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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

Indicate by checkmark 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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)

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

At April 30, 2003, there were 43,059,516 shares of Common Stock, par value $.001 per share, outstanding.

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ITXC CORP.

INDEX

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PART I - Financial Information

Item 1.   Financial Statements 

ITXC CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

See accompanying notes.

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ITXC CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

See accompanying notes.

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ITXC CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

See accompanying notes.

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ITXC CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.     Basis of Presentation

The March 31, 2003 and 2002 financial statements have been prepared by ITXC Corp. (the “Company” or “ITXC”) and are unaudited.  In the opinion of the Company’s management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows for the interim periods have been made. Certain information and footnote disclosures required under accounting principles generally accepted in the United States have been condensed or omitted from the consolidated financial statements and notes thereto presented herein pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes thereto presented herein should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2002 and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year.

The consolidated financial statements include the accounts of ITXC Corp. and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.

2.     Comprehensive Income

The components of comprehensive loss for the three-month periods ended March 31, 2003 and 2002 were as follows:

3.     Stock-Based Compensation

The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” using an intrinsic value approach to measure compensation expense, if any. Appropriate disclosures using a fair value based method, as provided by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, are also reflected in these notes to the financial statements. The Company has not issued any options other than to employees and directors and certain consultants who are full time occupied in the Company’s activities.

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The following table summarizes relevant information as to reported results under the Company’s intrinsic value method of accounting for stock options, with supplemental information as if the fair value recognition provisions of SFAS No. 123 had been applied for the three-month periods ended March 31, 2003 and 2002:

4.     Acquisition

On May 2, 2002 the Company purchased assets, which comprised the wholesale call completion business operated by privately-held Nexcom Telecommunications LLC (“Nexcom”) in 11 countries in Eastern Europe, for total consideration of $11.7 million which consisted of $9.0 million in cash and 533,701 shares of the Company’s common stock.  275,459 of those shares and $1.5 million in cash are subject to an escrow agreement supporting Nexcom’s indemnification obligations to the Company.  Nexcom had previously provided termination services to the Company in most of the countries in which the assets are located.  In connection with the transaction, the Company recorded goodwill of $7.9 million; and other intangibles of $2.9 million related to vendor agreements, customer lists and licenses, which will be amortized over periods ranging from 3 to 80 months.  These values were determined using an independent third party valuation.  Also included in the purchase were $0.8 million of property, plant and equipment.  The acquisition was accounted for as a purchase in accordance with SFAS No. 141, Business Combinations, and accordingly, the net assets and results of operations have been included in the Consolidated Financial Statements from the date of acquisition. The acquisition would not have had a material impact on the Company’s results of operations, had the acquisition been completed at the beginning of the periods presented.

5.     Restructuring Charges

During the first quarter of 2002, the Company recorded  $1.1 million in restructuring charges related to two of its lease facilities.  In the first quarter of 2003, the Company reached a settlement with the landlord for the Beaverton, Oregon facility resulting in a cash payment to the landlord of approximately $1.2 million.  The Company recorded an additional restructuring charge in the fourth quarter of 2002 related to this settlement.  No more restructuring charges are expected in 2003 associated with this facility. 

6.     Goodwill and Other Intangible Assets

The following table summarizes the activity in Goodwill for the periods indicated:

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The following table summarizes the Other Intangibles subject to amortization at the dates indicated:

Amortization expense for Other Intangibles totaled approximately $121,000 and $6,000 for the three months ended March 31, 2003 and 2002, respectively.

7.     Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This Statement is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. SFAS No. 143 addresses the recognition and measurement of obligations associated with the retirement of tangible long-lived assets resulting from acquisition, construction, development, or the normal operation of a long-lived asset. SFAS No. 143 requires that the fair value of an asset retirement obligation be recognized as a liability in the period in which it is incurred. The asset retirement obligation is to be capitalized as part of the carrying amount of the long-lived asset and the expense is to be recognized over the useful life of the long-lived asset. The adoption of this standard did not have a significant impact on the Company’s consolidated results of operations and financial position. 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of SFAS No. 146 was adopted beginning January 1, 2003.  The adoption of this standard did not have a material impact on its consolidated results of operations and financial position.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”.  SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the impact of the method used on reported results.  The disclosure provisions of SFAS No. 148 are effective for fiscal years ended after December 15, 2002 and have been incorporated into the accompanying notes presented herein.

