3ECp)7~,;~0 BEFORE THE IA/t J~' MAY ) 2008/OO9 PUBLIC SERVICE COMMISSION D- PSC8C 80SC OF SOUTH (2AROLINACAROLINA OC_I°INQOC/IETlhiG DEp;

]'

APPLICATION OF ]BASISIBASIS RETAIL, INC,,INC„D/B/AD/B/A ]BASIS,IBASIS, ) FOR A CERTIFICATE OF PUBLIC CONVENIENCE AND )DOCKZrNO NECESSITY TO PROVIDE LONG DISTANCE ) DOCKET NO.200 F 8 TELECOMMUNICATIONSTELECOMMUMCATIONS SERVICES AND FOR ALTERNATIVE ) REGULATION OF ITS LONG DISTANCE SERVICE OFFERINGS ) " iBasis Retail, he,,Inc., doing business as "iBasis,""iBasis, ("iBasis Retail" or "Applicant")"Applicant" ) pursuant to S.C.S.C.

Code Ann. §it 58-9-280 as amended,amended, 26 S.C.S.C. Reg.Reg, 103-823, and Section 253 of the

Act of 1996, respectfullyrespectfully submitssubmits thisthis Application forfor Authority to Provide Long Distance Services within the State of South Carolina. In addition, Applicant requestsrequests that the Commission regulate its futurefuture longlong distance business service,service, consumer card, and any operator service offerings as described below inin accordanceaccordance with the principles and procedures established forfor alternative regulation in Orders No. 95-

1734 and 96-55 in Docket No. 95-661-C, and as modified by Order No. 2001-997 in Docket No. 2000-

407-C consistent with such regulationregulation grantedgranted toto other competitive interexchangeinterexchsnge carriers.

Applicant proposes to offer interexchange telecommunications services toto customers from allall

points within the State of South Carolina. Specifically, Applicant intends toto offer prepaid calling card

services throughout South Carolina.Carolina, Customers with service,service, billing and repair inquiries, and complaints

may reachreach iBasisiBasis Retail using its toll customercustomer service number.number. Applicant's toll freefee customer

service number for prepaid calling card services is 1-877-291-9783, andand a toll free customercustomer service

number isis also printed on each calling card.

South Carolina Application of iBasisiBasis Retail, Inc. Page 1 All servicesareavailabletwenty-fuurtwenty-four (24)hoursperday,seven (7)(7) daysaweek.TheApplicant will commenceofferingservicefollowingthethe granting of thisthis application.application,

Approval of thisthis application will promote the public interest by increasing the levellevel of competitioncompetition within South Carolina. This competitioncompetition will mandate thatthat allall interoxcbangeinterexch ange telecommunicationstelecommunications providers will operate more efficiently, enabling the consumer to benefit via reduced rates.

InIn support of this Application, Applicant respectfullyrespectfully states asas follows:

14 The name and address of thethe Applicant are: iBasisiBasis Retail, Inc. 20 Second Avenue Burlington, MA 01803 Telephone: (781) 505-7500 Facsimile: (781) 505-7300 Toll Free: (877)(877)291-9783 Website:Web site: www.ibasis.netwww. ibasis.

4 All correspondence,correspondence, notices, inquiriesinquiries and other communications regarding thisthis application shouldshould be sent to:

Bonnie D. Shealy Robinson, McFadden & Moore, P.C.P.C. 1901 Main Street, Suite 1200 1901 Main Street, Suite 1200 corn Post Office Box 944 Columbia, South Carolina 29202 Telephone: 803-779-8900 Facsimile: 803-252-0724 E-mail:E-maih [email protected] sly@Robins onlaw. corn

KemalKernel Hawa Mintz, Levin, Cohn, Ferris, GlovskyGiovsky andand Popeo, P.C.P.C. 70l701 Pennsylvania Avenue .N.W.W. Suite 900 Washington, DC 20004 Telephone: (202) 434-7300 Facsimile: (202) 434-7400 E-mail:E-maik [email protected]@mintz.

South Carolina ApplieationApplication of iBasisiBasis Retail, Inc. Page 2 3,1 ContactContact personperson regardingregarding ongoingongoing operationsoperations ofofthetheCompanyCompany is:is: EllenEHen SchmidtSchmidt SeniorSenior CounselCounsel iBasisiBasisRetail,Retail, Ine.Inc, 2020SecondSecond AvenueAvenue Burlington,/viABurlington, MA 0180301803 Telephone:Telephone: (781)(781)505-7956505-7956 Facsimile:Facsimile; (781)(781)505-7304505-7304 E-mail:E-maih [email protected]@ibasis, net

4_ DescriptionDescription ofofApplicantApplicant ApplicantApplicant isis aa privateprivate corporationcorporation thatthat waswas incorporatedincorporated inin thethe statestate ofofDelawareDelaware onon JuneJune 29,29,

2007. ApplicantApplicant isis a wholly-ownedwholly-owned subsidiarysubsidiary ofof i.Basis,iBasis, Inc.,Inc., aa publiclypublicly tradedtraded DelawareDelaware

corporationcorporation withwith headquartersheadquarters atat 2020 SecondSecond Avenue,Avenue, Burlington,Burlington, MassachusettsMassachusetts 01803.01803.

AppheantApplicant's s CertificateCertificate of IncorporationIncorporation andand AuthontyAuthority toto TransactTransact Business min thethe State ofof South

Carolina are attachedattached heretohereto as ExhibitExhXiit A.

5.1 Officers and Directors and Legal Counsel

See Exhibit B.

w Customer Service

Applicant understandsunderstands the importance ofof effective customer service for prepaid caHingcalling card

serviceservice consumers.consumers. ApplicantApplicant has made arrangementsarrangements for itsits customerscustomers to call iBasisiBasis Retail at itsits

toll-freetoll-free customercustomer serviceservice number,number, 877-291-9783.877-291-9783. InIn addition, Customers may contacteontaet iBasis

RetailRetail inin writingwriting atat thethe headquartersheadquarters addressaddress andand viavia e-maile-mail at [email protected]@ibasis.net.nct. InIn addition,addition, a toll-toll-

freefree customercustomer serviceservice numbernumber willwill bebe printedprinted onon eacheach callingcalling card.card.

7J FinancialFinancial AbilityAbility

ApplicantApplicant hashas sufficientsufficient financialfinancial resourcesresources toto operateoperate inin SouthSouth Carolina.Carolina. ApplicantApplicant isis aa wholly-wholly-

ownedowned subsidiarysubsidiary ofof iBasis,iBasis, Inc.Inc.,, aa publiclypublicly tradedtraded company.company. InIn supportsupport ofof thethe Applicant'sApplicant's

SouthSouth CarolinaCarolina ApplicationApplication ofof iBasisiBasis Retail,Retail, Inc.Inc. PagePage 33 financialabilityto providethethe proposed services,services, thethe Applicant offers copies of itsits parent

company's financialfinancial statements as filedfiled with thethe Securities andand Exchange Commission at Exhibit

S,8. Managerial and Technical AbilityAMity

__xhibit~hibit D contains a brief overview of thethe managerial experience of Applicant. iBasis Retail has

thethe managerial experience in the telecommunicationstelecommunications industryindustry that will allow it to be a successful

competitive prepaid calling card service provider.

9., Proposed Service Territory

Applicant proposes toto offer long distance prepaid calling card serviceservice throughout thethe State of

South Carolina. Exhibit E contains the proposed tarifftariff of iBasis Retail, Inc.Inc. and Exhibit F.F

containscontains thethe $5,000$5,000 indemnity bond pursuant to the Commission's rules and regulations.

10. Public InterestInterest andand Need

Approval of tiffsthis application andand Applicant'sApplicant" s proposed tarifftariff will serve the public intereStinterest

andand offer several benefits toto consumers inin South Carolina. First andand foremost, Applicant will

offer itsits customers thethe ability toto have quality prepaid calling card services at competitive rates.

The history of telecommunicationstelecommunications competition has demonstrateddemonstrated thatthat as new entrantsentrants havehave

improvedimproved thethe price and performanceperfonnance of service, consumers have benefited from a wider choice of

service and options. The resultingresulting reducedreduced rates thatthat competitive pressures have brought toto the

market have stimulatedstimulated demand, resulting inin growing revenuesrevenues for both new entrants and

established firms.firms. Applicant expects these samesame phenomena to affectaffect serviceservice over time,time, thusthus

creating a larger market for all carriers. Therefore, thethe approvalapproval of Applicant's application is

clearly inin thethe public interest.

South Carolina Application of iBasis Retail, Inc. Page 4 11.11. WaiversWaivers andand RegulatoryRegulatory ComplianceCompliance

ApplicantApplicant requestsrequests thatthat thethe CommissionCommission grantgrant itit aa waiverwaiver ofof thosethose regulatoryregulatory

requirementsrequirements inapplicableinapplicable toto competitivecompetitive intcrexehangeinterexchange serviceservice providers.providers. SuchSuch rulesrules areare notnot

appropriateappropriate forfor competitivecompetifive providerspmviders andand constituteconstitute anan economiceconomic barrierbarrier toto entryentry intointo thethe

interexehangeinterexchange market.market.

A, ApplicantApplicant requestsrequests thatthat itit bebe exemptexempt fromfrom anyany financialfinancial recordingrecording rulesrules ororregulationsregulations thatthat requirerequire aa uarriercarrier toto maintainmaintain itsits financialfinancial recordsrecords inin conformanceconformance withwith thethe UniformUniform SystemSystem of AccountsAccounts ("uSOA").("USGA"). AsAs aa competitivecompetitive provider,provider, ApplicantApplicant currentlycurrently maintainsmaintains itsits booksbooks andand recordsrecords inin accordanceaccordance withwith GenerallyGenerally AcceptedAccepted AccountingAccounting PrinciplesPrinciples ("GAAP").("GAAP"). GAAP isis used extensivelyextensively byby interexchangeinterexchange carriers.carriers. BecauseBecause ApplicantApplicant utilizes GAAP, the Commission willwill havehave aa reliablereliable methodmethod byby whichwhich toto evaluateevaluate Applicant's operations. Therefore, Applicant requestsrequests toto bebe exemptexempt fromfrom anyany and allall USOAUSGA requirementsrequirements ofoftilethe Commission.

B, In addition, Applicant requests a waiver of S.C.S.C. Reg.Reg, 103-610, and toto be allowedallowed toto maintain its books and records at its headquarters locationlocahon in Burlington, Massachusetts.Massachusetts. In the event thatthat thethe Commission findsfinds itit necessary toto review Applicant's books, thisthis information will be provided upon request toto the Commission or Applicant will bear the expense of traveltravel for thethe Commission staff toto examine the books andand recordsrecords locatedlocated outside of South Carolina.

C. Applicant finallyfinally requests waivers of any reporting requirements which are not applicable to competitive providers such as Applicant because such requirements (a) are not consistentconsistent with thethe demandsdemands of thethe competitive market; or (b) they constitute an undue burden on a competitivecompetitive provider, thereby requiring an ineffectiveineffective allocation of resources.resources,

Applicant reservesreserves thethe rightright toto seekseek any regulatoryregulatory waivers which may be requiredrequired forfor Applicant

toto competecompete effectivelyeffectively withinwithin thethe state'sstate's interexchangeinterexehange market,market.

12.12. AlternativeAlternative RegulationRegulation ofof BusinessBusiness ServiceService OfferingsOfferings

InIn DocketDocket No.No. 95.95-661-C661-C inin responseresponse toto aa PetitionPetition forfor AlternativeAlternative RegulationRegulation byby ATdtTAT&T

CommunicationsCommunications ofof thethe SouthernSouthern States,States, thethe CommissionConurtission determineddetermined thatthat therethere waswas sufficientsufficient

competitioncompetition inin thethe marketmarket forfor interexchangeinterexehange telecommunicationtelecommunication servicesservices totojustifyjustify aarelaxationrelaxation inin

SouthSouth CarolinaCarolina ApplicationApplication ofof iBasisiBasis RetailRetail, Inc.Inc. PagePage S5 thethe mannerin whichAT&TATdbT wasregulated. The Commission determined that AT&TATtkT was not

requiredrequired toto file maximum rates for future longlong distance business service, consumerconsumer card,card, and

operator service offerings and thatthat its tariffs be presumed valid upon filing, subject to thethe

Commission's right within seven days to instituteinstitute anan investigationinvestigation of the tariff filing.filing. Applicant

requests thatthat itsits long distance business, consumer card, and any operator service offerings be

regulated pursuant to the procedures described in Order Nos. 95-1734 and 96-55 in Docket No.

95-661-C, asas modified by Order No. 2001-997 in Docket No. 2000-407-C. Applicant submitssubmits

that as a competitorcompetitor of AT&TAT8'.T in the market forfor providing telecommunicationtelecommunication services toto

customers, itit should be subjectsubject toto no regulatoryregulatory conslraintsconstraints greater than thosethose imposedimposed on AT&T.AT&T,

Applicant requestsrequests that itsits interexehangeinterexchange service offerings described inin itsits proposed tariff be

regulated under this form of relaxed regulation.

This Application demonstrates that Applicant has the technieal,technical, financial, and managerial resourcesresources toto provide interexehangeinterexchange prepaid callingcalling card serviceservice within South Carolina. The granting of this Application will promote the public interest by increasing the levellevel of competition inin thethe telecommunications markets of the state. Competition of this nature will mandate that all telecommunications providers providingproviding service inin South Carolina will operate more efficiently andand improveimprove thethe overall serviceservice quality for consumers.

Approval of the Application of Applicant will serve the publicpublic interestinterest by offeringoffering consumers throughout the State of South Carolina a meaningful quality service option. Approval of this Application will also benefit consumers by ereatingcreating greater competition inin the interexchangeinterexchange marketplace.

Competition in thethe telecommunicationstelecommunications marketplace inspires innovationinnovation and development of services that meet customer needs cost effectively.effectively.

Wherefore, Applicant respectfully petitions this Commission forfor authority toto operate as a

South Carolina Application of iBasis Retail, Inc. Page 6 provideroflonglong distancetelecommunicationsservicesinin theStateof South Carolina inin accordance with this Application, for alternative regulation of its longlong distance service offerings, and for such other reliefrelief as itit deems necessary and appropriate.

iBasisiBasis Retail, Inc.Inc.

By: Bonnie D. Shealy ROBINSON, MOFADDBN dr MOOR, .C. 1901 Main Street, Suite 1200 P.O.P,O, Box 944 Columbia, SC 29202 Telephone: (803){803)779-8900 Facsimile: (803) 252-0724 E-mail:E-maik [email protected]@robinsonlaw. corn

KemalKernel Hawa Jennifer CulderCukier MINTZ,MIN72, LEVIN,LBYIN, COHN,CDIIN, FERRIS,FBRRIs, GLOVSKYANDPOPEO,POPBO& P.C.P.C. 701 Pennsylvania Avenue, N.W.N.W. Suite 900 Telephone: (202) 434-7300 Facsimile: (202) 434-7400 E-mail: [email protected]@mintz. corn E-mail:E-mail:[email protected]@mintz,comcorn

Counsel for iBasis Retail, 1no.Inc.

Columbia, South Carolina

May 21, 2009

South Carolina Application of iBasis Retail, Inc.Inc, Page 7 iBasisiBasis Retail, Inc.

SCHEDULE OF EXHIBITSEXHIB1TS

ExhibitAExhibit A Certificate of IncorporationIncorporation/ Certificate of Authority

Exhibit B Officers, Directors, and Legal Counsel

Exhibit C Financial Statements of Parent Company iBasis, Inc.Inc.

Exhibit D R_sum_sRdsumds of Key Employees

Exhibit E Proposed Tariff

Exhibit F Indemnity Bond iBas|siBasis Retail,Inc.

EXHIBITEXIOSIT A

Certificate of Incorporation

South Carolina Certificate of Authority Delaware PAGE 1

ii i iiii i First State

I, _ARRIETHARRIET SMIT_SHITS WINDSOR,WINDSOR_ SECRETARY OFO» STATE OF THETEE STAPESTATE OFO» DELAWAREIDELAWARE, DO HEREBY CERTIFYCERTX»'Y THETSE ATTACHED ISXS A TRUE AND CORRECT

COPY OFO»' THE CERTIFICATECERTX»'XCATE OF INCORPORATION OF "ISASIS"XBASl'S RETAIL,RETAXL,

INC.",INC. ", FILED INXN THISTHi'S OFFICEOFFXCE ON THE TWENTY-NINTH DAY OF JUNEZONE,i

A,D.A, D. 2007, AT 5_125:12 O'CLOCKO' CLOCK P.M.P.M,

A FILEDFILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE

NEW CASTLE CO0-NTYRECORDERCOUNTY RECORDER OFO»' DEEDS.

J

,F,, HBF(IeLHerrlet $m/thSrnnn Windear,V_.dsor,Secretaryseereterr'ofOfState 4381514 8100 AUTEENTICJ_TION:AUTHENTXCATION: 5808023

070770371 DATE: 06-30-0708-30-07 stateSeato ofozDe2awareDsievvesvv Se_ret2xySeosoeezp ofozStateSeers Division oZ cosooreeions DeliveredDoiiveseetDivision 05:Y_05:X3of Co_6/29/2Pts 06/29/2007_tions007 FILEDszzzD 05:1205222PMpH 06/2_/200706/29/2007 SRVB'AV070770371070770372 -—438_5142381522FZLEszr4r CERTIFICATECERTIFICATEOFOFINCORPORATIONINCORPORATION

OF

IBASISIBASISRETAIL,RETAIL,INC.INC.

ARTICLEARTICLE I.I.

TheThe namename ofofthisthis corporationcorporation isisiBasisiBasisRetail,Retail, Inc.Inc.(the(the "Corporation")."Corporation" ).

ARTICLEARTICLE IX.PL

TheThe addressaddress ofofthethe registeredregistered offic_office ofofthethe CorpOrationCorporation inin thethe StateState ofofDelawareDelaware isis27112711 CentarvilleCenterviiie Road,Road, SuiteSuite 400,400,inin thethe CityCity ofofWilmington,Wtlmlngton, CountyCounty ofofNewI4ew Ca_e.Castle. TheThe namename ofofthethe registeredregistered agentagent atat thatthat address isis Corporation Servi_Service Company.Company. ARTICLE III,III.

The purpose &theof the CorpOrationCorporation isis to engageengage inin anyany lawfo.llawful actact oror activityactivity forfor whichwhich corporations may bebe, organized under thethe General Corporation LawLaw of thethe StateState ofofDelaware. ARTICLE IV.

The name ofthe Corporation'sincorporatorisAnthony Abbenateand the ineorporator'sincorporator's mailing address is 707011 pennsylvaniaPennsylvania Avenue, N.W.,N. W., Washington, D.C.D.C. 20004. ARTICLE V.

This Corporation isis authorized toto issueissue one class ofstookstock to be designated "Common Stock".Stock". The totaltotal numbernombar ofof_haresshares that thethe Corporation is authorizedauthorized toto issue is Three Thousand (3,(3,000)000) shares, par valuevalue $0.$0.001.00 I, ARTICLEARTICLE VLVI.

AA directordirector of'theof the CorporationCorporatlun shallshall notnot bebe personallypersonally liableliable toto thethe corporationcorporation or itsits stockh'oldersstockholders forfor monetarymonetary damagesdamages forforbreachbreach of fiduciaryfiduciary dutyduty asas aa director,director, exceptexcept for!for llabi[ityiability (i)(i) forforanyanybreachbreach ofof thethe director'sdirector's dutyduty ofof loyaltyloyalty toto thethecorporationcorporation oror itsits stockholders,stockholders, (ii)(ii) forfor actsacts oror omissionsomissions notnot inin goodgood faithfaith oror whichwhich involveinvolve intentionalintentional misconductmisconduct oror aaknowingknowing violationviolation oflavr,o flaw, (iii)(iii) underunder SectionSection 174174ofof thethe GeneralGeneral CorpomtionCorporation LawLaw ofof thetheStateState ofof Delaware,Delaware, oror(iv)(iv) forfor anyany transactiontransaction fromfrom whichwhich thethe directordirector derivedderived anyany improperimproperpersonalpersonal benefit.b_nefit, IfIfthethe GeneralGeneral CorporationCorporation LawLaw ofofthethe StateState ofof DelawareDelaware isis amendedamended afterafter approvalapprovalbyby thethe stockholdersstockholders ofof thisthisArticleArticle totoauthorizeauthorize corporatecorporate actionaction furtherfurther eliminatingeliminating oror limitinglimiting thethe personalpersonal liabilityliability ofofdirectorsdlr_torS thenthen thetholiabilityliability ofofaadirectordirector ofof thethe corporationcorporationshallshallbebe eliminatedelirrfinated oror limitedlimited totothethe Mastfullest extentextent permittedpennitted bybythetheGeneralGeneral CorporationCorporation LawLaw ofofthetheStateState ofof DelawareDelaware asassosoamended.amended.

