, we had approximately $50.4 million of 5.75% Convertible Subordinated Notes and $19.1 million of 11.5% Senior Secured Notes. We must pay interest on these notes twice a year. All notes are due in 2005. We cannot assure you that we will be able to pay interest and other amounts, including the principal amount, due on the notes as and when they become due and payable. If our cash flow is inadequate to meet our obligations, we will default on the notes. Any default of the Convertible Subordinated Notes and Senior Secured Notes could have a material adverse effect on our business, prospects, financial condition and operating results and our ability to raise future capital.

Additionally, as of March 31, 2003, we had an outstanding balance of $2.3 million on our Lines of Credit from Silicon Valley Bank totaling $15 million, and had approximately $2.9 million of outstanding letters of credit issued under these agreements. If we fail to pay our liabilities under these Lines of Credit, Silicon Valley Bank may enforce all available remedies and seize our assets or receivable, to satisfy any amounts owed.

We may be required to repurchase our Convertible Subordinated Notes upon a repurchase event.

The holders of the Convertible Subordinated Notes may require us to repurchase all or any portion of the outstanding notes upon a “repurchase event.” A repurchase event includes a change in control of iBasis, or if our shares of common stock are no longer approved for trading on an established automated over-the-counter trading market. We may not have sufficient cash reserves to repurchase the notes, which would cause an event of default under the existing indenture and under our other debt obligations.

The market price of our shares may experience extreme price and volume fluctuations for reasons over which we have little control.

The stock market has, from time to time, experienced, and is likely to continue to experience, extreme price and volume fluctuations. Prices of securities of Internet-related companies have been especially volatile and have often fluctuated for reasons that are unrelated to the operating performance of the affected companies. The market price of shares of our common stock has fluctuated greatly since our initial public offering and could continue to fluctuate due to a variety of factors, some of which we cannot reliably identify. In the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation.

Provisions of our governing documents and Delaware law could 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;

• our stockholders need a supermajority of votes to amend key provisions of our certificate of incorporation and by-laws;

• there are limitations on 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 could limit our ability to provide our services or make them more expensive.

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 to offer our services. We may face similar questions in additional countries. Some countries have indicated they will evaluate proposed Internet telephony service on a case-by-case basis and determine whether to regulate it as a voice service or as another telecommunications service, and in doing so potentially impose subsidies or other costs on Internet telephony providers. In addition, many countries have not yet addressed Internet telephony in their legislation or regulations. Increased regulation of the Internet and/or Internet telephony providers, or the prohibition of Internet telephony or related services, in one or more countries, could limit our ability or the ability of our service partners or affiliates to provide our services. Finally, international organizations such as the International Telecommunications Union and the European Commission are continuing to examine whether Internet telephony should continue to be subject to light regulation. Adverse recommendations by these bodies could also limit our ability to provide services profitably.

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;

• 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 bodies begin to impose related restrictions on Internet telephony or our other services or otherwise enforce criminal or other laws against us, our affiliates or employees, such activities could have a material adverse effect on our ability to attain and maintain profitability.

As we continue to operate abroad and expand into additional foreign countries, such countries may assert that we are required to qualify to do business in the particular foreign country, that we are otherwise subject to regulation, or that we are prohibited from conducting our business in that country. Our failure to qualify as a foreign corporation in a jurisdiction in which we are required to do so, or to comply with foreign laws and regulations, would materially adversely affect our business, financial condition and results of operations, including subjecting us to taxes and criminal or other penalties and/or by precluding us from, or limiting us in, enforcing contracts in such jurisdictions. We cannot be certain that our customers, service partners, or other affiliates are currently in compliance with regulatory or other legal requirements in their respective countries, that they or we will be able to comply with existing or future requirements, and/or that they or we will continue in compliance with any requirements. Our failure or the failure of those with whom we transact business to comply with these requirements could materially adversely affect our business, financial conditions and results of operations.

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

While the FCC has tentatively decided that information service providers, including Internet telephony providers, are not telecommunications carriers for regulatory purposes, various entities have challenged that decision. In addition, some members of Congress are dissatisfied with the conclusions of the FCC, which could result in the imposition of greater or lesser regulation on our industry. State government agencies may also increasingly regulate Internet-related services. These types of regulation may negatively impact the cost of doing business over the Internet and materially adversely affect our ability to attain or maintain profitability.

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

Our prepaid international calling card services are offered 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. Although we do not market the calling cards for domestic interstate or intrastate use, we have not blocked the ability to place such calls or required our wholesale customers 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 lighter regulation to which our Internet-based services are subject. Because we provide wholesale international services, we do not believe that we are subject to federal or state 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. There can be no assurance that the FCC and state regulatory authorities will 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, all of which could materially affect our business.