8.     Restricted Cash

In conjunction with its letter of credit facility for its Princeton, New Jersey lease, the Company has $2.2 million in restricted cash as of March 31, 2003 and December 31, 2002 that represents the collateral supporting the letter of credit.  The Company is obligated to maintain the letter of credit for the term of the lease, which expires on July 31, 2011.  As a result, the Company will be required to either maintain the restricted cash or provide an alternative means of collateral.

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9.      Legal Proceedings

The Company is involved in certain claims and legal actions arising in the normal course of business. Management does not expect that the outcome of these cases will have a material effect on the Company’s financial position or results of operations.

On May 23, 2000, Connectel, LLC, filed suit against the Company in the United States District Court for the Eastern District of Pennsylvania. Connectel alleges in its complaint that the Company is infringing on the claims of a patent owned by Connectel by, acting alone or with others, assembling, offering to sell, selling or using communications networks or switching systems within the United States and for export worldwide without license from Connectel. Connectel also seeks unspecified damages. The Company believes that the Connectel claims are without merit and the Company intends to defend the lawsuit vigorously. However, should a judge issue an injunction against the Company, such action could have a material adverse effect on its operations.

The Company and certain of its officers/directors were named as defendants in several purported shareholder class action lawsuits. The lawsuits allege, among other things, that, in connection with the Company’s public offerings of securities, its Prospectus did not disclose certain alleged practices involving its underwriters and their customers. These actions seek compensatory and other damages, and costs and expenses associated with the litigation. These actions are in the early stages and the Company has not yet determined if there is any potential material impact on its Consolidated Financial Statements.  ITXC is one of hundreds of companies named in substantially identical lawsuits.  Management believes that ITXC and its officers/directors did not engage in any improper or illegal conduct and intends to defend these actions vigorously. All of these cases have been consolidated for pretrial purposes before Judge Scheindlin in the Southern District of New York.  All of the individual defendants who had been named as defendants in the Company’s case have now been dismissed from the proceeding without prejudice, pursuant to a stipulation with the plaintiffs.  Neither the individual defendants nor the Company nor its insurers paid any consideration for these dismissals.

In September, 2001, the Company had been served with a complaint filed in Virginia state court on behalf of Hercules Communications Company, LLC in which the plaintiff demanded damages, including punitive damages, based on the Company’s alleged refusal to carry out a purported agreement to purchase certain assets from Hercules. The claims were primarily based on alleged breach of contract, breach of implied contract, breach of an oral contract, promissory estoppel and fraud. The Court dismissed plaintiff’s claim for promissory estoppel and fraud, but did allow the plaintiff to refile its fraud complaint.  Discovery is now underway.  In June 2002, plaintiff moved to substitute Hercules Satellite Communications, L.L.C. for Hercules Communications, LLC, over the Company’s objection.  The Court rejected plaintiff’s motion, and thereafter the plaintiff voluntarily dismissed the case.  A new case was then brought in the name of Hercules Satellite Communications, L.L.C.  The allegations in the new case are substantially similar to those which had survived in the prior case.   A trial date is now scheduled for August 2003, and discovery is nearing completion.  The Company continues to believe the case is not meritorious and intends to vigorously defend its conduct.

Interactive Marketing Technologies, Inc., (“IMT”) a telecommunications service bureau headquartered in Erlanger, Kentucky, which, among other things, provides services to the prepaid calling card industry, commenced a lawsuit against ITXC seeking unspecified compensatory and punitive damages in the United States District Court for the Eastern District of Kentucky alleging breach of contract, bad faith, tortuous [sic] interference with contract and negligent misrepresentation, among other claims.  IMT is the customer to which ITXC had discontinued service on February 20, 2003, and from which ITXC had demanded payment of a multimillion dollar past due balance, after the parties were unsuccessful in efforts to restructure IMT’s obligations to ITXC. The Company believes the claims are without merit and plans to defend the case.  It is the Company’s belief that this dispute is covered by the arbitration clause of the agreement between ITXC and IMT, and the Company has therefore commenced an arbitration action against IMT seeking to recover the amounts owed by IMT, and has moved to dismiss the pending action in Kentucky based on the arbitration clause.

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The Company has received an adversary complaint in bankruptcy court in connection with the bankrupt World Access, Inc. and its affiliate companies alleging that payments and offsets by the debtors to ITXC, all made prior to the bankruptcy filing in April 2001, and totaling approximately $3 million, constituted voidable transfers under the Bankruptcy laws and should be returned to the debtors.   The Company plans to defend the action.

The Company is not a party to any other legal proceeding, the adverse outcome of which is expected to have a material adverse effect on its business, financial condition, operating results or future prospects.