4CS21D2vi4052102vA of this Article VI the Any repeal or modifieatlonmodificadon of the foregoing provisions of this Article VI by the ' stockholders of thethe Corporation shall notnot adversely affect myany right or protectionprotection of a director of thethe Corporation existing at the time of such repeal or modification. ARTICLE VII.YIL

• "TheThe Corporation reserves thethe fightright to amend,amend, alter, change or repeal any pro_'isionprovision contained inin thisthis Certificate of Incorporation, inin the manne_:manner mownow or hereafter proscribedprescribed by statute, andand all fightsrights conferred on stockholdersstockholders herein are granted subjectsubject !oto thisthis reservation.

ARTICLE VIII.

Election of directors need not bebe by Writtenvrntten ballot unlessunless thethe Bylaws of thethe Corporation sballshall so provide. ARTICLE IX.IX.

The number of directors which shaUshall constituteconstitute thethe whole Board of Dh'ectorsDirectors of the Corporation shallshall be fixedfixed fiomfi'om timetime totc timetime by, or in thethe manner provided in,in, the Bylaws of the Corporation or in anan anaertdmentamendment thereofthereof dulyduly adopted by the Board of Directors nftheof the Corporation or by the stockholders of thethe Corporation.Corporation, ARTICLE X.

Meetings of stockholdersstockholders of the Corporation may be held within or without the State of Delaware, as thethe Bylaws of the Corporation may provide. The books of the corporation maymaybebe kept (subject to any provision contained in thethe statutes) outside the State of Delaware at such place or places as may be designated from time to timetime byby thethe Board of Directors of:theofthe Coq_orationCorporation or in thethe Bylaws of the Corporation,Corporation.

ARTICLEXI.ARTICLE XI,

Except as otherwise provided inin this Certificate of Incorporation, inin furtharaneafurtherance andand not inin limitation of thethe powers conferred by statute,statute, the Board of Directors of the Corporation is expressly authorizedauthorized to make, repeal, alter, a.mendamend and rescindrescind any or allall of thethe Bylaws of_eofthe Corporation.Corporahon.

• % ' i. . IN WITNESS WHEREOF,/-heWHEREOF, the undersigned has sigqedsigned t_t CertificateCertilicate of In_rporationIncorporation this 29 day ofJunc, 2007. this.29 _ day of June, 2007. __ _N

• . • A_th0nyAnthony Abbenate _ : Incorporatorincorporator

.

4082102v.I4082102v, l i The State of South Carolina [

' l

Office of Secretary of State Mark Hammond ,! | Certificate of Authorization ! I, Mark Hammond, Secretary of State of South Carolina Hereby certify that: m IBASISI BASIS RETAIL, INC,INC, a corporation duly organized under the lawslaws of the state of DELAWARE and i issued a certificateceitiTicate of authority to transacttransact business in South Carolina on December 1st, 2008, has on the date hereof filedffied all reportsreports due this office, paid I all fees, taxestaxes and penalties owed to thethe Secretary of State, that the Secretary of State has not mailed notice to thethe Corporation that its authority to transact i business in South Carolina is subject toto being revoked pursuant toto Section 33- t5-31015-310 of the 1976 South Carolina Code, and no application forfor surrender of J authority to do business inin South Carolina has been filedfiled in this office as of thethe i date hereof. date hereof, i |

Given under my Hand and the Great I Given under my Hand and the Great Seal of thethe State of South Carolina this I 3rd day of December, 2008. 3rd day of December, 2008. i |

Mark Hammond, Secretary of State | | • ___t_ _ __ mua_ | iBasisiBasis Retail, Inc.Ine.

EXHIBIT B

Officers, Directors,Dkectors, and Legal Counsel Officers of iBasis Retail, Inc.Inc.

Name Title Address . Ofer Gneezy Chief Executive Officer 20 Second Avenue Burlington, MA 01803 781-505-7500

Mark Flynn Secretary 20 Second Avenue Burlington, MA 01803 781-505-7500

Richard TennantTeunant Chief Financial Officer ' 20 Second Avenue Burlington, MA 01803 781-505-7500

Directors of iBasisiBasis Retail, Inc.Ine.

Name Title Address OferOfcr Gneezy Chief ExeoutiveExecutive Officer 20 Second Avenue Burlington, MA 01803 781-505-7500

Gordon VanderbmgVanderbrug Executive Vice President 20 Second Avenue Burlington, MA 01803 781-505-7500

Richard Tennant Chief Financial Officer 20 Second Avenue Burlington, MA 01803 781-505-7500

Legal Counsel ofiBasisof iBasis Retail, Inc.

Name Title Address Ellen Schmidt Senior Counsel 20 Second Avenue Burlington, MA 01803 781-505-7956

KemalKernel Hawa Counsel to iBasis Retail 701 PennsYlvaniaPennsylvania Avc.Ave.,, NW MINTZ, LEVIN, COHN, FERRIS, Suite 900 GLOVSKYAND POPEO, P.C.P.C. Washington, DC 20004 202-434-7300 iBasis Retail, Inc.Inc.

EXHIBIT C -—Part I1

Financial Statements of Parent Company iBasis,iBasis, Inc.

SEC Form 10-Q10-9 J,

PagePage 11ofof4141

10-Q10-Q11a2192905z10-.htma2192905210-q.htm 10-Q10-Q

• Tableb e ofofCo_t_ents_Cmotenta

UNITEDUNITED STATESSTATES SECURITIESSECURITIES ANDAND EXCHANGEKXCHANGK COMMISSIONCOMMISSION Washington,Washington, D.C.D.C.2054920549

FORMFORM lO-Q10-Q

(Mark(Mark one)one)

[]Ii QUARTERLYQUARTERLY REPORTREPORT PURSUANTPURSUANT TOTO SECTIONSECTION 1313OROR 15(d)15(d)OFOF THETHE SECURITIESSECURITIES EXCHANGEEXCHANGE ACTACT OFOF 19341934

ForFor thethe quarterlyquarterly periodperiod endedended MarchMarch 31,31,20092009

OR

[]0 TRANSITION REPORT PURSUANTPURSUANT TOTO SECTION 13 OR 15(d) OFOF THE SECURITIES EXCHANGE ACT OF 1934

For the transitiontranstflon period from toto

Commission fllefile number;number: 000-27127

iBRSis,iBasis, IIIC.Inc. (Exact(Exact name of registrantregistrant as specified in itsits charter)

DelawareDelaware (State(State oror otherotherjurisdictioniurisdietion (I.(I..S.R.S. Employer ofof incorporationincorporation orororganization)organization) identificationIdentification No.No.))

2020 SecondSecond Avenue,Avenue, Burlington,Burlington, MA 0180301803 (Address(Address ofof executiveexecutive offices,offices, includingincluding zipzip code)code)

(781)(781) 505-7500505-7500 (Registrant's(Registrant's telephonetelephone number,number, includingincluding areaareacode)code)

IndicateIndicate bybycheckcheekmarkmark whetherwhether thetheregistrant:registrant:(I)(I) hsshasfiledfiled allallreportsreports requiredrequired totobebe tiledfiled bybySectionSection I133 oror I15(d)5(d) ofofthethe SecuritiesSecurities ExchangeExchange ActAct ofof19341934duringduring thetheprecedingpreceding 1212monthsmonths (or(orforforsuchsuch shortershorter periodperiod thatthat thetheregistrantregistrant waswas requiredrequired totofilefilesuchsuch reports),reports), andand(2)(2)hashasbeenbeensubjectsubject totosuchsuch filingfiling requirementsrequirements forforthethepastpast 9090 days.days. YesYes ISI_ NoNo (3[]

indicateIndicate bybycheckcheek markmarkwhetherwhether eacheachregistrantregistrant hashassubmittedsubmitted electronicallyelectronically andand postedpostexlononitsitscorporatecorporateWebWebsite,site,ififany,any, everyevery InteractiveInteractive DataDataFileFilerequiredrequired totobebesubminedsubmitted andandpostedpostedpursuantpursuanttotoRuleRule405405ofofRegulationRegulation 8-TS-T(1232(§232.405405 ofofthisthis chapter)chapter) duringduring thetheprecedingpreceding 1212monthsmonths (or(orforforsuchsuchshortershorterperiodperiodthatthatthetheregistrantregistrant waswasrequiredrequired totosubmitsubmit andandpostpost suchsuch

http:http_Hwww.sec.g_v/Archives/edgar_data/_9_756/_1_47469_9_5233/a21929_5z_-q_h..-//tvvvw. sec.gov/Archives/edgar/data/1091756/000104746909005233/a2192905z10-q. h. .. 5/19/20095/19/2009 PagePage22ofof4141

files).files).YesYesl:JO NoNo[]E

Indicateindicate bybycheckcheckmarkmark whetherwhether thetberegistrantregistrant isisaalargelarge acceleratedaccelerated filer,filer,ananacceleratedaccelerated filer,filer, ororaanon-acceleratednon-accelerated filer,filer, ororaasmallersmaller reportingreporting company.company. SeeSeethethedefinitionsdetinitions of"largeof "large aceeleraledaccelerated filer,"filer, ""accelerated"accelerated filer"filer"andand "smaller"smaller reportingreporting company"company" ininRuleRule 12b-212b-2ofofthetheExGhang¢Exchange Act.Act.

LargeLarge acceleratedaccelerated filerfiler i"lO AcceleratedAccelerated filerfiler []E Non-acceleratedNon-accelerated filerfiler []O SmallerSmafierreportingreporting companycompany []O (Do(Donotnotcheckcheck ifaif asmallersmaller reportingreporting company)company)

Indicateindicate byby checkcheck markmark whetherwhether thethe registrantregistrant isisaashellshell companycompany (as(asdefineddefined inin RuleRule 12b-212b-2ofofthethe ExchangeExchange Act).Act). YesYesOr-I NoNoE[]

IndicateIndicate thethe numbernumber ofofsharesshares outstandingoutstanding ofofeacheach ofofthethe issuer'sissuer's classesclasses ofofcommoncommon stock,stock, asasofofthethe latestlatest practicablepracticable date.date.

CommonCommon Stock,Stock, parpar valuevalue $0.001$0.001perper share,share, asas ofofAprilApril 30,30,20092009 71,228,32871,228328

II iiiii i II I

http:http://www.se_.g_v/Ar_hives/edgar/data/__9_756/_____47469_9__5233/a2_929_5z__-q_h...//www. sec.gov/Archives/edgar/data/1091756/000104746909005233/a2192905z10-q, h„. 5/19/20095/19/2009 PagePage33ofof4141

Table'I'able ofofContentsContents

iBASIS,IBASIS,INC.INC. IndexIndex

r*.L_a~Re PARTI'ART I:=-F[NAI_I—FINANCIALI_AL INFQRMATIONIN'}Ri%1A'I'105 ljemgolem II : Financial~P Statement_ I I CondensedC densed ConsolidatedConsolida FinancialFinancial StatementsStatements (unaudited){unauditedl ±I CondensedCondensed Consoljcbtt_d.BalanceConsoli jaLed Balance SheetsShe~ets atat MarchMar h331h 20092009andand DecemberDecember 31,200831,2008 !I I' _O~ddC liddated ddState\ ne _ s ~faof OperationsI fo

PARTI'ART .!IL-.=O.I—OTHERT H._E_R_LNFDRIl NFO3IMA3PIM AT IONON IIt~emt_ --= Ke__al__.e_¢dij_g_~ca~IF oceediftss 2929 ILem.lAI.tern, IA ..-:= __s.k.EacLo_rsgt'sgLFa¹rs 2929 Itemitem 66 -- ExhibitsExhibits _030 S_ature~SI ature 31_31

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T@leTable of Conten_ContenQ

Part l--FinancialI—Pi nanclal Information

ItemItem 1. FlnanclalStatementsFrancis! Statements

iBasls,i Basis, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

March 31,dl, Decembernecesnberst,31, 2009 200820ha (in thousands, exceptesceptpersharedala)per share dale) Assets $ 48,567 $ 56,912 Cash and cashcash equivalents $48,567 $56,912 Accounts receivablereceivable and unbilled revenue--externalrevenue —external parties, net of allowance forfor doubtful accountsaccounts of $3,546$3,546 and $5,178,$5,178,respectively 228,526228,526 234,946234,946 Accounts receivables-relatedreceivable —related parties 2,2052,205 2,0532,053 Prepaid expensesexpenses and other currentcurrent assets 6,3966,396 6,4776,477 Total current assetsassets 285,694285,694 300,388300,388

Property andsnd equipment, net 33,05833,058 34,83634,836 Other assetsassets 1,4371,437 1,5731,573 IntangibleIntangible assets, net 82,36982,369 8720687,206 Goodwill 17,32417,324 17,32417,324 Total assetsassets $419,419,882882 $$441,441,327327 Liabilities and Stockholders' Equity Accounts payable--externalpayable —external parties $$186,186,458458 $$155,155,676676 Accrued expenses 109,003109,003 151,685151,685 Deferred revenue 12,50712,507 t3,89413,894 665 577 Current portion of long-termlong-tenn debt 665 577 Total currentcurrent liabilitiesliabilities 308,633308,633 321,321,832832

Long-term debt, net of currantcurrent portion 21,34921,349 27,38027,380 Deferred incomeincome taxestaxes 2,4392,439 2,2,534534 Other long-termlong-term liabilities 950 1,0631,063 Total liabilities 333,371333,371 352,352,809809

Stockholders'Stockholders'equity:equity: Common stock,stock, $0.001$0,001 par value, authorized--170,000authorized —170,000 shares; issued-_76,204issued —76,204 and 76,20476,204 shares; outstanding_71,228outstanding —71,228 and 7132871,228 shares,shares, respectivelyrespectively 76 76 Additional paid-in capital 3383338,17676 337,590337,590 Treasury stock atat cost; 4,9764,976 and 4,9764,9/6 shares,shares, respectively (15,000)(15,000) (15,000)(15,000) Accumulated other comprehensive lossloss (2,033)(2,Q33) (1,140)(1,14Q) Accumulated deficit (234,708)(234,708) (233,008)(233,008) Total stockholders'stockholders' equity 86,51186,511 88,51888,518 Total liabilitiesliabilities and stockholders'stockholders' equity $$419,419,882882 $$441,441,327327

The accompanying notes areare an integral part of thesethese condensed consolidatedconsolidated financialfinancial statements.

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Table of Contents

IBasis,lB as is, lnc.Inc.

Condensed ConsolidatedConsoVidated Statements of Operations

(unaudlted)(unaudited)

ThreeThree blonthghtanths Ended Marth31 t 20092000 20082000 tin(in thousands,thansands, exceptper share data) Net revenue---externalrevenue —external partiesparttes $211,829$211,829 $274,669$274,669 Net revenue---relatedrevenue —related parties 43,67843,678 50,23450,234 Total net revenuerevenue 255,507255,507 "324,903324,903

Costs andand operating expenses: Data communications andand telecommunications----externaltelecommunications —external partiesparhes (excluding(excluding depreciation and amortization) 209,248209,248 266,379266,379 Data communications andand telecommunieations---.celatedtelecommunication~elated parties (excluding(excluding depreciation andand amortization) 15,26815,268 23,1t923, 119 Engineering and network operations expenses 5,0015,001 6,6286,628 Selling, general and administrativeadministrative expenses 17,20617,206 19,82119,821 Depreciation and amortization 8,2378,237 7,2317,231 Total costs and operatingoperating expenses 254,960254,960 323,178323,178 Income from operations 547 1,7251,725 Interest incomeincome 77 440 Interest expense (698) (883)(883) Foreign exchange loss, netnet (563) (251) Income (loss)0oss) before provision for incomeincome [axestaxes (637) 1,0311,031 Provision forfor incomeincome taxes 1,0631,063 3,1033,103 Netloss $S (1,700)(1,700) $S (2,072)(2,072)

Net lossloss per share: Basic $ (0.02)(0.02) $ (0.03)(0,03) Diluted $ (0.02)(0.02) $8 (0.03)(0.03)

Weighted average common sharesshares outstanding: Basic 71,22871,228 74,95274,952 Diluted 71,22871,228 74,95274,952

The accompanying notesnotes are anan integralintegral par_part of these condensed consolidatedconsolidated financial statementS.statements.

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iFLfableableofContents

iB_ls,igasls, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudlted)(unaudited)

Three Monthsstench& Ended Marchteen&eh 31, 2_93009 2_S3000 Onthousands)pn& thee&end&i Cash flowsflows fromfrom operating activities: Net tossloss $ (1,700)(1,700) $ (2,072)(2,072) Adjustments toto reconcile net loss to net cash provided by operatingoperating activities: Depreciation and amortization 8,2378,237 7,2317,231 Stock-basedStork-based compensation 586 579 218 Provision forfor doubtful accounts receivable 218 Changes inin assets andand liabilities:liabilities. Accounts receivable and unbilled revenue----externalrevenue —external parties 6,2026,202 6,2436,243 Accounts receivable---relatedreceivable —related partiesparties 4,6774,677 Prepaid expenses and other current assets 81 (6,128)(6,128) Other assetsassets 136 (18) Accounts payable---externalpayable —external parties 30,35630,356 (17_65){17,465) Accounts payable---relatedpayable —related partiesparties -- (2,643)(2,643) AocruedAccrued expensesexpenses (42,(42,256)256) 1%18417,184 DeferredDefen ed revenue (1,387)(1,387) (1,643)(1,643) Long.termLong-term deferred incomeincome taxes (95) (236) Other long-term liabilitiesliabilities (ll3)(113) (191)(190 Net cash provided by operating activities 4,9424&942 841 Cash flowsflows fromfrom investing activities: Purchases of property and equipment (1,55_(1,550) 0,923)(3,923) Maturities of available-for-sale short-term marketable investments -- 1,9991,999 Decrease in other long-termlong-term assetsassets -- 5@005,000 Net cashcash provided by (used(used in)in) investing activities (I,550)(1,550) 3,0763,076 Cash flowsflows fromfrom financingtlnancing activities: Bank borrowingsborrowings (repayments)(repayments) (6,314)(6,314) 5,0005,000 Partial payment of loanloan from related party (4,829)(4,829) -- Proceeds from exercisesexercises of common stock options -- 336 Payments of principal on capital lease obligations -- (565)(565) Dividend payment relatedrelated toto warrant exerciseexercise -- (323)(323) Net cashcash provided by (used(used in)in) financing activities (11,143)(11 143) 4,4484 448 Effect ofaxchangeof exchange rate changes on cash andand eashcash equivalents (594) (439){439) Net increaseincrease (decrease) inin cash and cash equivalents (8,345)(8,345) 7,9267,926 Cash and cash equivalents, beginning of period 56,91256,912 63,73563,735 Cash and cash equivalents,equivalents, end of perlodperiod $$48,48,567567 $$71,71,661661 Supplementaldisclosure of cash flowflow information: InterestInterest paid $$1,1,198198 $$527527 Taxes paid $$838838 $$2,2,325325 Supplemental disclosure of non-cash investing and financing activities: Common stock issuedissued inin exchange forfor cashless warrantwan ant exercise $ --—$$192192 Contribution to equity forfor forgivenessforgiveness of enstscosts hilledbilled by related party $ --—$$1,1,297297 -- Contribution to equity forfor expensesexpenses paidpaid directly byby relatedrelated partyparty $ —$$118I18 Property andand equipment acquired under long-termlong-term financingfinancing arrangement $$359359 $$1,1,731731

The accompanyingaccompanying notes are anan integral part of these condensed consolidated financialfinancial statements.

3

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TableofCantcutsContents

iBasls,iBasis, Inc.

Notes toto Condensed Consolidated FinancialPlnancial Statements

(unaudited)

(1)(1)Business and Presentation

Business

We areare a leading wholesale carriercamer of international long distance telephone calls and a provider of retailretail prepaid calling services andand enhancedenhanced servicesservices for mobile operators.

Our operations consist of our wholesale trading business ("Trading"),("Trading" ), inin which we connect buyers and sellers of business also includes international telecommunications services, and our retail services business ("Retail").("Retail" ),Our Trading business also includes Outsourcing revenuerevenue which we generate asas a managed services provider of wholasalewholesale international voice services for specific cartiercanier eustovaers,customers, includingincluding KPNKpN BN.B.V.("KPN")("KpN") which owns a majority of our outstanding commoncommon stock.stock.

