Ibasis 10Q 2006 Q2 Quarterly report

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TABLE OF CONTENTS

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 June 30, 2006
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 (State or other jurisdiction of incorporation or organization)		04-3332534 (I.R.S. Employer Identification No.)
20 Second Avenue, Burlington, MA 01803 (Address of executive offices, including zip code)
(781) 505-7500 (Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer ý Non-accelerated filer o

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

As of July 31, 2006, there were 33,172,913 shares of the Registrant's Common Stock, par value $0.001 per share, outstanding.

iBASIS, INC.

Index

			Page
PART I—FINANCIAL INFORMATION
	Item 1—	Condensed Consolidated Financial Statements	1
		Condensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005 (unaudited)	1
		Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2006 and 2005 (unaudited)	2
		Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2006 and 2005 (unaudited)	3
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (unaudited)	4
		Condensed Notes to Consolidated Financial Statements (unaudited)	5
	Item 2—	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3—	Quantitative and Qualitative Disclosures About Market Risk	26
	Item 4—	Controls and Procedures	26
PART II—OTHER INFORMATION
	Item 1—	Legal Proceedings	27
	Item 1A—	Risk Factors	27
	Item 4—	Submission of Matters to a Vote of Security Holders	40
	Item 6—	Exhibits	41
		Signature	42
		Certifications

Part I—Financial Information

Item 1.Financial Statements

iBasis, Inc.
Condensed Consolidated Balance Sheets
(unaudited)

			June 30, 2006			December 31, 2005
			(in thousands, except per share data)
Assets
Cash and cash equivalents			$	30,020		$	27,478
Short-term marketable investments				19,400			16,936
Accounts receivable, net of allowance for doubtful accounts of $3,182 and $2,507, respectively				56,193			47,641
Prepaid expenses and other current assets				3,173			2,676

	Total current assets			108,786			94,731

Property and equipment, at cost:
	Network equipment			48,612			53,434
	Equipment under capital lease			4,917			4,917
	Computer software			10,271			10,353
	Leasehold improvements			7,037			6,697
	Furniture and fixtures			998			1,049

				71,835			76,450
	Less: Accumulated depreciation and amortization			(58,211	)		(64,696	)

Property and equipment, net				13,624			11,754
Other assets				325			323

	Total assets		$	122,735		$	106,808

Liabilities and Stockholders' Equity
Accounts payable			$	38,621		$	27,796
Accrued expenses				26,971			24,479
Deferred revenue				11,738			9,517
Current portion of long-term debt				1,661			1,598

	Total current liabilities			78,991			63,390

Long term debt, net of current portion				1,370			2,216
Other long term liabilities				922			916
Stockholders' equity:
	Common stock, $0.001 par value, authorized—170,000 shares; issued—34,216 and 34,112 shares, respectively			34			34
	Treasury stock; 1,069 and 691, respectively, at cost			(4,358	)		(2,091	)
	Additional paid-in capital			475,223			473,778
	Accumulated other comprehensive loss			(13	)		(17	)
	Accumulated deficit			(429,434	)		(431,418	)

		Total stockholders' equity		41,452			40,286

		Total liabilities and stockholders' equity	$	122,735		$	106,808

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

iBasis, Inc.
Condensed Consolidated Statements of Operations
(unaudited)

		Three Months Ended June 30,
		2006			2005
		(in thousands, except per share data)
Net revenue		$	127,324		$	94,581
Costs and operating expenses:
Data communications and telecommunications (excluding depreciation and amortization)			110,981			81,874
Research and development			3,539			3,126
Selling and marketing			4,260			2,866
General and administrative			5,288			3,746
Depreciation and amortization			1,822			1,726
Merger related expenses			1,542			—

	Total cost and operating expenses		127,432			93,338

Income (loss) from operations			(108	)		1,243
Interest income			450			254
Interest expense			(95	)		(1,116	)
Other expenses, net			(43	)		(140	)
Foreign exchange gain (loss), net			148			(347	)
Debt conversion premium			—			(661	)

Income before provision for income taxes			352			(767	)
Provision for income taxes			11			—

Net income (loss)		$	341		$	(767	)

Net income per share:
	Basic	$	0.01		$	(0.03	)
	Diluted	$	0.01		$	(0.03	)
Weighted average common shares outstanding:
	Basic		33,133			21,998
	Diluted		34,948			21,998

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

iBasis, Inc.
Condensed Consolidated Statements of Operations
(unaudited)

		Six Months Ended June 30,
		2006			2005
		(in thousands, except per share data)
Net revenue		$	238,103		$	183,253
Costs and operating expenses:
Data communications and telecommunications (excluding depreciation and amortization)			207,443			158,175
Research and development			6,779			6,258
Selling and marketing			7,850			5,593
General and administrative			9,809			7,059
Depreciation and amortization			3,388			3,446
Merger related expenses			1,542			—

	Total cost and operating expenses		236,811			180,531

Income from operations			1,292			2,722
Interest income			862			464
Interest expense			(189	)		(2,362	)
Other expenses, net			(90	)		(160	)
Foreign exchange gain (loss), net			131			(580	)
Debt conversion premium			—			(661	)

Income (loss) before provision for income taxes			2,006			(577	)
Provision for income taxes			22			—

Net income (loss)		$	1,984		$	(577	)

Net income (loss) per share:
	Basic	$	0.06		$	(0.03	)
	Diluted	$	0.06		$	(0.03	)
Weighted average common shares outstanding:
	Basic		33,195			21,829
	Diluted		34,642			21,829

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

iBasis, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

					Six Months Ended June 30,
					2006			2005
					(in thousands)
Cash flows from operating activities:
	Net income (loss)				$	1,984		$	(577	)
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				3,388			3,446
		Amortization of deferred debt financing costs				—			22
		Merger related expenses in accounts payable and accrued expenses				1,387			—
		Increase to allowance for doubtful accounts				600			300
		Stock-based compensation and services				1,087			—
		Amortization of discount on short-term marketable securities				62			(76	)
		Non-cash debt conversion premium				—			115
		Changes in assets and liabilities:
			Accounts receivable			(9,152	)		(5,840	)
			Prepaid expenses and other current assets			(342	)		(405	)
			Other assets			(2	)		(14	)
			Accounts payable			10,150			1,764
			Accrued expenses			1,780			6,779
			Deferred revenue			2,221			1,138
			Other long term liabilities			6			(53	)

				Net cash provided by operating activities		13,169			6,599

Cash flows from investing activities:
	Purchases of property and equipment					(5,258	)		(1,842	)
	Purchases of available-for-sale short-term marketable investments					(17,600	)		(12,924	)
	Payments of merger related expenses					(155	)		—
	Maturities of available-for-sale short-term marketable investment					15,075			12,375

				Net cash used in investing activities		(7,938	)		(2,391	)

Cash flows from financing activities:
	Repurchases of common stock					(2,267	)		—
	Payments of principal on capital lease obligations					(783	)		(632	)
	Redemption of 5³/4% Convertible Subordinated Notes					—			(895	)
	Debt conversion premium								(546	)
	Proceeds from exercise of warrants								910
	Proceeds from exercises of common stock options					358			138

				Net cash used in financing activities		(2,692	)		(1,025	)

Effect of exchange rate changes on cash and cash equivalents						3			—
Net increase in cash and cash equivalents						2,542			3,183
Cash and cash equivalents, beginning of period						27,478			20,928

Cash and cash equivalents, end of period					$	30,020		$	24,111

Supplemental disclosure of cash flow information:
Cash paid during the period for interest					$	94		$	2,474
Supplemental disclosure of non-cash investing and financing activities:
	Conversion of 6³/4% Convertible Subordinated Notes to common stock				$	—		$	3,345
	Conversion of 8% Secured Convertible Notes to common stock				$	—		$	9,100
	Equipment acquired under capital lease obligations				$	—		$	1,300
	Merger related expenses incurred but not paid yet				$	1,387			—

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

iBasis, Inc.
Condensed Notes to Consolidated Financial Statements

(unaudited)

(1) Business and Presentation

Business

We are a leading provider of international communications services and a provider of retail prepaid calling services. Our operations consist of our Voice-Over-Internet-Protocol ("VoIP") trading business ("Trading"), in which we connect buyers and sellers of international telecommunications services, and our retail services business ("Retail"). In the Trading business we receive voice traffic from buyers—originating carriers who are interconnected to our network via VoIP or traditional time division multiplexing ("TDM") connections, and we route the traffic over the Internet to sellers—local carriers in the destination countries with whom we have established agreements to manage the completion or termination of the call. We use proprietary, patent-pending technology to automate the selection of routes and termination partners based on a variety of performance, quality, and business metrics. We offer this Trading service on a wholesale basis to carriers, telephony resellers and other service providers worldwide. We have call termination agreements with local service providers in North America, Europe, Asia, the Middle East, Latin America, Africa and Australia. Our Retail business was launched in late 2003, with the introduction of our retail prepaid calling cards which are marketed through distributors primarily to ethnic communities within major metropolitan markets in the U.S. In late 2004, we launched a prepaid calling service, Pingo®, offered directly to consumers through an eCommerce web interface, which we have included in our Retail business segment. Revenues from our Pingo® services have not been material in any period to date.

Presentation

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

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and notes in our Annual Report on Form 10-K for the year ended December 31, 2005.

On May 2, 2006, we affected a one-for-three reverse stock split of our issued and outstanding shares of common stock. All share and per share amounts for all periods presented in these condensed consolidated financial statements and notes included herein have been adjusted to reflect the reverse stock split.