10.      Income Taxes

On July 2, 2002, the State of New Jersey signed into law new corporate business tax legislation, which was retroactive to January 1, 2002.  Accordingly, corporations are now subject to a gross receipts and gross profits tax.  For the quarter ended March 31, 2003, the Company has recorded a provision for New Jersey income tax expense of $50,000 in its condensed consolidated statement of operations.  The Company also recorded $120,000 of tax expense related to its overseas offices.

11.     Subsequent Events

On April 10, 2003, IDT Corporation publicly announced that it intended to make an offer to purchase the Company’s outstanding shares of common stock for $1.40 in IDT Class B common stock. On the same date, the Company announced that its Board of Directors had met and had made an initial determination that the IDT proposal would not be in the interests of the Company’s stockholders.

The Company also announced on April 10, 2003 that its Board had approved a Shareholder Protection Rights Plan and declared a dividend of one Right on each outstanding share of ITXC common stock. Initially the Rights will be evidenced by common stock certificates, will automatically trade with the Company’s common stock, and will not be currently exercisable. The Rights become exercisable when and if an entity acquires 15% or more of the Company’s common stock and will entitle each stockholder, other than the acquiring entity, to purchase a number of shares of common stock with a market value of $14 for a payment of $7 at that time. The Board, at its option, may require that each Right be exchanged for one share of common stock. This exchange feature would not apply to rights held by an entity which has acquired 15% of the common stock. The Rights may be redeemed by the Board of Directors for $0.001 per Right at any time before they become exercisable.

On May 1, 2003, IDT issued a press release which stated, in pertinent part, that “IDT Corporation (NYSE: IDT; IDT.C) today announced that it has terminated its proposal to acquire all outstanding shares of ITXC Corp. (NASDAQ: ITXC). Pursuant to the terms of an agreement entered into with ITXC, IDT will not take any action to acquire the shares of ITXC for the next thirty days without ITXC’s consent, and the parties will enter into discussions. IDT makes no assurances that any agreement between the parties will be reached, or that any future offers will be made.”

The Company has engaged the investment banking firm of Morgan Stanley & Co., Incorporated as its financial advisor with respect to any possible transactions and to assist the Company’s efforts to protect and maximize shareholder value. No assurances are given that any transactions will be entered into with IDT Corporation or any other entity.

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

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, the related Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (the “10-K”) and the Unaudited Condensed Consolidated Financial Statements and related Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

ITXC has included in this Quarterly Report certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 concerning ITXC’s business, operations and financial condition. “Forward-looking statements” consist of all non-historical information, and the analysis of historical information, including any references in this Quarterly Report to future revenue growth, future expense growth, future credit exposure, future profitability, anticipated cash resources, anticipated capital expenditures, capital requirements, and the Company’s plans for future periods. In addition, the words “could”, “expects”, “anticipates”, “objective”, “plan”, “may affect”, “may depend”, “believes”, “estimates”, “projects” and similar words and phrases are also intended to identify such forward-looking statements.

Actual results could differ materially from those projected in the Company’s forward-looking statements due to numerous known and unknown risks and uncertainties, including, among other things, difficulties in predicting the outcome of a contest for control; unanticipated technological difficulties; the volatile and competitive environment for Internet telephony and telecommunications; changes in domestic and foreign economic, market, and regulatory conditions; the inherent uncertainty of financial estimates and projections; uncertainty inherent in litigation; uncertainty relating to the search for a successor CEO; the creditworthiness of our customers; the impact of future transactions; and other considerations described as “Risk Factors” in Exhibit 99.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and in other filings by the Company with the SEC. All such forward-looking statements are current only as of the date on which such statements were made. ITXC does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

Critical Accounting Policies and Estimates

ITXC’s discussion and analysis of its financial condition and results of operations are based upon the Company’s Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, investments, intangible assets, restructuring and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies apply to and affect significant judgments and estimates used in the preparation of its Condensed Consolidated Financial Statements:

Allowance for Doubtful Accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company estimates the amount of the allowance for doubtful

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accounts required to reduce accounts receivable to expected net realized value by reviewing the status of significant past-due receivables and analyzing historical bad debt trends and industry and customer specific conditions.

Revenue Recognition. The Company recognizes telecommunications revenue and the related costs at the time the services are rendered. Telecommunications revenue is derived from fees charged to terminate voice and fax services over the Company’s network. Increased competition from other providers of Internet telephony services and traditional telephony services could materially adversely affect revenue in future periods. To date, the Company has derived a significant portion of its revenue from a small number of customers. The loss of a major customer could have a material adverse effect on the Company’s business, financial condition, operating results and future prospects.

