Arbinet 10-Q 2005 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2005

¨ 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 0-51063

ARBINET-THEXCHANGE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	13-3930916
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

120 Albany Street, Tower II, New Brunswick, NJ	08901
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code (732) 509-9100

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No:  x

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of July 31, 2005:

Class	Number of Shares
Common Stock, par value $0.001 per share	24,815,390

ARBINET-THEXCHANGE, INC.

TABLE OF CONTENTS

		Page
PART I.FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited):
	Consolidated Balance Sheets as of December 31, 2004 and June 30, 2005	2
	Consolidated Statements of Operations for the Three Months and Six Months ended June 30, 2004 and 2005	3
	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2004 and 2005	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
PART II.OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 4.	Submission of Matters to a Vote of Security Holders	35
Item 6.	Exhibits	36
SIGNATURES		37

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

ARBINET-THEXCHANGE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31, 2004			June 30, 2005
ASSETS
Current Assets:
Cash and cash equivalents	$	53,532,660		$	36,639,115
Marketable securities		—			19,647,000
Trade accounts receivable (net of allowances of $900,000 at December 31, 2004 and June 30, 2005)		27,351,810			24,039,233
Other current assets		2,369,746			1,836,757
Total current assets		83,254,216			82,162,105
Property and equipment, net		24,689,053			23,447,163
Intangible assets, net		1,862,772			1,625,898
Goodwill		2,170,236			1,993,797
Other assets		2,890,663			2,636,298
Total Assets	$	114,866,940		$	111,865,261
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Loan payable and capital lease obligations-current portion	$	1,924,023		$	1,001,317
Accounts payable		15,645,826			12,946,712
Deferred revenue		4,314,006			4,390,178
Accrued expenses and other current liabilities		9,445,247			8,360,539
Total current liabilities		31,329,102			26,698,746
Loan payable and capital lease obligations—long-term		1,719,181			547,129
Other long-term liabilities		6,580,791			6,070,702
Total Liabilities		39,629,074			33,316,577
Stockholders’ Equity
Preferred Stock, 5,000,000 shares authorized		—			—
Common Stock, $0.001 par value, 60,000,000 shares authorized, 24,584,574 and 24,774,903 shares issued, respectively		24,584			24,774
Additional paid-in capital		176,073,297			176,490,920
Treasury stock, 68,673 shares		(1,274,549	)		(1,274,549	)
Deferred compensation		(160,707	)		(355,610	)
Accumulated other comprehensive loss		(350,571	)		(899,936	)
Accumulated deficit		(99,074,188	)		(95,436,915	)
Total Stockholders’ Equity		75,237,866			78,548,684
Total Liabilities and Stockholders’ Equity	$	114,866,940		$	111,865,261

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

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ARBINET-THEXCHANGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS AND THE SIX MONTHS ENDED JUNE 30, 2004 AND 2005

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2005			2004			2005
Trading revenues	$	116,802,504		$	120,874,980		$	224,578,645		$	245,307,294
Fee revenues		10,546,517			11,640,404			20,667,446			23,950,836
Total revenues		127,349,021			132,515,384			245,246,091			269,258,130
Cost of trading revenues		116,802,505			120,729,033			224,546,076			244,961,840
		10,546,516			11,786,351			20,700,015			24,296,290
Costs and expenses
Operations and development		2,983,916			3,282,661			6,017,549			6,910,652
Sales and marketing		1,492,329			1,891,326			2,767,015			3,648,969
General and administrative		2,279,564			2,993,177			4,441,576			5,809,660
Depreciation and amortization		2,229,494			2,334,165			4,279,174			4,866,291
Insurance reimbursement for litigation settlements		—			(1,450,000	)		—			(1,450,000	)
Total costs and expenses		8,985,303			9,051,329			17,505,314			19,785,572
Income from operations		1,561,213			2,735,022			3,194,701			4,510,718
Interest income		68,718			385,089			139,827			688,016
Interest expense (including $417,610 and $835,120 of interest on redeemable preferred stock for the three months and the six months ended June 30, 2004, respectively)		(696,911	)		(109,704	)		(1,494,246	)		(253,597	)
Other income (expense), net		(315,497	)		(267,928	)		(386,984	)		(816,564	)
Income before income taxes		617,523			2,742,479			1,453,298			4,128,573
Provision for income taxes		—			399,818			—			491,300
Net income		617,523			2,342,661			1,453,298			3,637,273
Preferred stock dividends and accretion		(1,696,028	)		—			(3,386,570	)		—
Net income (loss) attributable to common stockholders	$	(1,078,505	)	$	2,342,661		$	(1,933,272	)	$	3,637,273
Basic net income (loss) per share	$	(0.42	)	$	0.10		$	(0.80	)	$	0.15
Diluted net income (loss) per share	$	(0.42	)	$	0.09		$	(0.80	)	$	0.14
Shares used in computing basic net income (loss) per share		2,549,079			24,497,929			2,430,211			24,479,281
Shares used in computing diluted net income (loss) per share		2,549,079			25,814,206			2,430,211			25,968,025
Pro forma diluted net income per share	$	0.03					$	0.07
Pro forma shares used to compute diluted net income per share		21,947,398						21,669,788
Other comprehensive income (loss):
Foreign currency translation adjustment		25,178			(603,598	)		(117,033	)		(549,365	)
Comprehensive (loss) income	$	(1,053,327	)	$	1,739,063		$	(2,050,305	)	$	3,087,908

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

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ARBINET-THEXCHANGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2005

	Six Months Ended June 30,
	2004			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,453,298		$	3,637,273
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,255,661			4,866,297
Amortization of deferred compensation		38,150			69,385
Non-cash interest on redeemable preferred stock		835,120			—
Changes in operating assets and liabilities:
Trade accounts receivable, net		(4,881,901	)		2,514,392
Other assets		507,839			1,536,424
Accounts payable		1,763,335			(2,561,931	)
Deferred revenue, accrued expenses and other current liabilities		(1,224,263	)		(736,843	)
Other long-term liabilities		(519,987	)		(510,089	)
Net cash provided by operating activities		2,227,252			8,814,908
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(3,135,973	)		(3,671,719	)
Purchases of marketable securities		—			(19,647,000	)
Net cash used in investing activities		(3,135,973	)		(23,318,719	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of indebtedness		(5,142,594	)		(376,338	)
Issuance of common stock		97,335			153,525
Loans made to stockholders, net of repayments		150,130			—
Payments on obligations under capital leases		(1,242,199	)		(1,718,420	)
Net cash used in financing activities		(6,137,328	)		(1,941,233	)
Effect of foreign exchange rate changes on cash		(4,652	)		(448,501	)
Net decrease in cash and cash equivalents		(7,050,701	)		(16,893,545	)
Cash and cash equivalents, beginning of year		17,147,245			53,532,660
Cash and cash equivalents, end of period	$	10,096,544		$	36,639,115

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

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ARBINET-THEXCHANGE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim consolidated financial statements include the accounts of Arbinet and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (GAAP), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Interim financial reporting does not include all of the information and footnotes required by GAAP for complete financial statements. The interim financial information is unaudited, but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. Operating results for the three months and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

Foreign Currency Translation

In the second quarter of 2005, the Company designated, on a prospective basis, approximately $12 million of its receivable from its U.K. subsidiary as permanent in nature and commenced reporting foreign exchange translation gains and losses on that amount as a component of accumulated other comprehensive loss included in stockholders’ equity. Prior to its designation as long term, the translation gains and losses related to this portion of the intercompany receivable were included in other income (expense), net in the consolidated statements of operations. In the first quarter of 2005, approximately $0.2 million of foreign exchange loss related to this receivable was recorded in other income (expense), net.

Reclassifications

Certain amounts in the comparative periods have been reclassified to conform to the current period’s presentation.

Effects of Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Historically, in accordance with SFAS 123 and SFAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure, the Company had elected to follow the disclosure only provisions of Statement No. 123 and, accordingly, continues to account for share based compensation under the recognition and measurement principles of APB Opinion No. 25 and related interpretations. Under APB 25, when stock options are issued with an exercise price equal to the market price of the underlying stock price on the date of grant, no compensation expense is recognized in the financial statements, and compensation expense is only disclosed in the footnotes to the financial statements. The Company will be required to adopt Statement No. 123(R) no later than the quarter beginning January 1, 2006. Since the Company is currently in the process of evaluating the option valuation methods and adoption transition alternatives available under Statement 123(R), it has not yet determined the impact Statement 123(R) will have on its consolidated results of operations, financial position and cash flows.

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2. STOCK BASED COMPENSATION

The Company has elected under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), to account for its employee stock options in accordance with Accounting Principle Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), using an intrinsic value approach to measure compensation expense, if any. Companies that account for stock-based compensation arrangements for its employees under APB No. 25 are required by SFAS No. 123 to disclose the pro forma effect on net income (loss) as if the fair value based method prescribed by SFAS No. 123 had been applied. The Company plans to continue to account for stock-based compensation using the provisions of APB No. 25 and has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”.

Had the compensation cost for the Company’s stock options been determined based on the fair value of the options at the date of grant, the Company’s pro forma net income (loss) would have been as shown below.

	Six Months Ended June 30,
	2004			2005
Net income (loss) attributable to common stockholders, as reported	$	(1,933,272	)	$	3,637,273
Add: Stock-based compensation expense as reported, net of tax		38,150			69,385
Deduct: Stock-based employee compensation expense determined under fair-value-based method, net of tax		(88,607	)		(1,323,813	)
Pro forma net income (loss)	$	(1,983,729	)	$	2,382,845
Income (loss) per share:
Basic — as reported	$	(0.80	)	$	0.15
Diluted — as reported	$	(0.80	)	$	0.14
Basic — pro forma	$	(0.80	)	$	0.10
Diluted — pro forma	$	(0.80	)	$	0.09

The fair market value of each option grant for all years presented has been estimated on the date of grant using the Black-Scholes Option Pricing Model with the following assumptions:

	June 30,
	2004		2005
Expected option lives	4 years		4 years
Risk-free interest rates	2.74	%	3.43	%
Expected volatility	35.9	%	37.4	%
Dividend yield	0	%	0	%

Earnings Per Share

Basic earnings per share are computed by dividing net income available for common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated based on the weighted average number of outstanding common shares plus the dilutive effect of convertible preferred stock, options and warrants as if they were exercised. During a loss period, the effect of the convertible preferred stock and the potential exercise of stock options and warrants was not considered in the diluted earnings per share calculation since it would be antidilutive.