In our Trading businessbusiness we receivereceive voice lraffictraffic from buyers--originatingbuyers —originating telecommunicationsteleeominunications carriersearners who areare interconnectedinterconnected to our network via Voice over InternetInteract Protocol ("VolP")("Voip") or traditionaltraditional timetime division multiplexingmuitiplexing CTDM")('TDM") connections,connections, and we route that traffictraffic over our network toto sellers--localsellers —local serviceservice providers and telecommunicationstelecommunications carrierscamera inin the destination countriescountries with whom we have established agreementsagreements to manage the enmpletioncompletion or termination of calls. We offer ourour Trading service on a wholesale basis to carriers,camera, mobile operators, consumer VolP companies,companies, telephonytelephony resellersresellers andand other servicaservice providersproviders worldwide. Our OutsoureingOutsourcing revenue eurranflycurrently consists of international voice traffic we terminateterminate forfor KPN and itsits affiliatesatYiliates andand for TDC, aa leadingleading telecommunicationstelecommunications carrierearner inin Denmark.

Our Retail businessbusiness consists ofretaitretail prepaid calling cards, which are marketed throughthrough distributors primarily to ethnic communitiescommunities within majormaj or metropolitan markets in thethe United States, and Pinged,pingottb, a prepaidprepaid calling service thatthat we offer and sellsell directlydirectly toto consumersconsumers viavia anan eCommeraeeCommerce model. Both cancan be private-labeled forfor other serviceservice providers. The prepaid calling card business and Pingo leverage our existing international network and have thethe potential to deliver higherhigher margins thanthan are typicallytypically achieved in thethe wholesale Trading business. InIn addition, thethe retailretail prepaid calling cardcard business typically has a faster cash collection cycle than thethe wholesale Trading business. InIn 2007 we latmehedlaunched PingoBosiness,PingoBusiness, enhancements thatthat enable businesses toto manage multiple Pingo accounts throughthrough a singlesingle administrative account.

We use proprietary, patented and patent-pending technologytechnology inin our global VolPVoIP network to automate the selection of routesroutes and terminationtermination partnerspartnem based on a varietyvariety of performance,perfonnance, quality, and business metrics. We have callcall terminationtermination agreements with local service providersprovldeis inin more than 100 countriescountries in North America, Europe, Asia, thethe Middle East, Latin America, Africa and Australia.

TransactionTransacrion withwith KPNEpiv 13.B.V.,v.,a subsidiarysubsidiary of Royal KPNSpiv N./v V.v.

On October t,I, 2007, iBasis, Inc. ("iBasis,"("iBasis,"theihe "Company","Company", "we""we" and "our")"our") and KPN B.V.B.V. ("KPN"), aa subsidiary of Royal KPN N.V.N.V. ("Royal("Royal KPN"), completed transactionstransactions ("KPN("KPN Transaction")Tmnsaction") pursuant tOto which iBasisiBasis issuedissued 40,121,07440,121,074 shares of its common stockstock toto KPN and acquiredacquired thethe outstanding sharesshares of two subsidiaries of KPN ("KIN("KPN GCS"), which encompassed KPN' internationalinternational wholesale voice business. The Company also received $55 million inin cashcash fromfrom KIN,KPN, subject toto post-closingpost-closing adjustments basedbased on thethe working capital and debt ofiBasisofiBasis and KPNKpN GCS. ImmediatelyImmediately aiderafter issuance on October 1, 2007, thethe shares ofiBasisof iBasis common stockstack issued to KPN representedrepresented 51% of the issued and outstanding sharesshares ofiBasisof iBasis common stock on a fully-dilutedfully-diluted basis (which included allall of thethe issuedissued and outstanding common stock and thethe common stockstock underlying outstandingoutstanding

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_TabLeTable ofCo0teAa_Contcents

iBasls,iBasis, Inc.Inc.

Notes to Condensed Consolidated Financial Statements (Continued)(Contimied)

(unaudtted)(unaudited)

(I)(I)BusinessBusinms and Presentation (Continued)

a "in-the-money" stockstock options, as adjusted, and warrants toto purchase common stock). On October 8, 2007, iBasis paidpaid a record date of dividenddividend in the amountamount of$113of $113millionmifiion at a rate of $3.28$3.28 per shareshare to eacheach of itsits shareholders on the record date of September 28, 2007,2007, thethe tradingtrading date immediatelyimmediately priorprior to the closingclosing datedate of the KPN Transaction.

Although iBasisiBasis acquiredacquired all of the outstandingoutstanding capital stock ofKPNof KPN GCS, after the closing of the transaction,transaction, KPN at a holds a majority of the outstanding common stockstock ofiBasisof iBasis and KPN'sKpN's director designeesdesignees are expected toto represent,represent, at a statement the future date, a majority of the Company's board of directors. Accordingly, for accounting and financialtinancial statement purposes, the accounting and KPN Transaction was treatedtreated as a reverse acquisition ofiBasisof i Basis by KPN GCS under thethe purchase method of aocounting and the historical the financialfinancial results ofKPNof KPN GCS became thethe historical financial resultsresults of the combinedcombined company and replaced the historical financialflnancial results ofiBasisof iBasis as a stand-alonestand-alone company.

PresentationFrescoist/on

The unaudited condensed consolidated financial statements presented herein have been prepared by us and, in thethe Interim results opinion of management, reflectreflect allall adjustments eraof a normal recurring nature necessary for aa fair presentation. Interim results are notnot necessarilynecessarily indicativeindicative of results for a full year.year, The condensed consolidated balance sheetsheet as of December 31, 2008 was derived from ourour audited financialfinancial statements.stateinents,

The unaudited condensed consolidated financial statementsstatements have been prepared pursuant to thethe rulesrules and regulations of thethe Securities and Exchange ComanissionCommission ("SEC"). Certain information andand footnotefootnote disclosures normally includedincluded inin the annualannual financialfinancial statements prepared in accordance with U.S.U.S.generally accepted accounting principles havehave been condensed or omitted pursuantpursuant toto those rulesrules and regulations,reguiations, but we believe that the disclosures are adequateadequate to make the informationinformation presented not misleading.

IntereompanyIntercompany balancesbalances and transactionstransactions with KPN andand its other subsidiariessubsidiaries ("related("related parties") havehave notnot beenbeen eliminated, but are presented herein asas balances and transactionstransactions with relatedrelated parties.

New Accounting Pronouncements

In December 2007, thethe Financial Accounting Standards Board ("FASB") issued SFAS No. 14t141 (revised(revised 2007) ("SFAS Jnterests in Consoltdated No.No, 141R"), "Business Combinations" and SFAS No. 160 ("SFAS No.No, 160'%160"),"Noneontrolling"Noncontrol/ing" Interests in Consolidated Financial Statements,Statemettts, an amendment of Accountingttccomtting Research BulletinBulletin No.f/o. 51."3/. SFAS No. 141R changes howhow business acquisitionsacquisitions are accounted for and impacts financial statementsstatements both on thethe acquisitionacquisition date and inin subsequentsubsequent periods. SFAS No. 160 changes thethe accounting and reportingreporting for minority interests, which will be reeharacterizedrecharscterized as noncontrollingnoncontrol ling interestsinterests andand classifiedclassified as a component of equity. SFAS No. 141R and SFAS No. 160 were effectiveetfective beginning thethe firstfirst fiscal quarter of 2009. With our adoption of SFAS NO.No. 141R on January I,1, 2009, previously reserved pre-acquisitinnpre-acquisition net operating losses will reducereduce incomeincome tax expense when utilized or when the valuation allowanceallowance forfor suchsuch net operating losses is released, which may have a material etYeeteffect onon our results operations and financial position inin 2009 andand inin futurefuture years. Prior toto JanuaryJanuary I,1,2009, the utilization ofoi'previouslypreviously reservedreserved pre-aequisitionpre-acquisition net operating losseslosses reducedreduced goodwill.goodwill. The adoptionadoption of

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Tableooff_C'ont_:ntsContents

iBasls_ifiasis, Inc.lnc.

Notes toto Condensed Consolidated Financial Statements (Continued)(Continued)

(unaudited)(unaudited)

(1)(I)Business andand Presentation (Continued)(Continued)

SFAS No. 160 on January 1,I, 2009 did not have aa material effect on our statementsstatements of financial position, results of operations or cashcasli flows,fioivs.

InIn March 2008, thethe FASB issuedissued SFAS No. 161 ("SFAS No. 161"), "Disclosures"Disclosures aboutabost Derivative Instruments andanti HedgingActivities--anHedging Activities —an amendment of F,4SBFASJJ StatementStatemeut No.Hm 133."1333The standard isis intended to enhance the currentcurrent disclosure frameworkframework inin SFAS No. 133, Accounting forfor Derivative InstrumentsInstruments andand Hedging Aetivitiss.Activities. The standard requiresrequires that objectives for using derivative instrumentsinstruments be disclosed in terms of underlyingunderlying risk andand accountingaccounting designation.designation, SFAS No. 161 is effective forfor fiscalfiscal years and interiminterim periods beginning afterafter November 15, 2008. The adoption of SFAS No. 161161 on JanuaryJanuary l,I, 2009 diddid not havehave a material effectet'feet on ourour financialfinancial position, results of operations or cash flows.

Position 142-3, "Determination the Usefid Life af/n In April 2008, thethe FASB issuedissued FASB Staff Position No. FAS 142-3, "Determination of the Usefid Life oflntangibletangible Assets" ("FSP("FSP 142-3"),142-3"),FSP 142-3 is effective for financial statementsstatements issued for fiscalfiscal years beginning after December 15, 2008 and interiminterim periods within thosethose years. FSP t42-3142-3 amendsamends the factorsfactors thatthat should be consideredconsidered in developingdeveloping renewal or extension assumptions used to determine thethe useful life of a recognized intangibleintangible asset, under SFAS No. 142, "Goodwill"Gaatftvi// and Other Intangible1ntangi hie Assets" ("SFAS("SFASNo.No, 142"). FSP 142-3142 3 is intended toto improveimprove thethe consistencyconsistency between the useful lifelife of an intangible asset determined under SFAS No. 142 and the period of expected cash flows usedused toto measure thethe fair valuevalue of thethe assetasset under SFAS No. 141R14IR andand other generally accepted accounting principles. The adoptionadoption of FSP 142-3 on January 1,I, 2009 did not havehave a material effect onon our financial position, results of operationsoperations or cash flows.tlows.

InIn May 2008, thethe FASB issued SFAS ("SFAS No.No, 162"), "The Hierarchy of Generally AcceptedAccountingAccepted Accounting Prlueiples."Principles. "SFAS No. 162 identifies the sourcessources of accounting principles and thethe frameworkIkamework for selectingselecting thethe principles used inin thethe preparation of financial statementsstatements that are presented inin conformityconformity with generally accepted accounting principles. SFAS No. 162 becomes effectiveeffective 60 days following the Securities andand Exchange Commission's approvalapproval of thethe Public Company Accounting Oversight Board amendments toto AU Section 411, "The"The Meaning of Present FairlyFairly inin Conformity With Generally Accepted AccountingAccounting Principles."Principles. "We do not expectexpect that the adoption of SFAS No. 162 to have a material effect on our financial position,position, results of operations or cash flows.

(2) Net lossloss per share

Basic and diluted net loss per common shareshare is determined by dividing net lo_sloss by the weighted average ¢onunoncommon shares outstanding duringduring thethe period.period,

6

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iBasis,iBasis, Inc.lue.

Notes toto Condensed Consolidated Financial Statements (Continued)

(unaudited)(unaudited)

(2) Net loss per share (Continued)

The following table summarizessummarizes commoncommon sharesshares thatthat have been excluded from thethe computation of baslebasic and diluted weighted average commoncommon shares forfor thethe three months ended March 31, 2009 andand 2008 because their inclusioninclusion would be anfi-ditutive:anti-dilutive:

Thr_:eThree Molnh$htonlhs Three Monthshtnnths Er_dedEnded Ended March31 2009 bl_reh31,2OOS On(in thousands)thonssnds) Options toto purchase common sharesshares 5,4805,480 4,5784,578 Warrants to purchasepurchase commoncommon shares 432 432 Total 5,9125,91 5,5,010010

O)(3)Stock-Based Compensation

We issue stock options asas an equityequity incentive to employeesemployees and non.employeenon-employee directorsdirectors under our 20072007 Stock Plan (the(the "2007"2007 Plan").Plan" ).The StOCkstock options we issued underunder our 2007 Plan areare forfor a fixedfixed number of shares with anan exercise price equal toto the fairfair market value of our stock on thethe date of grant, which isis the closingclosing priceprice asas reported on the NASDAQ Stock Market LLC. The employee stock optionoption grantsgrants under thethe 2007 Plan typicallytypically vest quarterly in equal installmentsinstallments over four years, provided that no options shallshall vest duringduring the employees' firstfirst year of employment, and have aa term oftenof ten years.years.

The 2007 Plan replaced thethe 1997 Stock Incentive Plan, which expired on August 11, 2007. All outstanding stockstock options granted under the 1997 Stock Incentive Plan will remainremain in effect until theythey expire according to theirtheir terms.terms.

The followingfollowing tabletable presents the stock-based compensationcompensation expense includedincluded in our unaudited condensed consolidatedconsolidated statements of operations:

Three Mon|hsMonths ThrteMonthsThree Months Ended Ended Marth31,2009 blarch3l 2008 (inlhousand_(in thonssnds) Stock-based compensation expense: Engineering andsnd network operations $8 147 $8 145145 Selling, general and administrative 439 434 Total stock-based compensationcompensation $5 556586 $5 579

During thethe threethree months ended March 31, 2009 and 2008, we granted stock options totalingtotaling 1.31.3 million shares and 1.31.3 million shares, respectively, to oarour directors, officers andand employees. The fairfair

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iBasle,iBasis,Inc,Inc.

NotesNotes totoCondensedCondensed ConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(unaudited)(unaudited)

(3)(3)Stock-BasedStock-Based CompensationCompensation (Continued)(Continued)

valuevalue ofofthesethese stockstock optionoption awardsawards werewere estimatedestimated usingusing thethe Blaek-SeholesBlack-Scholes modelmodel withwith thethe followingfollowing assumptions:assumptions:

Thr_Three MonthsMonies ThreeThree MonthsMonths EndedKneed EndedEnded March3I 2009 March31 2008 RiskRisk freefree interestinterest raterate 1.99%1.99% 2.62%2 62% DividendDividend yield 0°.4 0%0% Expected lifelife 6.256,25yearsyears 6.256.25yearsyears VolatilityVolatility 100%100% 100%100% Fair value of options grantedgranted $0.74$0.74 $3.63$3.63

The risk-freerisk-free intereStinterest raterate was based onon thethe U.S.V.S.Treasury yield curvecurve inin effecteffect at thethe timetime ofofgrant,grant, TheThe expectedexpected dividend yield of is basedbased on thethe fact thatthat wewe have no current intentionintention toto paypay cash dividends. OurOur estimateestimate of thethe expected lifelife was based on a combination of thethe vestingvesfiing period 0foffourfour yearsyears andand thethe termtenn oftenof ten years forfor thesethese stockstock option grants. Our estimate of expected volatility isis based onon the historical volatility of our commoncommon stock over thethe period which approximates the expectedexpected lifelife of thethe options.

No income tax benefit was realized 1'romfrom stock option exercises during the threethree months ended March 31, 2009 and 2008.

(4) Business Segment Information

During lhethe threethree months ended March 31,31,20092009 andand 2008, we operated inin two business segments,segmentS, Trading and RetaiLRetail. Our Trading business segmentsegment includesincludes revenue fromfrom wholesale Trading and Outsourcing.Outsouming. We consider Outsourcing as part of ourour Trading segmentsegment as thethe products we sell are primarilyprimarily the same products that we sell toto our wholesale Trading customers and OutsourcingOutsoureing and wholesalewholesale Trading are managed as one busine_.business. Our Retail business segment consistsconsistS primarily of our prepaidprepaid callingcalling cardcard servicesservices andand pingo,Pingo, our prepaid calhngcalling service sold directly toto consumers through an internetIntemet webwebsite.site.

AA breakdownbreakdown ofofourour revenuerevenue andand grossgross profit,profit, defineddefined asas netnet revenuerevenue lessless datadata communicationscommunications andandtelecommunicationstelecommunications costs,ousts, forfor thethe threethree monthsmonths endedended March 31,3I, 20092009 andand 20082008 isis asas follows:follow s

ThreeThtte MoauuMonths KndedEnded Three hlanlhsMenths KndedEnded M_¢h 31 r 2009 March 31_ 2008 RevenueRevenue GranGro_ ProalProfit RerenaeRevtnue GrossGro_ Proati'roflt tla(In masons)milliOnl) TradingTrading $183,$183,33 $19.$ 19.88 $254.$254.11 $21.$ 21.77 OutsourcingOutsourcing 48.48.00 7,7,55 50.50.22 10.10.22 RetailRetail 24,24,22 3.3.77 20.20.66 3.3.55 TotalTotal $255,$255,55 $31.'$ 31.00 $324.$324.99 $35,$ 35.44

WeWe useuse netnet revenuerevenue andandgrossgross profit,profit, whichwhich isisnetnet revenuerevenue lessless datadata communicationscommunications andandtelecommunicationstelecommunications costs,costs, asas thethe basisbasis forformeasuringmeasuring profitprofit ororlossloss andandmakingmaking decisionsdecisions ononourour TradingTrading

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TableOf'_2onteo-tsof Contents

iBasis,iBasis, Inc.

Notes to Condensed Consolidated Financial Statements (Continued){Coatinued)

(nnaadited)(unaudited)

(4) Business Segment Information (Continued)

and Retail business segments. We do not allocate our engineeringengineering and networknetwork operations expenses, selling, general andand administrative expenses,expenses, and depreciation and amortization between Trading and Retail.

Operating results, excluding interest income and expense,expense, foreign exchangeexchange gains or losses,losses, and incomeincome tax expense,expense, forfor our two business segments are as follows:follows:

ThreeThree MonthsMontln Ended March 31_31 2009 ...... (In(tn thousands)thousands) ~TradtnTrading_. . Retailaetna Total Net revenue----externalrevenue —external parties $187,631$187,631 $24,198$24,198 $2lt,829$211,829 Net revenue--relatedrevenue —related parties 43,67843,678 --— 43,67843,678 Total net revenue 231,309231,309 24,19824, 198 " 255,507255,507 Data communicationscommunications andand telecommunicationtelecommunication costs---externalcosts —external parties 188,719188,719 20,52920,529 209,248209,248 Data communicationscommunications and telecommunicationtelecommunication costs--relatedcosts—related parties 15,26815,268 --— 15,26815,268 Total data communications and telecommunications 203,987203,987 20,52920,529 ,224,516224,516 OrossprofitGross profit $$27,27,322322 $$3,3,669669 30,99130,991 Engineering and network operations expenses 5,0015,001 Selling, general and administrative expenses 17,20617,206 Depreciation and amortization 8,2378,237 Income fromt)om operations $$547547

Three Months Ended M]r;hllt r h 311200831 2000 Onon lhuusands)thousands) . Retail Total Net revenue---externalrevenue —external parties $254,096$254,096 $20.573$20,573 $274,669$274,669 Net revenue--relatedrevenue —related parties 50,23450,234 --— 50,23450,234 Total net revenuerevenue 304,330304,330 20,57320,573 324,903324,903 Data communications and telecommunicationtelecommunication costs-----externalcosts—external parties 249,287249,287 17,09217,092 266,379266,379 Data communications and telecommunicationtelecommunication costs---relatedcosts —related parties 23,11923,119 --— 23,11923,119 Total data communications and telecommunications 272,406272,406 17,09217,092 289,498289,498 G-rossprofitGross profit $$31,31,924924 $$3,3,481481 35,40535,405 Engineering andand network operations expenses 6,6286,628 Selling, general and administrative expensesexpenses 19,82119,821 Depreciation and amortization 7,2317,231 IncomeIncome fromfrom operations $$1,1,725725

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_TableTableofofC_ontentsContents

iBasis)iBasis,lne.Inc.