Goodwill and Other Intangible Assets.  On January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets”.  In assessing the recoverability of its goodwill and other intangibles, the Company must make assumptions regarding estimated future cash flows.  If such assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded.  

Property and Equipment.   On January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.  If indicators of impairment are present, the Company must determine whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than its carrying amount. If less, the Company will be required to recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values.  The Company is in the process of simplifying its network to eliminate the need for circuit switches in new installations, to lower costs and improve quality and reliability for its customers, and to reduce further capital costs and operating complexity.  In connection with the initiative, the Company has commenced a plan to migrate to a Cisco-based architecture which may require an impairment evaluation of any assets that may be eliminated.

Overview

We are a leading global provider of voice and fax services established in July 1997. We primarily use the Internet for transport of these calls.

In April 1998, we launched our first service delivered over ITXC.net®-our WWeXchange® service. Our operations since that time have included:

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To date, our primary sources of revenue have been the fees that we receive from customers for terminating calls that they have originated. Our revenue for terminating calls over ITXC.net has depended primarily upon the following factors:

Competition from other providers of Internet telephony services and traditional telephony services, failure of customers to meet payment obligations and regulatory developments could materially adversely affect revenue in future periods.

To date, we have derived a significant portion of our revenue from a small number of customers. The loss of a major customer could have a material adverse effect on our business, financial condition, operating results and future prospects.

Our operating expenses have been primarily:

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We believe that the services we provide over the Internet are not currently actively regulated in the U.S. Several efforts have been made, however, to enact federal legislation that would regulate certain aspects of the Internet. In addition, the Federal Communications Commission has been considering various initiatives that could affect the provision of Internet telephony, its regulatory status, and the obligations to make payments to the Universal Service Fund. An adverse outcome of either regulatory proceedings or legislation could increase our costs significantly and could materially adversely affect our business, operating results, financial condition and future prospects.

We anticipate that from time to time our operating expenses may increase on a per minute basis as a result of decisions to route additional traffic over the traditional telephone network or private data networks in order to maintain quality transmissions during relatively short periods of time as we transition our network to increased levels of capacity, or to meet peak demands.  During these periods, we occasionally experience reductions in volume from certain customers. Historically, we have satisfactorily resolved these transition issues. However, in the future other anticipated or unanticipated operating problems associated with the growth of ITXC.net may develop.

On May 2, 2002 the Company purchased assets which comprised the wholesale call completion business

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operated by Nexcom Telecommunications, LLC in 11 countries in eastern Europe, for total consideration of $11.7 million which consisted of $9 million in cash and 533,701 shares of the Company’s common stock. 275,459 of those shares and $1.5 million in cash are subject to an escrow agreement supporting Nexcom’s indemnification obligations to the Company. Nexcom had previously provided termination services to the Company in most of the countries in which the assets are located. In connection with this acquisition the Company acquired capital assets and hired a small number of Nexcom’s employees located in those countries.

Since our inception in July 1997, we have experienced operating losses in each quarterly and annual period and negative cash flows from operations in each quarter since we commenced offering services over ITXC.net in April 1998. As of March 31, 2003, we had an accumulated deficit of $332.9 million. The profit potential of our business is unproven, and our limited operating history makes an evaluation of us and our prospects difficult. We may not achieve profitability or, if we achieve profitability, we might not sustain profitability.

Results of Operations - Comparison of the Three Months Ended March 31, 2003 and 2002

Revenues

Telecommunications revenues amounted to $81.7 million during the quarter ended March 31 2003 and $57.7 million during the three months ended March 31, 2002, an increase of 41.6%.  Almost all of our total revenue during 2003 was derived from our WWeXchange service, which provides international call completion to our customers and enables them to offer their own customers phone-to-phone global voice service. The increase over the first quarter of 2002 was the result of more calls being carried on our network, ITXC.net.  

We carried approximately 884 million minutes of traffic in the first quarter of 2003 as compared with 658 million minutes during the comparable period of 2002. During the quarter ended March 31, 2003, our average revenues per minute was 9.2 cents per minute, as compared with 8.8 cents per minute during the quarter ended March 31, 2002. The increase in average revenues per minute is primarily attributable to a favorable shift in route mix to higher priced destinations.

Approximately $8.7 million of revenues reported for the first quarter of 2003 relates to amounts from Interactive Marketing Technologies, Inc., which may not be collectible. The Company has reserved for these amounts in its Selling, General and Administrative Expenses.