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The following is a reconciliation of the basic number of common shares outstanding to diluted number of common and common share equivalent shares outstanding:

	Six Months Ended June 30
	2004	2005
Basic number of common shares outstanding	2,430,211	24,479,281
Dilutive effect of stock options and warrants	—	1,488,744
Dilutive number of common and common share equivalents	2,430,211	25,968,025

The following is a summary of the securities outstanding during the respective periods that have been excluded from the calculations because the effect on earnings per share would have been antidilutive:

	June 30, 2004	June 30, 2005
Redeemable convertible preferred stock	16,991,134	—
Stock options	1,609,904	721,288
Preferred stock warrants	407,164	—
Common stock warrants	169,991	—
	19,178,193	721,288

The shares used in calculating the pro forma net income per share assume the conversion of the following mandatorily redeemable convertible preferred shares and warrants outstanding:

	June 30, 2004
Net income	$	1,453,298
Weighted average common shares outstanding		2,430,211
Plus conversion of mandatorily redeemable convertible preferred stock		16,991,134
Total weighted average shares outstanding used in computing pro forma net income per share		19,421,345
Dilutive effect of stock options and warrants		2,248,443
Total common stock and common stock equivalents		21,669,788
Pro forma basic net income per share	$	0.07
Pro forma diluted net income per share	$	0.07

3. MARKETABLE SECURITIES

Marketable securities have been classified as available-for-sale and are carried at fair value based on quoted market prices. Interest on marketable securities is recognized as income when earned. Realized gains and losses are calculated using specific identification. The fair value of marketable securities at June 30, 2005 approximates cost. All marketable securities at June 30, 2005 have a maturity of one year or less. The following is a summary of marketable securities at June 30, 2005 by type:

Commercial Paper	$	19,975,000
U.S. Government and federal agency obligations		14,848,000
Corporate bonds		874,000
		35,697,000
Less: amounts classified as cash equivalents		16,050,000
Total marketable securities	$	19,647,000

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4. INCOME TAXES

The Company recorded an income tax provision of approximately $400,000 and $491,000 for the three months and six months ended June 30, 2005, respectively, based upon the Company’s estimated effective annual tax rate of 11.9%. The difference between the federal statutory tax rate and the effective tax rate is primarily related to the expected utilization of certain of the Company’s net operating loss carryforwards, the impact of state taxes and a portion of pre-tax income associated with the Company’s U.K. subsidiary.

5. RESTRUCTURING CHARGES

During 2001 and 2002, the Company exited two separate facilities and accordingly recorded charges for the future lease obligations, net of estimated sub-lease income. The table below shows the amount of the charges and the cash payments related to those liabilities.

Balance at December 31, 2004	$	4,575,671
Cash payments		(474,963	)
Balance at June 30, 2005	$	4,100,708

As of June 30, 2005, $0.9 million of the $4.1 million balance is recorded in accrued liabilities and $3.2 million is recorded in other long-term liabilities.

6. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

On March 18, 2003, World Access, Inc. f/k/a WAXS, Inc., WA Telcom Products Co., Inc., WorldxChange Communications, Inc., Facilicom International LLC and World Access Telecommunications Group, Inc. f/k/a Cherry Communications Incorporated d/b/a Resurgens Communications Group, or collectively the Debtors, filed a lawsuit against us in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division. The Debtors had previously filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. The Debtors seek recovery of certain payments they made to us as a buyer on our exchange, which total approximately $855,000. The Debtors claim that such payments were a preferential payment under the Bankruptcy Code. The Debtors also seek costs and expenses, including attorneys’ fees and interest. We filed an answer to the complaint on April 18, 2003, denying the Debtors’ claims for relief and asserting several affirmative defenses. On August 12, 2003, we served discovery on the attorneys for World Access and its related entities. Shortly after we served our discovery, the bankruptcy judge entered an order stating that the cases of World Access and its related entities, which had been jointly administered, could not be substantively consolidated. Since then the majority of Debtors’ preference complaints in the case have been continued while the Debtors sort out their administrative problems. In September 2004, the Debtors have confirmed a Plan of Liquidation which created a trust to proceed with liquidating avoidance actions. On May 18, 2005, the bankruptcy judge entered a Scheduling Order requiring us to appear at a Scheduling Conference on October 12, 2005.

On May 27, 2003, we received a demand letter from counsel for Octane Capital Management and its affiliate, Octane Capital Fund I, L.P., or collectively Octane, demanding the right to purchase up to $2.8 million of our shares of Series E preferred stock on the same terms as originally set forth in a Securities Purchase Agreement dated as of July 3, 2001. Additionally, the letter demanded the right to convert Octane’s investment in shares of our Series D preferred stock into shares of Series D-1 preferred stock pursuant to the terms of such purchase agreement. The Octane demand letter also alleged violations of Octane’s rights under a Second Amended and Restated Investors’ Rights Agreement dated as of March 7, 2000, or the Investors’ Rights Agreement, including, among other allegations, the allegation that Octane did not receive proper advance notice of the complete terms of our Series E preferred stock offering. On May 28, 2003, we sent notice to all stockholders, including Octane, indicating our plan to defend against these claims.

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On September 1, 2004, after no contact with us for over a year, Octane contacted our representatives to renew its demand against us. We responded to Octane’s demand, denying all allegations of wrongdoing.

On December 10, 2004, we received a complaint filed that day by Octane and Amerindo Technology Growth Fund II Inc., or ATGF, another investor of the Company, in the United States District Court for the Southern District of New York, entitled Octane Capital Fund, L.L.P. et al. v. Arbinet-thexchange, Inc., Civil Action No. 04-CV-9759 (KMW). Octane and ATGF filed an amended complaint with the court on December 13, 2004, amending and replacing the December 10, 2004 complaint. The amended complaint alleges, among other things, that we breached terms of the Investors’ Rights Agreement by failing to give Octane and ATGF proper advance notice of the complete terms of our Series E preferred stock offering. The amended complaint seeks money damages for both Octane and ATGF for the alleged breach of contract. On February 11, 2005, we filed our answer to the amended complaint, denying all liability, and filed counterclaims against Octane and ATGF for, among other claims, breach of the Investors’ Rights Agreement in connection with their conduct seeking additional shares of stock and other relief.

It is our position that Octane waived the right to participate in the Series E Financing and to receive notice from us relating to such offering, and that, in addition, sufficient notice was provided to Octane and ATGF. Prior to the Series E Financing, we received notice from a representative of Octane indicating that Octane was planning not to exercise its rights to participate in the Series E Financing due to its capital constraints. In such notice, Octane did not reference that any potential terms would impact its decision not to participate in the Series E Financing. We believe, however, that sufficient notice of the terms of the Series E Financing was given to Octane and ATGF. In that regard, on June 15, 2001, we sent Octane and ATGF, along with other potential investors, notice of the general terms of the Series E Financing. Consistent with its earlier notice informing us that it did not intend to participate in the Series E Financing, Octane did not respond to this notice and contends that there was no waiver. ATGF did not indicate an interest in participating in the Series E Financing under the terms of the June 15, 2001 notice. The June 15, 2001 notice included a statement that we might change the pre-investment capitalization in order to incent previous investors to purchase Series E preferred stock. However, Octane and ATGF allege that the notice was insufficient because it failed to disclose different and more favorable terms ultimately included in the Securities Purchase Agreement dated July 3, 2001.

On May 9, 2005, the plaintiffs filed an unopposed motion to dismiss this case in federal court without prejudice for lack of subject matter jurisdiction. The court granted the plaintiffs’ motion on the same day. There can be no assurance that the plaintiffs will not file a complaint relating to this matter in another jurisdiction. In such event, there can be no assurance that an adverse result in this litigation will not have a material adverse effect on the Company or its financial position. We intend to defend vigorously against such claims in the event they are brought by Octane or ATGF.

On December 13, 2004, we received a letter from legal counsel to Zarick Schwartz and his company, ATOS, with respect to his alleged intellectual property rights relating to telecommunications operating system technology. Among other matters, Mr. Schwartz and ATOS claimed that Mr. Schwartz is the sole inventor of technology that was subsequently claimed by Arbinet as the subject matter of certain of our patents. Arbinet denies all of the allegations. On December 14, 2004, we reached an agreement with Mr. Schwartz and ATOS to submit this dispute to binding arbitration. The parties have agreed that in the event the arbitrator determines that Mr. Schwartz is in fact the sole inventor of the subject matter claimed in at least one of Arbinet’s patents listed in the December 13, 2004 letter, and the operation of Arbinet’s business comes within the scope of such claim, then Arbinet shall pay Mr. Schwartz or ATOS an aggregate of $1.5 million over five years. In the event the arbitrator determines that Mr. Schwartz is not the sole inventor of the subject matter of any of the listed Arbinet patents, then Arbinet shall pay Mr. Schwartz or ATOS an aggregate of $500,000. Mr. Schwartz released all other claims against Arbinet, other than the inventorship claims to be arbitrated in the binding arbitration. Mr. Schwartz has agreed to assign any and all of his rights in the Arbinet patents, if it is determined that he has any rights, to Arbinet, and Mr. Schwartz will cooperate in executing any documents needed to perfect Arbinet’s interests in its patents worldwide. Each of the parties shall bear its own costs and expenses, including legal fees. Arbinet intends to vigorously defend itself during the arbitration to ensure that inventorship is properly determined.

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On May 13, 2005, we received a letter from counsel representing Alex Mashinsky, our founder and a former officer and director, together with a draft complaint and a draft press release, threatening to commence litigation in the Southern District of New York against us, as well as against Communications Ventures III, L.P., one of our shareholders, our Chairman Anthony L. Craig, director Roland A. Van der Meer, and our President, Chief Executive Officer and director J. Curt Hockemeier, if we do not agree to an “amicable settlement” with him. Mashinsky alleges breach of fiduciary duty, self-dealing, fraud, and breach of contract in connection with our Series E preferred stock financing consummated in 2001, asserting over $90 million in damages. According to his correspondence he “is prepared to discuss settlement of this matter at an amount representing a significant discount.” We believe that his allegations are without merit and represent yet another attempt by him to seek financial rewards from us. Contrary to certain of his current allegations, just last year in a loan settlement agreement dated July 9, 2004, Mashinsky acknowledged and agreed that, in June 2001, he had consented to the Series E preferred stock financing. We deny Mashinsky’s claims and, if he commences litigation against us, we intend to vigorously defend against his claims. There can be no assurance that litigation, if brought, or an adverse result in such litigation, if any, will not have a material adverse effect on our results of operations or financial position.

7. SUBSEQUENT EVENT

The Company and Summit Telecom Systems, Inc. (“Summit”) entered into a Patent Acquisition Agreement on June 3, 2005 and an Amendment to the Patent Acquisition Agreement on July 21, 2005 (together, the “Agreements”), pursuant to which Arbinet obtained Summit’s entire right, title and interest in certain intellectual property, including patents relating to the field of telecommunications services. Under the terms of the Agreements, in July 2005 Arbinet made an initial cash payment to Summit of $900,000. A second cash payment of $200,000 is being held in escrow until June 2006 at which time it will be released to Summit.

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

Overview

We are the leading electronic market for trading, routing and settling communications capacity. Members of our exchange, consisting primarily of communications services providers, buy and sell voice calls and Internet capacity through our centralized, efficient and liquid marketplace. Communications services providers that do not use our exchange generally individually negotiate and buy access to the networks of other communications services providers to send voice calls and Internet capacity outside of their networks. We believe that we provide a cost-effective and efficient alternative to these direct connections. With a single interconnection to our exchange, members have access to all other members’ networks. Members place orders through our easy-to-use web-based interface. Sellers on the exchange post sell orders to offer voice calls and Internet capacity for specific destinations, or routes, at various prices. We independently assess the quality of these routes and include that information in the sell order. Buyers enter buy orders based on route quality and price and are matched to sell orders by our fully automated trading platform and our proprietary software. When a buyer’s order is matched to a seller’s order, the voice calls or Internet capacity are then routed through our state-of-the-art facilities. We invoice and process payments for our members’ transactions and manage the credit risk of buyers primarily through our credit management programs with third parties.