NotesNotes totoCondensedCondensed ConsolidatedConsolidated FinancialFinancial StatementsStatemeuts (Continued)(Continued)

(unaudited)(unaudited)

(4)(4)BusinessBusiness SegmentSegment Informationinformation (Continued)(Continued)

AssetsAssets relatingrelating totoourourTradingTrading andand RetailRetail businessbusiness segmentssegments consistconsist ofofaccountsaccounts receivable,receivable, netnet ofofallowanceallowance forfordoubtfuldoubtful accounts,accounts, customercustomer andand distributordistributor relationshipsrelationships intangibleintangible assetsassets andand goodwill.goodwill, WeWedodonotnot allocateallocate cashcashandand cashcash equivalents,equivalents, prepaidprepaid expensesexpenses andand otherother currentcurrent assets,assets, propertyproperty andand equipment,equipment, net,net, ororotherother assetsassets betweenbetween TradingTrading andand Retail.Retail.

AsAsofMarch3lof March 31:20092009 {'In0nthousandOthousands) , R¢taa Total SegmentSegment assets:assetsr Accounts receivablereceivable andand unbilledunbifled revenue_-extemalrevenue —external parties,parties, netnet $221,211$221,211 $$7,7,315315 $228,526$228,526 IntangibleIntangible assets--customerassets —customer andand distributordistributor relationships,relationships, netnet 24,63124,631 9,5709,570 34,20134,201 GoodwillGoodwill 17,32417,324 --— 17,32417,324 _63,166$263,166 $16,885$16,885 280,051280,051 Non-segment assetsassets 139,83l139,831 Total assets $419,882$419,882

AIAs of DecemberDecepoher 3t,32 2008n)00 pn(In thousands)thousands) ~Tradln• Trading_. RetailRetell Total SegntentSegment assets;assets: Accounts receivablereceivabie and unbilled revenuerevenue--external—external parties, net $224,883$224p883 $10,063$102063 $234,$234,946946 Intangible assetsassets---customer—customer and distributordistributor relationships, net 26,14726,147 10,10,420420 36,36,567567 Goodwill 17,17,324324 —-- 17,17,324324 $268,$268,354354 $20,$20,483483 "288,837288,837 Non-segment assets 152,152,490490 Total assetsassets $441,$441,327327

(5)(5) AccountsAccounts ReceivableReceivable andand UnbilledUnbilled RevenueRevenue--External—External PartiesParties

AccountsAeeounta receivablereceivable---external—external parties,parties, netnet consistsconsists ofof thethefollowing:following:

AsA_ ofof MarchMarCh sl,31) AsA_ ofef DecemhcrDt¢emb_r 31,31) 20092009 20002_8 (lo(In uIotnaods)Ihomand0 AccountsAccounts receivablereceivable 8$ 192,192,291291 $$ 183;/63183,763 UnbilledUnbilled revenuerevenue 39,39,78t781 56,56,361361 232,232,072072 240,240,t24124 AllowanceAllowance forfordoubtfuldoubtful accountsaccounts (3,(3,546)546) (5,(5,i78)178) ' 211Total accountsI receivablw---externalI 11 ** Ipparties 2$ 222326228,526 I,$ 234246234,946

TheThemajoritymajority ofofunbilledunbilled revenuerevenue relatesrelatestotothethepreviousprevious month'smonth's traflictraffic volumevolume whichwhich isisinvoicedinvoiced totoourour customerscustomers ininthethe followingfollowing month.month. TheThe allowanceallowance forfordoubtfuldoubtful accountsaccounts reflectsreflects ourour bestbest estimateestimate

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TableTableofofContentsContents

iBusis)IBasts,Inc.Inc.

NotesNotes toto CondensedCondensed ConsolldatedConso)idsted FinancialFinancial StatementsStatements (Continued)(Continued)

(unaudited)(unaudited)

(5)(5)AccountsAccounts ReceivableReceivable andand UnbilledUnbitied Revenue---ExternalRevenue —External PartiesParties (Continued)(Continued)

ofofprobableprobable losseslosses inherentinherent inin thethe accountsaccounts receivablereceivable balance.balance. WeWedeterminedetermine thethe allowanceallowance basedbased onon specificspecific knownknown uncollectibleuncollectible accounts,accounts, historicalhistorical experienen,experience, andand otherother currentlycurrently availableavailable evidence.evidence. DuringDuring thethe threethree monthsmonths endedended MarchMarch 31,2009,3I, 2009,wewe wrote-offwrote-off approximatelyapproximately $2.0$2.0millionmillion ofofpreviouslypreviously reservedreserved customercustomer accountsaccounts receivablereceivable balances.balances.

(6)(6)PropertyProperty andand EquipmentEquipment

PropertyProperty andand equipment,equipment, net,net, consistsconsists of thethe following:following:

b-sAs ofor March 31,31, AsAs ofornccsnsbcrDecember 31,31, 20092000 20082000 (In(ln thousand))thoosands) NetworkNetwork equipmentequipment $$47,47,250250 $$47,47,047047 SoftwareSoflsvarc 15,56615,566 14,82314,823 Leasehold improvements 1,6291,629 1,6291,629 Other tangible fixed assetsassets 3,4493,449 3,5943,594 67,89467,894 67,09367,093 Accumulated depreciation (34,836)(34,836) (32,257)(32,257) Total property sndand equipment, net $3 33,33,058838 $3 34,34,836838

Total depreciation and amortization expense related to property and equipment was $3.4$3A million and $3.$3.44 million for the three months endedended IvlarchMarch 31,200931,2009 and 2008, respectively.

(7) Goodwill and Other Intangible Assets

InIn conjunctionconjunction with thethe closingclosing of thethe KI3NKPN TmnsactionTransaction on October I, 2007, we originailyoriginally recorded $24S.$248.8S million of goodwill,goodwill, whichwhich isis notnot being amortized (See(See discussiondiscussion of Impairment below). Additionally, inin connection with thethe KPN Transaction,Transaction, we recordedrecorded $97.$97.77 tnillionmillion of amortizingamortizing intangibleintangible assets,assets, including trademarkstrademarks andand tradetrade names,names, Trading customercustomer andand Retail distributordistributor relationships,relationships, terminationtermination partner relationshipsrelationships and technology.technology. The estimated useful lifelife of trademarkstrademarks sndand tradetrade namesnames isis 1515yearsyears sndandisis beingbeing amortizedamortized on a straight-line basis.basis. The estimatedestimated usefuluseful lifelife ofof Trading customercustomer relationshipsrelationships isis 1010yearsyears andand thethe estimatedestima_d usefuluseful lifelife ofof Retail distributordistributor relationshipsrelationships isis 55 yearsyears and thesethese intangibleintangible assetsassets areare beingbeing amortizedamortized usingusing anan economiceconomic consumptionconsumption method toto reflectreflect thethe diminishingdiminishing cashcash flowsflows fromfrom thesethese relationshipsrelationships overover time.time. The estimatedestimated usefuluseful lifelife ofof terminationtermination partner relationshipsrelationships isis 55 years and isis beingbeing amortizedamortized usingusing anan economiceconomic consumptionconsumption methodmethod totoreflectreflect diminishingdiminishing cashcash flowsflows fromfrom thesethese relationshipsrelationships overover time.time. TheThe estimatedestimated usefuluseful lifelife ofOftechnologytechnology isis 55 yearsyears andand isis beingbeing amortizedamortized onon 0a straight-linestraight-line basis.basis.

InInconnectionconnection withwith thethe closingclosing ofofthetheTDCTDC transactiontransaction onon AprilApril I,I, 2008,2008, wewe recordedrecorded $10.$10.11 millionmillion ofofintangibleintangible assets,assets, primarilyprimarily TradingTrading customercustomer relationships.relationships. TheThe TradingTrading customercustomer relationshipsrelationships areare beingbeing amortizedamortized overover aa 55 toto 1010 yearyear periodperiod usingusing thethe economiceconomic consumptionconsumption methodmethod totoreflectreflect thethe diminishingdiminishing cashcash flowsflows fromfrom thesethese relationshipsrelationships overover time.time.

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Table.o_!sTable of~Co ts

IBasis,IBasis,Inc.Iuc.

NotesNotes totoCondensedCondensed ConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(unaudlted)(unaudited)

(7)(7)GoodwillGoodwill andand OtherOther IntangibleIntangible AssetsAssets (Continued)(Continued)

TheThe followingfollowing tabletable summarizessummarizes otherother intangibleintangible assets:assets:

AsofMareb31r2o09 . . A_afDeeeml_r31,2es8 AccumulatedAccumulated AccumulatedAccumulated AtAt Co_tCoal AmnrlizatlonAmornsauou AtAlCostCost AmortizationAmorlisallou tlntia thou_'.nds)lhousauds) TrademarksTrademarks andand tradetrade namesnames $21,800$21,800 $$ (2,180)$21,800(2,180) $21,800 $$ (1,817)(1,817) WholesaleWholesale customercustomer relationshipsrelationships 30,74730,747 (6,116)(6,116) 30,74730r747 (4,616)(4,616) RetailRetail distributordistributorrelationshipsrelationships 13,50013,500 (3,930)(3,930) 13,50013,500 (3,080)(3,080) TerminationTermination partnerpartner relationshipsrelationships 8,4008,400 (3,178)(3,178) 8,4008,400 (2,719)(2,719) TechnologyTechnology 33,30033,300 (9,990){9,990) 33,30033,300 (8,325)(8,325) OtherOther 6464 (48)(48) 6464 (48)(48) $107,811$107,811 _"$ (25,442)(25,442) $107,811$107,811 g$ (20.605)(20,605)

We currently expect to amortizeamortize the followingfollowing remainingremaining amounts of intangibleintangible assetsassets asas of MarchMarch 31,200931,2009 inin thethe fiscalfiscal periods as follows:follows;

Year end ng December 31t, ~ta lhousauds 2009 (remaining nine months) $14,$ 14,529529 2010 17,91617,916 2011 16,38216,382 2012 12,51712,517 20132013 3,8753,875 Thereafter 17,17,150150 Total S$ 82,82,369369

InspaireseentImpairment

We havehave twotwo operatingoperating segmentssegments which areare alsoalso ourourreportingreporting units;units: (I)(l) Trading andand (2)(2) Retail.Retail. As of MarchMarch 31,31,20092009 andand DecemberDecember 31,31, 2008,2008, allall goodwillgoodwill waswas assignedassigned toto ourour TradingTrading reportingreporting unit.unit.

WeWe performperform ananannualannual impairmentimpairment testtest ofof itsits goodwillgoodwill asas requiredrequired underunder thethe provisionsprovisions ofof SFASSFAS 142142 onon December 3131 andand wheneverwhenever eventsevents oror changeschanges inin circumsumcescircumstances wouldwould moremore likelylikely thanthan notnot reducereduce thethe fairfair valuevalue of aareportingreporting unitunit belowbelow itsits carryingcarrying value.value. SFASSFAS No.No. 142142requiresrequires thatthat thethe impairmentimpairment testtest bebe performedperformed throughthrough thethe applicationapplication ofof aa two-steptwo-step process.process. TheThe firstfirst stepstep comparescompares thethe carryingcarrying valuevalue ofof ourour reportingreporting units,units, whichwhich areare ourour TradingTrading andand RetaiiRetail operatingoperating segments,segments, toto theirtheirestimatedestimated fairfair valuesvalues asas ofof thethe testtestdate.date. IfIffairfair valuevalue isis lessless thanthan carryingcarrying value,value, aa secondsecond stepstep mustmust bebe performedperformed toto quantifyquantify thcthe amountamount ofof thethe impairment,impairment, ifif any.any. WeWe estimateestimate thethe fairfairvaluevalue ofof ourour reportingreporting unitsunits usingusing ananincomeincome approach,approach, asasofofDecemberDecember 31,31,2008,2008, whichwhich estimatesestimates fairfair valuevalue basedbased uponupon futurefuture cashcash flowsflows discounteddiscounted toto theirtheir presentpresent value.value. WeWe thenthen reconcilereeoneile thethe estimatedestimated fairfair valuevalue ofofourour reportingreporting unitsunits toto ourour overalloverall marketmarket capitalization.capitalization. AssessingAssessing thethe impairmentimpairment ofofgoodwillgoodwill requiresrequires usustotomakemake certaincertain significantsignificant assumptions,assumptions, estimatesestimates andandjudgments,judgments, includingincluding futurefuture revenue,revenue, expenses,expenses, cashcash Bows,flows, discountdiscount ratesrates sndand impliedimplied controlcontrol premiums.premiums. TheThe actualactual resultsresults maymay differdiffer fromfrom

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Table of COllLeONCcnLenIS

iBasls,i Basis, Inc.

Notes toto Condensed Consolidated Financial Statements (Continued)(Continued)

(unaudited)(unaudited)

(7)(7)Goodwill and Other IntangibleIntangible Assets (Continued)(Continued)

thesethese assumptions and estimatesestimates andsnd itit is possible that such differences could have a material impact onon our financialfinancial statements.statements.

We base thethe valuation of our Trading reportingreporting unit, inin part, on i) our actualactual historicalhistorical performance; it)ii) ourour estimate of thethe futurefuture performance of our Trading reporting unit and iii) projections developed by an independent analyst. As aa resultresult of ourour annual impairmentimpairment analysis as of December 31,2008,31,2008, we concluded there had been an impairmentimpairment of thethe carryingcarrying value of goodwillgoodwill of $214.7$214 7 million as of December 31, 2008. InIn addition,addition, thethe carrying valuevalue of goodwill was further reduced by $t6.8$16 8 million, toto $t7.3$17 3 million,mfllion, asas of December 31,31,2008,2008, as a resultresult of thethe utilization of previouslypreviously reserved pro-acquisitionpre-acquisition netnct operating losses.losses,

For intangible assets, we assess thethe carrying value of these assetsassets whenever events or circumstancescircumstances indicateindicate that thethe carryingcarrying value may not be recoverable. We determined thatthat thethe adverse business climate and thethe significantsignificant drop inin ourour market capitalizationcapitalization experienced duringduring the fourthfourth quarter of fiscal 2008 were significant events that indicatedindicated that the carryingcarrying amount of our intangible assetsassets might not be recoverable.reroverable. SFAS No. 144 is aa two-step test which is required to be performed prior to assessing the impairment of goodwill. The firstfirst stepstep comparescompares the carrying value of thethe asset,asset, or asset group,group, to thethe undiscountedundiscounted cash flows of the asset,asset, or asset group.group. IfIfthethe assetasset or asset group's carrying valuevalue exceeds the undiscountedundiscounted cash flows,flows, step twotwo of the testtest is required to measure the impairment loss,loss, ififany. An asset or asset group cannotcannot bebe impaired below the asset oror asset group'sgroup's fairfair value.value,

As requiredrequired by SFAS No. 144, we performed our assessment, as of December 31,2008,31,2008, at the asset group levellevel which represented thethe lowest level of cash flowsflows that are largely independentindependent of cash flows of other assets and liabilities.liabilities, For us, this assetasset grouping isis atat thethe reporting unit level.level. Whenivhen performing thisthis test at the reporting unit level,level, goodwill isis includedincluded in thethe carryingcarrying value of the asset group. The carrying value of thethe Trading reporting unit, including goodwill (prior toto the goodwill impairmentimpairment charge described above), was greater than the undiscounted cashcash flowsflows while thethe Retail reporting unit's undiscountedundiscounted cash flowsflows exceeded the carrying value. For ourour Trading reporting unit, we performed step two of the impairmentimpairment testtest and determined therethere was no impairmentimpairment of our intangible assets as the fairfair value of thethe assetasset group, exoludingexcluding goodwill, was greater than thethe carrying value.value, The projections and assumptionsassumptions used inin calculatingcalculating the fairfair value of thethe assets were consistent with the projeetiunsprojections used in the goodwill impairment teSttest as of December 31,2008.31,2008. We alsoalso reassessed thethe amortization method and remaining amortizationamortization period forfor thethe assets, as of December 31, 2008, and determineddetermined that no changes toto the amortizationamortization period or method were necessary.

During thethe three months ended March 31, 2009, our market capitalization continued toto decline. As a result,result, we consideredconsidered this toto be an indicationindication thatthat thethe can'yingcarrying value of $17.3$17.3 million of ourour goodwill may be impaired.impaired. Accordingly, we conductedconducted an analysis toto determine ifif there had been an impairmentimpairment of the carrying value of goodwill asas of March 31, 2009. Our analysis was performed in accordance with SFAS 142, as described above. As aa result of thisthis analysis, we determined thatthat the carryingcarrying value of goodwill was not impairedimpaired as of March 331,I, 2009. In addition, we performed anan analysis under SFAS 144 of our other intangibleintangible assetsassets and determined thatthat thethe carcyingcarrying valuevalue of our other intangibleintangible assets was not impairedimpaired as of March 31, 2009. ItIt isis reasonablyreasonably possiblepossible thatthat therethere could be anan impairmentimpairment of our intangible assets and/orsnd/or our remaining goodwillgoodwill in thethe near term and thethe amounts could be material.

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_TableTableC_ ofof Contentso_nten_ts

iBasis,iBasis,Inc.inc.

NotesNotes totoCondensedCondensed CoasondatedConsolidated FinancialFinancial StatementsStstemeuts (Continued)(Continued)

(unaudited)(unaudited)

(8)AccruedExpenses(8) Accrued Expenses

AccruedAccrued expensesexpenses consistconsist ofofthethe following:following:

AsAsofofMarchMarch 31,3i, A_Asofofneceml_rDecember 31,3l, 20091000 20081000 (Intrn thousands)thousands) TerminationTermination feesfees andand circuitcircuit costscosts $$95,95,6t9619 $$136,136,655655 CompensationCompensation 2,4832,483 3,2243,224 DividendDividend payablepayable 1,42111421 1,4211,421 AccruedAccrued otherother 9,4809,480 10,38510,385 TotalTotal accruedaccrued expensesexpenses "$3 109,003109,0113 $3 151,685151,695

(9)(9)AccruedAccrued Restructuring Costs

At March 31,31, 2009, we had accruedaccrued restructuring costscosts of $0.9$0 9 million,migion, which consisted of $0.4$04 millionmilh'on inin futurefuture payment obligations relatingrelating toto a terminatedterminated New York City facility leaselease andand $0.5$0.5 million of costs accrued forfor futurefuture leaselease obligationsobligations for certain vacant leased faeilifies,facilities, net of future sublease payments.payments. Payments of thesethese restructuringrestructuring costscosts willwill be made through February 2011.201 I.

A summary ofaccrued restmoturingrestructuring costs for the three months ended March 31, 2009 is asas follows:

FtattreE3ll33re Pa_T_Eattnenctlag Obligation on ConlractualContractnat Le_eLease LeaseLea_e obllgauonsObligation Relating TermlnauoaTermlnatloo to VacantVmcantEacnluesFacillUes TolalTotal Qn(In thonsanas)thomand_) Balance,Balance, December 31, 2008 $490$ 490 $611$ 611 $1,101$1,1Q1 Cash paymentspayments (59)(59) (128)(_28) (187) Balance, March 31,31, 2Q092009 3$ 431 ~$ 493483 994$ 914

Current portion, included in seemed expenses $114$ 714 Current portion, included in accrued expenses 200 Long-termLong-term portion,portion, includedinoluded inin otherother long-termlong-term liabilitiesliabilities 200 $ 914 TotalTotal $ 914

(10)(10) IncomeIncome TaxesTaxes

TheThe incomeincome taxtax provisionprovision ofof $1.$1.1million1million andand $3.$3.11 millionmillion forfor thethe threethree monthsmonths endedended MarchMarch 31,31,20092009 andand 2008,2008, respectively,respectively, primarilyprimarily relatesrelates toto incomeincome taxestaxes onon thethe taxabletaxable incomeincome ofof ourour NetherlandsNetherlands operations.operations. TheThe lowerlower year-to-yearyear-to-year incomeincome taxtax provisionprovision isis largelylargely aaresultresult ofof ourour on-goingon-going integrationintegration efforts,efforts, whichwhich havehave increasedincreased thethe levellevel ofof managementmanagement andand supportsupport ofof ourour NetherlandsNetherlands operationsoperations thatthat isis beingbeing providedprovided fromfrom ourour V.U.S.S, headquarters.headquarters. AsAs aaresult,result, wewe havehave beenbeen ableable totoreducereduce thethe pre-taxpro-tax incomeincome ofof ourour NetherlandsNetherlands operationsoperations and,and, correspondingly,correspondingly, wewe havehave reducedreduced thethe levellevel ofof lossesleases inin thethe V.U.S.S, forfor whichwhich wewe receivereceive nono currentcurrent taxtax benefit,benefit.