Operating Expenses

Data Communications and Telecommunications Expenses. During the three months ended March 31, 2003 and 2002, data communication and telecommunications expenses amounted to $72.6 million and $48.6 million, respectively, or 88.9% and 84.2% of revenues, respectively.  The increase in the dollar amount of such costs primarily reflected the increased traffic during 2003, as well as costs associated with establishing an increasing capacity at our hubs in anticipation of future growth in traffic.  In February of 2003, we opened our Germany SuperPoP.   The Company’s ARPM’s (average rate per minute) percentage increased from the first quarter of 2002 to the first quarter of 2003.  This was primarily caused by an increase in the mix of High ARPM minutes to higher priced destinations.

Network Operations Expenses.  Network operations expenses increased to $2.5 million during the three months ended March 31, 2003 from $2.0 million during the three months ended March 31, 2002. Such expenses primarily reflected the cost of operating our 24-hours-a-day, 7 days-a-week network operations center, as well as costs associated with the New Jersey, Los Angeles, London and Frankfurt hubs. During the first quarter of 2003, we incurred additional maintenance and consulting expenses as we continued to migrate to an “all Cisco” network.

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Network operations expenses represented 3.1% and 3.4% of revenues during the three months ended March 31, 2003 and 2002, respectively. This improvement in 2003 resulted from an increased revenue base in 2003. We anticipate that we will be able to continue to leverage these costs over a larger revenue base in future quarters, and that they will therefore decrease as a percentage of revenues.

Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses increased to $18.7 million during the three months ended March 31, 2003 from $7.0 million during the three months ended March 31, 2002. As a percentage of revenues, SG&A expenses increased to 22.9% from 12.2% over the comparable three-month period.  These increases are primarily attributable to a provision of $8.8 million that we made to our accounts receivable reserve in the first quarter of 2003.  Accounts receivable reserves and bad debt experience have been in large part a function of the financial state of the telecommunications companies who are our customers.  In order to minimize accounts receivable reserves and write-offs, we have closely monitored credit exposure to customers, rejected customers that represented unacceptable credit risks, limited the business we would accept from customers whom we judge to bear excess credit risk and made significant efforts to assure that bilateral arrangements permit the offset of accounts receivable against accounts payable.  Nonetheless, during the first quarter of 2003, we took a reserve of $8.7 million for the potential bad debt associated with Interactive Technologies Inc. (“IMT”).  IMT has since sued us.  While we believe IMT’s lawsuit to be without merit and while we intend to take all available steps to collect the debts owed, the collectibility of that debt is not certain.

We had 287 employees at March 31, 2003, as compared with 226 employees at the end of the first quarter of 2002.

As our revenues continue to grow, we expect SG&A expenses to decrease as a percentage of revenues, although they will likely increase in absolute terms. Such expectation represents a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ from such expectation as a result of a number of factors, including the rate of revenue growth, if any, the extent to which we incur unanticipated expenses associated with revenue growth and the extent to which our customers present unanticipated credit problems.

Depreciation

Depreciation expense decreased to $5.6 million during the three months ended March 31, 2003 from $5.7 million during the three months ended March 31, 2002.  The nominal decrease in depreciation expense from 2002 to 2003 was a result of the equipment we removed from our network during the fourth quarter of 2002.  As a percentage of revenue, depreciation expense for the three-month periods was 6.9% in 2003 and 9.9% in 2002.  We added $6.4 million of capital expenditures during the first quarter of 2003.

Amortization of Intangibles

In connection with our May 2, 2002 acquisition of the assets of Nexcom, we recorded $7.9 million of goodwill and $2.9 million of other intangibles.  We amortized $121,000 and $6,000 of intangibles during the three months ended March 31, 2003 and March 31, 2002, respectively.

Non-Cash Employee Compensation Expenses

We had no non-cash employee compensation expense during the quarter ended March 31, 2003 as compared with  $0.7 million during the quarter ended March 31, 2002.  Non-cash employee compensation represented amortization of deferred compensation incurred in connection with the grant of options at exercise prices less than fair value. These costs were fully amortized at the end of the second quarter of 2002.

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Interest Income, Net

Our interest income, net principally represents income from cash and investments, which, in turn, were derived from capital contributions made by our investors.  During the quarters ended March 31, 2003 and 2002, the interest on our marketable securities, including the interest earned on the proceeds from our initial and follow-on public offerings, exceeded the interest that we paid on our capital leases and line of credit by $0.4 million and $0.9 million, respectively. The reduction in our interest income reflects our usage of cash and yield reductions resulting from a decline in short-term interest rates.