Proposed Transaction with KPN Telecom B.V., a subsidiary of Royal KPN N.V.

outstanding in-the-money stock options warrants, or approximately 40 million shares. As of June 30, 2006, the newly-issued shares to KPN would represent approximately 55% of our issued and outstanding common shares. The two entities which we are acquiring from KPN encompass KPN's international wholesale voice business.

Upon the completion of the foregoing transactions, we will pay a dividend in the aggregate amount of $113,000,000, on a pro rata basis to those persons who are shareholders of iBasis of record on the date immediately prior to the date of the closing of the transactions contemplated by the share purchase and sale agreement. In connection with payment of the dividend, outstanding common stock options will be adjusted to preserve their value. The proposed transaction, which is subject to customary closing conditions, including regulatory approvals and the approval of iBasis shareholders, is expected to be completed before the end of 2006.

Although we will be issuing shares of our common stock in acquiring the two subsidiaries of KPN, after the merger is completed, KPN will hold a majority of our outstanding common stock. Accordingly, for accounting and financial reporting purposes, we will be treated as the accounting acquiree. Under the purchase method of accounting, our assets and liabilities will be, as of the date of the merger, recorded at their fair value and added to the historical assets and liabilities of the two subsidiaries of KPN, including any amount for goodwill representing the difference between the deemed purchase price of iBasis and the fair value of our identifiable net assets. We have incurred merger related expenses of $1.5 million to date, consisting primarily of investment banking advisory services, legal and accounting fees. Such amounts have been expensed because we are the accounting acquiree.

(2) Net income per share

Basic net income per common share is determined by dividing net income by the weighted average common shares outstanding during the period. Diluted net income per share reflects the maximum dilution and is determined by dividing net income by weighted average common shares outstanding and the assumed exercise and share repurchase of dilutive stock options and warrants during the period. For the three and six months ended June 30, 2005, none of the shares issuable upon conversion of the 6³/4% Subordinated Convertible Notes and 8% Senior Secured Notes were included in diluted net income per share as they were anti-dilutive for that period.

The following table summarizes common shares that have been excluded from the computation of diluted weighted average common shares for the periods presented:

	Three and Six Months Ended June 30,
	2006	2005
	(in thousands)
Options to purchase common shares	838	2,131
Shares to be issued upon conversion of the 6³/4% Convertible Subordinated Notes due June 2009	—	5,874
Shares issued upon conversion of the 8% Secured Convertible Notes due June 2007 in July 2005	—	3,586
Warrants to purchase common shares	67	2,725

Total	905	14,316

(3) Stock Based Compensation

We issue stock options as an equity incentive to employees, outside directors and non-employee contractors under our 1997 Stock Incentive Plan (the "1997 ISO Plan"). The stock options we issue are for a fixed number of shares with an exercise price equal to the fair market value of our stock on the

date of grant. The employee stock option grants typically vest quarterly in equal installments over four years, provided that no options shall vest during the employees' first year of employment, and have a term of ten years.

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards 123R,"Share-Based Payment" ("SFAS 123R"), which require us to record compensation expense related to the fair value of our stock-based compensation awards. Prior to January 1, 2006, we accounted for our stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations.

We elected to use the modified prospective transition method as permitted under SFAS 123R and, therefore, have not restated our financial results for the prior periods. Under this transition method, stock-based compensation expense for the three and six months ended June 30, 2006 includes compensation expense for all stock option awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Stock-based compensation expense for all stock option awards granted subsequent to December 31, 2005 was based on the grant date fair value estimated in accordance with SFAS 123R. We recognize compensation expense for stock option awards granted subsequent to December 31, 2005 on a straight-line basis over the requisite service period of the award.

The following table presents the stock-based compensation expense included in our unaudited condensed consolidated statement of operations.

		Three Months Ended June 30, 2006		Six Months Ended June 30, 2006
		(in thousands)
Stock-based compensation expense:
	Research and development	$	134	$	221
	Sales and marketing		109		186
	General and administrative		410		518

Total stock-based compensation			653		925
Provision for income taxes			—

Net stock-based compensation expense		$	653	$	925

No income tax benefit was realized from stock option exercises during the three and six months ended June 30, 2006 and 2005, respectively. In accordance with SFAS 123R, we present excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.

The fair value of our stock option awards was estimated using the Black-Scholes model with the following weighted-average assumptions:

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Risk free interest rate		4.88	%		3.88	%		4.69	%		3.81	%
Dividend yield		0.00	%		0.00	%		0.00	%		0.00	%
Expected life		6.25 Years			5 years			6.25 Years			5 years
Volatility		113	%		122	%		114	%		126	%
Fair value of options granted	$	4.98		$	3.42		$	5.29		$	6.21

The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield of zero is based on the fact that we have never paid cash dividends and we

have no current intention to pay cash dividends. Our estimate of the expected life was determined using the simplified method allowed under SFAS 123R as our stock options qualify as "plain vanilla" options. Our estimate of expected volatility is based on the historical volatility of our common stock over the period which approximates the expected life of the options.

Prior to January 1, 2006, we accounted for stock-based compensation plans in accordance with the provisions of APB 25, as permitted by SFAS 123, and, accordingly, did not recognize compensation expense for the issuance of stock options with an exercise price equal to the market price at the date of grant. The following table illustrates the effect on net income and net income per share if we had applied the fair value recognition provisions of SFAS 123.

		Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
		(In thousands, except per share amounts)
Net loss, as reported		$	(767	)	$	(577	)
Less: Total stock-based employee compensation expense determined under fair value based method for all awards			(550	)		(1,130	)

Net loss, pro forma		$	(1,317	)	$	(1,707	)

Net income per share:
	Basic, as reported	$	(0.03	)	$	(0.03	)
	Diluted, as reported	$	(0.03	)	$	(0.03	)
	Basic, pro forma	$	(0.06	)	$	(0.08	)
	Diluted, pro forma	$	(0.06	)	$	(0.08	)

Stock Option Activity

The following table presents the activity for the 1997 ISO Plan for the six months ended June 30, 2006:

	Shares		Weighted Average Exercise Price
	(In thousands)
Outstanding at December 31, 2005	2,102		$	4.62
Granted	605			6.51
Exercised	(104	)		3.46
Cancelled	(27	)		4.97

Outstanding at June 30, 2006	2,576		$	5.10

Exercisable at June 30, 2006	1,547		$	4.85

Available for future grants at June 30, 2006	1,164

The following table presents weighted average price and contract life information about significant option groups outstanding and exercisable at June 30, 2006:

	Outstanding				Exercisable
Range of Exercise Prices	Outstanding Options	Weighted Average Remaining Contractual Life (in Years)	Weighted Average Exercise Price		Options Outstanding	Weighted Average Exercise Price
	(in thousands)				(in thousands)
$0.75–$2.07	66	5.66	$	1.69	63	$	1.71
2.16	233	5.38		2.16	233		2.16
2.64–3.30	705	6.76		2.75	475		2.76
3.51–5.64	716	7.60		4.49	505		4.11
5.73–6.54	548	9.45		6.47	67		6.43
6.72–9.30	205	8.87		7.37	101		7.58
11.13–15.00	71	3.59		13.74	71		13.74
33.00–40.50	16	3.88		40.18	16		40.18
$44.43–86.25	16	3.93		45.88	16		45.88

	2,576	7.46	$	5.10	1,547	$	4.85

The aggregate intrinsic value of options outstanding as of June 30, 2006 was $11.0 million, which represents the amount option holders would have received had they exercised their options as of that date. The intrinsic value is the difference between our closing stock price on the last trading day of the three months ended June 30, 2006 and the stock option exercise price, times the number of stock option shares. The intrinsic value of options exercised during the six months ended June 30, 2006 was $0.3 million. The fair value of options vested during the six months ended June 30, 2006 was $1.0 million.

The following table presents the non-vested shares for the Plan for the six months ended June 30, 2006:

Non-vested Stock Options	Shares		Weighted-Average Grant-Date Fair Value
	(in thousands)
Non-vested at December 31, 2005	674		$	4.16
Granted	605			5.48
Vested	(232	)		4.20
Forfeited	(18	)		4.68

Non-vested at June 30, 2006	1,029			4.92

As of June 30, 2006, unrecognized compensation expense related to the unvested portion of our stock options was $3.2 million and is expected to be recognized over a weighted-average period of approximately 2.8 years.

(4) Short-term marketable investments

Our investments are classified as available-for-sale, carried at fair value and consist of securities that are readily convertible into cash, including government securities and commercial paper, with original maturities at the date of acquisition ranging from 90 days to one year.

Short-term marketable investments consist of:

	June 30, 2006					December 31, 2005
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(In thousands)
Government securities	$	—	$	—		$	5,402	$	(7	)
Commercial paper, corporate bonds and certificates of deposit		19,400		(17	)		11,534		(10	)

Total	$	19,400	$	(17	)	$	16,936	$	(17	)

The net unrealized loss of $17,000 as of June 30, 2006 on our short-term marketable investments in government securities, commercial paper, corporate bonds and certificates of deposit was caused by interest rate increases. Because we have the ability and intent to hold these investments until a recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at June 30, 2006 due to the short-term duration and insignificant severity of the impairment. As of June 30, 2006 and December 31, 2005, the unrealized loss on our short-term marketable securities is a component of total comprehensive loss.