AsAs discusseddiscussed ininNoteNote 1010totoourour consolidatedconsolidated financialfinancial statementsstatements ininourour 20082008 AnnualAnnual ReportReport onon FormForm 10-K,10-K, wewe havehave recordedrecorded aavaluationvaluation allowanceallowance againstagainst ourour V.U.S.S. netnet deferreddeferred taxtax assetsassets sincesince ititisis

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Table of ContenlsContents

IBasis_IBasis, lne,Inc,

Notes to Condensed CousolidatedConsolidated Financial Statements (Continued)

(unandlted)(unaudited)

(10) Incomeincome Taxes (Continued)(Contiuued)

more likely than not thatthat our U.S.VS, net deferred tax assets wiltwill not be realized. With our adoption of SFAS No. 141R onon January 1,I, 2009, previouslypreviously reserved pro-acquisitionpre-acquisition netnet operatingoperating losseslosses will reducereduce incomeincome tax expenseexpense when utilized or when the valuation allowance for such net operating losses isis released.

(11) Line of Credit and Long-Term Debt

Long-termLang-term debtdebt consistsconsists of the following:

As ofor March 31,32, AsAs of December 3h3l, 2_91000 20082000 (In0o lh0uxaJlds]ihoossedsi Bank borrowings $$20,20,766766 $$27,27,080080 Capital lease obligations 1,2481,248 877 22,01422,014 27,95727,957 Less: Current portionportion (665) (577)(577) Long-term portienportion $s 21,349ss,sss $s 27,380ss,sss

In October 2007, we entered intointo a Second Amended andand Restated Loan and Security Agreement (the "Loan Agreement")Agreement" )with Silicon Valley Bank, which amended and restated a0 certain Amended and Restated Loan andand Security Agreement dated as of December 29, 2003. We enteredentered into the Loan Agreement to obtain fundingfunding for working capital purl_saspurposes and inin support of the KPN Transaction.Tmnsaction. Pursuant to thethe Loan Agreement, as subsequently amended, we may borrow up to $35.0$35.0million fromfrom time to timetime under a0 secured revolving credit facilityfacility forfor a two-yeartwo. year period. Borrowings under thethe lineline ofcredit will be on a formula basis, based onon eligible domestic andand foreign accounts receivable. The lineline of credit containscontains quarterlyquarterly financialfinancial covenants,covenants, consistingconsisting primarily of minimum profitabilityprogtability and minimum liquidity requirements. The line of credit has a quarterlyquarterly commitment feefee of 0.63%0.63% on any unused portion of thethe line of credit and an up-front, one- timetirne facility feefee of 0.75%,0.75%,or $263,000.$263,000.The revolvingrevolving creditcredit facilityfacility isis also guaranteed by all domestic wholly-owned subsidiaries.subsidiaries. The revolvingrevolving credit facility isis collateralized by a firstfirst priority lien and securitysecurity interest on the assets ofiBasisof iBasis and suchsuch guarantors.guarantors, In addition, iBasisiBasis has pledged 66.2%66.2% of all of itsits ownershipovmership inin iBasis B.V.,B.V., aa wholly- ownedovmed subsidiarysubsidiary based in The Netherlands, as collateralcollateral for the revolvingrevolving credit facility. Pursuant to thethe terms of thethe Loan Agreement, we may useuse the proceeds solely forfor working capital and to fund our general business requirements.

On JanuaryJanuary 26, 2009, thethe Company and Silicon Valley Bank modified the Loan Agreement, effective as of December 30, 2008. The medificatienmodification toto the Loan Agreement contains thethe followingfollowing amendments, among others:

i)i) We decreased the amount available under the Loan Agreement fromfrom $50.0$50.0 million to $35.0$35.0 million;

ii)ii) We extended the maturity date of the Loan Agreement toto September 30, 2010;20i0;

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_Table_of'fable ofCo!!ten_Contents

iBasis_iBasis,Inc.Inc.

NotesNotes totoCondensedCondensed ConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(unaudited)(unaudited)

(11)(11)LineLine ofofCreditCredit andand Long-TermLong-Term DebtDebt (Continued)(Continued)

iii)iii) WeWe establishedestablished minimumminimum interestinterest ratesrates payablepayable onon amountsamounts drawndrawn underunder thetheLoanLoan Agreement,Agreement, whichwhich includeinclude anan interestinterest raterate floorfloor ofof4.25%4.25%onon amountsamounts subjectsubject totoSiliconSilicon ValleyValley Bank'sBank's primeprime raterate andand anan interestinterest raterate floorfloor ofof2.0%2.0%onon amountsamounts subjectsubject totothethe L1BORLIBORrate;rate;

iv)iv) WeWe changedchanged formulasformulas forfordeterminingdetermining quarterlyquarterly adjustmentsadjustments totomarginsmargins applicableapplicable totoprimeprime raterate andand LIBORLIBOR raterate andand formulaFormula forForunusedunused revolvingrevolving lineline feefee fromfrom formulasformu)as basedbased onon thethe totaltotal fundedfunded debtdebt ratioratio totoformulasformulas basedbased onon EB1TDAEBITDA (earnings(earnings beforebefore interest,interest, taxes,tax.ss,depreciationdepreciation andand amortization)amortization) minusminus capitalcapital expenditures;expenditures;

v)v) We increasedincreased theihe frequencyfrequency ofofcertaincertain financialfinancial reportingreporting requirementsrequirements fromfrom quarterlyquarterly totomonthlymonthly asas requestedrequested byby Silicon ValleyValley Bank;Bank;

,A)vi) We modifiedmodified thethe minimum adjustedadjusted quickquick ratio financialfinancial covenantcovenant toto requirerequiresa minimumminimum adjustedadjusted quickquick ratioratio of 0.800.80 to 1.001.00 forfor thethe fiscal quarter endedended December 31,31,20082008 andand asas ofofthethe endend of eacheach fiscalfiscal quarterquarter thereafter;

vii) We ddeteddeleted the minimum consolidated EBITDA financialfinancial covenant;covenant;

viii) We added a financial covenant requiring consolidated EBITDA minus capital expendituresexpenditures toto bebeatat leastleast (a)(a) a loss of $1,$1,000,000000,000 with respectrespect to the fiscal quarters ending December 31,3I, 2008 and March 31, 2009, (b) $1.00$1.00 with respectrespect toto the fiscal quarter ending June 30, 2009, (e)(c) $1,750,000$1,750,000 with respect to the fiscalliscal quarter ending September 30, 2009, and (6)(d) $3,$3,500,000500,000 with respect to the fiscal quarter ending December 31, 2009 andend eacheach flscalfiscal quarterquarter tkereafler;thereafter; and

ix)ix) We modified thethe minimum liquidity financialfinancial covenant to require a minimum liquidity amount of $17.$17.55 million measured atat thethe endend ofof each fiscalfiscal month through August 31,2009 and a minimum ot'of $20$20 million atat thethe endend of eacheach fiscalfiscal month thereafter.thereafter. In addition,addition, we are requitedrequired toto maintain at leastleast 40% of ourour totaltotal cash,cash, cashcash equivalents andand short-termshort-term investmentsinvestments with Silicon Valley Bank.

AsAs ofof MarchMarch 31,31. 2009,2009, wewe werewere inin compliancecompliance withwith allall ofof thethe covenants underunder thethe Loan Agreement.Agreement. InIn connectioncounection with thisthis modiflcation,modification, wewe paidpaid SiliconSilicon ValleyValley BankBank aamodiflcationmodification feefee ofof $52,$52.500500 andand aa revolvingrevolving lineline renewalrenewal feefee of $175,$175,000000 whichwhich areare beingbeing recognizedrecognized asasinterestinterest expense.expense.

AtAt MarchMarch 31,31, 20092009 andand DecemberDecember 31,31, 2008,2008, wewe hadhad $20.$20.88 millionmillion andand $27.$27.11 million,million, respectively,respectively, inin borrowingsborrowings outstanding,outstanding, andand hadhad issuedissued outstandingoutstanding standbystandby lettersletters ofof creditcredit ofof $2,$2.66 millionmillion andand $2.$2.66 million,million, respectively,respectively, underunder thethe LoanLoan Agreement.Agreement.

InInthethethreethreemonthsmonths endedended MarchMarch 31,31, 2009,2009, wewe purchasedpurchased certaincertain equipmentequipment forfor $0.$0.44 millionmillion underunder aafourfour yearyear financingfinancing agreement,agreement, withwith paymentspayments dueduemonthlymonthly throughthrough MayMay 2013.2013.

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Table_f_fCoj_tentsTable of Contents

iBasis_IBasts, Inc.lnc.

Notes to Condensed Consolidated FinancialFinaucial Statements (Continued)

(unaudlted)(unaudited)

(12)(12)Commitments and Contingencies

CommitmentsCommitments

We leaselease our administrative endand operating faeililies,facilities, under operating leases which expireexpire on various dates throughthrough 2018. The futarefiiture approximate minimum lease payments under thesethese operating leasesleases as of March 31, 2009 consist of thethe following:following;

Year ended December 3!._. ln thomhllds Less than one yearyear $$2,2,631631 One toto twotwo years 763 Two to three years 353 Three toto four years 274 Four toto five years 286 Thereafter 1,4391,439 Total futurefuture minimum leaselease payments $5,$ 5,746746

At March 31, 2009, we had eommitmemscommitments withwi th certain telecommunications carrierscamera for thethe termination of minutes forfor thethe next twelvetwelve months totalingtotaling $13.6$13.6 million. As of MamhMarch 31, 2009, we diddid not have any otherother material purchase obligations, or other material long-termlong-term commitmentscommitments reflectedreflected on ourour consolidated balance sheets,sheets.

Litigation

In addition toto litigation that we have initiated or responded to inin the ordinary course of business,business, we areare currently party toto the following potentially material legallegal proceedings:proceedings:

Class Action Pursuant toto 1999l999InitialInl rial Public OfferingCPertng

In 2001, we were served with several class action complaints thatthat were filed in thethe United States District Court for thethe Southern DistrictDishict of New York against us and several of our officers,otficers, directors, and formerformer officersofficers and directors, asas well as againstagainst the investmentinvestment banking firmshens thatthat underwroteunderwrote our November 10, 1999 initialinitial public offering of common stockstock and our March 9.9, 2000 secondarysecondary offeringofi'ering of eomm0ncommon stock. The complaints were filedfiled on behalf of a class of persons who purchased our common stockstock between November 10, 1999 and December 6, 2000.

The complaints are similar toto each other and to hundredshundreds of other complaintscomplaints filed against other issuers and theirtheir underwriters,underwriters, and allegeallege violationsviolations of thethe Securities Act of 1933,1933,asas amended (the "Securities"Securities Act"), and thethe Securities Exchange Act of 1934,1934, as amended (the(the "Exchange Act"), primarilyprimarily based on the assertionassertion that therethere was undisclosed compensation received byby our underwritersunderwriters inin connectionconnection with our public offeringsofferings and thatthat therethere were understandings with customers to make purchases inin thethe afiermarket.

In September 2001, the complaintscomplaints were consolidated and allegeallege that our prospectusespmspectuses failed toto disclosedisclose thesethese arrangements. The consolidated complaint seeks anan unspecified amount of monetary damages and other relief.relief, In October 2002, the individualindividual defendants were dismissed from thethe litigation by stipulationstipulation andand without prejudice and subject toto anan agreement toto tolltoll thethe running of time-based defenses. In February 2003, thethe districtdistrict courtcourt denieddenied our motion toto dismiss.

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"fableTable of Contents

iBasis_IBasis, lnc,Inc,

Notes toto Condensed Consolidated Financial Statements (Continued)(Continued)

(unaudited)

(12)(12) Commitments and ContingenciesCoutiugeneles (Continued)(Continued)

defendants the class action In June 2004, we and the individualindividual defendants, as well as many otherother issuers named as defendants in the class action to the court. The proceeding, entered into an agreement-in-principleagreement-in-principle toto settle thisthis matter, and this settlementsettlement was presented to the court. The districtdistrict court grantedgranted a preliminary approval of thethe settlement in Februarypebruary 2005, subjectsubject to certain modifications toto the order proposed barbar order,order, toto which plaintiffs andand issuersissuers agreed. In August 2005, the district court issuedissued a preliminary order hearing, afier furtherfurther approving thethe modifieationsmoditications to the settlement, certifying the settlementsettlement classesclasses and scheduled a faimeasfairness hearing, after notice toto the class. Plaintiffs have continuedcontinued toto pursue their claims against the underwriters.underwriters. The district court established aa procedure whereby six "focus""focus" easescases are being pursued initially and has certifiedcertified aa class of purchaserspurchasers in thosethose cases. The underwritersunderwriters appealedappealed the certification order inin each of thethe six cases andsnd inin December 2006,2006, the United States Court of in the six focus Appeals for the Second Circuit re,reversedversed thethe certificationccrtification orders. Motions to dismiss amended complaints filedfiled in the six focus casescases havehave been denied.

The plaintiffs, thethe underwriterunderwriter defendants,defendants, the issuerissuer defendants and thethe issuer's insurers have entered intointo preliminary settlementsettlement agreements, subjectsubject to approvalapproval &theof the district court, and on April 2, 2009 the plaintiffs filedfiled aa motion seeking preliminary approval of the court. The proposed settlementsettlement would release all of thethe claims asserted against usus andand would be the settlement will be fundedfunded byby the underwriter defendantsdefendants and the issuers'issuers' insurers.insurers. There cancan bebe no assurance that the proposed settlement will be intend to approvedapproved by the district court..court. .We believe thatthat if this matter is not settled,settled, we have meritorious defenses which we intend to vigorouslyvigorously assert. We cannotcannot estimate potential losses,losses, if any, fromfrom thesethese matters or whether, inin lightlight of our insurance no amounts have coverage,coverage, any lossloss would be material to our financialfinancial condition, resultsresults of operations or cash flows.fiows, As such,such, no amounts have been accrued as of March 3t,31, 2009.

Actions Pursuant tota Option Investigation

On December 21, 2006, two derivative actions naming us as a nominalnominal defendant were filed in the United States District Court for the District of Massachusetts: David Shutvet,Shiitvet, Derivatively on Behalf ofofiBaris,iBasls, lnc.,/nc. , v. Ofer Gneezy et aL,at., U.S.D.C.U.S.D.C. Civil AetinnAction No. 06-12276-DPW;0612276 DPW; and Victor Malozi,hfalazi, DerivativelyDerivative/y on Behalf of iBasis,iBasts lnc.,Jnc., v. Ofer GneezyGneszy et aL,ai„UU.S.D.C.S D C. Civil Action No. 06-12277-DPW.06-12277-DPW. On May 10, 2007, the two actionsactions that arcare describeddescribed below were consolidated and, onon December 5, 2007, the United States DistrietDistrict Court for the District of Massachusetts issued aa formal order dismissing thethe entire action for failure to statestate aa claim underunder federalfederal law. On MayMsy 30, 2008, thethe plaintiffs filed aa notice of appeal fromRom that Memorandum and Order to thethe United States Court of Appeals for thethe First Circuit. On February 4, 2009, however, thethe plaintiffsplaintiffs filed a motion for voluntary dismissaldismissal of their appeal, andand accordingly on FebruaryFebruary 18,18,2009, thethe United States Court of Appeals issuedissued aa judgment dismissing thethe appeal. As a result, thisthis derivative litigation has terminated.

SEC Option Investigationinvestigation

We announcedannounced onon October 20, 2006, thatthat we were contacted by thethe SEC asas part of an informalint'ormal inquiry and we furtherfurther disclosed onon March 29, 2007, in ourour Current Report onon Form 8-K, that the SEC had notifiednotified us thatthat we would be receiving a formal order of investigation relatingrelating to our stock option practices. On April 13, 2007, we received the formalformal order of investigation. The SEC investigation soughtsought documents and information from usus relatingrelating toto the grant &ourof our optionsoptions from 19991999throughthrough

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Tab}__o.{'CofttontsTable&(Contents

iBasls,iflasis, Inc.Iuc.

Notes toto Condensed ConsolidatedConsofidated Financial Statements (Continued)

(unaudited)

(12) Commitments and Contingencies (Continued)

2006. The SEC has taken testimony from individuals including certain of our current and formerformer officers andand directors. We the outcome have cooperated fullyfully with thethe SEC investigationinvestigation andand we are inin communication with thethe SEC staffregardingstaff regarding the outcome of the investigation. There isis no assurance thatthat we will be ableable to resolve thethe SEC investigation on acceptable termsterms without thethe institution of enforcement proceedings by thethe SEC against us oror oneone or more of our senior executive officersofiicers or thatthat otherother inquiriesinquiries wiltwill not be commenced by other U.S.U.S, federal, state or other regulatoryregulatory agencies. An SEC enforcementenforcement proceeding could seekseek an injunction against futurefuture violations of the securities laws, a civilcivil penaltypenalty and, as toto individual executives, disgorgement and aa bar order against serving as an officer or director of a publicly traded company. AAberbar order as 1oto any of our seniorsenior executiveexecutive officers would deprive us of any such executive's services and couldcould have a material adverse affect on ourour business.

We cannot estimateestimate thethe amount of losses,losses, ifif any, from thethe SEC investigation, oror whether any tossloss would be material to our financialfinancial condition, results of operations or cashcash flows. As such, no amounts havehave been accrued as of March 31, 2009.

Sub_DistributorSub-Distributor ActionAction

On September 20, 2007,2007, JJ & J CommmtieatiunsCommunications ("J & J"),J"),a sub-dislributorsub-distributor of calling cards distributed through iBasis distdbuterdistributor Abdul Communications ("Abdul"), amended a complaint filed in thethe United States District Court forfor thethe District of Maryland against Abdul, toto add iBasis and PCI, a wholesale calling-card provider ("PCl"),("PCI"), as defendants inin the matter. The complaintcomplaint assertsasserts that JJ & IJ has lostlost andand continues to loselose money because iBasisiBasis and PCI deactivated calling cards forfor which JI & J allegedly paid. J & J isis seeking in excess of $1.0$1,0 million dollars,dollars, plus punitive damages, attorneys fees and litigation costscosts based on a variety of claims against Abdul, iBasis,iBasis, and PCI, predicated on contractual theories,theories, variousvarious torts,torte, unnspiracyconspiracy andand an alleged violationviolation of§of 9 201 of thethe Telecommunications Act. With respect toto iBasis,iBasis, J &Bt J alleges both direct liability andand vicarious liability, forfor itsits allegedalleged statusstatus as principalprincipal in anan allegedalleged agency relationshiprelationship with Abdul. iBasis respondedresponded toto the amendedamended complaintcomplaint throughthrough an answer and motion toto dismiss on February 8, 2008. On June 2, 2008, thethe Court dismissed the conspiracyconspiracy and Telecommunications Act claims. Discovery is proceeding as to the remaining claims.

We cannot estimate the amount of losses, if any, fromfrom thisthis matter, or whether anyany loss would bcbe material to our financialfinancial condition,condition, results of operations or cash flows.flows, As such,such, no amount has been accrued as of March 331,l, 2009.

Bankruptcy Preference ClaimC/a/sn

On April 24, 2001 (the(the "Petition Date"),Date"), World Access, Inc.Inc. ("World("World Access"),Access"), WerldxChangeWorldxChange Communications, Inc. ("WorldxChange"),("WorldxChangeu), and FaailienmFacilicom International,International, LLC ("Faeilicom"),(uFacilicom"), together with otherother relatedrelated debtors (collectively,(collectively, the "Debtors"),"Debtors" ), filed voluntaryvoluntary petitions forfor reliefrelief underunder chapter 11 of titletitle 11 of the United States Code (the "Bankruptcy Code")Code" ) inin the United States BanknlpteyBankruptcy Court forfor the Northern District of Illinois (Eastern Division). The Debtors' easescases arejointlyjointly administeredadministered but have not been substantivelysubstantively consolidated,consolidated. Prior toto the Petition Date, we andsnd the Debtors engagedengaged inin a reciprocalreciprocal business relationship.relationship. On or aboutabout April 21,200321, 2003 the Debtors initiated a large number of avoidance actions, including anan adversary prcce¢dingproceeding in which the Debtors asserted claims againstagainst us for allegedly preferential transfers and nonpaymentnonpayment of overdue amounts owed byby

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T_lbleTable of Col)_ntsContents

iBasis,ifiasis, Inc.inc.