Restructuring Charges

During the first quarter of 2002, we recorded $1.1 million of restructuring charges related to two of our lease facilities.  In the first quarter of 2003, the Company reached a settlement with the landlord for the Beaverton, Oregon facility resulting in a cash payment to the landlord of approximately $1.2 million. The Company recorded a restructuring charge in the fourth quarter of 2002 related to this settlement.  No more restructuring charges are expected in 2003 associated with this facility.

Losses

We have reported net operating losses and net losses since our inception. We believe that we will first report positive net income and cash flow by the first half of 2004. This estimate represents a forward-looking statement under the Private Securities Litigation Reform Act of 1995.   Due to the risk factors described in the first paragraph of this “Management’s Discussion and Analysis”, the Company’s actual results could vary materially from this estimate.

Liquidity and Capital Resources

Prior to our initial public offering, we financed our operations primarily through the private placement of our capital stock and, to a lesser extent, through equipment financing. Net proceeds from our initial public offering, including proceeds resulting from the exercise by the underwriters of their over-allotment option, were $78.4 million. This capital was supplemented by net proceeds of $161.4 million raised upon consummation of our March 2000 follow-on offering of Common Stock.

Net cash used in financing activities was $0.4 million for the three months ended March 31, 2003, principally reflecting the repayment of certain capital lease obligations.

Net cash used in operating activities amounted to $15.2 million for the three months ended March 31, 2003, primarily the result of net operating losses, increased accounts receivable and a decrease in accounts payable and accrued expenses.

Net cash used in investing activities was $7.8 million for the three months ended March 31, 2003 and was primarily related to the purchases of property and equipment offset by the sale of available for sale securities. During the first three months of 2003 the Company incurred $6.4 million in capital expenditures.

As of March 31, 2003, our principal commitments consisted of obligations outstanding under operating and capital leases. At that date, future minimum payments for all non-cancelable leases included required payments of $3.3million during 2004 and $16.3 million for years 2005-2008 and thereafter under all leases.   The remaining future minimum payments for 2003 are estimated to be $4.2 million.  The minimum lease payments have not been reduced by minimum operating sublease rentals of $1.7 million due in the future under noncancelable subleases. We anticipate an increase in capital expenditures and lease commitments consistent with the anticipated growth in operations, infrastructure and personnel.

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On October 23, 2002 the Company announced that its Board of Directors had authorized a stock repurchase program for up to $10 million.  On March 31, 2003 the Company announced that its Board of Directors had authorized a stock repurchase program for up to an additional $5 million.  Any purchases under this repurchase program may be made from time-to-time either in the open market, through block trades or otherwise. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time-to-time without prior notice.  As of March 31, 2003 the Company had used $9,813,811 of these authorizations to repurchase a total of 3,883,700 shares.  Included in this total was the negotiated direct purchase of 3,783,000 shares from VocalTec Communications Inc. at $2.53 per share, which took place on November 5, 2002, pursuant to a purchase agreement.   

During the quarter ended June 30, 2002, the Company terminated a credit facility with a bank and paid the remaining $1.1 million outstanding balance of the equipment note payable.  In conjunction with the Company’s letter of credit facility for its Princeton, New Jersey lease, the Company has $2.2 million of restricted cash.

The primary sources of our short-term funding continue to be the capital that we have raised.  Our capital requirements depend on numerous factors, including market acceptance of our services, the responses of our competitors, the resources allocated to ITXC.net and the development of future applications of our technology, our success in marketing and selling our services, and other factors. We have experienced substantial increases in our capital expenditures since our inception, consistent with growth in our operations and staffing.  While we anticipate continuing our capital expenditures, we do not expect an increase in capital expenditures year over year.  We will evaluate possible acquisitions of, or investments in, complementary businesses, technologies or services and plan to expand our sales and marketing programs. Any such possible acquisition may be material and may require us to incur a significant amount of debt or issue a significant number of equity securities. Further, any businesses that we acquire will likely have their own capital needs, which may be significant, which we would be called upon to satisfy independent of the acquisition price. We currently believe that our available cash and cash equivalents will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. This statement represents a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from our expectations. We may need to raise additional funds in order to fund more rapid expansion, to develop new or enhance existing services, to respond to competitive pressures or to acquire or invest in complementary business, technologies or services. Additional funding may not be available on favorable terms or at all.

The following summarizes ITXC’s contractual obligations at March 31, 2003, and the effect such obligations are expected to have on the Company’s liquidity and cash flow in future periods.