(5) Business Segment Information

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

Our Retail business consists of our retail prepaid calling card services, and Pingo®, a prepaid calling service sold to consumers through an eCommerce interface. To date, we have marketed our retail prepaid calling card services primarily to ethnic communities within major domestic markets through distributors. Launched in the third quarter of 2004, revenue from our Pingo® services were not material for the three months and six months ended June 30, 2006.

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

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

	Three Months Ended June 30, 2006
	Trading		Retail		Total
	(In thousands)
Net revenue	$	102,525	$	24,799	$	127,324
Data communications and telecommunication costs (excluding depreciation and amortization)		90,427		20,554		110,981

Gross profit	$	12,098	$	4,245		16,343

Research and development expenses						3,539
Selling and marketing expenses						4,260
General and administrative expenses						5,288
Depreciation and amortization						1,822

Income from operations					$	1,434

	Three Months Ended June 30, 2005
	Trading		Retail		Total
	(In thousands)
Net revenue	$	77,725	$	16,856	$	94,581
Data communications and telecommunication costs (excluding depreciation and amortization)		68,462		13,412		81,874

Gross profit	$	9,263	$	3,444		12,707

Research and development expenses						3,126
Selling and marketing expenses						2,866
General and administrative expenses						3,746
Depreciation and amortization						1,726

Income from operations					$	1,243

	Six Months Ended June 30, 2006
	Trading		Retail		Total
	(In thousands)
Net revenue	$	191,484	$	46,619	$	238,103
Data communications and telecommunication costs (excluding depreciation and amortization)		168,775		38,668		207,443

Gross profit	$	22,709	$	7,951		30,660

Research and development expenses						6,779
Selling and marketing expenses						7,850
General and administrative expenses						9,809
Depreciation and amortization						3,388

Income from operations					$	2,834

	Six Months Ended June 30, 2005
	Trading		Retail		Total
	(In thousands)
Net revenue	$	148,476	$	34,777	$	183,253
Data communications and telecommunication costs (excluding depreciation and amortization)		129,531		28,644		158,175

Gross profit	$	18,945	$	6,133		25,078

Research and development expenses						6,258
Selling and marketing expenses						5,593
General and administrative expenses						7,059
Depreciation and amortization						3,446

Income from operations					$	2,722

	As of June 30, 2006
	Trading		Retail		Total
	(In thousands)
Segment assets (accounts receivable, net)	$	45,086	$	11,107	$	56,193
Non-segment assets						66,542

Total assets					$	122,735

	As of December 31, 2005
	Trading		Retail		Total
	(In thousands)
Segment assets (accounts receivable, net)	$	38,574	$	9,067	$	47,641
Non-segment assets						59,167

Total assets					$	106,808

(6) Accrued Restructuring Costs

During 2002, we announced restructuring plans to better align our organization with our corporate strategy and recorded a charge to our Statements of Operations in that year in accordance with the criteria set forth in EITF 94-3 and SEC Staff Accounting Bulletin 100. The restructuring included the write-off of property and equipment, contractual obligations relating to certain vacant leased facilities and a reduction in our workforce resulting in employee severance costs.

At June 30, 2006, accrued restructuring costs of $1.3 million consisted of costs accrued for leased facilities obligations, net of certain future sublease assumptions. In the three months ended June 30, 2006, we took an additional charge of $0.1 million as a result of a change in estimate relating to our future sublease assumptions.

A summary of the accrued restructuring costs for the six months ended June 30, 2006 is as follows:

2002 Restructuring Charge:	Leased Facility Obligations
	(In thousands)
Accrual as of December 31, 2005	$	1,391
Payments		(284	)
Change in estimates		177

Accrual as of June 30, 2006	$	1,284

Current portion	$	362
Long-term portion		922

Total	$	1,284

(7) Line of Credit and Long-Term Debt

Long-term debt consists of the following:

	June 30, 2006		December 31, 2005
	(In thousands)
Capital lease obligations	$	3,031	$	3,814
Less-current portion		1,661		1,598

Long term debt, net of current portion	$	1,370	$	2,216

At June 30, 2006 and December 31, 2005, we had $2.5 million and $2.4 million, respectively, in letters of credit outstanding under our $15 million bank line of credit. We obtained a waiver of non-compliance from our bank on the minimum net income covenant for the three months ended June 30, 2006, due to merger related expenses of $1.5 million. We had no other borrowings outstanding under our bank line of credit at June 30, 2006, or December 31, 2005.

(8) Contingencies

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

Beginning July 11, 2001, we were served with several class action complaints that were filed in the United States District Court for the Southern District of New York against us and several of our officers, directors, and former officers and directors, as well as against the investment banking firms that underwrote our November 10, 1999 initial public offering of 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 against other issuers and their underwriters, and allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 primarily based on the assertion that there was undisclosed compensation received by our underwriters in connection with our public offerings and that there were understandings with customers to make purchases in the aftermarket. The plaintiffs have sought an undetermined amount of monetary damages in relation to these claims. On September 4, 2001, the cases against us were consolidated. On October 9, 2002, the individual defendants were dismissed from the litigation by stipulation and without prejudice.

On June 11, 2004, we and the individual defendants, as well as many other issuers named as defendants in the class action proceeding, entered into an agreement-in-principle to settle this matter, and on June 14, 2004, this settlement was presented to the court. The district court granted a preliminary approval of the issuers' settlement on February 15, 2005, subject to certain modifications to the proposed bar order, to which plaintiffs and issuers agreed. On August 31, 2005, the court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The court appointed Garden City Group as the notice administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members beginning on November 15, 2005 and completed by January 15, 2006. The deadline for filing objections to the settlement was March 24, 2006, and the fairness hearing was April 26, 2006. Although we believe that we and the individual defendants have meritorious defenses to the claims made in the complaints, in deciding to pursue settlement, we considered, among other factors, the substantial costs and the diversion of our management's attention and resources that would be required by litigation.

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

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

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

On June 30, 2006, the Federal Communications Commission announced the results of a Notice of Proposed Rulemaking, which would require providers of prepaid calling cards that utilize Internet Protocol to contribute to the Universal Service Fund (USF) and pay other regulatory fees. In connection with its Retail business, the Company plans to absorb or pass along such fees, which based on current traffic mix equal approximately 1.8% of revenue. The FCC ruling would also impose the fees on a retroactive basis, which we plan to contest. As of June 30, we estimate that the maximum potential retroactive charge would be approximately $2.6 million. If not stayed, the order could become effective during the fourth quarter.

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

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

Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward-looking statements due to a number of factors, including those set forth in Item 1A "Risk Factors" and elsewhere in this report. The factors set forth in Item 1A "Risk Factors" and other cautionary statements made in this Form 10-Q should be read and understood as being applicable to all related forward-looking statements wherever they appear herein. The forward-looking statements contained in this Form 10-Q represent our judgment as of June 30, 2006. We caution readers not to place undue reliance on such statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

We are a leading provider of international communications services and a provider of retail prepaid calling services. Our continuing operations consist of our Voice-Over-Internet-Protocol ("VoIP") trading business ("Trading"), in which we connect buyers and sellers of international telecommunications services, and our retail services business ("Retail"). In the Trading business we receive voice traffic from buyers-originating carriers who are interconnected to our network via VoIP or traditional time division multiplexing ("TDM") connections, and we route the traffic over the Internet to sellers-local service providers and carriers in the destination countries with whom we have established agreements to manage the completion or termination of the call. We use proprietary, patent-pending technology to automate the selection of routes and termination partners based on a variety of performance, quality, and business metrics. We offer this Trading service on a wholesale basis to carriers, consumer VoIP companies, telephony resellers and other service providers worldwide. We have call termination agreements with local service providers in North America, Europe, Asia, the Middle East, Latin America, Africa and Australia.

Our Retail business was launched in late 2003, with the introduction of our retail prepaid calling cards that are marketed through distributors primarily to ethnic communities within major metropolitan markets in the U.S. Our retail prepaid calling card business leverages our existing international VoIP network and has the potential to deliver higher margins than are typically achieved in the Trading business. In addition, the retail prepaid calling card business typically has a faster cash collection cycle than the Trading business. In late 2004, we launched a prepaid calling service, Pingo®, offered directly to consumers through an eCommerce web interface, which we have included in our Retail business segment. Revenue from our Pingo® services have not been material to date.

We continue to expand our market share in our Trading services by expanding our customer base and by introducing cost-effective solutions for our customers to interconnect with our network. Our DirectVoIP™ Broadband services addresses requirements that are specific to the growing consumer VoIP market, which we believe represents significant growth potential for us and has the ability to

generate higher margins than is typically achieved in the Trading business. In addition, we continue to increase the traffic we terminate to mobile phones, which also generally delivers higher average revenue per minute and higher margins than typical fixed-line traffic.

Both business segments have benefited from our PremiumCertified™ international routing product which we believe enhances our ability to compete for retail international traffic from existing customers as well as from mobile operators and consumer VoIP providers. Our PremiumCertified™ service features routes to more than 700 destinations that are actively monitored and managed to deliver a level of quality that is equal to or exceeds the highest industry benchmarks for retail quality.

Recent Events

NASDAQ Listing

On June 21, 2006, our common stock began trading again on the NASDAQ National Market under the stock symbol "IBAS". On May 3, 2006, we affected a one-for-three reverse stock split and subsequently submitted an application to NASDAQ to achieve this relisting.

Proposed Transaction with KPN Telecom B.V., a subsidiary of Royal KPN N.V.