Revenue

We generate revenues from both the trading which members conduct on our exchange, which we refer to as trading revenues, and the fees we charge members for the ability to trade on our exchange, which we refer to as fee revenues. Our trading revenue represents the aggregate dollar value of the calls which are routed through our switches at the price agreed to by the buyer and seller of the capacity. For example, if a 10-minute call is originated in France and routed through our facilities to a destination in India for $0.11 per minute, we record $1.10 of trading revenue for the call. Generally, we do not generate any profit or incur any loss from trading revenues because in most cases we pay the seller the same amount that we charge the buyer. We occasionally offer our members contracts to buy and sell minutes to specific markets at fixed rates. We may generate profit or incur losses associated with trading revenue on these contracts. Historically, this profit or loss has not been material to our operating results. Our system automatically records all traffic terminated through our switches.

We record trading revenues because:

• all traffic traded on our exchange is routed through one of our switches; and

• we are obligated to pay sellers for the minutes they sell on our exchange regardless of whether we ultimately collect from buyers.

Our fee revenues represent the amounts we charge buyers and sellers for the following:

• a monthly minimum fee based on the amount of capacity that members have connected to our switches and overage fees for the number of minutes or megabytes which are routed through our switches in excess of amounts allowed under the monthly minimum, or collectively referred to as access fees, which comprised approximately 80% of fee revenues for both the six months ended June 30, 2004 and 2005;

• a credit risk management fee, which is a charge for the credit management, clearing and settlement services we provide;

• a membership fee to join our exchange; and

• additional services as utilized by our members for items such as premium service offerings and accelerated payment terms.

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Costs and Expenses

Our cost of trading revenues consists of the cost of calls which are routed through our switches at the price agreed to by both the buyer and seller of the capacity. In the preceding example, we would record cost of trading revenues equal to $1.10, an amount which we would pay to the seller.

Operations and development expense consists of costs related to supporting our exchange, such as salaries, benefits, bonuses and related costs of engineering, technical support, product and software development and system support personnel, as well as facilities and interconnect costs. Sales and marketing consists of salaries, benefits, commissions, bonuses and related costs of sales and marketing personnel, trade shows and other marketing activities. General and administrative costs consist of salaries, benefits, bonuses of corporate, finance and administrative personnel, bad debt expense and outside service costs, such as legal and accounting fees.

Business Development

We will continue to seek to increase our trading volume. We aim to achieve this by increasing participation on our exchange from existing members, increasing membership on our exchange, expanding our global presence, developing and marketing complementary services and leveraging our platform to allow the trading, routing and settling of other digital goods, such as Internet capacity. We currently have exchange delivery points, or EDPs in New York, Los Angeles, London, Frankfurt and Hong Kong. We plan to expand our presence in the high-growth markets of Asia through our EDP in Hong Kong and Latin America with a new EDP in Miami, Florida or South America. We can initially establish an EDP in a new market without any additional capital by directly connecting the new EDP to one of our existing EDPs through a leased network, as we have accomplished for our EDPs in Hong Kong and Frankfurt. Once we have sufficient business in a new market, we may install a new switch for the EDP in that market for a cost of approximately $1.0 million. We plan to develop, market and expand services that are complementary to our existing offerings, including enhanced trading, credit and clearing services and switch partitioning. We may not be successful in doing so due to many factors, including the business environment in which we operate.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the amounts reported for assets, liabilities, revenues, expenses and the disclosure of contingent liabilities. Our significant accounting policies are more fully described in the Note 1 to our consolidated financial statements included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2004.

Our critical accounting policies are those that we believe are both important to the portrayal of our financial condition and results of operations and often involve difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management evaluates these estimates, including those related to bad debts, income taxes, long-lived assets, restructuring, contingencies and litigation on an ongoing basis. The estimates are based on historical experience and on various assumptions about the ultimate outcome of future events. Our actual results may differ from these estimates.

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We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

• Long-lived assets. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Factors we consider important which could trigger an impairment review include the following:

• significant underperformance relative to expected historical or projected future operating results;

• significant changes in the manner of or use of the acquired assets or the strategy for our overall business; and

• significant industry, economic or competitive trends.

• Income taxes. We have net deferred tax assets, reflecting net operating loss (“NOL”) carryforwards and other deductible differences, which may reduce our taxable income in future years. These net deferred tax assets are fully offset by a valuation allowance resulting in no tax benefit being recognized. We are required to periodically assess the realization of our deferred tax assets and changes in circumstances may require adjustments in future periods. The amount of net deferred tax assets actually realized could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities or changes in the amounts of future taxable income. If it becomes more likely than not that we will recognize future tax benefit from the deferred tax assets, we may need to reverse some or all of our valuation allowance. In calculating our estimated effective annual tax rate for 2005, we have reflected the anticipated utilization of certain of our NOLs to offset taxable income in certain tax jurisdictions.

• Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of members on our exchange to make required payments. The amount of our allowance is based on our historical experience and an analysis of our outstanding accounts receivable balances. If the financial condition of our members deteriorates, resulting in additional risk in their ability to make payments to us, then additional allowances may be required which would result in an additional expense in the period that this determination is made. While credit losses have historically been within our range of expectations and our reserves, we cannot guarantee that we will continue to experience the same level of doubtful accounts that we have in the past.

Results of Operations

The following table sets forth, for the periods indicated, certain financial data for the three months and the six months ended June 30, 2004 and 2005:

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2005		2004		2005
	(in thousands)				(in thousands)
Trading revenues	$	116,803	$	120,875	$	224,579	$	245,307
Fee revenues		10,546		11,640		20,667		23,951
Total revenues		127,349		132,515		245,246		269,258
Cost of trading revenues		116,803		120,729		224,546		244,962
		10,546		11,786		20,700		24,296
Costs and expenses:
Operations and development		2,984		3,283		6,018		6,911
Sales and marketing		1,492		1,891		2,767		3,649

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	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2005			2004			2005
	(in thousands)						(in thousands)
General and administrative		2,280			2,993			4,442			5,810
Depreciation and amortization		2,229			2,334			4,279			4,866
Insurance reimbursement for litigation settlements		—			(1,450	)		—			(1,450	)
Total costs and expenses:		8,985			9,051			17,505			19,786
Income from operations		1,561			2,735			3,195			4,511
Interest income		69			385			140			688
Interest expense		(697	)		(110	)		(1,494	)		(254	)
Other income (expense)		(315	)		(268	)		(387	)		(817	)
Income before income taxes		618			2,742			1,453			4,129
Provision for income taxes		—			400			—			491
Net income	$	618		$	2,343		$	1,453		$	3,637
Fee revenues		100	%		100	%		100	%		100	%
Costs and expenses:
Operations and development		28	%		28	%		29	%		29	%
Sales and marketing		14	%		16	%		13	%		15	%
General and administrative		22	%		26	%		21	%		24	%
Depreciation and amortization		21	%		20	%		21	%		20	%
Insurance reimbursement for litigation settlements		—			(12	)%		—			(6	)%
Total costs and expenses:		85	%		78	%		85	%		83	%
Income from operations		15	%		23	%		15	%		19	%
Interest income		1	%		3	%		1	%		3	%
Interest expense		(7	)%		(1	)%		(7	)%		(1	)%
Other income (expense)		(3	)%		(2	)%		(2	)%		(3	)%
Income before income taxes		6	%		24	%		7	%		17	%
Provision for income taxes		—			3	%		—			2	%
Net income		6	%		20	%		7	%		15	%

Comparison of Six Months Ended June 30, 2004 and 2005

Trading revenues and cost of trading revenues

Trading revenues increased 9.2% from $224.6 million for the six months ended June 30, 2004 to $245.3 million for the six months ended June 30, 2005. The increase in trading revenues was due to both an increase in the volume traded by our members on our exchange and an increase in the number of members trading on our exchange offset by a lower average trade rate per minute. Specifically the factors affecting trading revenues included:

• A total of 5.9 billion minutes were bought and sold on Arbinet’s exchange in the six months ended June 30, 2005, up 25% from the 4.8 billion minutes for the six months ended June 30, 2004. This increase was due to 713.8 million completed calls in the six months ended June 30, 2005, up 28% from the 558.1 million completed calls for the six months ended June 30, 2004, offset by lower average call duration. The average call duration on thexchange for the six months ended June 30, 2005 was 4.1 minutes per call compared to 4.3 minutes per call for the six months ended June 30, 2004. The lower average call duration was primarily a result of a change in the mix of geographic markets traded on thexchange. The volatility in average call duration and mix of geographic markets may continue in the future.

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• The number of members trading on our exchange increased from 334 on June 30, 2004 to 385 on June 30, 2005.

• The average trade rate, which represents the average price per minute of completed calls on the exchange, for the six months ended June 30, 2005 was $0.082 per minute compared to $0.095 per minute in the six months ended June 30, 2004. The lower average trade rate per minute was due to a change in the mix of geographic markets traded on the exchange by our members.

As a result of increases in trading revenues, cost of trading revenues increased 9.1% from $224.5 million for the six months ended June 30, 2004 to $245.0 million for the six months ended June 30, 2005.

Fee revenues

Fee revenues increased 15.9% from $20.7 million for the six months ended June 30, 2004 to $24.0 million for the six months ended June 30, 2005. Fee revenues increased as a result of minutes increasing 25% for the comparable period offset, in part, by lower pricing. Average fee revenue per minute was $0.0040 in the six months ended June 30, 2005 compared to $0.0043 in the six months ended June 30, 2004. Average fee revenue per minute declined as more exchange members achieved volume based discounts and we offered limited fee discounts to certain high-quality sellers in order to incent those sellers to add supply to certain markets which had higher demand within the exchange. Although the majority of these short term incentives ended in April 2005, we may provide incentives to improve liquidity in our exchange in the future and that along with members continuing to achieve higher volume levels may lead to a decline in average fee revenue per minute in the future.

Operations and development

Operations and development costs increased 14.8% from $6.0 million to $6.9 million for the six months ended June 30, 2004 and 2005, respectively. This increase was primarily the result of increased rent and related utilities of $0.6 million and increased compensation-related expense of $0.6 million. Most of the increase in compensation-related expenses is the result of increased headcount to support our data business.

Sales and marketing

Sales and marketing expenses increased 31.9% from $2.8 million to $3.6 million for the six months ended June 30, 2004 and 2005, respectively. This increase was primarily the result of increased compensation-related expense of $0.6 million.

General and administrative

General and administrative expenses increased 30.8% from $4.4 million to $5.8 million for the six months ended June 30, 2004 and 2005, respectively. This increase was primarily the result of higher compensation expense of $0.2 million, higher litigation expense of $0.2 million, higher consulting and professional fees of $0.3 million and higher insurance expense of $0.4 million.

Depreciation and amortization

Depreciation and amortization increased 13.7% from $4.3 million to $4.9 million for the six months ended June 30, 2004 and 2005, respectively. This resulted from additional capital expenditures of approximately $10 million which were made during the last six months of 2004 and the first six months of 2005.

Insurance reimbursement for litigation settlements

In May 2005, the Company received $1.45 million from one of its insurers that covers certain legal expenses and settlement fees related to a previous legal matter.