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Income Taxes

On July 2, 2002, the State of New Jersey signed into law new corporate business tax legislation.  Corporations will now be subject to a gross receipts and gross profits tax.  We have recorded a provision for New Jersey tax of $50,000 in our condensed consolidated statement of operations reflecting this New Jersey tax and $120,000 of tax expense related to our overseas offices.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This Statement is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. SFAS No. 143 addresses the recognition and measurement of obligations associated with the retirement of tangible long-lived assets resulting from acquisition, construction, development, or the normal operation of a long-lived asset. SFAS No. 143 requires that the fair value of an asset retirement obligation be recognized as a liability in the period in which it is incurred. The asset retirement obligation is to be capitalized as part of the carrying amount of the long-lived asset and the expense is to be recognized over the useful life of the long-lived asset. The adoption of this standard did not have a significant impact on the Company’s consolidated results of operations and financial position. 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”.  SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of SFAS No. 146 was adopted beginning January 1, 2003.  The Company believes that the adoption of this standard did not have a material impact on its consolidated results of operations and financial position.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”.  SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the impact of the method used on reported results.  The disclosure provisions of SFAS No. 148 are effective for fiscal years ended after December 15, 2002 and have been incorporated into the consolidated financial statements and accompanying notes presented elsewhere herein.

Subsequent Events

On April 10, 2003, IDT Corporation publicly announced that it intended to make an offer to purchase our outstanding shares of common stock for $1.40 in IDT Class B common stock. On the same date, we announced that our Board of Directors had met and had made an initial determination that the IDT proposal would not be in the interests of the Company’s stockholders.

We also announced on April 10, 2003 that our Board had approved a Shareholder Protection Rights Plan and declared a dividend of one Right on each outstanding share of ITXC common stock. Initially the Rights will be evidenced by common stock certificates, will automatically trade with the Company’s common stock, and will not be currently exercisable. The Rights become exercisable when and if an entity acquires 15% or more of the Company’s common stock and will entitle each stockholder, other than the acquiring entity, to purchase a number of shares of common stock with a market value of $14 for a payment of $7 at that time. The Board, at its option, may require that each Right be exchanged for one share of common stock. This exchange feature would not apply to rights held by an entity which has acquired 15% of the common stock. The Rights may be redeemed by the Board of Directors for $0.001 per Right at any time before they become exercisable.

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On May 1, 2003, IDT issued a press release which stated, in pertinent part, that “IDT Corporation (NYSE: IDT; IDT.C) today announced that it has terminated its proposal to acquire all outstanding shares of ITXC Corp. (NASDAQ: ITXC). Pursuant to the terms of an agreement entered into with ITXC, IDT will not take any action to acquire the shares of ITXC for the next thirty days without ITXC’s consent, and the parties will enter into discussions. IDT makes no assurances that any agreement between the parties will be reached, or that any future offers will be made.”

We have engaged the investment banking firm of Morgan Stanley & Co., Incorporated as our financial advisor with respect to any possible transactions and to assist the Company’s efforts to protect and maximize shareholder value. No assurances are given that any transactions will be entered into with IDT Corporation or any other entity.

Item 3.   Quantitative and Qualitative Disclosure About Market Risk

We had investments of $66.2 million as of March 31, 2003 in certain marketable securities, which primarily consist of short-term fixed income investments. Due to the short-term nature of our investments, we believe that the effects of changes in interest rates are limited and would not have a material impact on our financial condition or operating results.

Item 4.   Controls and Procedures

The Company has established and maintains disclosure controls and procedures which are designed to provide reasonable assurance that material information relating to us, including our consolidated subsidiaries, is made known to senior managers responsible for disclosure by others within those entities, particularly during the period in which this quarterly report is being prepared. We have established a Disclosure Committee which is made up of several key management employees and reports directly to the Chief Financial Officer and Chief Executive Officer, to monitor and evaluate these disclosure controls and procedures. The Audit Committee of the Board also has reviewed the report of the Disclosure Committee.  The Chief Financial Officer and Chief Executive Officer have evaluated the effectiveness of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14 as of a date within 90 days prior to the filing date of this quarterly report. Based on this evaluation, we have concluded that our disclosure controls and procedures were effective in providing reasonable assurance that our senior officers are alerted in a timely fashion of material information relating to the Company during the period covered in this quarterly report. There were no 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.

PART II - Other Information

Item 1.   Legal Proceedings

From time to time, we are involved in various legal proceedings relating to claims arising in the ordinary course of business.