The FCC also requires all calling card service providers that enable users to place toll-free calls from payphones in the United States to compensate the payphone operator for each call placed from a payphone. Future change in FCC payphone compensation rules and/or the failure of a company that provides toll-free numbers to us to compensate payphone companies could affect our revenues.

In addition to specific telecommunications regulation, we are subject to other laws. 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.

Risks Related to Our Operations

We have a limited operating history upon which to base your investment decision, and you may inaccurately assess our prospects for success.

We were incorporated in August 1996, and first began to offer commercial services in May 1997. Due to our limited operating history, it is difficult for us to predict future results of operations for our core business. Moreover, we cannot be sure that we have accurately identified all of the risks to our business, especially because we use new, and in many cases, unproven technologies and provide new services. The technical implementation of such technologies and services on a commercial scale and subsequent widespread commercial acceptance, is yet unproven. As a result, our past results and rates of growth may not be meaningful indicators of our future results of operations. Also, your assessment of the prospects for our success may prove inaccurate.

We have a history of operating losses and may never become profitable.

We have incurred and expect to continue to incur operating losses and negative cash flows as we incur operating expenses and make capital investments in our business. Our future profitability will depend on our being able to deliver calls over our network at a cost to us that is less than what we are able to charge for our calls, collect payments from customers, and otherwise utilize our network on a profitable basis.

Our costs to deliver calls are dependent on a number of factors, including the countries to which we direct calls and whether we are able to use the Internet, rather than another component of our network or more expensive back-up networks. The prices that we are able to charge to deliver calls over our network vary, based primarily on the prices currently prevailing in the international long distance carrier market to specific countries. While we are currently able to terminate a substantial number of the calls carried over our network, we have been unable to operate our entire network profitably on an operating basis for sustained periods.

We may not ever generate sufficient revenues or reduce costs to the extent necessary, to permit us to achieve profitability or pay our liabilities as they become due. Even if we do become profitable, we may not sustain or increase profitability on a quarterly or annual basis.

Fluctuations in our quarterly results of operations that result from various factors inherent in our business may cause the market price of our common stock to fall.

Our revenue and results of operations have fluctuated and may continue to fluctuate significantly from quarter to quarter in the future due to a number of factors, many 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 attractive 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 problems;

• our ability to manage our traffic so that routes are profitable; and

• our ability to collect from our customers

• currency fluctuations 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 our common stock to decline significantly.

We may never generate sufficient revenue to attain profitability if telecommunications carriers and other communications service providers 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; and

• 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. If the volume of international voice and fax traffic fails to increase, or decreases,

and these third parties do not employ our network, 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 filed for bankruptcy owing us money for services we have provided to them in the past. Despite our efforts to collect these overdue funds, we may never be paid. Certain customers have filed for bankruptcy protection owing us amounts we have not yet received. 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 provide services to companies that refuse to pay. The risk is even greater in foreign countries, where the legal and collection systems available may not be adequate or impartial for us to 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 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 face technical problems or increased costs 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 substantially all of our Internet telephony equipment from Cisco Systems. We cannot assure you that we will be able to continue purchasing such equipment, software, network elements and other components from our vendors. 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. If we become unable to purchase the software and equipment needed to maintain and expand our network or customer service applications, we may not be able to continue to provide services and we may consequently be unable to generate the revenues to become profitable.

Parties that Maintain Phone and Data Lines. Our business model depends on the availability of the Internet and traditional telephone networks to transmit voice and fax calls. Third parties maintain and own these networks and other components that comprise the Internet. Some of these third parties are telephone companies. They may increase their charges for using these lines at any time and decrease our profitability. They may also fail to maintain their lines properly or otherwise disrupt our ability to provide service to our customers. Any failure by these third parties to maintain these lines and networks 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 cannot assure you that we will 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 cannot assure you that we will be able to increase the number of countries to which we provide service. We also may not be able to enter into relationships with enough overseas local service providers to handle increases in the volume of calls that we receive from our customers. Finally, any technical difficulties that these providers suffer 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 in large part 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.

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

The market for Internet voice and fax is extremely competitive and will likely become more competitive. Internet protocol and other Internet telephony service providers route traffic to destinations worldwide and compete directly with us. Also, Internet telephony service providers that presently focus on retail customers may in the future enter our market and compete with us. Such retail-oriented carriers also provide PC-to-PC services at very low prices or for free. Perceived competition with this market segment could drive our prices down. In addition, major telecommunications carriers, such as AT&T, British Telecom, Deutsche Telekom, MCI WorldCom and Qwest Communications all compete with our services.

We are subject to downward pricing pressures on our wholesale international Internet telephony services 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 for call completion on our network. If this downward pricing pressure continues, we cannot assure you that we will 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 would 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;

• compliance with tax, employment, securities, immigration, labor and other laws for employees living and traveling abroad;

• foreign taxes including withholding of payroll taxes;

• foreign currency fluctuations, which could result in increased operating expenses and reduced revenues;

• 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; and

• 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, may not be adequately protected by legal authorities or other means.