On June 21, 2006, we announced that we had entered into a share purchase and sale agreement with KPN Telecom B.V., a private limited liability company organized under the laws of The Netherlands ("KPN"). Pursuant to the share purchase and sale agreement, we will acquire the shares of two subsidiaries of KPN and receive $55 million in cash in exchange for newly-issued shares of our common stock representing 51% of our issued and outstanding shares of common stock and outstanding in-the-money stock options warrants, or approximately 40 million shares. As of June 30, 2006, the newly-issued shares to KPN would represent approximately 55% of our issued and outstanding common shares. The two entities which we are acquiring from KPN encompass KPN's international wholesale voice business.

Although we will be legally issuing shares of our common stock the two subsidiaries of KPN, after the merger is completed, KPN will hold a majority of our outstanding common stock. Accordingly, for accounting and financial reporting purposes, we will be treated as the accounting acquiree. Under the purchase method of accounting, our assets and liabilities will be, as of the date of the merger, recorded at their fair value and added to the historical assets and liabilities of the two subsidiaries of KPN, including any amount for goodwill representing the difference between the deemed purchase price of iBasis and the fair value of our identifiable net assets. We have incurred merger related expenses of $1.5 million to date, consisting primarily of investment banking advisory services, legal and accounting fees. Such amounts have been expensed because we are the accounting acquiree.

The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2006 and 2005 should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes for the three and six months ended June 30, 2006 included herein, and the year ended December 31, 2005, included in our Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

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

Revenue Recognition. For our Trading business, our revenue transactions are derived from the resale of international minutes of calling time. We recognize revenue in the period the service is provided, net of revenue reserves for potential billing disputes. Such disputes can result from disagreements with customers regarding the duration, destination or rates charged for each call. For our Retail business, revenue is deferred upon activation of the cards, or purchase of our web-based calling services, and is only recognized as the prepaid balances are reduced based upon minute usage and service charges.

Short-term Marketable Investments. Our investments are classified as available-for-sale, carried at fair value and consist of securities that are readily convertible into cash, including government securities and commercial paper, with original maturities at the date of acquisition ranging from 90 days to one year. As our investments are classified as available-for-sale, we are only exposed to charges to our results of operations in the event of a sale or an impairment of a security.

Allowance for Doubtful Accounts. 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 take 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, in part, by using reciprocal arrangements with customers, who are also iBasis suppliers, to offset our outstanding receivables, as well as requiring letters of credit and prepayments for certain customers. A majority of our accounts receivable are from international carriers.

Impairment of Long Lived Assets. Our long lived assets consist primarily of property and equipment, which are carried at historical cost. Only in situations where there are specific impairment indicators is the value of these assets subject to impairment. Any future impairment would not impact cash flow but would result in a charge to our statement of operations.

Restructuring Charges. In prior years, we recorded significant charges to operations in connection with our restructuring programs. The related reserves reflect estimates, including those pertaining to facility exit costs. We reassess the reserve requirements to complete each restructuring program at the end of each reporting period. Actual experience may be different from these estimates. In the three months ended June 30, 2006, we took a charge of $0.1 million as a result of a change in estimate relating to our future sublease assumptions on vacant facilities which is included in general and administrative expenses.

Income Taxes. We have net deferred tax assets related to net operating loss carry forwards and tax temporary differences that expire at various dates through 2025 and other tax temporary differences. Significant judgment is required in determining our provision for income taxes, the amount of deferred tax assets and liabilities and the valuation allowance required to offset our net deferred tax

assets. Factors such as future reversals of deferred tax assets and liabilities, projected future taxable income, changes in enacted tax rates and the period over which our deferred tax assets will be recoverable are considered in making these determinations. We evaluate the realizability of our deferred tax assets quarterly, and we may reverse a portion, or all, of our net deferred tax asset in future periods. If this occurs, a tax benefit would be recorded for financial reporting purposes.

Results from Continuing Operations

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

		Three Months Ended June 30,				Six Months Ended June 30,
		2006		2005		2006		2005
Net revenue		100.0	%	100.0	%	100.0	%	100.0	%
Costs and operating expenses:
	Data communications and telecommunications	87.2		86.6		87.1		86.3
	Research and development	2.8		3.3		2.8		3.4
	Selling and marketing	3.4		3.0		3.3		3.1
	General and administrative	4.1		4.0		4.1		3.8
	Depreciation and amortization	1.4		1.8		1.4		1.9

Total costs and operating expenses		98.9		98.7		98.7		98.5
Income from operations		1.1		1.3		1.3		1.5
Interest income		0.4		0.2		0.3		0.3
Interest expense		(0.1	)	(1.2	)	(0.1	)	(1.3	)
Other expenses, net		(0.0	)	(0.1	)	(0.2	)	(0.1	)
Foreign exchange loss, net		0.1		(0.4	)	0.1		(0.3	)
Debt conversion premium		—		(0.6	)	—		(0.4	)
Merger related expenses		(1.2	)	—		(0.6	)	—

Income before provision for income taxes		0.3		(0.8	)	0.8		(0.3	)
Provision for income taxes		(0.0	)	—		(0.0	)	—

Net income		0.3	%	(0.8	)%	0.8	%	(0.3	)%

Three Months Ended June 30, 2006 Compared to June 30, 2005

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

Our total net revenue increased by approximately $32.7 million, or 35%, to $127.3 million in Q2 of 2006 from $94.6 million in Q2 of 2005. Traffic carried over our network increased 50% to approximately 2.7 billion minutes in Q2 of 2006 from 1.8 billion minutes in Q2 of 2005. Our ARPM was 4.7 cents per minute in Q2 of 2006 compared to 5.2 cents per minute in Q2 of 2005. Trading revenue increased $24.8 million, or 32%, to $102.5 million in Q2 of 2006 from $77.7 million in Q2 of 2005. We have continued to expand our customer base and increase revenue from consumer VoIP customers, many of which use our PremiumCertified™ service. We currently have more than 40 consumer VoIP customers and revenue from these customers was approximately 10% of total Trading revenue in Q2 of 2006. Retail revenue increased $7.9 million, or 47%, to $24.8 million in Q2 of 2006 from $16.9 million in Q2 of 2005. The increase in Retail revenue reflects the growth we have achieved with the launch of new calling card brands and the strengthening of our distribution network, particularly in southern California. Revenue from our Pingo® calling services, which is part of our Retail revenue, was not material in Q2 of 2006 and Q2 of 2005.

Sequentially, total net revenue increased approximately $16.5 million, or 15%, in Q2 of 2006 over Q1 of 2006. Trading revenue increased $13.6 million, or 15%, and Retail revenue increased $2.9 million, or 14%, respectively, in Q2 of 2006 over Q1 of 2006.

Data communications and telecommunications costs. Data communications and telecommunications costs are composed primarily of termination and circuit costs. Termination costs are paid to local service providers to terminate voice and fax calls received from our network. Termination costs are negotiated with the local service provider. Should competition cause a decrease in the prices we charge our customers and, as a result, a decrease in our profit margins, our contracts, in some cases, provide us with the flexibility to renegotiate the per-minute termination fees. Circuit costs include charges for Internet access at our Internet Central Offices, fees for the connections between our Internet Central Offices and our customers and/or service provider partners, facilities charges for overseas Internet access and phone lines to the primary telecommunications carriers in particular countries, and charges for the limited number of dedicated international private line circuits we use. For our Retail calling services, these costs also include the cost of local and toll free access charges. Our average cost per minute ("ACPM") is based upon our total data communications and telecommunications costs divided by the number of minutes of traffic over our network for the applicable period. We believe this measurement is useful in understanding our financial performance and industry trends.

Data communications and telecommunications expenses increased by $29.1 million, or 36%, to $111.0 million in Q2 of 2006 from $81.9 million in Q2 of 2005, in line with our growth in total net revenue. Our ACPM was 4.1 cents per minute in Q2 of 2006 compared to 4.6 cents per minute in Q2 of 2005. Data communications and telecommunications expenses were $90.4 million and $20.5 million for our Trading and Retail business segments, respectively, in Q2 of 2006, compared to $68.5 million and $13.4 million for our Trading and Retail business segments, respectively, in Q2 of 2005. As a percentage of total net revenue, data communications and telecommunications expenses were 87.2% in Q2 2006 compared to 86.6% in Q2 of 2005.

Gross profit. Total gross profit (net revenue less data communications and telecommunications costs) was $16.3 million, or 12.8%, of net revenue in Q2 of 2006, compared to $12.7 million, or 13.4% of net revenue in Q2 of 2005. Average margin per minute was 0.61 cents per minute in Q2 of 2006, compared to 0.71 cents per minute in Q2 of 2005. The decrease in the year-to-year gross margin percent was primarily a result of a greater mix of lower margin Trading traffic than in the 2005 period. Trading gross profit was $12.1 million, or 11.8% of Trading revenue in Q2 of 2006, compared to $9.3 million, or 11.9% of Trading revenue, in Q2 of 2005. Retail gross profit was $4.2 million, or 17.1% of Retail revenue in Q2 of 2006, compared to $3.4 million, or 20.4% of Retail revenue, in Q2 of 2005.

Sequentially, total gross profit decreased slightly to 12.8% of total revenue in Q2 of 2006 from 12.9% of total revenue in Q1 of 2006. Trading gross profit was 11.8% of revenues in Q2 of 2006, compared to 11.9% in Q1 of 2006 and Retail gross profit increased slightly to 17.1% of revenues in Q2 of 2006, from to 17.0% in Q1 of 2006, as a result of improved pricing on previously launched prepaid calling card brands.