On May 23, 2000, Connectel, LLC, filed suit against the Company in the United States District Court for the Eastern District of Pennsylvania. Connectel alleges in its complaint that the Company is infringing on the

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claims of a patent owned by Connectel by, acting alone or with others, assembling, offering to sell, selling or using communications networks or switching systems within the United States and for export worldwide without license from Connectel. Connectel also seeks unspecified damages. The Company believes that the Connectel claims are without merit and the Company intends to defend the lawsuit vigorously. However, should a judge issue an injunction against the Company, such action could have a material adverse effect on its operations.

The Company and certain of its officers/directors were named as defendants in several purported shareholder class action lawsuits. The lawsuits allege, among other things, that, in connection with the Company’s public offerings of securities, its Prospectus did not disclose certain alleged practices involving its underwriters and their customers. These actions seek compensatory and other damages, and costs and expenses associated with the litigation. These actions are in the early stages and the Company has not yet determined if there is any potential material impact on its Consolidated Financial Statements.  ITXC is one of hundreds of companies named in substantially identical lawsuits.  Management believes that ITXC and its officers/directors did not engage in any improper or illegal conduct and intends to defend these actions vigorously. All of these cases have been consolidated for pretrial purposes before Judge Scheindlin in the Southern District of New York.  All of the individual defendants who had been named as defendants in the Company’s case have now been dismissed from the proceeding without prejudice, pursuant to a stipulation with the plaintiffs.  Neither the individual defendants nor the Company nor its insurers paid any consideration for these dismissals.

In September, 2001, the Company had been served with a complaint filed in Virginia state court on behalf of Hercules Communications Company, LLC in which the plaintiff demanded damages, including punitive damages, based on the Company’s alleged refusal to carry out a purported agreement to purchase certain assets from Hercules. The claims were primarily based on alleged breach of contract, breach of implied contract, breach of an oral contract, promissory estoppel and fraud. The Court dismissed plaintiff’s claim for promissory estoppel and fraud, but did allow the plaintiff to refile its fraud complaint.  Discovery is now underway.  In June 2002, plaintiff moved to substitute Hercules Satellite Communications, L.L.C. for Hercules Communications, LLC, over the Company’s objection.  The Court rejected plaintiff’s motion, and thereafter the plaintiff voluntarily dismissed the case.  A new case was then brought in the name of Hercules Satellite Communications, L.L.C.  The allegations in the new case are substantially similar to those which had survived in the prior case.   A trial date is now scheduled for August 2003, and discovery is nearing completion.  The Company continues to believe the case is not meritorious and intends to vigorously defend its conduct.

Interactive Marketing Technologies, Inc., (“IMT”) a telecommunications service bureau headquartered in Erlanger, Kentucky, which, among other things, provides services to the prepaid calling card industry, commenced a lawsuit against ITXC seeking unspecified compensatory and punitive damages in the United States District Court for the Eastern District of Kentucky alleging breach of contract, bad faith, tortuous [sic] interference with contract and negligent misrepresentation, among other claims.  IMT is the customer to which ITXC had discontinued service on February 20, 2003, and from which ITXC had demanded payment of a multimillion dollar past due balance, after the parties were unsuccessful in efforts to restructure IMT’s obligations to ITXC. The Company believes the claims are without merit and plans to defend the case.  It is the Company’s belief that this dispute is covered by the arbitration clause of the agreement between ITXC and IMT, and the Company has therefore commenced an arbitration action against IMT seeking to recover the amounts owed by IMT, and has moved to dismiss the pending action in Kentucky based on the arbitration clause.

The Company has received an adversary complaint in bankruptcy court in connection with the bankrupt World Access, Inc. and its affiliate companies alleging that payments and offsets by the debtors to ITXC, all made prior to the bankruptcy filing in April 2001, and totaling approximately $3 million, constituted voidable transfers under the Bankruptcy laws and should be returned to the debtors.   The Company plans to defend the action.

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We are not a party to any other legal proceeding, the adverse outcome of which is expected to have a material adverse effect on our business, financial condition, operating results or future prospects.

Item 2.   Changes in Securities and Use of Proceeds

On April 10, 2003, the Board of Directors of the Company adopted a Shareholder Protection Rights Plan and declared a dividend of one Right on each outstanding share of ITXC common stock.  See Management’s Discussion and Analysis of Financial Condition and Results of Operations-- Subsequent Events.

Item 6.   Exhibits and Reports on Form 8-K

(a) Exhibits:

(b) The registrant submitted two Current Reports on Form 8-K during the quarter ended March 31, 2003. Information regarding the items reported on is as follows:

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SIGNATURES

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.

ITXC CORP.

Dated: May 14, 2003

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CERTIFICATION

Date:  May 14, 2003

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CERTIFICATION

Date:  May 14, 2003

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EXHIBIT INDEX

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