Delivering calls outside of the United States generates a significant portion of our revenue. Many countries in these geographic regions have experienced political and economic instability over the past decade. Repeated political or economic instability in countries to which we deliver substantial volumes of traffic could lead to difficulties in completing calls through our regional service providers or decreased call volume to such countries. 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 depends is changing rapidly. Significant technological changes could render the hardware and software which we use obsolete, and competitors may begin to offer new services that we are unable to offer. We must adapt to our rapidly changing market by continually improving the responsiveness, reliability, services and features of our network and by developing new features and applications to meet customer needs. 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.

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. We will need to expand and upgrade our hardware and software to accommodate such increased traffic. If we do not expand and upgrade 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 key personnel and may have difficulty attracting and retaining the skilled employees we need to execute our growth plans.

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, Dan Powdermaker, our Senior Vice President of Worldwide Sales, and Sean O’Leary, Senior Vice President of Marketing. If any of these individuals or others at the Company 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 depend, in large part, on our ability to attract, retain and motivate highly skilled employees, particularly engineering and technical personnel. Recent workforce reductions have resulted in reallocations of employee duties that could result in employee and contractor uncertainty. 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.

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 cannot assure you that we can 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.

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 poor. 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. Because the Internet telephony market is new and evolving, predicting the size of these markets and their growth rate is difficult. If our market fails 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.

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.

We cannot be certain that our ability to provide our services using the Internet will not 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.

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, interest rates would not have a material impact on their value at March 31, 2003. 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.

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. Although most of our costs are U.S. dollar denominated, some of our costs are in Euros or British pounds which partially offsets our risk from revenues denominated in these currencies.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Based on their evaluation of iBasis’ disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, iBasis’ chief executive officer and chief financial officer have concluded that iBasis’ disclosure controls and procedures are designed to ensure that information required to be disclosed by iBasis in the reports that it files or submits 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 controls. There were no significant changes in iBasis’ internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.

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:

Exchange Act of 1934 primarily based on the assertion that there was undisclosed compensation received by our underwriters in connection with our public offerings. The plaintiffs are seeking an as-yet undetermined amount of monetary damages in relation to these claims. On September 4, 2001, the cases against iBasis were consolidated. On October 9, 2002, the individual defendants were dismissed from the litigation by stipulation and without prejudice. Although iBasis has not filed an answer in any of these matters, iBasis believes that it and the individual defendants have meritorious defenses to the claims made in the complaints and intends to contest the lawsuits vigorously. In doing so or deciding whether to pursue a settlement, we will consider, among other factors, the substantial costs and the diversion of our management’s attention and resources that would be required by litigation. We cannot assure you that we will be successful should we decide to litigate. 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.

Item 6 - Exhibits and Reports on Form 8-K

(a)	Exhibits:

	10.1	Second modification to the loan arrangement dated December 30, 2002, evidenced by, among other documents, a certain Loan and Security Agreement dated as of December 30, 2002 between iBasis, Inc., iBasis Global, Inc. and Silicon Valley Bank, as amended by a certain First Loan Modification Agreement dated as of January 30, 2003 (as amended, the “Loan Agreement”).

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

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

(b)	Reports on Form 8-K:

	On January 8, 2003 the Company filed Form 8-K to announce that it had obtained a two-year secured line of credit from Silicon Valley Bank.

	On January 30, 2003, the Company filed Form 8-K to announce that it had entered into an agreement with a group of affiliated funds who collectively held an aggregate principal amount of $30.2 million of the Company’s 5 3/4% Convertible Subordinated Notes Due 2005 pursuant to which the group exchanged such notes for an aggregate principal amount of $15.1 million of new 11.5% Senior Secured Notes Due 2005.

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.


May 15, 2003	By:	/s/ Richard Tennant
(date)		Richard Tennant
		Vice President and Chief Financial Officer
		(Authorized Officer and Principal Accounting Officer)

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Ofer Gneezy, President and CEO of iBasis, Inc., a Delaware corporation, doing business in Burlington, Massachusetts, certify that:

1. I have reviewed this quarterly report of Form 10-Q of iBasis, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

May 15, 2003		/s/ Ofer Gneezy
(Date)		Ofer Gneezy
		Chief Executive Officer
		(Principal Executive Officer)

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

Quarterly Certification

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Richard Tennant, Chief Financial Officer of iBasis, Inc., a Delaware corporation, doing business in Burlington, Massachusetts, certify that:

1. I have reviewed this quarterly report of Form 10-Q of iBasis, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

May 15, 2003		/s/ Richard Tennant
(Date)		Richard Tennant
		Chief Financial Officer
		(Principal Financial Officer)