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Interest and other income/expense

Interest income increased primarily due to the amount earned on invested cash proceeds from our initial public offering in December 2004. Interest expense decreased 83% from $1.5 million to $0.3 million million for the six months ended June 30, 2004 and 2005, respectively. This decrease resulted from $0.8 million of non-cash interest expense recorded in the 2004 period and not in the 2005 period related to Series B and B-1 Preferred Stock. Interest expense also decreased as a result of our repayment of approximately $14 million in outstanding loans during 2004. Other income (expense), net includes net gains (losses) resulting from foreign currency transactions of approximately $141,000 and $(281,000) for the six months ended June 30, 2004 and 2005, respectively. The loss from foreign currency transactions in the six months ended June 30, 2005 is primarily due to the strengthening of the U.S. dollar versus the British Pound from December 31, 2004 to June 30, 2005 and its effect on a U.S. dollar-denominated liability on the books of the Company’s U.K. subsidiary. In the second quarter of 2005, the Company designated, on a prospective basis, approximately $12 million of its receivable from its U.K. subsidiary as permanent in nature and commenced reporting foreign exchange translation gains and losses on that amount as a component of accumulated other comprehensive loss included in stockholders’ equity. Prior to its designation as long term, the translation gains and losses related to this portion of the intercompany receivable were included in other income (expense), net in the consolidated statements of operations. In the first quarter of 2005, approximately $0.2 million of foreign exchange loss related to this receivable was recorded in other income (expense), net.

Provision for income taxes

The Company recorded an income tax provision of approximately $491,000 for the six months ended June 30, 2005 based upon the Company’s estimated effective annual tax rate of 11.9%. The Company increased its estimated effective annual tax rate to 11.9% in the second quarter 2005 from 6.6% in the first quarter 2005 due to lower forecasted consolidated pre-tax income for the year and a resulting increase in the proportion of pre-tax income associated with the Company’s U.K. subsidiary. The difference between the federal statutory tax rate and the effective tax rate is primarily related to the expected utilization of certain of the Company’s net operating loss carryforwards, the impact of state taxes and a portion of pre-tax income associated with the Company’s U.K. subsidiary.

Comparison of Three Months Ended June 30, 2004 and 2005

Trading revenues and cost of trading revenues

Trading revenues increased 3.5% from $116.8 million for the three months ended June 30, 2004 to $120.9 million for the three months ended June 30, 2005. The increase in trading revenues was due to both an increase in the volume traded by our members on our exchange and an increase in the number of members trading on our exchange offset by a lower average trade rate per minute. Specifically the factors affecting trading revenues included:

• A total of 2.9 billion minutes were bought and sold on Arbinet’s exchange in the three months ended June 30, 2005, up 21% from the 2.48 billion minutes for the three months ended June 30, 2004. This increase was due to 372.3 million completed calls in the three months ended June 30, 2005, up 29% from the 289.7 million completed calls for the three months ended June 30, 2004, offset by lower average call duration. The average call duration on thexchange for the three months ended June 30, 2005 was 3.9 minutes per call compared to 4.2 minutes per call for the three months ended June 30, 2004. The lower average call duration was primarily a result of a change in the mix of geographic markets traded on thexchange. The volatility in average call duration and mix of geographic markets may continue in the future.

• The number of members trading on our exchange increased from 334 on June 30, 2004 to 385 on June 30, 2005.

• The average trade rate, which represents the average price per minute of completed calls on the exchange, for the three months ended June 30, 2005 was $0.083 per minute compared to $0.097 per minute in the three months ended June 30, 2004. The lower average trade rate per minute was due to a change in the mix of geographic markets traded on the exchange by our members.

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As a result of increases in trading revenues, cost of trading revenues increased 3.4% from $116.8 million for the three months ended June 30, 2004 to $120.7 million for the three months ended June 30, 2005.

Fee revenues

Fee revenues increased 10.4% from $10.5 million for the three months ended June 30, 2004 to $11.6 million for the three months ended June 30, 2005. Fee revenues increased as a result of minutes increasing 21% for the comparable period offset, in part, by lower pricing. Average fee revenue per minute was $0.0040 in the three months ended June 30, 2005 compared to $0.0043 in the three months ended June 30, 2004. Average fee revenue per minute declined as more exchange members achieved volume based discounts and we offered limited fee discounts to certain high-quality sellers in order to incent those sellers to add supply to certain markets which had higher demand within the exchange. Although the majority of these short term incentives ended in April 2005, we may provide incentives to improve liquidity in our exchange in the future and that along with members continuing to achieve higher volume levels may lead to a decline in average fee revenue per minute in the future.

Operations and development

Operations and development costs increased 10% from $3 million to $3.3 million for the three months ended June 30, 2004 and June 30, 2005, respectively. This increase was primarily the result of increased rent and related utilities of $0.3 million.

Sales and marketing

Sales and marketing expenses increased 26.7% from $1.5 million to $1.9 million for the three months ended June 30, 2004 and June 30, 2005, respectively. This increase primarily the result of increased compensation-related expense of $0.3 million.

General and administrative

General and administrative expenses increased 31.3% from $2.3 million to $3 million for the three months ended June 30, 2004 and June 30, 2005, respectively. This increase was primarily the result of higher consulting and professional fees of $0.2 million, higher bad debt expense of $0.2 million and higher insurance expense of $0.2 million.

Depreciation and amortization

Depreciation and amortization increased 4.7% from $2.2 million to $2.3 million for the three months ended June 30, 2004 and June 30, 2005, respectively. This resulted from additional capital expenditures of approximately $10 million which were made during the last six months of 2004 and the first six months of 2005.

Insurance reimbursement for litigation settlements

In May 2005, the Company received $1.45 million from one of its insurers that covers certain legal expenses and settlement fees related to a previous legal matter.

Interest and other income/expense

Interest income increased primarily due to the amount earned on invested cash proceeds from our initial public offering in December 2004. Interest expense decreased 84.3% from $0.7 million to $0.1 for the three months ended June 30, 2004 and June 30, 2005, respectively. This decrease resulted from $0.4 million of non-cash interest expense recorded in the 2004 period and not in the 2005 period related to Series B and B-1 Preferred Stock. Interest expense also decreased as a result of our repayment of approximately $14 million in outstanding loans during 2004.

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Other income (expense), net includes net losses resulting from foreign currency transactions of approximately $(80,000) and $(31,000) for the three months ended June 30, 2004 and 2005, respectively. In the second quarter 2005, the Company designated, on a prospective basis, approximately $12 million of its receivable from its U.K. subsidiary as permanent in nature and commenced reporting foreign exchange translation gains and losses on that amount as a component of accumulated other comprehensive loss included in stockholders’ equity. Prior to its designation as long term, the translation gains and losses related to this portion of the intercompany receivable were included in other income (expense), net included in the consolidated statements of operations.

Provision for income taxes

The Company recorded an income tax provision of approximately $400,000 for the three months ended June 30, 2005 based upon the Company’s estimated effective annual tax rate of 11.9%. The Company increased its estimated effective annual tax rate to 11.9% in the second quarter 2005 from 6.6% in the first quarter 2005 due to lower forecasted consolidated pre-tax income for the year and a resulting increase in the proportion of pre-tax income associated with the Company’s U.K. subsidiary. The difference between the federal statutory tax rate and the effective tax rate is primarily related to the expected utilization of certain of the Company’s net operating loss carryforwards, the impact of state taxes and a portion of pre-tax income associated with the Company’s U.K. subsidiary.

Liquidity and Capital Resources

Our primary source of liquidity had historically been cash received through the sale and issuance of equity and debt securities. We received equity investments between April 1999 and May 2003 in an aggregate amount of approximately $125.0 million. Our principal liquidity requirements have been for working capital, capital expenditures and general corporate purposes. On December 21, 2004, we completed our initial public offering and raised net proceeds of approximately $66.6 million.

During the six months ended June 30, 2005, we made approximately $3.7 million of capital expenditures related to enhancements to our trading platform, including software development and hardware and the development of our trading platform for Internet capacity which was funded primarily from cash generated through operations. At June 30, 2005, we had cash and cash equivalents of $36.6 million and marketable securities of $19.6 million. We also are party to a $25.0 million lending facility with Silicon Valley Bank, under which we can borrow against our accounts receivable and general corporate assets. As of June 30, 2005, we had the full $25.0 million available to us as no amounts were outstanding under this facility. We believe that our current cash, cash equivalents and marketable securities and cash flows from operating activities, should be sufficient for us to fund our current operations for the foreseeable future. To the extent we require additional capital to fund our working capital or capital expenditures, we intend to seek additional financing in the credit or capital markets, although we may be unsuccessful in obtaining financing on acceptable terms, if at all.

The following table sets forth components of our cash flows for the following periods:

	Six Months ended June 30,
	2004		2005
Net cash provided by operating activities	$	2,227,252	$	8,814,908
Net cash used in investing activities		3,135,973		23,318,719
Net cash used in financing activities		6,137,328		1,941,233

Cash provided by operating activities

Cash provided by operations for the six months ended June 30, 2005 was primarily attributable to net income of $3.6 million and depreciation and amortization of $4.9 million. Cash provided by operating activities for the six months ended June 30, 2004 was attributable to net income of $1.5 million, depreciation and amortization of $4.3 million, non-cash interest expense of $0.8 million, partially offset by an increase in operating net assets of $4.4 million.

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Cash used in investing activities

Total capital expenditures for the six months ended June 30, 2005 were $3.7 million related primarily to the purchase of computer equipment and telecommunications switching equipment. Total purchases of marketable securities for the six months ended June 30, 2005 were $19.6 million. Total capital expenditures for the six months ended June 30, 2004 were $3.1 million related primarily to the purchase of computer equipment and telecommunications switching equipment.

Cash provided by financing activities

Cash used in financing activities for the six months ended June 30, 2005 was primarily attributable to the repayment of approximately $2.1 million in debt. Cash used in financing activities for the six months ended June 30, 2004 was primarily attributable to the repayment of approximately $6.4 million in debt.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Credit Risk Management

We manage the invoicing, credit risk and settlement of all traffic traded on our exchange. Since we are obligated to pay the seller regardless of whether we ultimately collect from the buyer, we assume the credit risk associated with all traffic traded on our exchange. As part of managing the credit risk associated with buyers on our exchange, we have an integrated credit risk management program under which the following arrangements assist in the mitigation of this credit risk:

• Netting. We net our members’ buying and selling activity. This enables us to extend credit to members up to the amount they have sold in a given period. The netting also reduces the working capital requirements for our members and for us. For the six months ended June 30, 2005, 31% of our trading revenues were offset by selling activity.

• Credit risk assessment and underwriting. GMAC and Highbridge provide us with credit risk assessment and credit underwriting services. Under the terms of our agreements with GMAC and Highbridge either GMAC or Highbridge assumes the credit risk of selected members to enable such members to purchase voice calls or Internet capacity on our exchange.

• Self underwriting.Members can self-finance a credit line with us by prepaying, posting a cash deposit or letter of credit or by placing money in escrow.

• CreditWatch system. We enter a credit line for each member into our CreditWatch system. This credit line is the sum of the GMAC credit line, Highbridge credit line, selling activity, other cash collateral and Arbinet provided credit. The CreditWatch system regularly monitors a member’s net trading balance and sends email alerts to each member who surpasses 50%, 75% and 90% of its available credit limit and is able to automatically suspend a member’s ability to buy as its net balance reaches its total credit line.