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 were $3.5 million in Q2 of 2006 compared to $3.1 million in Q2 of 2005. Although payroll-related expenses have increased, other expenses, including network hardware and software maintenance costs, have been reduced to partially offset the year-to-year increase. Stock-based compensation included in research and development expense in Q2 of 2006 was $0.1 million. As a percentage of net revenue, research and development expenses decreased to 2.8% in Q2 of 2006 from 3.3% in Q2 of 2005.

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

Selling and marketing expenses increased by $1.4 million, to $4.3 million in Q2 of 2006, from $2.9 million in Q2 of 2005. The increase in expenses primarily relates to additional investments we have made in sales and marketing to support our expanding Trading and Retail businesses. We have added sales personnel in developing regions and have substantially increased our marketing and promotional expenditures, particularly for our Retail business. Stock-based compensation included in sales and marketing in Q2 of 2006 was $0.1 million. As a percentage of net revenue, selling and marketing expenses were 3.4% in Q2 of 2006 from 3.0% in Q2 of 2005.

General and administrative expenses. General and administrative expenses include salaries, payroll taxes and benefits, and related costs for general corporate functions, including executive management, finance and administration, legal and regulatory, facilities, information technology and human resources.

General and administrative expenses increased by $1.5 million to $5.2 million in Q2 of 2006 from $3.7 million in Q2 of 2005. The increase relates to a combination of higher payroll-related expenses, as well as higher professional fees, including legal and accounting. In addition, general and administrative expenses include the fair value of $0.2 million for a warrant issued for investment banking advisory services. Total stock-based compensation and services, including the fair value of the warrant, included in general and administrative expenses in Q2 of 2006 was $0.6 million. As a percentage of net revenue, general and administrative expenses were 4.1% in Q2 of 2006 and 4.0% in Q2 of 2005.

Depreciation and amortization expenses. Depreciation and amortization expenses increased by $0.1 million to $1.8 million in Q2 of 2006 compared to $1.7 million in Q2 of 2005. This increase was primarily due to depreciation relating to the addition of new capital equipment deployed into our network in the first half of 2006. As a percentage of net revenue, depreciation and amortization expenses decreased to 1.4% in Q2 of 2006 from 1.8% in Q2 of 2005.

Interest income. Interest income was $0.4 million in Q2 of 2006 compared to $0.2 million in Q2 of 2005. The increase reflects the income earned on our higher average year-to-year cash and short-term investment balances.

Interest expense. Interest expense in Q2 of 2006 of $0.1 million relates to capital lease obligations. Interest expense in Q2 of 2005 of $1.1 million primarily related to our 6³/4% Subordinated Convertible Notes and 8% Senior Secured Notes which were converted to common stock between June and September of 2005.

Other expenses, net. Other expenses, net were $43,000 and $140,000 in Q2 of 2006 and Q2 of 2005, respectively, and relate mostly to state excise, use and franchise taxes.

Foreign exchange gain (loss), net. Foreign exchange gain was $148,000 in Q2 of 2006, compared to a loss of $347,000 in Q2 of 2005. The foreign exchange gain in Q2 2006 was primarily due to the effect of a stronger Euro on our Euro-denominated accounts receivable. The foreign exchange loss in 2005 was primarily due to the effect of a weakening Euro on our Euro-denominated accounts receivable.

Merger related expenses. Merger related expenses of $1.5 million relate to transaction costs incurred to date for the pending proposed merger of iBasis with the international wholesale voice business of Royal KPN, N.V. These transaction costs consist primarily of investment banking advisory services, legal and accounting fees. These costs have been expensed as iBasis is not considered the accounting acquirer in this pending merger and the merger is being treated as a reverse acquisition. We expect to incur additional merger related expenses associated with this pending merger, primarily in the Q3 of 2006.

Provision for income taxes. The provision for income taxes of $11,000 in Q2 of 2006 represents foreign income taxes on the earnings of our foreign subsidiaries. We did not have a U.S. federal or state tax provision in Q2 of 2006, as we reversed a portion of our valuation allowance against our net deferred tax assets associated with significant net operating loss carry-forwards. In Q2 of 2006, the portion of our valuation allowance reversed was approximately $0.1 million. In Q2, 2005, we did not record a benefit for income taxes relating to our net operating loss carry-forwards as it was more likely than not that this tax benefit would not be realized.

Net income. Net income was $0.3 million in Q2 of 2006, or $0.01 per share, compared to a net loss of $0.7 million, or $(0.03) per share, in Q2 of 2005.

Six Months Ended June 30, 2006 Compared to June 30, 2005

Net revenue. Our total net revenue increased by approximately $54.9 million, or 30%, to $238.1 million in 2006 from $183.2 million in 2005. Traffic carried over our network increased 34% to approximately 5.0 billion minutes in 2006 from 3.6 billion minutes in 2005. Our ARPM was 4.7 cents per minute in 2006 compared to 5.2 cents per minute in 2005. Trading revenue increased $43.0 million, or 30%, to $191.5 million in 2006 from $148.5 million in 2005. We have continued to expand our customer base and increase revenue from consumer VoIP customers, many of which use our PremiumCertified™ service. We currently have more than 40 consumer VoIP customers and revenue from these customers was approximately 10% of total Trading revenue in 2006. Retail revenue increased $11.8 million, or 34%, to $46.6 million in 2006 from $34.8 million in 2005. The increase in Retail revenue reflects the growth we have achieved with the launch of new calling card brands and the strengthening of our distribution network, particularly in southern California. Revenue from our Pingo® calling services, which is part of our Retail revenue, was not material in 2006 and 2005.

Data communications and telecommunications costs. Data communications and telecommunications expenses increased by $49.2 million, or 31%, to $207.4 million in 2006 from $158.2 million in 2005, in line with our growth in total net revenue. Our ACPM was 4.1 cents per

minute in 2006 compared to 4.5 cents per minute in 2005. Data communications and telecommunications expenses were $169.4 million and $38.0 million for our Trading and Retail business segments, respectively, in 2006, compared to $129.5 million and $28.7 million for our Trading and Retail business segments, respectively, in of 2005. As a percentage of total net revenue, data communications and telecommunications expenses were 87.1% in 2006 compared to 86.3% in 2005.

Gross profit. Total gross profit (net revenue less data communications and telecommunications costs) was $30.7 million, or 12.9%, of net revenue in 2006, compared to $25.1 million, or 13.7% of net revenue in 2005. Average margin per minute was 0.61 cents per minute in 2006, compared to 0.71 cents per minute in 2005. The decrease in the year-to-year gross margin percent was primarily a result of a greater mix of lower margin Trading traffic than in the 2005 period. Trading gross profit was $22.7 million, or 11.9% of Trading revenue in 2006, compared to $18.9 million, or 12.8% of Trading revenue, in 2005. Retail gross profit was $8.0 million, or 17.1% of Retail revenue in 2006, compared to $6.1 million, or 17.6% of Retail revenue, in 2005.

Research and development expenses. Research and development expenses increased by $0.5 million, to $6.8 million in 2006 compared to $6.3 million in of 2005. Although payroll-related expenses have increased, other expenses, including network hardware and software maintenance costs, have been reduced to partially offset the year-to-year increase. Stock-based compensation included in research and development expense in 2006 was $0.2 million. As a percentage of net revenue, research and development expenses were 2.8% in 2006 compared to 3.4% in 2005.

Selling and marketing expenses. Selling and marketing expenses increased by $2.3 million, to $7.9 million in 2006 compared to $5.6 million in 2005. The increase in expenses primarily relates to additional investments we have made in sales and marketing to support our expanding Trading and Retail businesses. We have added sales personnel in developing regions and have substantially increased our marketing and promotional expenditures, particularly for our Retail business. Stock-based compensation included in sales and marketing in 2006 was $0.2 million. As a percentage of net revenue, selling and marketing were 3.3% in 2006 compared to 3.1% in 2005.

General and administrative expenses. General and administrative expenses increased by $2.7 million to $9.8 million in 2006 from $7.1 million in 2005. The increase relates to a combination of higher payroll-related expenses, as well as higher professional fees and an increase of $0.3 million to our allowance for doubtful accounts receivable. In addition, general and administrative expenses include the fair value of $0.2 million for a warrant issued for investment banking advisory services. Total stock-based compensation and services included in general and administrative expenses in 2006 was $0.7 million. As a percentage of net revenue, general and administrative expenses were 4.1% in 2006 and 3.8% in 2005.

Depreciation and amortization expenses. Depreciation and amortization expenses decreased by $0.1 million to $3.4 million in 2006 compared to $3.5 million in 2005. As a percentage of net revenue, depreciation and amortization expenses decreased to 1.4% in 2006 from 1.9% in 2005.

Interest income. Interest income was $0.8 million in 2006 compared to $0.5 million in 2005. The increase reflects the income earned on our higher average year-to-year cash and short-term investment balances.

Interest expense. Interest expense in 2006 of $0.2 million relates to capital lease obligations. Interest expense in 2005 of $2.4 million was primarily related to our 6³/4% Subordinated Convertible Notes and 8% Senior Secured Notes which were converted to common stock between June and September of 2005, as well interest on relating to capital lease obligations.

Other expenses, net. Other expenses, net were $90,000 and $160,000 in 2006 and 2005, respectively, and relate mostly to state excise, use and franchise taxes.