Notes toto Condensed Consolidated Financial Statements (Continued)

(unaudited)(unaudited)

(12)(12)Commitments andand ContingenciesCoutiugencies (Continued)

statutory iBasisiBasis to thethe Debtors totaling approximately $2.1$2. 1 million. We have asserted defensesdet'enses to the claims,claims, invoked statutory defenses and filedfiled proofs of claim for appmximatslyapproximately $0.5$0.5 million to which the trusteetrustee forfor thethe Debtors hashas objected. We expect toto engage inin settlementsettlement discussion inin advance of mandatadmandated mediation to attemptattempt to resolve these claims.claims. We havehave determined that it is probable thatthat we will incurincur a liabilityliability of approximately $0.5$0.5 million and, accordingly, we have accruedaccrued thatthat amount as of March 31, 2009.2009,

ConsumerConsiimer Class Action

We were named inin a putative consumer class action complaint,complaint, filedfiled inin thethe United States District Court for the District of New Jersey. We were served on May 27, 2008. The putative classclass action plaintiff,plaintiff, Orlando Ramirez, asserted violations of consumer protection statutesstatutes inin New JerseyJersey andand other states on behalf of an asserted nationwidenationwide class of purchaserspurchasers due to an alleged failurefailure to adequately disclose thethe actual calling time available on iBasis'iBasis' prepaid calling cards.cards. We filed aa motion toto change venue toto the Eastern District of New York where named plaintiffresidesplaintiff resides andand purchased thethe card. Plaintiffs warewere granted a voluntary dismissal, without prejudice, on JulyJuly 9, 2008.2008, On December 19, 2008, aa substantially similar complaint was filed against us on behalfbehalf of Mr. Ramirez inin the United StalesStates DistrictDisuict Court forfor thethe Eastern District of New York. We were served with the summonssummons and complaint onon April 16, 2009.2009, We believe thatthat we have substantialsubstantial defenses to the claimsclaims alleged inin thethe complaint and we intendintend to vigorously defend against thethe claims asserted. We cannot estimateestimate thethe amountamount of losses,losses, ifif any, fromI'rom thisthis matter, or whether any lossloss would be material to our financial condition, resultsresults of operations or cash flows.flows. As such, nono amountamount has been accruedaccrued asas of March 331,I, 2009.

Other Matters/ifatters

We are also subject to suitssuits for coneetien,collection, relatedrelated commercialcommercial disputes, claims by formerformer employees,employees, garnishmentgarnishment actions, claims relatedrelated to certaincertain taxes, claimsclaims from carrierscamera and foreignforeign serviceservice partnerspartners overover reconciliation of payments for circuits, Inter'netInternet bandwidth and/orand/or accessaccess to the public switched telephonetelephone network, andand claims fromfrom estates of bankrupt companies alleging thatthat we received preferential payments fromfrom suchsuch companiescompanies prior toto their bankruptcybankruptcy filings.filings. We cannot estimate the amount of losses,losses, ifif any, from these matters, or whether any lossloss would be material toto our financialfinancial condition, results of operationsoperations or cash flows.flows. As such, no amount hashas been acuruedaccrued as of March 31, 2009.

(13) Related Party Transactions

RevenueJtevenue and Data and TefecammuntcatlanTelecommunlcatlon Casts

Revenue fl'omfrom KPN and itsits subsidiariessubsidiaries amounted toto $43,7$43.7 million andand $50.2$50.2 million forfor thethe three months ended March 331,l, 2009 and 2008, respectively, andand is reported in net revenue from&om relatedrelated parties inin thethe Condensed Consolidated Statements of Operations.

Data andand telecommunicationtelecommunication costscosts purchased from KPN was $15.3$15,3 million and $23.t$23.1 million for the three months ended March 331,I, 2009 and 2008, respectively, andsnd is reportedreported in data and telecommunicationstelecommunications costs--relatedcosts —related parties inin the Condensed Consolidated Statements of Operations.

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TableTable of_C.ontentso~f.entente

iBasls,iBasia,Inc.Inc.

NotesNotes totoCondensedCondensed ConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(unaudlted)(unaudited)

(13)(13)RelatedRelated PartyParty TransactionsTransactions (Continued)(Continued)

TheseThese costscosts relaterelate totoservicesservices forfor thethe procurementprocurement andand transmissiontransmission ofsendlngof sending andsnd receivingreceiving traffictraffic (provided(provided totoususbyby K.PNKPN andand itsits subsidiaries).subsidiaries).

AllocatedAllocated expensesexpenses

EngineeringEngineering andand networknetwork operationsoperations expensesexpenses includeinclude allocatedallocated costscosts fromfrom KPN,KPN, whichwhich werewere $1.2$1.2millionmillion andand $1.8$1.8millionmillion forfor thethe threethree months endedended MarchMarch 31,31,20092009 andand 2008,2008,respectively.respectively, TheThe reductionreduction inin engineeringengineering andand networknetwork operationsoperations supportsupport fromfrom KPN reflectsreflects thethe resultsresults ofofourour integrationintegration effortseiforis andand thethe migrationmigration ofofourour mid-rangemid-range voicevoice productproduct toto ourour VoIPVofp network.network,

Selling,Selling, general andand administrative expensesexpenses includeinclude allocatedallocated corporatecorporate andand divisionaldivisional costscosts fromfrom KPN,KPN, whichwhich were $0.7$0.7millionmiflion and $1.1$1.1 million forfor thethe threethree months ended March 31,31,2009 andand 2008, respectively.respectively. TheThe decreasedecrease inin thesethese allocatedallocated costscosts fromfrom KPN primarily reflects certaincertain costs thatthat were previously allocated, suchsuch asas audit fees,fees, which areare nownow being paid directly by us,us, asas well as the result of the integrationintegration ofofourour Netherlands andand U.S.U.S,operations.operations.

WorkingIporking Capital nndand DebiDebt AdjusttnentsAdjustments relatedre(uted totn KPNEpli/ TransactionTrunsttction

In accordance with the Share Purchase Agreement for the KPN Transaction, aa post-closing adjustment was required if (i) iBasis'iBasis' working capital was lower than or exceeded $37,100,000;$37,100,000; (it)(ii) iBasis'iBasis' debt exceeded or was lower than $2,$2,900,000;900,000; (iii)Off) the combined working capital of KPN GCS was lower thanthan or exceeded ($6,($6,100,000);100,000); and/or (iv) the combined debt of KPN GCS exceeded $0, as of the date of the closingdosing of thethe KPN Transaction. Based on iBasis'i Basis' balance sheet position on the date of the closing of the KPN Tmnsaction,Transaction, working capitalcapital was $13,353,000$13 353 000 less than the specified levellevel of $37,100,000,$37 100000, andand debt was $1,$1,776,000776,000 less than the specifiedspecified level of $2,$2,900,000.900,000. As a result, a payment ofof$11,577,000$11,577,000 was due toto KPN fromfrom iBasis.iBasis. BasedBased onon KPN GCS's balancebalance sheetsheet position on the date of the closing of the KPN Transaction, working capital exceededexceeded thethe specifiedspecified levellevel of ($6,($6,100,000)100,000) byby $3,$3,945,000945,000 andand debt was at the specified level of $0. As a result, payment of $3,$3,945,000945,000 was duedue toto KPNKPN fmmfrom iBasis.iBasis.

In earlyearly 2008,2008, KPNKPN forgaveforgave $0,$0.88 million inin expensesexpenses incurredincurred by KPN GCS since thethe closingclosing of thethe KPN Transaction.Transaction. AsAs aa result,result, thethe amountamount duedue toto KPNKPN waswas reducedreduced byby thisthis amountamount andand thethe reductionreduction waswas recorded asas a contributioncontribution toto equity.equity. TheseThese expensesexpenses werewere recordedrecorded inin ourour resultsresults ofofoperationsoperations inin thethe threethree months endedended MarchMarch 31,31, 2009,2009. The totaltotal amountamount of $14.$14.77 millionmillion duedue toto KPNKPN was scheduledscheduled toto bebe paidpaid byby iBasisiBasis inin threethree successivesueecssive quarterly installmentsinstallmentS throughthrough thethe thirdthird quarterquarter ofof2008,2008, withwith interestinterest atat thethe raterate ofof 6%6% perper annum.annum. InInMay 2008,2008, wewe made thethe fustfirst paymentpayment of$5.$5.22 million, includingincluding interest,interest, toto KPN.KPN. InIn SeptemberSeptember 2008,2008, wewe revisedrevised thethe termsterms ofof thethe remainingremaining balancebalance of $10.$10.33 million duedue toto KPN toto extendextend thethe paymentpayment datedate ofof thethe secondsecond installmentinstallment paymentpayment totoMarchMarch 20092009 andand thethe finalfinal installmentinstallment toto JuneJune 2009. InIn addition,addition, thethe interestinterest raterate waswas increasedincreased toto 7%7% onon thethe principalprincipal amountamount due,due, effectiveeffective OctoberOctober 1, 2008,2008, andand wewe paidpaid additionaladditional interestinterest ofof $60,$60,000000 relatingrelating toto thethe extensionextension ofofthethe secondsecond installmentinstallment thatthatwaswas originallyoriginally duedue JuneJune 30,30, 2008.2008. InInMarchMarch 2009,2009, wewe mademade thethe secondsecond installmentinstallment paymentpayment ofof $5.$5.55 million,million, includingincluding interest,interest, toto KPN.KIN.

AsAs ofof MarchMarch 31,31, 20092009 andand DecemberDecember 31,31,2008,2008, unpaidunpaid principalprincipal andand accruedaccrued interestinterest duedue toto KPNK.PNwaswas $5.$5.11 mifiionmillion andand $10,$10.55 million,million, respectively.respectively.

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T_blgTabke ¢off Con.t._en_tsContents

Item 2. Management's/Ifanagemenr's DlscussionDiscussion and Analysis of FinanclalFinancial ConditionCoiidiiion and Results of OperaflonsOperations

Overview

We are aa leading wholesale carrier of international long distance telephone callscalls and a provider of retail prepaid calling services and enhanced services forfor mobile operators.

! Our operations consist of our wholesale trading business ("Trading"),("Trading" ),inin which we connectconnect buyers and sellers of international telecommunicatioustelecommunications services, and our retail servicesservices business ("Retail").("Retail" ).Our Trading business also includes Outsourcing revenue which we generate as aa managed servicesservices provider of wholesale international voice services forfor specific carrier customers, including KINKpN B.V.B.Y, ("KIN")("KpN") which owns a majority of our outstandingoutstanding common stock.stock.

InIn our Trading business we receive voice traffic fromfrom buyers---originatingbuyers —originating telecommunications carriers who are interconnected toto ourour network via Voice over InteractInternet Protocol ("VotP")("YolP")oror traditional timetime divisiondivision multiplexing ('TDM")('TDlrt") connections, and we route that traffictraffic over our network toto sellers--localsellers —local service providers and telecommunicatiunstelecommunications carrierscarriers inin the destination countries with whom we have established agreements to manage the completion or termination of calls.calls. We offer our Trading service on aa wholesale basis toto carders,carriers, mobile operators,operators, eousumerconsumer VolPVoIP companies, telephony rescUersresellers and otherother serviceservice providers worldwide. Our OutaourcingOutsourcing revenuerevenue currently eousistsconsists of internationalinternational voice traffictratTic we terminateterminate for KINKPN andand its affiliates andand for TDC, a leading telecommunicationstelecommunications cardercarrier inin Denmark.

Our Retail business consists of retailretail prepaid callingcallinginternationalcards, which are marketed through distributors primarily toto ethnic communities within major metropolitan markets inin the United States, andand Pinged,pingotN, a prepaid calling service that we offer and sell directly toto consumers via an eCommerce model. Both can be private-labeledprivate-labeled for other service providers. The prepaid calling cardcard business and Pingo leverageleverage our existing international networknetwork and have the potential to deliver higher margins than are typicallytypically achieved in the wholesale Trading business. In addition, the retailretail prepaid calling cardcard businessbusiness typicallytypically has a faster cash collection cyclecycle thanthan thethe wholesale Trading business. In 2007 we laanchedlaunched PingoBusiness, enhancements that enable businesses toto manage multiple Pingo aecountsaccounts throughthrough a single administrative account.

We use proprietary,proprietary, patented andand patent-pending technologytechnology inin our globalglobal VolP networknetwork to automate the selection of routes andand termination partners based on a variety of performance, quality, and business metrics. We have callcali terminationtctmination agreements with locallocal service providers in more than 100 countries inin North America, Europe, Asia, the Middle East, Latin America, Africa and Australia.

Transaction with KPN B,V.,B.V., aa subsidiary of Royal KPN N.V.N.V. " On October 1,I, 2007, iBasis,iBasis, Inc. ("iBasis,"("iBasis, the "Company","Company", "we""we"andand "our")"our") and KPN B.V.B,V, ("KIN"),("KPN"),a subsidiary of Royal KPN N.V.N.V. ("Royal("Royal KPN"), completed _a'ansactionstransactions ("KPN("KPN Transaction")Transaction" )pursuant toto which iEasisiBasis issued 40,121,07440,121,074 shares of its common stock toto KINKPN andand acquired thethe outstanding sharesshares of twotwo subsidiariessubsidiaries ofKPNof KPN ("KPN("KPN GCS"), which encompassed KPN' internationalinternational wholesale voice business. The Company also receivedreceived $55 million in cash from KPN, subject toto pest-closingpost-closing adjustments based on the working capital andand debtdebt ofiBasisof iBasis and KINKPN GCS. ImmediatelyImmediately afteratter issuance onon October 1,I, 2007, the sharesshares ofiBasisof iBasis common stock issued to KINKPN representedrepresented 51%51'/v of the issuedissued and outstanding sharesshares ofofiBasisiBasis common stockstock on aa fully-dilutediblly-diluted basis (which includedincluded all of thethe issued andand outstanding common stock and thethe common stockstock underlying outstanding "in-the-money" stockstock options, asas adjusted, andand warrants to purchasepurchase common stock). On October 8, 2007, iBasisi Basis paidpaid a dividend inin thethe amount of $113 million atat aa rate of $3.28$3.28 per shareshare toto each of itsits shareholders on the record date of September 28, 2007, thethe tradingtrading date immediatelyiminediately prior to thethe closing date of the KPN Transaction.

Although iBasis acquiredacquired allall of the outstanding capitalcapital stockstock ofKPNof KPN GCS, afteratter thethe closing of the transaction,transaction, KPN holds a majority of the outstanding common stockstock ofiBasisof iBasis and KPN'sKphps director designees are expected to represent,represent, at a future date, a majority of thethe Company's board of directors.

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Accordingly,Accordingly, forforaccountingaccounting andandfinancialfinancial statementstatement purposes,purposes, thetheKPNKPNTransactionTransaction waswastreatedtreated asasa0reversereverse acquisitionacquisition ofof iBasisiBasisbybyKPNKPNGCSGCSunderunder thethepurchasepurchase methodmethod ofofaccountingaccounting andand thethefinancialfinancial resultsresults ofofKPNKPNGCSGCSbecamebecame thethehistoricalhistorical financialfinancial resultsresults ofofthethe combinedcombined companycompany andand replacereplace thethehistoricalhistorical financialfinancial resultsresults ofiBasisof iBasisasasaastand-alonestand-alone company.company.

CriticalCritical AccountingAccounting PoliciesPolicies andand EstimatesEstimates

OurOur discussiondiscussion andand analysisanalysis ofofourour financialfinancial conditioncondition andand resultsresults ofofoperationsoperations arearebasedbased uponupon ourourconsolidatedconsolidated financialfinancial statements.statements. TheThe preparationpreparation ofofthesethese financialfinancial statementsstatements andandrelatedrelated disclosuresdisclosures inin conformityconformity withwith accountingaccounting principlesprinciples generallygenerally acceptedaccepted inin thethe UnitedUnited StatesStates ofofAmericaAmerica requiresrequires usustoto(i)(i)makemakejudgments,judgments, assumptionsassumptions andand estimatesestimates thatihat affectaffect thethe reportedreported amountsamounts ofofassets,assets, liabilities,liabilities, revenuerevenue andand expenses;expenses; andand (ii)(ii)disetesedisclose contingentcontingent assetsassets andand liabilities.liabilities. AA criticalcritical accountingaccounting estimateestimate isisanan assumptionassumption thatthat couldcould havehave aamaterialmaterial effecteffect ononourour consolidatedconsolidated financialfinancial statementsstatements ifif another,another, alsoalso reasonable,reasonable, amountamount werewere usedused ororaachangechange inin thethe estimatesestimates isisreasonablyreasonably likelylikely fromfrom periodperiod totoperiod.period. WeWe basebase ourour accountingaccounting estimatesestimates onon historicalhistorical experienceexperience andand otherother factorsfactors thatthat wewe considerconsider reasonablereasonable underunder thethe circumstances.circumstances. However,llowever, actualactual resultsresults maymay differdiffer fromfiom thesethese estimates.estimates. ToTothethe extentextent therethere areare materialmaterial differencesdifferences betweenbetween ourour estimatesestimates andand thethe actualactual results,results, ourour futurefuture financialfinancial conditioncondition andand resultsresults ofofoperationsoperations willwill bebeaffected.affected. OurOur criticalcritical accountingaccounting policiespolicies andand estimatesestimates areare describeddescribed inin ItemItem 7,7, "Managements"Management's DiscussionDiscussion andand AnalysisAnalysis ofofFinancialFinancial ConditionCondition andand ResultsResults ofof Operations"Operations" inin ourour 2008 AnnualAnnual ReportReport onon FormForm 10-K10-Kforfor thethe yearyear endedended DecemberDecember 31,31,2008.2008.ThereThere havehave beenbeen nono changeschanges toto thesethese criticalcritical accountingaccounting policies andand estimatesestimates forfor thethe threethree monthsmonths endedended MarchMarch 31,31,2009.2009.

Results fromfrom Operations

TheThe followingfog owing tabletable setssets forthforth for thethe periods indicatedindicated thethe principalprincipal itemsitems includedincluded inin thethe CondensedCondensed ConsolidatedConsolidated StatementsStatements of Operations as a percentage of totaltotal net revenue:revenue:

Th_eThree Monlhlhienlhe EndedEnded Mar¢hMarch 3131 .20092000 . 20082000 Net revenue--externalrevenue —exiernai parties 82.9%82.9% 84.84.5%5% Net revenuerevenue--related—related parties 17.117.1 15.515.5 Total net revenue 100.100.00 100.0100,0

Costs and operating expenses: Data communications andand telecommunicationstelecommunications---external—external parties 81,81.99 82.82.00 6.0 7.1 Data communicationscommunications andand telecommunicationstelecommunicatioos--related—related pargesparties 6.0 7, 1 Engineering and network operations 2.2.00 2.2.00 Selling,Selling, generalgeneral andand administrativeadministrative 6.6.77 6.6.11 DepreciationDepreciation andand amortizationamortization 33.22 22.33 TotalTotal costscosts andand operatingoperating expensesexpenses 99.99.88 99.99.55

IncomeIncome froinfrom operahonsoperations 020.2 050.5 InterestInterest expense,expense, netnet (0,(0,2)2) (0,(O.1)1) ForeignForeign exchangeexchange gaingain 0oss),(loss), netnet (0.(0.2)2) (O.(o.1)l)

IncomeIncome beforebefore provisionprovision forforincomeincome taxestaxes (0.(0.2)2) 0.0.33 ProvisionProvision forfor incomeincome taxestaxes 0.0.55 0.0.99 NetNet incomeincome 0oss)(loss) (0 7)% (0.6)%

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ThreeThree MonthsMonths EndedEnded MarchMarch 31,31,20092009ComparedCompared totothetheThreeThree MonthsMonths EndedEnded MarchMarch 31,31,20082008

NetNet revenue.revenue. OurOurprimaryprimary sourcesource ofofrevenuerevenue fromfrom externalexternal partiesparties arearethethe feesfeesthatthat wewe chargecharge customerscustomers forforcompletingcompleting voicevoice andand faxfaxcallscalls overover ourournetwork.network, WeWechargecharge ourour customerscustomers fees,fees,perperminuteminute ofoftraffic,traffic, thatthat arearedependentdependent ononthethe lengthlength andand destinationdestination ofofthethe callcall andand recognizerecognize thisthis revenuerevenue inin thethe periodperiod inin whichwhich thethe callcallisiscompleted.completed, RevenueRevenue fromfrom relatedrelated partiesparties consistsconsists ofoffeesfees thatthat wewechargecharge KINKPN andand itsits affiliateSafliliates forforthethe traffictraffic theythey sendsend totousus totocompletecomplete overoverourournetwork.network. TheThe feesIves thatthat wewe chargecharge KPNKPN andand itsits affiliatesaffiliates arcare basedbased onon thethe pricingpricing ininestablishedestablished serviceservice levellevel agreements.agreements. OurOur averageaverage revenuerevenue perper minuteminute ("ARPM")("ARPM") isisbasedbased uponupon ourour totaltotal netnet revenuerevenue divideddivided byby thethe numbernumber ofmiuntesof minutes ofoftraffictraflic overover ourour networknetwork forfor thethe applicableapplicable period.period. ARPMARPM isisaakeykey telecommunicationstelecommunications indusl_industry financialfinancial measurement.measurement. WeWebelievebelieve thisthis measurementmeasurement isisusefuluseful inin understandingunderstanding ourour financialfinancial performance,performance, asaswellwell asasindustryindustry trends.trends, AlthoughAlthough thethe longlong distancedistance telecommunicationstelecommunications industryindustry hashas beenbeen experiencingexperiencing decliningdeclining pricesprices inin recentrecent yearsyears duedue totothethe effectseffects ofofderegulationderegulation andand increasedincreased enmpetition,competition, ourour averageaverage revenuerevenue perper minuteminute cancan fluctuatefluctuate fromfrom periodperiod toto periodperiod asasaaresultresult ofofshiftsshifls inin traffictraffic overover ourour networknetwork toto higherhigher priced,priced, oror lowerlower priced,priced, destinations.desti nations.