• Frequent settlement. We have two trading periods per month. Payments from buyers are due fifteen days after the end of each trading period. This frequent settlement reduces the amount outstanding from our buyers. The frequent clearing of trading balances, together with the ability to net buy and sell transactions, allows our members to trade large dollar volumes while minimizing the outstanding balance that needs to be underwritten by additional sources of credit.

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We occasionally issue credit lines to our members based on our review of a member’s financial statements and payment history with us. Typically, these credit lines are in excess of the credit lines issued by GMAC or Highbridge. We evaluate the credit risk, on a case-by-case basis, of each member who is not covered by our third-party credit arrangements, our netting policy, prepayments or other cash collateral. While there are no written procedures regarding the extension of credit lines, we have adopted written procedures to determine authority levels for certain of our officers to grant internal credit lines.For the six months ended June 30, 2005, approximately 97% of our trading revenues were covered by GMAC and Highbridge credit lines, netting, prepayments or other cash collateral, of which 50% were covered by GMAC and Highbridge credit lines. However, our credit evaluations cannot fully determine whether buyers can or will pay us for capacity they purchase through our exchange. In the future, we may elect to increase the amount of our credit we extend to our customers we deem creditworthy in order to reduce our credit underwriting costs. If buyers fail to pay us for any reason and we have not been able or have elected not to secure credit risk protection with respect to these buyers, our business could be adversely affected. In the event that the creditworthiness of our buyers deteriorates, our credit providers and we may elect not to extend credit and consequently we may forego potential revenues that could materially affect our results of operations.

We have certain minimum annual commissions due pursuant to the terms of our agreements with each of GMAC and Highbridge. Pursuant to the terms of our agreement with GMAC we are required to pay a minimum annual commission of $725,000 and pursuant to the terms of our agreement with Highbridge we are required to pay a minimum quarterly commission of $150,000.

As of May 3, 2005, we signed a letter of intent to extend the agreement with GMAC for two years which, when the final agreement is executed, will amend certain terms, including reducing the minimum annual commission to $350,000.

Additional Factors That May Affect Future Results

If any of the following risks occur, our business, financial condition, results of operations or prospects could be materially adversely affected. In such case, the trading price of our Common Stock could decline.

We have a limited operating history as a company and as an exchange for communications services providers. If we are unable to overcome the difficulties frequently encountered by early stage companies, our business could be materially harmed.

We began our operations in November 1996. In October 1999, we discontinued some of our previous operations, which involved the sale and rental of telecommunication equipment and operating international routes, and modified our business strategy to focus exclusively on our Internet-based exchange for long-distance voice calls. In the second quarter of 2004, we introduced our exchange-based system for buying and selling Internet capacity.

We have experienced, and expect to continue to experience, risks and difficulties frequently encountered by companies in an early stage of commercial development in new and rapidly evolving markets. In order to overcome these risks and difficulties, we must, among other things:

• generate sufficient usage of our exchange by our members;

• maintain and attract a sufficient number of members to our exchange to sustain profitability;

• execute our business strategy successfully, including successful execution of our Internet capacity business;

• manage our expanding operations; and

• upgrade our technology, systems and network infrastructure to accommodate increased traffic and transaction volume and to implement new features and functions.

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Our failure to overcome these risks and difficulties and the risks and difficulties frequently encountered by early stage companies could impair our ability to raise capital, expand our business or continue our operations.

We have incurred a cumulative loss since inception and if we do not maintain or generate significant revenues, we may not remain profitable.

We have incurred significant losses since our inception in November 1996. At December 31, 2004, our accumulated deficit was approximately $99.1 million. Although we achieved net income of $7.9 million in the year ended December 31, 2004, we expect to incur significant future expenses, particularly with respect to the development of new products and services, deployment of additional infrastructure and expansion in strategic global markets. To remain profitable, we must continue to increase the usage of our exchange by our members and attract new members in order to improve the liquidity of our exchange. We must also deliver superior service to our members, mitigate the credit risks of our business and develop and commercialize new products and services. We may not succeed in these activities and may never generate revenues that are significant or large enough to sustain profitability on a quarterly or annual basis. A large portion of our fee revenues is derived from fees that we charge our members on a per-minute and per-megabyte basis. Therefore, a general market decline in the price for voice calls and Internet capacity may adversely affect the fees we charge our members in order to keep or increase the volume of member business and could materially impact our future revenues and profits. Our failure to remain profitable would depress the market price of our common stock and could impair our ability to expand our business, diversify our product and service offerings or continue our operations.

Our members may not trade on our exchange or utilize our other services due to, among other things, the lack of a liquid market, which may materially harm our business. Volatility in trading volumes may have a significant adverse effect on our business, financial condition and operating results.

Traditionally, communications services providers buy and sell network capacity in a direct, one-to-one process. Our members may not trade on our exchange unless it provides them with an active and liquid market. Liquidity depends upon the number of buyers and sellers that actively trade on a particular communications route. Our ability to increase the number of buyers that actively trade on our exchange will depend on, among other things, the willingness and ability of prospective sellers to satisfy the quality criteria imposed by prospective buyers, and upon the increased participation of competing sellers from which a buyer can choose in order to obtain favorable pricing, achieve cost savings and consistently gain access to the required quality services. Our ability to increase the number of sellers that actively trade on our exchange will depend upon the extent to which there are sufficient numbers of buyers available to increase the likelihood that sellers will generate meaningful sales revenues. Alternatively, our members may not trade on our exchange if they are not able to realize significant cost savings. This may also result in a decline in trading volume and liquidity of our exchange. Trading volume is additionally impacted by the mix of hundreds of geographic markets traded on the exchange. Each market has distinct characteristics such as price and average call duration. Declines in the trading volume on our exchange would result in lower revenues to us and would adversely affect our profitability because of our predominantly fixed cost structure. Volatility in trading volumes may have a significant adverse effect on our business, financial condition and operating results.

Our members may not trade on our exchange, because such members may conclude that our exchange will replace their existing business at lower margins.

If our exchange continues to be an active, liquid market in which lower-priced alternatives are available to buyers, sellers may conclude that further development of our exchange will erode their profits and they may stop offering communications capacity on our exchange. Since our exchange provides full disclosure of prices offered by participating sellers, on an anonymous basis, buyers may choose to purchase network capacity through our exchange instead of sending traffic to their existing suppliers at pre-determined, and often higher, contract prices. If suppliers of communications capacity fear or determine that the price disclosure and spot market limit order mechanisms provided by our exchange will “cannibalize” the greater profit-generating potential of their existing business, they may choose to withdraw from our exchange, which ultimately could cause our exchange to fail and materially harm our business.

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Our member enrollment cycle can be long and uncertain and may not result in revenues.

Our member enrollment cycle can be long, and may take up to 12 months or even longer from our initial contact with a communications services provider until that provider signs our membership agreement. Because we offer a new method of purchasing and selling international long-distance voice calls and Internet capacity, we must invest a substantial amount of time and resources to educate services providers regarding the benefits of our exchange. Factors that contribute to the length and uncertainty of our member enrollment cycle and that may reduce the likelihood that a member will purchase or sell communications traffic through our exchange include:

• the strength of pre-existing one-to-one relationships that prospective members may already have with their communications services providers;

• existing incentive structures within our members’ organizations that do not reward decision-makers for savings achieved through cost-cutting;

• the experience of the trial trading process by prospective members; and

• any aversion to new methods for buying and selling communications capacity.

If we fail to enroll new members, we may not increase our revenues which would adversely affect our business, financial condition and results of operations.

Until recently, our operations have been cash flow negative and we have depended on equity financings and credit facilities to meet our cash requirements, which may not be available to us in the future on favorable terms, if at all. We may require substantial additional funds to execute our business plan and, if additional capital is not available, we may need to limit, scale back or cease our operations.

Until the year ended December 31, 2002, we experienced negative operating cash flow and have depended upon equity financings, as well as borrowings under our credit facilities, to meet our cash requirements in each annual period since we began our operations in November 1996. We expect to meet our cash requirements for the next 12 months through a combination of cash flow from operations, existing cash, cash equivalents and short-term investments and net proceeds from our initial public offering consummated in December 2004. If our cash requirements vary materially from those currently planned, or if we fail to generate sufficient cash flow from our business, we may be required to borrow under our credit facilities or seek additional financing sooner than anticipated.

Our current credit facility with Silicon Valley Bank expires in May 2006. We may default under this facility or may not be able to renew this credit facility upon expiration or on acceptable terms. In addition, we may seek additional funding in the future and intend to do so through public or private equity and debt financings. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product or service candidates or products or services which we would otherwise pursue on our own. Additional funds may not be available to us on acceptable terms or at all. If we are unable to obtain funding on a timely basis, we may not be able to execute our business plan. As a result, our business, results of operations and financial condition could be adversely affected and we may be required to significantly curtail or cease our operations.

Our settlement procedures subject us to financial risk on all receivables not accepted by GMAC or Highbridge under our credit arrangements or covered by our other methods of managing our credit risk. In addition, we may elect to forego potential revenues to avoid certain credit risks.

Under our settlement procedures, we pay a seller on our exchange the net sales price, or the total amount sold by a member less the amount purchased by that member in a given period, for its trading activity. We may not, however, collect the net sales price from the buyers on our exchange until after we have paid the sellers. We have established credit risk assessment and credit underwriting services with each of GMAC and SCM Telco Finance, or SCM Telco, that provide us with a level of credit risk protection. In August 2004, SCM Telco assigned our credit

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agreement to Highbridge/Zwirn Special Opportunity Fund, LP, or Highbridge, which assumed all of SCM Telco’s obligations under the credit agreement. We are subject to financial risk for any nonpayment by our buyers for receivables that GMAC and/or Highbridge do not accept. We seek to mitigate that risk by evaluating the creditworthiness of each buyer prior to its joining our exchange, as well as requiring either deposits, letters of credit or prepayments from our buyers. We also manage our credit risk by reducing the amount owed to us by our buying members by netting the buy amount and the sell amount for each member on our exchange. In 2004, approximately 97% of our trading revenues were covered by GMAC and Highbridge credit lines, netting, prepayments or other cash collateral, of which 48% were covered by GMAC and Highbridge credit lines. However, our credit evaluations cannot fully determine whether buyers can or will pay us for capacity they purchase through our exchange. In the future, we may elect to increase the amount of credit we extend to our customers we deem creditworthy in order to reduce our credit underwriting costs. If buyers fail to pay us for any reason and we have not been able or have elected not to secure credit risk protection with respect to these buyers, our business could be adversely affected. In the event that the creditworthiness of our buyers deteriorates, our credit providers and we may elect not to extend credit and consequently we may forego potential revenues that could materially affect our results of operations.

We may not be able to find a replacement for GMAC or Highbridge which could materially harm our business.