Foreign exchange gain (loss), net. Foreign exchange gain was $131,000 in 2006, compared to a loss of $580,000 in 2005. The foreign exchange loss in 2005 was primarily due to the effect of a weakening Euro on our Euro-denominated accounts receivable, whereas the strengthening of the Euro resulted in foreign exchange gains on collections of Euro-denominated accounts receivable in 2006.

Merger related expenses. Merger related expenses of $1.5 million relate to transaction costs incurred to date for the pending proposed merger of iBasis with the international wholesale voice business of Royal KPN, N.V. These transaction costs consist primarily of investment banking advisory services, legal and accounting fees. These transaction costs consist primarily of investment banking advisory services, legal and accounting fees. These costs have been expensed as iBasis is not considered the accounting acquirer in this pending merger and the merger is being treated as a reverse acquisition.

Provision for income taxes. The provision for income taxes of $11,000 in 2006 represents foreign income taxes on the earnings of our foreign subsidiaries. We did not have a U.S. federal or state tax provision in 2006, as we reversed a portion of our valuation allowance against our net deferred tax assets associated with significant net operating loss carry-forwards. In 2006, the portion of our valuation allowance reversed was approximately $0.7 million. In Q2, 2005, we did not record a benefit for income taxes relating to our net operating loss carry-forwards as it was more likely than not that this tax benefit would not be realized.

Net income. Net income was $2.0 million in 2006, or $0.06 per share, compared to a net loss of $0.6 million, or $(0.03) per share, in 2005. The increase in net income was due to the growth in net revenue and gross profit in combination with the elimination of interest on our bond debt which was converted to our common stock between June and September of 2005. This improvement was partially offset by the $1.5 million in merger related expenses incurred to-date.

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 working capital needs have been met, in large part, from the net proceeds from our public and private offerings of common stock and issuances of convertible debt. In addition, we have also met our capital needs through capital leases and other equipment financings.

Net cash provided by operating activities in 2006 was $13.2 million, compared to $6.6 million in 2005. Net cash provided by operating activities in 2006 was largely a result of net income of $2.0 million and non-cash charges for depreciation of $3.4 million, stock-based compensation of $0.9 million and a provision for doubtful accounts receivable of $0.6 million. Net cash provided by operating activities in Q2 of 2005 of $6.6 million was primarily the result of the net loss of $0.5 million, offset by non-cash depreciation charges of $3.4 million and an increase in current liabilities.

Net cash used in investing activities of $7.9 million in 2006 includes $5.3 million for capital expenditures, primarily for expansion of the iBasis Network. In addition, we used $17.6 million for purchases of short-term marketable investments and received proceeds of $15.1 million from the maturities of short-term marketable investments. Cash used in investing activities in 2005 of $2.4 million consisted of $1.8 million for capital expenditures, $12.9 million for purchases of short-term marketable investments, partially offset by proceeds of $12.4 million from maturities of short-term marketable investments.

Net cash used in financing activities was $2.7 million in 2006. In Q1 of 2006 we purchased 0.4 million shares of our common stock at a total cost of $2.3 million, under our previously announced

stock repurchase program. We did not repurchase any shares of our common stock in Q2 of 2006. A summary of our stock repurchases for the six months ended June 30, 2006 is as follows:

Period		Total Shares Purchased	Average Price Paid per Share
January 1, 2006 – January 31, 2006		58,267	$	5.70
February 1, 2006 – February 28, 2006		251,667	$	5.94
March 1, 2006 – March 31, 2006		67,167	$	6.18

	Total	377,101	$	5.94

In February 2006, we increased our stock repurchase program to $15 million. As of March 31, 2006, cumulatively we had purchased a total of 0.7 million shares at a total cost of $4.1 million, leaving $10.9 million remaining for repurchases under this program.

In 2006, capital lease payments were $0.8 million and proceeds from the exercise of employee stock options were $0.4 million. Net cash used in financing activities in 2005 was $1.0 million and consisted of $0.9 million used for the redemption of the remaining 5³/4% Convertible Subordinated Notes, $0.5 million in debt conversion premiums and $0.6 million for capital lease payments. In addition, we received proceeds of $0.9 million for the exercise of 0.5 million warrant shares to purchase our common stock in 2005.

We had no borrowings under our $15.0 million bank line of credit at June 30, 2006 or December 31, 2005. We had issued outstanding letters of credit of $2.6 million and $2.4 million at June 30, 2006 and December 31, 2005, respectively.

At our Annual Meeting held on May 2, 2006, our shareholders approved an amendment to our certificate of incorporation to allow us to effect a reverse stock split of our common stock to increase our per-share market price for the purpose of achieving compliance with the listing requirements of the NASDAQ National Market. On May 3, 2006, we affected a one-for-three reverse stock split resulting in our issued and outstanding shares being reduced from approximately 99,375,000 shares to approximately 33,125,000 shares. As of that date, each three shares of our issued and outstanding shares of common stock was automatically combined, converted and changed into one share of our common stock. Our application to NASDAQ for the listing of our common stock on the NASDAQ National Market was accepted and on June 21, 2006, we began trading on the NASDAQ National Market under the stock symbol "IBAS".

On June 21, 2006, we announced the signing of a definitive agreement to merge the international wholesale voice business of Royal KPN N.V. ("KPN") into iBasis. Pursuant to the agreement, we will acquire KPN's subsidiary KPN Global Carrier Services and receive $55 million in cash in exchange for newly-issued shares of our common stock representing 51% of our issued and outstanding shares of common stock and outstanding in-the-money stock options warrants, or approximately 40 million shares. As of June 30, 2006, the newly-issued shares to KPN would represent approximately 55% of our issued and outstanding common shares. Our shareholders of record immediately prior to closing will receive a cash dividend of $113 million immediately following closing. In connection with payment of the dividend, outstanding common stock options will be adjusted to preserve their value.

Although we will be legally issuing shares of our common stock KPN Global Carrier Services, after the merger is completed, the former sole stockholder of KPN Global Carrier Services (a subsidiary of KPN), will hold a majority of our outstanding common stock. Accordingly, for accounting and financial reporting purposes, we will be treated as the accounting acquiree. Under the purchase method of accounting, our assets and liabilities will be, as of the date of the merger, recorded at their fair value and added to the historical assets and liabilities of KPN Global Carrier Services, including any amount for goodwill representing the difference between the deemed purchase price of iBasis and the fair value

of our identifiable net assets. We have incurred merger related expenses of $1.5 million to date, consisting primarily of investment banking advisory services, legal and accounting fees. We expect to incur additional merger related transaction costs of at least $0.8 million to $1.2 million, primarily in the third quarter of 2006, before the completion of the pending merger. Such amounts have been expensed because we are the accounting acquiree.

The transaction, which is subject to customary closing conditions, including regulatory approvals and the approval of iBasis shareholders, is expected to be completed before the end of 2006.

We anticipate that the June 30, 2006 balance of $49.4 million in cash, cash equivalents and short-term marketable investments, together with cash flow generated from operations, will be sufficient to fund our operations, and capital expenditures for at least the next twelve months. We currently do not have any plans to make additional purchases of shares of our common stock under our stock repurchase program. We currently expect our capital asset expenditures for the year ended December 31, 2006 will be between $10 million and $12 million.

Off-Balance Sheet Arrangements

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

Contractual Obligations

The following table summarizes our future contractual obligations as of June 30, 2006:

	Payment Due Dates
	Total		Less than 1 Year		1 to 2 Years		2 to 3 Years		3 to 5 Years		After 5 Years
	(In thousands)
Capital lease obligations, including interest	$	3,332	$	1,866	$	1,276	$	190	$	—	$	—
Operating leases		7,433		2,416		1,785		1,676		1,556		—

Total	$	10,765	$	4,282	$	3,061	$	1,866	$	1,556	$	—

Item 3.Quantitative and Qualitative Disclosures About Market Risk

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

Our investments in commercial paper and debt instruments are subject to interest rate risk, but due to the short-term nature of these investments, changes in interest rates would not have a material impact on their value at June 30, 2006. 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. Our capital lease obligations are fixed rate debt. A 10% change in interest rates would not have a material impact on interest expense associated with our line of credit agreement.

Although we conduct our business in various regions of the world, most of our revenues are denominated in U.S. dollars with the remaining being generally denominated in Euros or British Pounds. Thus, we are exposed to foreign currency exchange rate fluctuations as the financial results and balances of our foreign subsidiaries are translated into U.S. dollars. As exchange rates vary, these results, when translated, may vary from expectations and may adversely impact our results of operations and financial condition. Accordingly, if the dollar weakens relative to foreign currencies, particularly the Euro or British Pound, our foreign currency denominated revenues and expenses would increase when stated in U.S. dollars. Conversely, if the dollar strengthens, our foreign currency denominated revenues and expenses would decrease.

Item 4.Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

As of June 30, 2006, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a—15(b) promulgated under the Exchange Act. Based upon that evaluation, the Company's management, including its Chief Executive Officer and its Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective in ensuring that material information required to be disclosed by the Company 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 Securities and Exchange Commission's rules and forms, including ensuring that such material information is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

During the quarter ended June 30, 2006, there have not been any changes in the Company's internal controls over financial reporting that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting.

Part II—Other Information

Item 1. Legal Proceedings

Please see Note 8 (Contingencies) of our Condensed Notes to Condensed Consolidated Financial Statements contained in this quarterly report on Form 10-Q for a description of legal proceedings.