TotalTotal revenuerevenue waswas $255.5$255.5 millionmillion forfor thethe threethree monthsmonths endedended MarchMarch 331,I, 20092009comparedcompared toto$324.9$324.9millionmillion forfor thethe samesame periodperiod inin 2008.2008.RevenueRevenue fromfrom externalexternal partiesparties waswas $211.8$211.8millionmillion forfor thethe threethree monthsmonths endedended MarchMarch 31,31,20092009comparedcompared toto $274.7$274.7millionmillion forfor thethe samesame periodperiod inin 2008.2008.The decreasedecrease inin revenuerevenue fromfrom externalexternal partieSparties primarilyprimarily reflectsreflects thethe resultsresults ofofaa newnew pricingpricing initiative,initiative, whichwhich we commencedcommenced inin thethe fourthfourth quarterquarter ofof2008,2008.whichwhich hashas focusedfocused ourour effortseflorts onon higherhigher marginmargin traffictraflic and eliminationelimination or reductionreduction inin lowlow marginmargin oror unprofitableunprofitable traffic.trafllc. AsAs aa result,result, ourour grossgross profit, defineddefined asas totaltotal netnet revenuerevenue lessless total datadata communicationscommunications and telecommunicationstelecommunications costs,costs, asas aa percentage ofoftotaltotal revenue,revenue, improvedimproved toto 12.1%12.1% forfor thethe threethree months ended March 331,I, 2009 fromfrom 10.9%10.9%forfor thethe samesame periodperiod inin 2008.2008.TheThe weakerweaker curteuro inin thethe threethree months endedended March 31,31,20092009 alsoalso resultedresulted in a decreasedecrease inin revenuerevenue from externalexternal partiesparties ofof approximatelyapproximately $15$15million inin U.S.U.S. dollars, on ourour cure-denominatedeuro-denominated revenuerevenue over thethe same periodperiod inin 2008. InIn addition,addition, thethe currentcurrent adverseadverse globalglobal economiceconomic conditions hashas contributed toto a year-to-year decline in thothe amount ofoftraffictraffic wewe receivereceive fromfrom prepaid callingcalling cardcard providersproviders and wholesale earriarscarriers whose traffictraffic comes from prepaid callingcalling card providers.providers.

Revenue from related parties forFor thethe threethree months ended March 31,200931,2009 waswss $43.7$43.7 million,million, compared toto $50.2$50.2 million for thethe same period in 2008. The decrease in revenue was primarily due to thethe effect of the weaker year-to-year on this curt-denominatedeuro-denominated revenue.

MinutesMinuteS of traffic for thethe three months ended March 31,2009 were 5.15.1 billion minutes compared to 5.85,8 billionbiflion minutes for thethe same period in 2008. Average revenue per minute was 4.4.9797 cents per minute for the three montilsmonths ended March 31, 2009, compared toto 5.5.5959 cents per minute forfor the samesame period inin 2008.

Data coatmualcagonscommunications and relecomatunlcatlonstelecommunications costi.costs. Data communications and telecommunicationstelecommunications costs are comprised primarily of terminationterminatiun andand circuitcircuit costs. TeiminafionTermination costs are paid to locallocal service providers, or toto KPN and its affiliates,affiliateS, to terminate voicevoice andand fax calls received I'romfrom ourour network. Termination costs are negotiated with the local service providers and terminationtermination costs forfor traffictraffic we sendsend to KPNKIN andend itsits affiliates are based primarily on pricing inin service levellevel agreements.agreements. Circuit costscosts primarily includeinclude feesfees forfor connectionsconnections between our network and ourour customers and/or service provider partnerspartners and chargescharges forfor Internetlntemet accessaccess at ourour InternetInternet Central Oflices.Offices.

Total datadata communications andand telecommunicationstelecommunications costscosts were $224.$224.55 millionmillion forfor thethe threethree months ended March 31, 20092009 comparedcompared toto $289.$289.55 millionmillion forfor thethe samesame periodperiod inin 2008.2008. DataData communications and telecommunicationstdeeommunicatlens costs fromfrom externalexternal partiesparties werewere $193.$193.66 millionmillion forfor thethe threethree monthsmonths endedended MarchMarch 31,3 I, 20092009 compared toto $266.$266.44 millionmillion forfor thethe same periodperiod inin 2008.2008. ThisThis decreasedecrease reflectsreflects thethe lowerlower minutesminutes of trafflcfraffic we terminatedterminated for thethe threethree monthsmonths ended March 31, 2009 comparedcompared toto thethe samesame periodperiod inin 2008,2008, asas wellwell asas aa lowerlower averageaverage costcost perper minute toto terminateterminate traffic.traffic. AverageAverage cost perper minute waswas 4.4.3737 centscents forfor thethe threethree monthsmonths endedended MarchMarch 31,31, 20092009 comparedcompared toto 4.4.9898 centscents perperminuteminute

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were million for for thethe same period in 2008. Data communications andand telecommunicationstelecommunications costs from related partiesparties were $15.3$15.3 million for costs from the threethree months ended March 31, 2009 compared toto $23.1$23 1 million forfor the samesame period inin 2008. The reductionreduction in costs from transmission As a terminating traffictraffic with KPN reflects our migration of certain traffictraffic toto our VolPVoiP network and lowerlower transmission costs. As a the three months percentage of total net revenue, totaltotal data communicationscommunications and telecommunicationstelecommunications costscosts were 87.9%87.9% for the three months ended March 31, 2009 compared toto 89.1%89.1%for thethe samesame period inin 2008.

Engineering andanti networkrrenvork operationsoperations expenses. Engineering and networknetwork operations expenses includeinclude thethe expenses associated with developing,developing, operating and supporting our'networkour network and expenses for operating our network operationsoperations centers.centers, Also includedincluded inin thisthis category areare engineering expenses incurred in developing,developing, enhancing andand supporting our network and our proprietaryproprietary softwaresoflware applications.applications. Engineering and networknetwork operations support of our TDM networknetwork are provided by KINKPN and chargedcharged Into us under a service level agreement.

Engineering and network operationsoperations expensesexpenses were $5.0$5.0 million forfor the three months endedended MerehMarch 31, 2009 compared toto $6.6$6.6 million for the samesame period inin 2008.2008, The reductionreduction in engineering andand network operations expenses reflect the reduced levellevel of support fromfrom KPN as a result of our integration efforts and the migration of our mid-range voice product to ourour VolPVoIP network.

Selling, general and administrativeadaiinistrarive expenses. Selling, general and administrativeadministrative expenses include salaries,salaries, payroll tax andand benefit expenses, and other costs for salessales andand marketing functions andand generalgeneral corporatecorporate functions, including executive management, finance, legal, facilities, information technology and human resources.resources,

Selling, generalgeneral and administrative expenses were $17.2$17.2 million for the threethree months ended March 331,l, 2009 compared toto $19.8$19.8 million for the same period inin 2008. The decrease in expenses reflectsreflects lower administrativeadministrative support costs from KPN, asas well asas our continued monitoring andand control of axpenses.expenses. The decrease in supportsupport costs fromfrom KINKPN primarily reflectsreflects thethe result of our integrationintegration of ourour Netherlands andand U.S.U.S.operations. During thethe threethree months ended March 31, 2009, we implementedimplemented a new enterprise resource planning ("ERP")("ERP")system, as well as a newnew billing system,system, which has allowedallowed us toto centralizecentralize our finance function,function, raterate management and commercial operations.operations. These new systems enables us toto gain efficienciesefficiencies inin manpower, as well as provide improved visibility and controlcontrol over our sources oft,venue.of revenue.

Depreciation and amortizationamortization expenses. Depreciation and amortization expensesexpenses were $8.2$8.2 million for the three months ended March 31,2009,31,2009, compared toto $7.2$7.2 million forfor thethe same period in 2008. The increase in depreciation and amortizationamortization expenseexpense primarily reflectsretlects a higher level ofamortizatienof amortization of our intangible assets.assets.

lnlerestInterest income and expense.expense. Interest expense, net was $0.6$0.6 million for thethe threethree months ended March 331,t, 2009 comparedcompared to $OA$0,4 million for the samesame periodperiod in 2008. The increaseincrease inin interest expense, net, primarily relates toto thethe amortization of fees paid toto Silicon ValleyYalley Bank forfor the modifications of our Loan Agreement, including thethe modificationmodiiication we made on JanuaryJanuary 26, 2009. These fees ereare primarily being amortized over the period beginning with thethe effective date of the modificationmodiflcation through the maturity date of thethe Loan Agreement.Agreement,

Foreignexehangeloss,Foreign exc/range Ioss, net.net, Foreignexehangeloss,Foreign exchange loss, netwas$O.6millionforthethreemonthsendedMarch312009,net was $0.6 million for the three months ended March 31 2009, and losses are the compared toto a lossloss of $0.3$0.3 million for the samesame period inin 2008. These foreign exchange gains and losses are primarily the resultresult of thethe change in exchangeexchange ratesrates betweenbehveen the U.S.U.S. dollar andand the cureeuro on our cure*denominatedeuro-denominated assetsassets and liabilities.liabilities.

Income taxes. The incomeincome tax provision was $1.1$1.1 million forfor the threethree months ended March 31, 2009 and $3.1$3.1 millionmiflion forfor the samesame period inin 2008 andand primarily relatesrelates toto income taxes onon the taxable incomeincome of our operations inin The Netherlands. In 2009, we expect to generategenerate taxable incomeinrome in the U.S.U,S.and lower taxable incomeincome inin The Netherlands, compared toto 2008, primarily as a result of thethe

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integrationintegration ofofourourU.S.U.S.andandNetherlandsNetherlands operations.operations. InInthetbeU.S.,U.S.,wewewillwill bebeableabletotoutilizeutilize ourouravailableavailable netnetoperatingoperating lossloss carrycarry forwardsfonvards totooffsetoffset thisthis expectedexpected taxabletaxabLe income.income.

DuringDuring thethethreethree mouthsmonths endedended MarchMarch 331,l, 2009,2009,ourourmarketmarket capitalizationcapitahzstion continuedcontinued totodecline.decline. AsAsaaresult,result, wewe consideredconsidered thisthis totobebeananindicationindication thatthat thethe carryingcarrying valuevalue ofof$17.3$17.3millionmillion ofofourourgoodwillgoodwill maymay bebeimpaired.impaired. Accordingly,Accordingly, wewe conductedconducted anan analysisanalysis totodeterminedetermine ififtherethere hadhad beenbeen ananimpairmentimpaitment ofofthethecarryingcanying valuevalue ofofgoodwillgoodwill asasofofMarchMarch 31,31,2009.2009, OurOur analysisanalysis waswas performedperformed inin accordanceaccordance withwith SFA$142.SFAS 142.AsAs aaresultresult ofofthisthis analysis,analysis, wewedetermineddetermined thatthat thethecarryingcarrying valuevalue ofofgoodwillgoodwill waswas notnot impairedimpaired asas ofofMarchMarch 31,31,2009.2009.InIn addition,addition, wewe performedperformed anan analysisanalysis underunder SFASSFAS144144ofot'ourour otherother intangibleintangible assetsassets andand determineddetetmined thatthat thethe carryingcarrying valuevalue ofofourour otherother intangibleirttangible assetsassets waswas notnot impairedimpaired asasofofMarchMarch 331,I, 2009.2009. ItItisisreasonablyreasonably possiblepossible thatthat therethere couldcould bebe anan impairmentimpairment ofofourour intangibleintangible assetsassets and/orand/or ourourremainingremaining goodwillgoodwill ininthethenearnear termterm andand thethe amountsamounts couldcould bebe mate_Sal.material.

LiquidityLiquidity andand CapitalCapital ResourcesResources

CashCash providedprovided byby operatingoperating activitiesactivities waswas $4.9$4.9millionmillion inin thethe threethree monthsmonths endedended MarchMarch 31,200931,2009andand waswas thethe resultresult ofof thethe netnet lossloss of $1.7$1.7million,million, afterafter non-cashnon-cash chargescharges of $9.0$9.0million,million, partiallypartially offsetoffset byby changeschanges inin operatingoperating assetsassets andand liabilitiesliabilities ofof$(2A)$(2.4)million.million. Non-cash chargescharges forforthethe threethree months endedended MarchMarch 31,31,20092009consistedconsisted primarilyprimarily ofofdepreciationdepreciation andand amortizationamortization expense.expense. TheThe net changechange of $(2.4)$(2.4)million inin operatingoperating assetsassets andand liabilitiesliabilities waswas primarilyprimarily aa resultresult ofofinterestinterest paidpaid toto KPNKFN ofof$0.7$0.7million,million, inin conjunctionconjunction withwith ourour WorkingWorking Capital LoanLoan principalprincipal paymentpayment of $4.8$4.8million,miflion, andand aa reductionreduction inin deferred revenuerevenue related toto our Retail business of $1.4$1.4 million.million. During thethe threethree months endedended MarchMarch 31,2009,31,2009, bothboth accountsaccounts receivable andand accountsaccounts payablepayable andand accruedaccrued expenses, combined,combined, declineddeclined byby essentiallyessentially thethe samesame amount,amount, reflectingreflectin thethe lowerlower sequentialsequential revenue and data eommunieatienscommunications andand telecommunicationstelecommunications costscosts inin thethe threethree monthsmonths endedended March 31,2009.31,2009,

Cash provided by operating activities was $0.8$0.8 million inin the threethree months endedended MarchMarch 31, 20082008 andand was thethe resultresult of thethe net lossloss of $2.$2.11 million and changes in other assets and liabilities of $(4.9)$(4.9)million, offset by non-cash charges of $7.8$7.8 million, primarily depreciation and amortization. Accounts receivable andand unbiUedunbilled revenue, net--externalnet—external parties declined by $6.2$6,2 millionmiilion and accounts payablepayable---external—external parties, aecreedaccrued expenses and deferred revenue,revenue, combined, declined by $1.$1.99 million. These declines primarily reflected the lower sequential quarterly revenue and related data and telecommunications costs.

Cash used in investing activitiesactivities in thethe threethroe months ended March 31,31,20092009 consisted of $1.$1.66 million used for purchases of propertyproperty and equipment.equipment.

CashCash flows provided byby tnvestinginvesting activities in thethe three months ended March 331,I, 2008 was $3.1$3.1 million. Additions to property and equipmentequipment werewere $3,$3.99 millionmillion inin thethe threethree months endedended March 31,2008,2008. Cash providedprovided by investinginvesting activitiesactivities includedincluded aa reductionreduction inin otherother assets,assets, relating toto investinginvesting activities,aetivlties, of $5.$5.00 million and maturities of short-term marketable securitiessecurities of $2.$2.00 million,

CashCash usedused inin financingfinancing activitiesactivities inin thethe threethree months endedended March 31, 20092009 consistedconsisted of repaymentsrepayments ofof $6.$6.33 millionmillion ofof ourour bankbank borrowingsborrowings andand aaprincipalprincipal paymentpayment ofof $4.$4.88 million toto KFNKPN onon ourour WorkingWorking CapitalCapital Loan. TheThe repayments ofof $63$6.3 miflionmillion ofof ourour bankbank borrowingsborrowings werewere aaresultresult ofof lowerlower borrowingborrowing capabilitycapability underunder ourour Loan AgreementAgreement with SiliconSilicon ValleyValley Bank.Bank. TheThe reductionreduction ininborrowingborrowing capabilitycapability waswas primarilyprimarily aaresultresult ofof aa declinedecline inin accountsaccounts receivablereceivable duedue toto thethe lowerlower sequentialsequential revenuerevenue ininthethe threethree monthsmonths endedended MarchMarch 31,31, 2009,2009. TheThe WorkingWorking CapitalCapital loanloan paymentpayment toto KpNKPN ofof $4.$4.88 million,million, plusplus accruedacereed interestinterest ofof $0.$0.77 million,million, waswas ourour secondsecood scheduledscheduled installmentinstallment payment,payment. TheThe finalfinal paymentpayment ofof principalprincipal andand interestinterest ofof $5.$5.11 millionmillion isisscheduledscheduled forfor thethe endend ofof JuneJune 2009.2009.

CashCash providedprovided byby financingfinancing activitiesactivities ininthethe threethreemonthsmonths endedended MarchMarch 31,31, 20082008 waswas $4.$4.44 million.million. WeWe borrowedborrowed anan additionaladditional $5.$5.00 millionmillion underunder ourour LoanLoan AgreementAgreement withwith SiliconSilicon ValleyValley BankBank duringduring thetheperiodperiod andand paymentspayments ofof capitalcapital leaselease obligationsobligations werewere $0.$0.66 million.million.

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InInthethe threethree monthsmonths endedended MarchMarch 31,31,20082008,wewepurchasedpurchased certaincertain softwaresofiware licenseslicenses furfor$1.7$1.7millionmillion underunder aa30-month30-month financingfinancing agreement,agreement, withwith paymentspayments duedue ononaasemi-annualsemi-annual basisbasis throughthrough JuneJune 2010.2010.

OnOn JanuaryJanuary 26,26,2009,2009,thethe CompanyCompany andand SiliconSilicon ValleyValley BankBank modifiedmodifted thethe LoanLoanAgreement,Agreement, effectiveeffective asasofof DecemberDecember 30,30,2008Z008 totoreducereduce thethe amountamount availableavailable underunder thethe LoanLoan AgreementAgreement fromfrom $50.0$50.0millionmillion toto$35.0$35,0million,million, extendextend thethe maturitymaturity datedate ofofthethe LoanLoan AgreementAgreement totoSeptemberSeptember 30,30,20102010andand totomodifymodify certaincertain financialfinancial covenants.covenants. InIn connectionconnection withwith thisthis modification,modification, wewepaidpaid SiliconSilicon ValleyValley BankBank aamodificationmoditication feefeeofof$52,500$52,500andand aarevolvingrevolving linelinerenewalrenewal feefeeofof $175,000.$175,000.SeeSeeNoteNote t11I "Line"I ine ofofCreditCredit endand Long-termLong-term Debt"Debt"ofofourourCondensedCondensed NotesNotes totoCondensedCondensed ConsolidatedConsolidated FinancialFinancial StatementsStatements forforfurtherfurther informationinformation onon ourour LoanLoan Agreement.Agreement.

AtAt MarchMarch 31,200931,2009andand DecemberDecember 31,31,2008,2008,wewe hadhad $20.8$20.8millionmillion andand $27.1$27.1million,million, respectively,respectively, inin borrowingsborrowings outstanding,outstanding, andand hadhad issuedissued outstandingoutstanding standbystandby lettersletters ofofcreditcredit ofof$2.6$2.6millionmillion andand $2.6$2.6million,million, respectively,respectively, underunder thethe LoanLoan Agreement.Agreement. AsAs ofofMarchMarch 331,I, 2009,Z009,wewe werewere inin compliancecompliance ofofallall ofofthethe covenantscovenants underunder thethe LoanLoan Agreement.Agreement.

InIn thethe threethree monthsmonths endedended MarchMarch 31,31,2009,2009,wewe purchasedpurchased certaincertain equipmentequipment forfor $0.4$0.4millionmillion underunder aafourfour yearyear financingfinancing agreement,agreement, withwith paymentspayments duedue monthlymonthly throughthrough MayMay 2013.2013.

WeWe anticipateanticipate thatthat our MarchMarch 31,31,20092009balancebalance of $48.6$48.6millionmillion inin cashcash andand cashcash equivalents,equivalents, togethertogether withwith expectedexpected netnet cashcash flowflow generatedgenerated fromfrom operations, willwill bebe sufficientsufficient toto fundfund our operationsoperations andand capitalcapital assetasset expendituresexpenditures fort'or thethe nextnext twelvetwelve months.months, WeWe expectexpect capitalcapital assetasset expenditures to be approximatelyapproximately $15$15million inin 2009.2009.