We currently rely on GMAC and Highbridge to bear a significant portion of the credit risk exposure to us with respect to transactions executed on our exchange. The second anniversary of our credit risk agreement with GMAC was February 2005. Upon the second anniversary, our contract with GMAC automatically extends on a month-to-month basis. As of May 3, 2005, we signed a letter of intent to extend the agreement with GMAC for two years which, when the final agreement is executed, will amend certain terms, including reducing the minimum annual commission from $725,000 to $350,000. Although we have an alternative arrangement with Highbridge to provide supplemental credit risk protection, if we cannot renew our contract with GMAC at the end of its term, if GMAC terminates the contract upon an event of default or if we are unable to identify a suitable alternative credit risk provider on acceptable terms, we may be unable to mitigate the credit risk associated with our business. Our agreement with Highbridge expires on December 12, 2005. Additionally, the agreement is terminable upon 60 days’ notice, with a $250,000 termination fee, if the agreement is cancelled by us in the first year. For the year ended December 31, 2004, approximately 48% of our trading revenues were covered by GMAC and Highbridge credit lines. The failure to find a replacement for either GMAC or Highbridge on terms acceptable to us, if at all, could subject us to significant losses and materially harm our business.

We are exposed to the credit risk of our members not covered by our credit management programs with third parties which could result in material losses to us.

There have been adverse changes in the public and private equity and debt markets for communications services providers that have affected their ability to obtain financing or to fund capital expenditures. In some cases, the significant debt burden carried by certain communications services providers has adversely affected their ability to pay their outstanding balances with us and some of our members have filed for bankruptcy as a result of their debt burdens, making us an unsecured creditor of the bankrupt entity. Although these members may emerge from bankruptcy proceedings in the future, a bankruptcy proceeding can be a slow and cumbersome process and creditors often receive partial or no payment toward outstanding obligations. Furthermore, because we are an international business, we may be subject to the bankruptcy laws of other nations which may provide us limited or no relief. Even if these members should emerge from bankruptcy proceedings, the extent and timing of any future trading activity is uncertain.

In addition, because we generally pay the sellers on our exchange and then seek payment from the buyers on our exchange, a bankruptcy court may require us to return the funds received from a buyer if we, and not our sellers, are deemed to have received a preferential payment prior to bankruptcy. Although we have credit risk programs in place to monitor and mitigate the associated risks, including our arrangements with GMAC and Highbridge and our policy of netting a member’s buy and sell transactions on our exchange, we do not always utilize these programs for certain members and, in such instances, these programs are not effective in eliminating or reducing these credit risks to us.

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We have experienced losses due to the failure of some of our members to meet their obligations and then subsequently seeking protection of applicable bankruptcy laws. Although these losses have not been significant to date, future losses, if incurred, could be significant and could harm our business and have a material adverse effect on our operating results and financial condition.

If we are not able to retain our current senior management team or attract and retain qualified technical and business personnel, our business will suffer.

We are dependent on the members of our senior management team, in particular, J. Curt Hockemeier, our President and Chief Executive Officer, for our business success. Our employment agreements with Mr. Hockemeier and our other executive officers are terminable on short notice or no notice. We do not carry key man life insurance on the lives of any of our key personnel. The loss of any of our executive officers would result in a significant loss in the knowledge and experience that we, as an organization, possess and could significantly affect our current and future growth. In addition, our growth will require us to hire a significant number of qualified technical and administrative personnel. There is intense competition from numerous communications services companies for human resources, including management, in the technical fields in which we operate, and we may not be able to attract and retain qualified personnel necessary for the successful operation and growth of our exchange. The loss of the services of key personnel or the inability to attract new employees when needed could severely harm our business.

The market for our services is competitive and if we are unable to compete effectively, our financial results will suffer.

We face competition for our voice trading services from communications services providers’ legacy processes and new companies that may be able to create centralized trading solutions that replicate our voice trading platform or circumvent our intellectual property. These companies may be more effective in attracting voice traffic than our exchange.

We face competition for our data trading services from Internet service providers and Internet capacity resellers. In addition, software-based, Internet infrastructure companies focused on Internet protocol route control products may compete with us for business. Furthermore, Internet network service providers may make technological advancements, such as the introduction of improved routing protocols to enhance the quality of their services, which could negatively impact the demand for our data services.

Some of our current and potential competitors may have greater financial resources than we do and may have the ability to adopt aggressive pricing policies. In addition, many of these companies have longer operating histories and may have significantly greater technical, marketing and other resources than we do and may be able to better attract the same potential customers that we are targeting. Once customers have established business relationships, it could be extremely difficult to convince them to utilize our exchange or replace or limit their existing ways of conducting business.

We expect competition to intensify in the future, and we may not have the financial resources, technical expertise, sales and marketing abilities or support capabilities to compete successfully. Our competitors may be able to develop services or processes that are superior to our services or processes or that achieve greater industry acceptance or that may be perceived by buyers and sellers as superior to ours.

Future governmental regulations may adversely affect our business.

The communications services industry is highly regulated in the United States and in foreign countries. Our business may become subject to various United States, United Kingdom and other foreign laws, regulations, agency actions and court decisions. The Federal Communications Commission, or FCC, has jurisdiction over interstate and international communications in the United States. The FCC currently does not regulate the services we offer. If, however, the FCC determined, on its own motion or in response to a third party’s filing, that it should regulate our services and that certain of our services or arrangements require us to obtain regulatory authorizations, the FCC could order us to make payments into certain funds supported by regulatory entities, require us to comply with reporting and other ongoing regulatory requirements and/or fine us. We are currently not regulated at the state level, but could be subjected to regulation by individual states as to services that they deem to be within their jurisdiction.

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In addition, like many businesses that use the Internet to conduct business, we operate in an environment of tremendous uncertainty as to potential government regulation. We believe that we are not currently subject to direct regulation of the services that we offer other than regulations generally applicable to all businesses. However, governmental agencies have not yet been able to adapt all existing regulations to the Internet environment. Laws and regulations may be introduced and court decisions reached that affect the Internet or other web-based services, covering issues such as member pricing, member privacy, freedom of expression, access charges, content and quality of products and services, advertising, intellectual property rights and information security. In addition, because we offer our services internationally, foreign jurisdictions may claim that we are subject to their regulations. Any future regulation may have a negative impact on our business by restricting our method of operation or imposing additional costs. Further, as a company that conducts a portion of our business over the Internet, it is unclear in which jurisdictions we are actually conducting business. Our failure to qualify to do business in a jurisdiction that requires us to do so could subject us to fines or penalties, and could result in our inability to enforce contracts in that jurisdiction.

Any of these government actions could have a material adverse effect on our business.

Expanding and maintaining international operations will subject us to additional risks and uncertainties.

We expect to continue the expansion of our international operations, which will subject us to additional risks and uncertainties. Although we have established exchange delivery points (EDPs) in New York City, Los Angeles, London, Frankfurt and Hong Kong, we intend to expand our presence in the markets of Asia and Latin America. Foreign operations are subject to a variety of additional risks that could have an adverse effect on our business, including:

• difficulties in collecting accounts receivable and longer collection periods;

• changing and conflicting regulatory requirements;

• potentially adverse tax consequences;

• tariffs and general export restrictions;

• difficulties in integrating, staffing and managing foreign operations;

• political instability;

• seasonal reductions in business activity during the summer months in Europe and certain other parts of the world;

• the impact of local economic conditions and practices;

• potential non-enforceability of our intellectual property and proprietary rights in foreign countries; and

• fluctuations in currency exchange rates.

Our inability to manage these risks effectively could adversely affect our business, financial condition and operating results.

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If we are unable to establish new EDPs, or do not adequately control expenses associated with the establishment of new EDPs, our results of operations could be adversely affected.

As part of our expansion strategy, we intend to establish new EDPs, particularly in new geographic markets. We will face various risks associated with identifying, obtaining and integrating attractive EDP sites, cost estimation errors or overruns, interconnection delays, material delays or shortages, our inability to obtain necessary permits on a timely basis, if at all, and other factors, many of which are beyond our control and all of which could delay the establishment of any new EDP. We may not be able to establish and operate new EDPs on a timely or profitable basis. Establishment of new EDPs will increase our operating expenses, including expenses associated with hiring, training, retaining and managing new employees, purchasing new equipment, implementing new systems and incurring additional depreciation expense. If we are unable to control our costs as we establish additional EDPs and expand in geographically dispersed locations, our results of operations could be adversely affected.

The future market for web-based trading of Internet capacity, and therefore the revenues of our data business, cannot be predicted with certainty.

We face the risk that the market for web-based trading of Internet capacity might develop more slowly or differently than we currently anticipate, if at all. In addition, if the Internet becomes subject to a form of central management, or if Internet network service providers establish an economic settlement arrangement regarding the exchange of traffic between Internet networks, the demand for web-based trading of Internet capacity could be adversely affected.

Even if the market for web-based trading of Internet capacity develops, our data service offerings may not achieve widespread acceptance. We may be unable to successfully and cost-effectively market and sell the services we offer to a sufficiently large number of members. In addition, a number of communications services providers and Internet service providers have been offering or expanding their network services, and the ability of these providers to bundle other services and products with their network services could place us at a competitive disadvantage. The failure of a significant market for web-based trading of Internet capacity to develop or the inability to increase membership in our data business could materially affect our revenues and, consequently, the results of our operations.

Acquisitions present many risks, and we may not realize the anticipated financial and strategic goals of any of our acquisitions.

We may in the future acquire complementary companies, products and technologies. Such acquisitions involve a number of risks, which may include the following:

• we may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or that economic conditions have changed, all of which may result in a future impairment charge;

• we may have difficulty integrating the operations and personnel of the acquired business and may have difficulty retaining the customers and/or the key personnel of the acquired business;

• we may have difficulty incorporating and integrating acquired technologies into our business;

• we may face patent infringement risks associated with the sale of the acquired company’s products;

• our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing diverse locations;

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• we may have difficulty maintaining uniform standards, controls, procedures and policies across locations;

• an acquisition may subject us to additional telecommunications regulations;

• an acquisition may result in litigation from terminated employees of the acquired business or third parties; and

• we may experience significant problems or liabilities associated with technology and legal contingencies of the acquired business.

These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions that are not ultimately consummated. Such negotiations could result in significant diversion of management time from our business as well as significant out-of-pocket costs.

The consideration that we pay in connection with an acquisition could affect our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate such acquisitions. To the extent we issue shares of stock or other rights to purchase stock, including options or other rights, our existing stockholders may experience dilution in their share ownership in our company and their earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs (such as of acquired in-process research and development costs) and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges. Any of these factors may materially and adversely affect our business and operations.

Risks Relating to Our Technology

System failures, human error and security breaches could cause us to lose members and expose us to liability.

The communications services providers that use our exchange depend on us to accurately track, rate, store and report the traffic and trades that are conducted over our exchange. Software defects, system failures, natural disasters, human error and other factors could lead to inaccurate or lost information or the inability to access our exchange. From time to time, we have experienced temporary service interruptions. These interruptions may occur in the future. Our systems could be vulnerable to computer viruses, physical and electronic break-ins and third party security breaches. In a few instances, we manually input trading data, such as bid and ask prices, at the request of our members, which could give rise to human error and miscommunication of trading information and may result in disputes with our members. Any loss of information or the delivery of inaccurate information due to human error, miscommunication or otherwise or a breach or failure of our security mechanisms that leads to unauthorized disclosure of sensitive information could lead to member dissatisfaction and possible claims against us for damages. Our failure to maintain the continuous availability of our exchange for trading, to consistently deliver accurate information to members of our exchange or to maintain the security of their confidential information could expose us to liability and materially harm our business.