Item 1A. Risk Factors

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

Factors That May Affect Future Results and Financial Condition

Risks Related to Our Company

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

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

•: 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;
•: our continuing ability to negotiate competitive costs to connect our network with those of other carriers and Internet backbone providers;
•: fraudulently sent or received traffic which is unbillable, for which we may be liable;
•: credit card fraud in connection with our web-based prepaid offering;
•: 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 lucrative routes could decline, independent of route-specific price, cost or volume changes;
•: technical difficulties or failures of our network systems or third party delays in expansion or provisioning system components;
•: our ability to manage distribution arrangements and provision of retail offerings, including card printing, marketing, usage tracking, web-based offerings and customer service requirements, and resolution of associated disputes;
•: our ability to manage our traffic on a constant basis so that routes are profitable;
•: our ability to collect from our customers; and
•: currency fluctuations and restrictions in countries where we operate.

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

We may never generate sufficient revenue and gross profit to continue to be profitable in the long term if telecommunications carriers and other communications service providers or others are reluctant to use our services or do not use our services, including any new services, in sufficient volume.

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

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

•: perceptions that the quality of voice transmitted over the Internet is low;
•: perceptions that VoIP 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 Trading business depends on carriers and other communications service providers generating an increased volume of international voice and fax traffic and selecting our network to carry at least some of this traffic. Similarly, the growth of Retail services we offer depends on these factors as well as acceptance in the market of the brands that we service, including their respective rates, terms and conditions. If the volume of international voice and fax traffic and associated or other retail services fail to increase or decrease and these parties or other customers do not employ our network or otherwise use our services, our profitability will be materially and adversely affected.

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

Some of our customers have closed their businesses or filed for bankruptcy owing us significant amounts for services we have provided to them in the past. Despite our efforts to collect these overdue funds, we may never be paid. The bankruptcy court may require us to continue to provide services to these companies during their reorganizations. Other customers may discontinue their use of our services at any time and without notice, or delay payments that are owed to us. Additionally, we may have difficulty in collecting amounts from them. Although we have internal credit risk policies to identify companies with poor credit histories, we may not effectively manage these policies and may provide services to companies that refuse to pay. The risk is even greater in foreign countries, where the legal and collection systems available may not be adequate or impartial for us to 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 such companies' bankruptcy filing. We may be required to return amounts received from subsequent bankrupt entities. We intend to employ all available defenses in contesting such claims or, in the alternative settle such claims. The results of any suit or settlement may have a material adverse affect on our business.

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

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

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

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

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

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

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

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

We may not be able to succeed in the intensely competitive market for prepaid calling services.

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

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

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

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

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

•: unexpected changes in tariffs, trade barriers and regulatory requirements relating to Internet access or VoIP;
•: economic weakness, including inflation, or political instability in particular foreign economies and markets;
•: difficulty in collecting accounts receivable;
•: tax, consumer protection, telecommunications, and other laws;

•: compliance with tax, employment, securities, immigration, labor and other laws for employees living and traveling, or conducting business, abroad, which may subject them or us to criminal or civil penalties;
•: foreign taxes including withholding of payroll taxes;
•: foreign currency fluctuations, which could result in increased operating expenses and reduced revenues;
•: unreliable government power to protect our rights and those of our employees;
•: exposure to liability under the Foreign Corrupt Practices Act or similar laws in foreign countries;
•: other obligations or restrictions, including, but not limited to, criminal penalties against us or our employees incident to doing business or operating a subsidiary or other entity in another country;
•: individual criminal exposure of our employees, some of whom have been sought by law enforcement agencies abroad to answer for the activities of the Company;
•: the personal safety of our employees and their families who at times have received threats of, or who may in any case be subject to, violence, and who may not be adequately protected by legal authorities or other means; and
•: inadequate insurance coverage to address these risks.

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

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

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

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

•: sales and other taxes, including payroll-withholding applications;
•: user privacy;
•: pricing controls and termination costs;
•: characteristics and quality of products and services;
•: qualification to do business;
•: consumer protection;
•: cross-border commerce, including laws that would impose tariffs, duties and other import restrictions;

•: copyright, trademark and patent infringement; and
•: claims based on the nature and content of Internet materials, including defamation, negligence and the failure to meet necessary obligations.

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

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

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

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

While the FCC has traditionally maintained an informal policy that information service providers, including VoIP providers, are not telecommunications carriers for regulatory purposes, various entities have challenged this idea before the FCC and at various state government agencies. In 2004, the FCC ruled that certain traffic AT&T carried in part utilizing an Internet protocol format was nonetheless regulated telecommunications for which terminating access charges were due. The FCC subsequently found that AT&T's prepaid calling cards, which AT&T had claimed as an enhanced, non-regulated offering, constituted traditional telecommunications for which universal service subsidies are due. In so doing, the FCC imposed such liability retroactively, and ruled that similarly situated carriers must also fulfill reporting and contribution requirements for universal service funding. The FCC recently released an order regarding several related topics, including regulation of prepaid calling cards and the extent that Internet protocol capabilities insulate such offerings from traditional regulation, the extent to which wholesale and other VoIP offerings may be subject to access charges or eligible for interconnection with incumbent networks, and proceedings covering IP-enabled services and Universal Service subsidies more generally. In this ruling, the FCC clarified that certain prepaid calling cards using VoIP are traditional telecommunications products and are subject to regulation as a telecommunications service, including the payment of access charges and contribution to Universal Service subsidies. In this order, the FCC stated that this clarification would be applied retroactively for these prepaid calling cards, but did not explicitly require carriers to pay arrearages on these subsidies and charges. In the event of an audit from the Universal Service Administrator or complaint from a local access provider, we could be subject to arrearages for Universal Service subsidies or access charges. Further, as regulated telecommunications, our prepaid calling cards would be subject to additional obligations including those relating to complying with law enforcement and wire-tapping orders.

In addition, to the extent that this order can be used by a state regulatory authority to claim that our service is traditional telecommunications service, we could be subject to licensing requirements and additional fees and subsidies from the state regulatory authorities.

We believe that our interstate transport products qualify for the enhanced service provider ("ESP") exemption for federal universal service fund contributions because it provides a VoIP information service, that is not an interconnected VoIP service under the FCC's rules. Nevertheless, while reserving rights to claim the ESP exemption, we have decided to contribute to the federal universal service fund as of January 1, 2005 on our interstate VoIP transport revenues.

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

We have offered our prepaid international calling card services on a wholesale basis to international carrier customers, and others, some of which provide these services to end-user customers, enabling them to call internationally over The iBasis Network from the U.S. We participate in selling and marketing such cards through a network of distributors on a retail basis. Further, we also offer a web- based prepaid card offering. Although the calling cards are not primarily used for domestic interstate or intrastate use, we have not blocked the ability to place such calls or required our wholesale customers or distributors to show evidence of their compliance with U.S. and state regulations. As a result, there may be domestic use of the cards. Because we provide services that are primarily wholesale and/or international, we do not believe that we are subject to federal or state telecommunications regulation for the possible uses of these services described here and, accordingly, we have not obtained state licenses, filed state or federal tariffs, posted bonds, or undertaken other possible compliance steps. We have also been questioned by regulators about our offerings. Under current standards and recent FCC decisions, the FCC and state regulatory authorities may not agree with our position. If they do not, we could be penalized, become subject to regulation at the federal and state level for these services, and could become subject to licensing and bonding requirements, federal and state fees and taxes, and other laws, all of which could materially affect our business.

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

The Telecommunications Act of 1996 requires that payphone service providers be compensated for all completed calls originating from payphones in the United States. When calling cards are used, the FCC's prior rules required the first switch-based carrier to compensate the payphone service provider, but subsequently adopted rules require the last switched-based carrier to do so, and further require that all carriers in the call chain implement a call-tracking system, utilize it to identify such calls, provide an independent audit of the adequacy of such system, and provide a report on these matters to the FCC and others in the call chain. We maintain that as an international VoIP provider, we sell an information service. We therefore claim that we are not a "carrier" for regulatory purposes and, in any case, our Internet-based systems do not rely on traditional long distance switches. Nonetheless, we have indirectly paid, and intend to continue paying, payphone service providers as part of our prepaid calling card business. We have contracted with a clearinghouse to remit funds directly to payphone service providers for calls originating from payphones utilizing our prepaid calling cards. For all other types of traffic related to our wholesale business, we believe that we are not responsible for payphone compensation, but rather that the carrier that precedes us is. In accordance therewith, for wholesale traffic, we have in most cases sought to apportion such responsibility by contract.

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

OFAC with regard to other transactions. Failure to obtain proper authority could expose us to legal and criminal liability.

In addition to the proposed transaction with KPN, we may undertake strategic acquisitions or dispositions, or may be the target of similar strategic initiatives, that could be difficult to integrate or could damage our business.

In addition to the proposed transaction with KPN, we may acquire additional businesses and technologies that complement or augment our existing businesses, services and technologies. We may also be subject to or participate in strategic activities by others that result in a transfer of control of our assets or control of our outstanding shares of stock. We may need to raise additional funds through public or private debt or equity financing or issue more shares to affect such activities, which may result in dilution for shareholders and the incurrence of indebtedness. We may have difficulty integrating any additional businesses into our existing business and the process of any acquisitions or subsequent integration could divert management's attention and expend our resources. We may not be able to operate acquired businesses profitably or otherwise implement our growth strategy successfully.

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

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

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

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

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

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

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

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

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

We operate two NOCs as well as numerous ICOs throughout the world. In some cases we have designed redundant systems, provided for excess capacity, and taken other precautions against platform and network failures as well as facility failures relating to power, air conditioning, destruction, or theft. Nonetheless, some of our infrastructure and functionality, including that associated with certain components of our retail business, operate as a single point of failure, meaning, failures of the type described may prohibit us from offering services.