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 cannot ensure that our testing will detect every potential error, defect or performance problem.

Any such error, defect or performance problem could have an adverse effect on our operations. Members and potential members of our exchange may be particularly sensitive to any defects, errors or performance problems in our systems because a failure of our systems to accurately monitor transactions could adversely affect their own operations.

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If we do not adequately maintain our members’ confidential information, we could be subject to legal liability and our reputation could be harmed.

Any breach of security relating to our members’ confidential information could result in legal liability to us and a reduction in use of our exchange or cancellation of our services, either of which could materially harm our business. Our personnel often receive highly confidential information from buyers and sellers that is stored in our files and on our systems. Similarly, we receive sensitive pricing information that has historically been maintained as a matter of confidence within buyer and seller organizations.

We currently have practices, policies and procedures in place to ensure the confidentiality of our members’ information. However, our practices, policies and procedures to protect against the risk of inadvertent disclosure or unintentional breaches of security might fail to adequately protect information that we are obligated to keep confidential. We may not be successful in adopting more effective systems for maintaining confidential information, so our exposure to the risk of disclosure of the confidential information of our members may grow as we expand our business and increase the amount of information that we possess. If we fail to adequately maintain our members’ confidential information, some of our members could end their business relationships with us and we could be subject to legal liability.

We may not be able to keep pace with rapid technological changes in the communications services industry.

The communications services industry is subject to constant and rapid technological changes. We cannot predict the effect of technological changes on our business. In addition, widely accepted standards have not yet been developed for the technologies that we employ. New services and technologies may be superior to our services and technologies, or may render our services and technologies obsolete.

To be successful, we must adapt to and keep pace with rapidly changing technologies by continually improving, expanding and developing new services and technologies to meet customer needs. Our success will depend, in part, on our ability to respond to technological advances, meet the evolving needs of members and prospective members and conform to emerging industry standards on a cost-effective and timely basis, if implemented. We will need to spend significant amounts of capital to enhance and expand our services to keep pace with changing technologies. Failure to do so may materially harm our business.

Any failure of our physical infrastructure could lead to significant costs and disruptions that could reduce our revenue and harm our business reputation and financial results.

Our business depends on providing members with highly reliable service. We must protect our infrastructure and the equipment of our members located in our EDPs. Our EDPs and the services we provide are subject to failure resulting from numerous factors, including:

• human error;

• physical or electronic security breaches;

• fire, earthquake, flood and other natural disasters;

• water damage;

• power loss; and

• terrorism, sabotage and vandalism.

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Problems at one or more of our EDPs, whether or not within our control, could result in service interruptions or significant equipment damage. Any loss of services, equipment damage or inability to terminate voice calls or supply Internet capacity could reduce the confidence of our members and could consequently impair our ability to obtain and retain members, which would adversely affect both our ability to generate revenues and our operating results.

Our business could be harmed by prolonged electrical power outages or shortages, increased costs of energy or general availability of electrical resources.

Our EDPs are susceptible to regional costs of power, electrical power shortages, planned or unplanned power outages caused by these shortages, such as those that occurred in California during 2001 and in the Northeast in 2003, and limitations, especially internationally, of adequate power resources. The overall power shortage in California has increased the cost of energy, which costs we may not be able to pass on to our members. We attempt to limit exposure to system downtime by housing our equipment in data centers, and using backup generators and power supplies. Power outages, which last beyond our backup and alternative power arrangements, could harm our members and our business.

The inability to expand our systems may limit our growth.

We seek to generate a high volume of traffic and transactions on our exchange. The satisfactory performance, reliability and availability of our processing systems and network infrastructure are critical to our reputation and our ability to attract and retain members. Our revenues depend primarily on the number and the volume of member transactions that are successfully completed. We need to expand and upgrade our technology, systems and network infrastructure both to meet increased traffic and to implement new features and functions. We may be unable to project accurately the rate or timing of increases, if any, in the use of our services or to expand and upgrade our systems and infrastructure to accommodate any increases in a timely fashion.

We use internally developed systems to process transactions executed on our exchange, including billing and collections processing. We must continually improve these systems in order to accommodate the level of use of our exchange. In addition, we may add new features and functionality to our services that may result in the need to develop or license additional technologies. Our inability to add additional software and hardware or to upgrade our technology, transaction processing systems or network infrastructure to accommodate increased traffic or transaction volume could have adverse consequences. These consequences include unanticipated system disruptions, slower response times, degradation in levels of member support, impaired quality of the members’ experiences of our service and delays in reporting accurate financial information. Our failure to provide new features or functionality also could result in these consequences. We may be unable to effectively upgrade and expand our systems in a timely manner or to integrate smoothly any newly developed or purchased technologies with our existing systems. These difficulties could harm or limit our ability to expand our business.

Our business is dependent on the development and maintenance of the Internet infrastructure.

The success of our exchange will depend largely on the development and maintenance of the Internet infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security, as well as timely development of complementary products, for providing reliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the numbers of users and amount of traffic. If the Internet continues to experience increased numbers of users, increased frequency of use or increased bandwidth requirements, the Internet infrastructure may be unable to support the demands placed on it. In addition, the performance of the Internet may be harmed by an increased number of users or bandwidth requirements or by “viruses,” “worms” and similar programs. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as the level of traffic and the processing of transactions on our exchange.

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Risks Relating to Patents and Proprietary Information

If we are not able to obtain and enforce patent protection for our methods and technologies, our ability to successfully operate our exchange and commercialize our product and service candidates will be harmed and we may not be able to operate our business profitably.

Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under the patent and other intellectual property laws of the United States and other countries, so that we can prevent others from using our inventions and proprietary information. However, we may not hold proprietary rights to some of our current or future methods and technologies. Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in industry-related literature lag behind actual discoveries, we cannot be certain that we were the first to make the inventions claimed in issued patents or pending patent applications, or that we were the first to file for protection of the inventions set forth in our patent applications. As a result, we may be required to obtain licenses under third-party patents. If licenses are not available to us on acceptable terms, or at all, we will not be able to operate our exchange or commercialize our product and services candidates.

Our strategy depends in part on our ability to rapidly identify and seek patent protection for our discoveries. This process is expensive and time consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary. The issuance of a patent does not guarantee that it is valid or enforceable, so even if we obtain patents, they may not be valid or enforceable against third parties. In addition, the issuance of a patent does not guarantee that we have the right to practice the patented invention. Third parties may have blocking patents that could be used to prevent us from marketing our own patented product and practicing our own patented technology.

Our pending patent applications may not result in issued patents. The patent position of technology-oriented companies, including ours, is generally uncertain and involves complex legal and factual considerations. The standards which the United States Patent and Trademark Office and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change. The laws of some foreign countries do not protect proprietary information to the same extent as the laws of the United States, and many companies have encountered significant problems and costs in protecting their proprietary information in these foreign countries. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims allowed in any patents issued to us or to others. The allowance of broader claims may increase the incidence and cost of patent interference proceedings and/or opposition proceedings and the risk of such claims being invalidated by infringement litigation. On the other hand, the allowance of narrower claims may limit the value of our proprietary rights. Our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products, or provide us with any competitive advantage. Moreover, once they have been issued, our patents and any patent for which we have licensed or may license rights may be challenged, narrowed, invalidated or circumvented. If our patents are invalidated or otherwise limited, other companies will be better able to develop products that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition.

We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.

Others may allege that we are infringing their intellectual property, forcing us to expend substantial resources in resulting litigation, the outcome of which would be uncertain. Any unfavorable outcome of such litigation could have a material adverse effect on our business, financial position and results of operations.

If any parties successfully claim that our creation, offer for sale, sale, import or use of technologies infringes upon their intellectual property rights, we might be forced to incur expenses to litigate the claims, pay damages, potentially including treble damages, if we are found to have willfully infringed such parties’ patents or copyrights. In addition, if we are unsuccessful in litigation, a court could issue a permanent injunction preventing us

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from operating our exchange or commercializing our product and service candidates for the life of the patent that we have been deemed to have infringed. Litigation concerning patents and other forms of intellectual property and proprietary technologies is becoming more widespread and can be protracted and expensive, and can distract management and other key personnel from performing their duties for us.

Any legal action against us claiming damages and seeking to enjoin commercial activities relating to the affected methods, processes, products and services could, in addition to subjecting us to potential liability for damages, require us to obtain a license in order to continue to operate our exchange or market the affected product and service candidates. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, some licenses may be nonexclusive, and therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to effectively operate our exchange or market some of our technology and products, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations.

If we become involved in patent litigation or other proceedings to enforce our patent rights, we could incur substantial costs, substantial liability for damages and be required to cease operation of our exchange or our product and services commercialization efforts.

We may need to resort to litigation to enforce a patent issued to us or to determine the scope and validity of third-party proprietary rights. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation could divert our management’s efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations, including the commercialization of our products and services.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our proprietary technology, processes and methods, we also rely in part on confidentiality agreements with our corporate partners, employees, consultants, advisors and others. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such party. Costly and time consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Forward Looking Statements

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. From time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in various filings made by us with the Securities and Exchange Commission, or press releases or oral statements made by or with the approval of one of our authorized executive officers. These forward-looking statements, such as statements regarding anticipated future revenues, net income, capital expenditures, and other statements regarding matters that are not historical facts, involve predictions. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements. These factors include those set forth in the section entitled “Additional Factors That May Affect Future Results” included herein.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign currency exposure

The financial position and results of operations of our U.K. subsidiary are measured using GBP as the functional currency. Our exposure is mitigated, in part, by the fact that we incur certain operating costs in the same foreign currencies in which fee revenues are denominated. The percentage of fee revenues denominated in British Pounds was approximately 20% for the year ended December 31, 2004 and approximately 16% for the six months ended June 30, 2005. In the second quarter 2005, the Company designated, on a prospective basis, approximately $12 million of its receivable from its U.K. subsidiary as permanent in nature and commenced reporting foreign exchange translation gains and losses on that amount as a component of accumulated other comprehensive loss included in stockholders’ equity. Prior to its designation as long term, the translation gains and losses related to this portion of the intercompany receivable were included in other income (expense), net in the consolidated statements of operations. In the first quarter 2005, approximately $0.2 million of foreign exchange loss related to this receivable was recorded in other income (expense), net.

Interest rate exposure

We are exposed to interest rate fluctuations. We invest our cash in short-term interest bearing securities. Assuming an average investment level in short-term interest bearing securities of $37 million, which is the balance at June 30, 2005, a one-percentage point decrease in the applicable interest rate would result in a $370,000 decrease in interest income.

Under the terms of our credit agreement with Silicon Valley Bank, our borrowings bear interest at the prime rate. Therefore, a one-percentage point increase in the prime rate would result in additional annualized interest expense of $10,000 assuming $1 million of borrowings. At June 30, 2005, we had no outstanding borrowings under this agreement.