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

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

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

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

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

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

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

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

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

Risks Related to the Internet and Internet Telephony Industry

If the 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.

Network security breaches could adversely affect our operations.

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

Undetected defects in our technology could adversely affect our operations.

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

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

If the overall performance of the Internet is seriously downgraded by website attacks, failure of service attacks, or other acts of computer vandalism or virus infection, our ability to deliver our

communication services over the Internet could be adversely impacted, which could cause us to have to increase the amount of traffic we have to carry over alternative networks, including the more costly public switched telephone network. In addition, traditional business interruption insurance may not cover losses we could incur because of any such disruption of the Internet. While some insurers are beginning to offer products purporting to cover these losses, we do not have any of this insurance at this time.

Risks Related to Our Company

A failure to obtain necessary additional capital in the future could jeopardize our operations.

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

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

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

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

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

Risks Related to the Proposed Transaction with KPN

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

Integration of KPN's international wholesale voice business into our business will be a complex, time consuming and costly process. Failure to timely and successfully integrate these operations may have a material adverse effect on the combined company's business, financial condition and results of

operations. The difficulties of combining these businesses will present challenges to the combined company's management, including:

•: experiencing operational interruptions or the loss of key employees, customers or suppliers;
•: operating a significantly larger combined company with operations in geographic areas in which we have not previously operated on a stand-alone basis; and
•: consolidating corporate and administrative functions.

The combined company will also be exposed to other risks that are commonly associated with transactions similar to this proposed transaction, such as unanticipated liabilities and costs, some of which may be material, and diversion of management's attention. As a result, the anticipated benefits of the merger of KPN's international wholesale voice business into our Company, including anticipated synergies, may not be fully realized, if at all.

We may not be able to obtain approval from our shareholders to issue shares constituting 51% of our common stock to KPN, which is required by the Markeplace Rules of Nasdaq.

Because our common stock is listed on The Nasdaq Stock Market, we are subject to the Marketplace Rules of Nasdaq. Under Nasdaq Rule 4350(i), the issuance of shares constituting 51% of our common stock to KPN requires the approval of the holders of a majority of the shares of common stock voted on such proposal prior to their issuance to KPN. In addition, such approval by our shareholders of the issuance of the Transaction Shares is a condition to the obligations of the parties to close the proposed transaction. We may not be able to obtain such approval from our shareholders, and therefore, we may not be able to close the proposed transaction.

The transactions contemplated by the share purchase and sale agreement may not be consummated even if shareholder approval for the proposed transaction is obtained.

The share purchase and sale agreement contains conditions that, if not satisfied or waived, would result in the proposed transaction not occurring, even though our shareholders may have voted in favor of the issuance of shares to KPN. In addition, KPN and our Company can agree not to consummate the transactions even if shareholder approval has been received. The closing conditions to the proposed transaction may not be satisfied, and any unsatisfied conditions may not be waived, which may cause the proposed transaction not to occur.

While the share purchase and sale agreement is in effect, we may be limited in our ability to pursue other attractive business opportunities.

Under certain circumstances, in connection with the termination of the share purchase and sale agreement, we will be required to pay KPN a termination fee of $10,000,000 plus additional amounts for reimbursement of expenses. Such fees are intended to provide a financial incentive for us to seek to complete the proposed transaction.

We have also agreed to refrain from taking certain actions with respect to our business and financial affairs pending completion of the proposed transaction or termination of the share purchase and sale agreement. These restrictions and no-solicitation provisions contained in the share purchase and sale agreement could be in effect for an extended period of time if completion of the proposed transaction is delayed.

In addition to the economic costs associated with pursuing the proposed transaction, our management is devoting substantial time and other human resources to the proposed transaction and related matters, which could limit our ability to pursue other attractive business opportunities, including potential joint ventures, stand-alone projects and other transactions. If we are unable to pursue such

other attractive business opportunities, then our growth prospects and the long-term strategic position of our business and the combined business could be adversely affected.

Regulatory agencies may delay approval of the proposed transaction, which may diminish the anticipated benefits of the proposed transaction.

Completion of the proposed transaction with KPN is conditioned upon the receipt of required governmental consents, approvals, orders and authorizations. Although KPN and our Company intend to pursue vigorously all required governmental approvals, the requirement to receive these approvals before the consummation of the proposed transaction could delay the completion of the proposed transaction, possibly for a significant period of time after our shareholders have approved the issuance of shares to KPN. Any delay in the completion of the proposed transaction could diminish anticipated benefits of it or result in additional transaction costs, loss of revenue or other effects associated with uncertainty about the transaction. In addition, until the proposed transaction is completed, the attention of management may be diverted from ongoing business concerns and regular business responsibilities to the extent management is focused on matters relating to the transaction, such as obtaining regulatory approvals.

Following the closing of the proposed transaction with KPN, KPN will own a majority of the shares of our common stock, and we will be a controlled company within the meaning of Nasdaq Marketplace Rules.

Following the closing of the proposed transaction with KPN, KPN will own in excess of 51% of the outstanding shares of our common stock, which will make it difficult to complete some corporate transactions without KPN's support.

In addition, because KPN will be deemed to beneficially own, in the aggregate, more than 50.0% of our common stock, after the closing of the transaction, we will be a "controlled company" within the meaning of Nasdaq Marketplace Rule 4350(c)(5). As a result, the Company is exempt from Nasdaq rules that require listed companies to have (i) a majority of independent directors on the Board of Directors, (ii) a compensation committee and nominating committee composed solely of independent directors, (iii) the compensation of executive officers determined by a majority of independent directors or a compensation committee composed solely of independent directors, and (iv) a majority of the independent directors or a nominating committee composed solely of independent directors elect or recommend director nominees for selection by the Board of Directors. Furthermore, as part of the proposed transaction, our by-laws will be amended to provide KPN certain board representation rights and certain veto rights. As a result of these changes, and KPN's majority holdings, after the Closing KPN will have the ability to control the outcome of all matters submitted to our stockholders for approval. We cannot assure you that the interests of KPN will be consistent with the interests of other holders of our common stock, or that KPN will vote its shares of common stock, or exercise its veto rights, in a manner that benefits other holders of our common stock.

Finally, KPN's ownership of 51% of the shares of our common stock could discourage the acquisition of our common stock by potential investors and could have an anti-takeover effect, possibly depressing the trading price of our common stock.

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

We have not entered into any lock-up agreement with KPN as part of the proposed transaction. As a result, following the closing of the transaction with KPN, the sale, or the possibility of a sale, by KPN of all or a substantial number of its shares in the public market could cause the market price of our common stock to decline. The sale of a substantial number of shares or the possibility of such a sale

also could make it more difficult for us to sell our common stock or other equity securities in the future at a time and at a price that we deem appropriate.

Following the closing of the transaction, we will have less available cash and our liquidity may be adversely affected.

We will pay to our shareholders a dividend in an aggregate amount of $113,000,000 promptly following the closing of the proposed transaction. The funds used to pay the dividend will come from cash on hand and the proceeds of the proposed transaction. Also, under the terms of outstanding warrants for our common stock, upon exercise of such warrants after the closing of the proposed transaction, the holders of the warrants shall be entitled to receive payment of an amount in cash equal to the amount such holder would have received in connection with the dividend payment if such warrants had been exercised immediately prior to the closing of the proposed transaction, in addition to the number of shares of common stock issuable upon such exercise. These exercises could result in the Company being required to pay up to an additional $8.6 million in connection with such exercises.

Furthermore, in connection with the merger of KPN's international wholesale voice business into our Company, we expect that we will assume certain short-term liabilities associated therewith which exceed the cash and short-term assets that such business will bring.

Each of the foregoing events will have an adverse effect on our cash reserves and could significantly compromise our liquidity after the Closing, which could result in us having to increase borrowings (which may not be available, or may be available only at significant cost), dispose of assets out of the ordinary course of business, or forego business opportunities that would otherwise be attractive.

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

At the Company's Annual Meeting of Shareholders held on May 2, 2006, shareholders re-elected Gordon VanderBrug and David Lee as Class 1 directors to serve a three-year term. The shareholders also ratified and appointed Deloitte & Touche LLP as independent auditors for the Company. In addition, shareholders approved an amendment to the Company's Amended and Restated Certificate of Incorporation to allow our Board of Directors to effect a reverse stock split. The ratio of the reverse stock split approved by the shareholders ranged from one-for-two to one-for-six and one half. Subsequent to the Annual Meeting, the Board of Directors approved a one-for-three reverse stock split that became effective May 3, 2006.

The results of the shareholder vote is as follows:

Election of Class 1 Directors:		For		Withheld
Gordon VanderBrug		85,311,115		182,231
David Lee

		For		Against		Abstain		No Vote
Approval of Amendment to the Company's Certificate of Incorporation to effect a reverse stock split		84,630,202		700,272		162,872		—

Item 6—Exhibits

(A) Exhibits:

10.1		Share Purchase and Sale Agreement between iBasis, Inc. and KPN Telecom B.V., dated as of June 21, 2006.
31.1		Certificate of iBasis, Inc. Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certificate of iBasis, Inc. Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certificate of iBasis, Inc. Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certificate of iBasis, Inc. Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.
August 9, 2006		By:		/s/ RICHARD TENNANT Richard Tennant Vice President and Chief Financial Officer (Authorized Officer and Principal Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

Ibasis Inactive 10-Q2006 Q2 Quarterly report

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