Item 4. Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2005. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2005, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

On March 18, 2003, World Access, Inc. f/k/a WAXS, Inc., WA Telcom Products Co., Inc., WorldxChange Communications, Inc., Facilicom International LLC and World Access Telecommunications Group, Inc. f/k/a Cherry Communications Incorporated d/b/a Resurgens Communications Group, or collectively the Debtors, filed a lawsuit against us in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division. The Debtors had previously filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. The Debtors seek recovery of certain payments they made to us as a buyer on our exchange, which total approximately $855,000. The Debtors claim that such payments were a preferential payment under the Bankruptcy Code. The Debtors also seek costs and expenses, including attorneys’ fees and interest. We filed an answer to the complaint on April 18, 2003, denying the Debtors’ claims for relief and asserting several affirmative defenses. On August 12, 2003, we served discovery on the attorneys for World Access and its related entities. Shortly after we served our discovery, the bankruptcy judge entered an order stating that the cases of World Access and its related entities, which had been jointly administered, could not be substantively consolidated. Since then the majority of Debtors’ preference complaints in the case have been continued while the Debtors sort out their administrative problems. In September 2004, the Debtors have confirmed a Plan of Liquidation which created a trust to proceed with liquidating avoidance actions. On May 18, 2005, the bankruptcy judge entered a Scheduling Order requiring us to appear at a Scheduling Conference on October 12, 2005.

On May 27, 2003, we received a demand letter from counsel for Octane Capital Management and its affiliate, Octane Capital Fund I, L.P., or collectively Octane, demanding the right to purchase up to $2.8 million of our shares of Series E preferred stock on the same terms as originally set forth in a Securities Purchase Agreement dated as of July 3, 2001. Additionally, the letter demanded the right to convert Octane’s investment in shares of our Series D preferred stock into shares of Series D-1 preferred stock pursuant to the terms of such purchase agreement. The Octane demand letter also alleged violations of Octane’s rights under a Second Amended and Restated Investors’ Rights Agreement dated as of March 7, 2000, or the Investors’ Rights Agreement, including, among other allegations, the allegation that Octane did not receive proper advance notice of the complete terms of our Series E preferred stock offering. On May 28, 2003, we sent notice to all stockholders, including Octane, indicating our plan to defend against these claims.

On September 1, 2004, after no contact with us for over a year, Octane contacted our representatives to renew its demand against us. We responded to Octane’s demand, denying all allegations of wrongdoing.

On December 10, 2004, we received a complaint filed that day by Octane and Amerindo Technology Growth Fund II Inc., or ATGF, another investor of the Company, in the United States District Court for the Southern District of New York, entitled Octane Capital Fund, L.L.P. et al. v. Arbinet-thexchange, Inc., Civil Action No. 04-CV-9759 (KMW). Octane and ATGF filed an amended complaint with the court on December 13, 2004, amending and replacing the December 10, 2004 complaint. The amended complaint alleges, among other things, that we breached terms of the Investors’ Rights Agreement by failing to give Octane and ATGF proper advance notice of the complete terms of our Series E preferred stock offering. The amended complaint seeks money damages for both Octane and ATGF for the alleged breach of contract. On February 11, 2005, we filed our answer to the amended complaint, denying all liability, and filed counterclaims against Octane and ATGF for, among other claims, breach of the Investors’ Rights Agreement in connection with their conduct seeking additional shares of stock and other relief.

It is our position that Octane waived the right to participate in the Series E Financing and to receive notice from us relating to such offering, and that, in addition, sufficient notice was provided to Octane and ATGF. Prior to the Series E Financing, we received notice from a representative of Octane indicating that Octane was planning not to exercise its rights to participate in the Series E Financing due to its capital constraints. In such notice, Octane did not reference that any potential terms would impact its decision not to participate in the Series E Financing. We believe, however, that sufficient notice of the terms of the Series E Financing was given to Octane and ATGF. In that regard, on June 15, 2001, we sent Octane and ATGF, along with other potential investors, notice of the general terms of the Series E Financing. Consistent with its earlier notice informing us that it did not intend to participate in the Series E Financing, Octane did not respond to this notice and contends that there was no waiver. ATGF did not

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indicate an interest in participating in the Series E Financing under the terms of the June 15, 2001 notice. The June 15, 2001 notice included a statement that we might change the pre-investment capitalization in order to incent previous investors to purchase Series E preferred stock. However, Octane and ATGF allege that the notice was insufficient because it failed to disclose different and more favorable terms ultimately included in the Securities Purchase Agreement dated July 3, 2001.

On May 9, 2005, the plaintiffs filed an unopposed motion to dismiss this case in federal court without prejudice for lack of subject matter jurisdiction. The court granted the plaintiffs’ motion on the same day. There can be no assurance that the plaintiffs will not file a complaint relating to this matter in another jurisdiction. In such event, there can be no assurance that an adverse result in this litigation will not have a material adverse effect on the Company or its financial position. We intend to defend vigorously against such claims in the event they are brought by Octane or ATGF.

On December 13, 2004, we received a letter from legal counsel to Zarick Schwartz and his company, ATOS, with respect to his alleged intellectual property rights relating to telecommunications operating system technology. Among other matters, Mr. Schwartz and ATOS claimed that Mr. Schwartz is the sole inventor of technology that was subsequently claimed by Arbinet as the subject matter of certain of our patents. Arbinet denies all of the allegations. On December 14, 2004, we reached an agreement with Mr. Schwartz and ATOS to submit this dispute to binding arbitration. The parties have agreed that in the event the arbitrator determines that Mr. Schwartz is in fact the sole inventor of the subject matter claimed in at least one of Arbinet’s patents listed in the December 13, 2004 letter, and the operation of Arbinet’s business comes within the scope of such claim, then Arbinet shall pay Mr. Schwartz or ATOS an aggregate of $1.5 million over five years. In the event the arbitrator determines that Mr. Schwartz is not the sole inventor of the subject matter of any of the listed Arbinet patents, then Arbinet shall pay Mr. Schwartz or ATOS an aggregate of $500,000. Mr. Schwartz released all other claims against Arbinet, other than the inventorship claims to be arbitrated in the binding arbitration. Mr. Schwartz has agreed to assign any and all of his rights in the Arbinet patents, if it is determined that he has any rights, to Arbinet, and Mr. Schwartz will cooperate in executing any documents needed to perfect Arbinet’s interests in its patents worldwide. Each of the parties shall bear its own costs and expenses, including legal fees. Arbinet intends to vigorously defend itself during the arbitration to ensure that inventorship is properly determined.

On May 13, 2005, we received a letter from counsel representing Alex Mashinsky, our founder and a former officer and director, together with a draft complaint and a draft press release, threatening to commence litigation in the Southern District of New York against us, as well as against Communications Ventures III, L.P., one of our shareholders, our Chairman Anthony L. Craig, director Roland A. Van der Meer, and our President, Chief Executive Officer and director J. Curt Hockemeier, if we do not agree to an “amicable settlement” with him. Mashinsky alleges breach of fiduciary duty, self-dealing, fraud, and breach of contract in connection with our Series E preferred stock financing consummated in 2001, asserting over $90 million in damages. According to his correspondence he “is prepared to discuss settlement of this matter at an amount representing a significant discount.” We believe that his allegations are without merit and represent yet another attempt by him to seek financial rewards from us. Contrary to certain of his current allegations, just last year in a loan settlement agreement dated July 9, 2004, Mashinsky acknowledged and agreed that, in June 2001, he had consented to the Series E preferred stock financing. We deny Mashinsky’s claims and, if he commences litigation against us, we intend to vigorously defend against his claims. There can be no assurance that litigation, if brought, or an adverse result in such litigation, if any, will not have a material adverse effect on our results of operations or financial position.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(b) Use of Proceeds from Registered Securities

On December 21, 2004, we sold 4,233,849 shares of our common stock in connection with the closing of our initial public offering. The Registration Statement on Form S-1 (Reg. No. 333-117278) we filed to register our common stock in the offering was declared effective by the Securities and Exchange Commission on December 16, 2004. The initial public offering price was $17.50 per share and the aggregate purchase price was approximately $74.1 million.

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The managing underwriters for the offering were Merrill Lynch & Co., Lehman Brothers, SG Cowen & Co., William Blair & Company and Advanced Equities, Inc. We incurred direct expenses in connection with the offering of approximately $7.5 million, which consisted of: (i) approximately $2.0 million in legal, accounting and printing fees; (ii) approximately $5.2 million in underwriters’ discounts, fees and commissions; and (iii) approximately $0.3 million in miscellaneous expenses.

After deducting expenses of the offering, we received net offering proceeds of approximately $66.6 million. We used approximately $15.2 million of our net proceeds to redeem the outstanding shares of our Series B and Series B-1 preferred stock and approximately $10.0 million to repay principal and interest outstanding under our credit facility with Silicon Valley Bank. Except with respect to the redemption of our Series B and Series B-1 preferred stock, none of the net proceeds were directly or indirectly paid to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates. Approximately $40 million of the net proceeds of the offering have been invested into investment-grade marketable securities within the guidelines defined in our investment policy. Such funds remain invested in such securities as of June 30, 2005. The remaining proceeds have been used for working capital purposes. We regularly assess the specific uses and allocations for the remaining funds.

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

Our Annual Meeting of stockholders was held on June 15, 2005.

There were present at the Annual Meeting in person or by proxy stockholders holding an aggregate of 17,713,739 shares of our common stock out of a total number of 24,526,129 shares of common stock issued and outstanding and entitled to vote at the meeting.

The matters that were voted on at the Annual Meeting were:

The proposed election of the following two nominees as directors of the Company to serve for their designated Class of Directors and for such terms as follows:

The nominees for Class I Directors to serve until the 2008 Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified:

Robert C. Atkinson; and

Mathew J. Lori

The results of the votes of the Annual Meeting were as follows:

Proposal	Number of Shares of Common Stock
	For	Withheld
Election of each of the nominees for the Board of Directors of the Company:
Robert C. Atkinson	17,561,016 Shares	152,723 Shares
Mathew J. Lori	17,560,216 Shares	153,523 Shares

Effective August 1, 2005, Mathew Lori resigned as a member of the Company’s Board of Directors (the “Board”) and member of the Audit Committee of the Board (the “Audit Committee”). There was no disagreement between Mr. Lori and the Company on any matter relating to the Company’s operations, policies or practices.

At a meeting of the Company’s Board held on August 2, 2005, Roger H. Moore was appointed a director to the Company’s Board to fill the vacancy left by the resignation of Mathew Lori. Mr. Moore was also appointed as a member of the Company’s Audit Committee.

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Item 6. Exhibits.

(a) Exhibits.

Exhibit No.	Description of Exhibit
10.1	Patent Acquisition Agreement, dated as of June 3, 2005, by and between Arbinet-thexchange, Inc. and Summit Telecom Systems, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 21, 2005).
10.2	Amendment to Patent Acquisition Agreement, dated July 21, 2005 by and between Arbinet-thexchange, Inc. and Summit Telecom Systems, Inc. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated July 21, 2005).
31.1	Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
31.2	Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
32.1	Certification Pursuant to 18 U.S.C. Section 1350 (Chief Executive Officer).
32.2	Certification Pursuant to 18 U.S.C. Section 1350 (Chief Financial Officer).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ARBINET-THEXCHANGE, INC.
Date: August 15, 2005	By:	/s/ J. Curt Hockemeier
		J. Curt Hockemeier, President, Chief Executive Officer and Director
		(Principal Executive Officer)
Date: August 15, 2005	By:	/s/ John J. Roberts
		John J. Roberts
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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