Off-BalanceOff-Balance SheetSheet ArrangementSArrangements

Under accounting principlesprinciples generally acceptedaccepted in thethe U.S.,U.S.,certaincertain obligationsobligations and commitments areare notnot requiredrequired toto bebe includedincluded inin the consolidatedconsolidated balanenbalance sheets and statementsstatements of operations. These obligations and commitments, while enteredentered intointo in thethe normal course ofbusiness,business, may haveshave a material impactimpact onon liquidity.Hquidity. We do notnot have any relationshipsre)ationships with unconsolidated entities or financial partnerships, such as entities oftenoften referredreferred toto as structured financefinance oror specialspecial purposepurpose entities, which would have been established for the purpose of facilitating off-balance sheetsheet arrangementsarrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market oror credit risk thatthat could arise if we hsdhad engaged inin such relationships.

Contractual Obligations

The following tabletable summarizes our future contractualcont,'actual obligations as of MarchMerch 331,l, 2009:

P_:/mentP ment DU¢Doe Dates LeesLess therthgn I ito21to2 zios21o3 2tO53los aner5Aner5 YasalTolal veerY¢lt¢ YearsYears Yearsyears uYearnYea_ Yearnyears (ta(In themaasa)thousands) Bank borrowingsborrowings $20,$20,766766 $ -- $20.$20,766766 $—$-- $-- $ -- InterestInterest onon bankbank borrowings(1)borrowings(l) 1,1,791791 1,1,194194 597 CapitalCapital leaselease obligations,obligations, includingincluding interestinterest 1,1,342342 709 410410 103103 120120 -- Operating leasesleases 5,5,746746 2,2,631631 763763 353353 560560 1,1,439439 PurchasePurchase commitmentscommitments forfor terminationtermination ofof minutesminutes 13,13,613613 13,13,613613 Total $43,$43,258258 $18,$ 18,147147 $22,$'22,536536 $456 $680$680 $1,$1,439439

(I)(l) InterestInterest paymentspayments ononbankbank borrowingsborrowings areare projectedprojected usingusing ourour borrowingborrowing raterate asas ofof MarchMarch 3],31,2009.2009. FutureFuture interestinterest paymentspayments maymay differdiffer fromfrom thesethese amountsamounts basedbased ononchangeschanges inin marketmarket interestinterest rates.rates.

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AsAsofofMarchMarch 331,t, 2009,2009,thethetotaltotal amountamount ofofnetnet unrecognizedunrecognized taxtaxbenefitsbenefits forforuncertainuncertain taxtaxpositionspositions andandthetheaccrualaccrual forfor thetherelatedreiab:d interestinterest waswss $0.7$0.7million.miflion. WeWeareare unableunable totomakemake aareasonablyreasonably reliablereliable estimateestimate ofofwhenwhen cashcashsettlement,settlement, ififany,any, willwill occuroccurwithwith aataxtaxauthorityauthority asasthethe timingtiming ofofexaminationsexaminations andand ultimateultimate resolutionresolution ofofthosethose examinationsexaminations isisuncertain.uncertain,

NewNeiv AccountingAccounting PronouncementsPronouncements

SeeSeeNoteNote II "Business"Business andand Presentation"Presentation" ofofourour CondensedCondensed NotesNotes totoCondensedCondensed ConsolidatedConsolidated FinancialFinancial StatementsStatements containedcontained inin thisthis QuarterlyQuarterly ReportReport onon FormForm 10-Q10-Qforfornewnew accountingaccounting pronouncements.pronouncements.

ItemItem 3.3. QuantitativeQuantitative audand Qualltah'veQualitative DisclosuresDisclosures AboutAbout Marketbfarket RiskRisk

OurOur primaryprimary marketmarket riskrisk exposureexposure isisrelatedrelated toto interestinterest ratesrates andsnd foreignforeign currencycurrency exchangeexchange rates.rates. WeWeareare exposedexposed toto foreignforeign currencycurrency riskrisk whichwhich cancan createcreate volatilityvolatility inin earningsearnings andand cashcash flowsflows fromfrom periodperiod totoperiod.period. Historically,Historically, KPNKPN GCSGCS soughtsought toto economicallyeconomically hedgehedge aaportionportion ofofitsits foreignforeigri currencycurrency riskrisk arisingarising fromfiom foreignforeign exehangnexchange receivablesreceivables andand foreignforeign currency-denominatedcurrency-denominated forecastedforecasted transactions.transactions. ForeignForeign exchangeexchange contractscontracts werewere usedused toto fixfixororprotectprotect thethe exchangeexchange ratemte totobebe usedused forfor foreignforeign currency.denominatedcurrency-denominated transactions.transactions. Hedge accountingaccounting wasives notnot appliedapplied inin thethe historicalhistorical financialfinancial statementsstatements of KPNKPN GCS.GCS, We dodo notnot currentlycurrently engageengage inin tzadingtrading marketmarket riskrisk sensitivesensitive instrumentsinstruments ororpurchasingpurchasing hedginghedging instruments,instruments, whether interestinterest rate,rate, foreignt'oreign enrreneycurrency exchange,exchange, commoditycommodity priceprice oror equityequity priceprice riskrisk andand havehave notnot purchasedpurchased optionsoptians oror enteredentered intointa swapsswaps oror forwardforward oror futuresfutures enntraets.contracts.

Our revenuesrevenues amare primarilypriniarily denominated inin U.S.U.S.dollarsdollars oror cures.. Thus,Thus, wewe areare exposedexposed toto foreignforeign currencycurrency exchangeexchange raterate fluctuationsfluctuations asas thethe financialfmancial results andand balances of our foreignforeign entitiesentities areare convertedconverted intointo U.S.U.S.dollars.dollars. AsAs exchangeexchange ratesrates vary, thesethese results, whenivhen converted, may vary from expectations andand may adverselyadversely impactimpaat ourour resultsresults ofafoperationsaperations and financialfinancial condition.condition. For example, if the dollar weakens relative toto thethe cure,euro, ourour cureeuro denominateddenominated revenuesrevenues andand expensesexpenses would increaseincrease when stated inin U.S.U.S.dollars. Conversely, if thethe U.S.U,S.dollardollar strengthensstrengthens relativerelative toto thethe cure,euro, our eurueuro denominated revenues and expenses would decrease.decrease,

Our primary interest rate risk is the risk on borrowings under our Loan Agreement with Silicon Valley Bank,Banlt, which isis subject to interest rates based on the bai_k'sbank's prime rate or LIBOR, plus margin. We had $20.8$20.8 million inin borrowings under our Loan Agreement at March 31, 2009. If, forfor exampte,example, interestinterest rates were to increase by 1%, this would result in additional annual interest expense of $0,$0.22 million on our current levellevel of borrowings. A change in the applicable interest rates would also affect the rate at which we couldcauld borrow funds or finance equipment purchases. Our capital lease obligations are fixed rate debt.

Item 4. ControlsControls and Procedures

Evaluation ofDisclosure Controls andand Procedures

OurOur management, with thetheparticipationparticipation ofof ourour Chief ExecutiveExeentive OfficerOfficer and our ChiefC'hief Financial Ofticer,Officer, evaluatedevaluated thethe effectivenesseffectiveness ofof aurour disclosuredisclosure controlscontrols andand procedures pursuantpursuant to Rule 13a13a---15—1$ promulgated under the Exchange Act of 1934,t 934, asas amended,amended, asas of thethe endend ofof thethe periodperiod coveredcovered byby thisthis QuarterlyQuarterly ReportReport onon Form 10.10-Q.Q. InIn designingdesigning andand evaluatingevaluating ourourdisclosuredisclosure controlscontrols andand procedures,procedures, ourour management recognizedrecognized thatthat anyany controlscontrols andand procedures,procedures, nono matter howhow well designeddesigned andand operated,operated, cancan provideprovide onlyonly reasonablereasonable assuranceassurance ofof achievingachieving thethe desireddesired contmlcontrol objectives.

BasedBased uponupon ourourevaluation.evaluation, ourourmanagement,management, includingincluding ourour ChiefChief ExecutiveExecutive OfficerOfficer andand ourour ChiefChief FinancialFinancial Officer,Officer, concludedenneluded thatthatourour disclosuredisclosure controlscontrols andand proceduresprocedures areare effectiveeffective inin ensuringensuring thatthat materialmaterial informationinformation requiredrequired toto bebe discloseddisclosed byby usus ininthethe reportsreports thatthat wewe filefile ororsubmitsubmit underunder thethe ExchangeExchange ActAct isis recorded,recorded, processed,processed, summarizedsummarized sndand reportedreported withinwithin thethetimetime periodsperiods specifiedspecified inin thethe

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SEfYsSECsrulesrules andand forms,forms, includingincluding ensuringensuring thatthat suchsuch materialmaterial informationinformation isisaeenmulatedaccumulated andand communicatedcommunicated totoourour management,management, includingincluding ourourChiefChiefExecutiveExecutive OfficerOfficerandand ourourChiefChiefFinancialFinancial Officer,Officer,asasappropriateappropriate totoallowallow timelytimely decisionsdecisions regardingregarding requiredrequired disclosure.disclosure.

ChangesClianges inin Internal/n(etna/ ControlCon(ro!OverOverFinancialFinancfal ReportingRepor(irrg

ThereThere havehave beenbeen nonochangeschanges inin ourour internalinternal controlcontrol overover financialfinancial reportingreporting duringduring thethe quarterquarter endedended MarchMarch 331,I, 20092009 thatthat havehave materiallymaterially affected,aft'ected, ororarearereasonablyreasonably likelylikely toto materiallymaterially affect,affect, ourour internalinternal controlcontrol overover financialfinancial reporting.reporting.

PartPart ll----Otherll—Other InformationInformation

ItemItem 1.I. LegalProeeedingsLegal Proceedi(rgs

PleasePlease seesee NoteNote 1212 "Commitments"Commitments andand Contingencies"Contingencies" ofofour CondensedCondensed NotesNotes toto CondensedCondensed ConsolidatedConsolidated FinancialFinancial Statements containedcontained inin thisthis Quarterly ReportReport onon FormFoun 10-Q10-Qforfor aadescriptiondescription ofoflegallegal proceedings.proceedings.

Item 1A.1A. RiskRisk FactorsFac(ors

InIn additionaddition toto the other informationinformation set forthforth inin thisthis FormForm t0-Q,IO-Q, youyou shouldshould enrefullycarefully considerconsider thethe factorsfactors discusseddiscussed inin Part I, "Item"Item IA:IA: Risk Factors" in our Annual Report on Form 10-K10-Kforfor thethe year ended December 331,l, 2008,2008, whichwhich could materially affect our business,business, financial conditioncondition or future results.results. The risksrisks describeddescribed inin our AnnualAnnual ReportReport onon FormForm 10-K10-K are not the onlyonly risks that we face.face. Additional risks and uncertainties notnot currentlycurrently known to usus or thatthat we currentlycurrently deem toto be immaterial also may materially adverselyadversely affect our business, financialfinancial condition end/orand/or operating results.results.

SPECIAL NOTE REGARDING FORWARI)-LOORINGFORWARD-LOOKING STATEMENTSSTATEMENTN

This Quarterly Report on Form 10-Q and, in particular, our Management'sManagemeat's Discussion and Analysis of Financial Condition and Results ofOperations set forth in Part I--ItemI—Item 2 contain or incorporate a number of forward-looking statements within thethe meaning of Section 27A of the Securities Act of 1933, as amended, and SeetionSection 21E of the Exchange Act includingineludlng statements regardingiregarding:

our expectations regarding the outcomeoutcome of&thethe legal proceedings that we are currently a party to, including our defense strategies, the resultsresults ofnegotiationsnegotiations andand settlements in suchsuch legal proceedings and our estimates regardingregarding thethe amountamount ofof feesfues andand losseslosses toto be paidpaid inin connectionconnection with suchsuch legallegal proceedings;

ourourexpectationsexpectations thatthat thethe VoipVoIP marketmarket offersoffers significantsignificant growth potential for us;

thethe potentialpotential ofof ourourprepaidprepaid callingcalling cardcardbusinessbusiness and Pingo toto generategenerate higherhigher margins;margins;

~ ourourexpectationsexpectations regardingregarding ourour abilityability toto generategenerate taxabletaxable incomeincome inin thethe U.U.S.S. andand lowerlower taxabletaxable incomeincome inin The Netherlands;Netherlands;

uncertaintyuncertainty relatedrelated toto currentcurrent economiceconomic conditionsconditions andand thethe relatedrelated impactimpact onon demanddemand forfor ourourproducts;products; andand

ourourliquidity.liquidity.

AnyAny ororsllallofof ourourforward-lookingforward-looking statementsstatements ininthisthis QuarterlyQuarterly ReportReport onon FormForm 10-Q10-Q maymay turnturn outout toto bebe wrong.wrong. TheyThey cancan bebe affectedaffected byby inaccurateinaccurate assumptionsassumptions wewe mightmight makemake ororbyby knownknown oror unknownunknown risksrisks andand uncertainties,uncertainties, ManyMany factorsfactors mentionedmentioned ininourourdiscussiondiscussion inin thisthis QuarterlyQuarterly ReportReport onon

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FormForm I10-Q0-Qwillwill bebeimportantimportant inindeterminingdetermining futurefuture results.results. Consequently,Consequently, nonoforward-lookingforward-looking statementstatement cancanbebeguaranteed.guaranteed. ActualActual futurefuture resultsresults maymay varyvary materially.materially. " " " WithoutWithout limitinglimiting thethe foregoing,foregoing, thethe wordswords "believes,""believes, "anticipates,""anticipates, "plans,""plans, "expects""expects" andand similarsimilar expressionsexpressions areare intendedintended totoidentifyidentify forward-lookingforward-looking statements.statements. ThereThere areare aanumbernumber ofoffactorsfactors thatthat couldcould causecause actualactual eventsevents ororresultsresults toto differdiffer materiallymaterially fromfrom thosethose indicatedindicated byby suchsuch forward-lookingforward-looking statements,statements, manymany ofofwhichwhich arearebeyondbeyond ourourcontrol,control, includingincluding thethe factorsfactors setsetforthforth underunder "Item"item 1A.IA.RiskRisk Factors"Factors" ofofourour20082008AnnualAnnual ReportReport onon FormPorm 10-K,10-K,asasupdatedupdated ororsupplementedsupplemented byby "Part"PartlI_Item11—Item lA--RiskIA—Risk Factors"Factors" ofofthisthis QuarterlyQuarterly ReportReport onon FormForm 10-Q.10-Q.InIn addition,addition, thethc forward-lookingforward-looking statementsstatements containedcontained hereinherein representrepresent ourour estimateestimate onlyonly asas ofofthethe datedate ofofthisthis filingfiling andand shouldshould notnot bebe reliedrelied uponupon asasrepresentingrepresenting ourour estimateestimate asas ofofanyany subsequentsubsequent date.date. WhileWhile wewe maymay eleotelect toto updateupdate thesethese forward-lookingforward-looking statementsstatements atatsomesome pointpoint ininthethe future,future, wewe specificallyspecifically disclaimdisclaim anyany obligationob)igstion toto dodososototoreflectreflect actualactual results,results, changeschanges inin assumptionsassumptions ororchangeschanges inInotherother factorsfactors affectingaffecting suchsuch forward-lookingfonvard-looking statements.statements.

ItemItem 6.6, ExhibitsExhibits

(a)(a) Exhibits:Exhibits:

31.1"31.1' Certificate ofofiBasis,iBasis, Inc. ChiefChief Executive OfficerOtTicer pursuantpursuant toto SectionSection 302 ofofthethe Sarbanes-OxleySarbanes-Oxley Act ofof2002,2002,

31.2"31.2» Certificate of iBasis,iBasis, fuc.Inc. ChiefChief FinancialFinancial Officer pursuant toto Section 302302ofofthethe garbanes-OxteySarbanes-Oxley ActAct ofof2002,2002.

32.1:[:32.12 Certifications ofiBasis,ofiBasis, Inc. Chief Executive Officer and ChiefChief FinancialPinancial Officer pursuant toto Section 906906 of thethe Sarbanes-Oxley Act of 2002.

* Filed herewith.

Furnished here

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SIGNATURESIGNATURE

PursuantPursuant totothethe requirementsrequirements ofofthetheSecuritiesSecurities ExchangeExchange ActActofof1934,I 934,thethe registrantregistrant hashas dulyduly causedcaused thisthis reportreport totobebe signedsigned onon itsits behalfbehalf byby thethe undersignedundersigned thereuntothereunto dulyduly authorized.authorized.

iBasis,iBssis,Inc.inc.

MayMay 8,8,20092009 By:By: Is/RICHARD/s/ RICHARD TENNANTTBNNANT ,,,,,n RichardRichard TennantTennant SeniorSenior Vicetrice PresidentPresident andand ChiefChiefFinancialFinancial Oj'ficerOfficer (Authorized(A etherized OffcerOfftcer andand PrincipalPrincipal FinancialFinancial andaad AccountingAccounting Officer)Ogrcer/

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EXHIBIT C -—Part 2

Financial Statements of Parent Company iBasis, Inc.Inc.

SEC Form IO-K10-K PagePage 1Iofof123123

10-K10-K11a2191484z10-k.htma2191484zl0-k.htm 10-K10-K

TabTableeofofConten!_Contents

UNITEDUNITED STATESSTATES SECURITIESSECURITIES ANDAND EXCHANGEKXCHANCK COMMISSIONCOMMISSION Washinglon,Wmhlngton, D.C,D.l'..20549205cp FORMFORM 10-K10-K

(s_lark(Mark One)One)

[]E ANNUALANNUAL REPORTREPORT PURSUANTPURSUANT TOTO SECTION 1313OROR 15(d)15(d)OFOFTHETHE SECURITIESSECURITIES EXCHANGEEXCHANGE ACTACT OFOF 19341934

ForFor thethe fiscalnscal yearycm endedended DecemberDecember 31,31,20082000

or

D13 TRANSITION REPORT PURSUANT TO SECTION 1313 OR 15(d) OFOF THTHEE SECURITIES EXCHANGEEXCHANGE ACT OF 1934

For the transitiontransition periodpetted ft0mfrom t0to

Commission filenl» numberinumber_ 000-27127000-21122

i

iBasis, Inc. (Exact name ofieglstranto f _egfstrant as specifiedspecified in its ¢berter)eh~)

DelawareDel_w_rt (State or otherotherjurlngctionjtutsdictlon of (I.(I.R.S.E.S.EmploycrEmployer incorporationineorporaliota otororganization)org_u_I_tlon) identificationIdentification No.No_)

1020 SecondSt_end Avenue,Avt_ue, nurllngton,llurl_ngton, MAIdA 0150301803 (Address(Address ofof principalpanclpal executiveexecutive onices,of6cez, includingir,etuding zipzip code)

(151)ffSi) 505..50f.-75002500 (Registrantb(Rc_is_rant'_ lelcphonetelephone number,number, indudtngil_lUding areaarea code)code)

SceuriSecuritiesties registeredregistered pursuantpursuanttoto SectionSection 12th)12('o)oMeoftbe Act:

Title"lille ofof ClamClas_ NtuueNtme ofof eatheach exchanexchangee onon whishwhich rregisteredistered ConimonCommon Stock,Stock, parparvaluevalue 50.$0.001001 perpershareshare 1lnThe NASDAQNASDAQ StockStock htarke(Market LLCLLC (NASDAQ(NASDAQ GlobalGlobat Market)Market)

SecuritiesSecurities registeredreglstered pursusiitpursuanttoIosectionsection 12(g)12(g)ofof thethe ActiAct:

NoneNone

(Titleffitie ofofctas_)elms)

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lndicateIndicatebybycheckcheckmarkmarkififthethefeglstrantregisnant isisaawell-knownwell known t,e_zsunedseasoned issuer,imuer,asasdefineddegnedininRnieRule405405ooff thetheSeemltiesSecuritiesAct.Act.YesYesOJ2 Nol_No fd

indicateIndicate bybyehe.:kchmkmarkmark ififthemeregistrantregistrant isisnotnotrequiredrequired toIofitHiee reportsteportspursuantpmsuant totoS¢_Sectionfiort 1313ororSeraionSectionl 5(d)t5(d)oorthof the ExchangeExchange Aft,Act.YesYesDCl No_No 08 her

IndicateIndicate bybycheekcheckmarkmark whetherwhether thethereglstlara:rcgisnanti (t)(1)hashas filedtiledallaareportsreports requiredrequired totobebefiledJacdbybySectionSeclion 1313oror15(d)15(d)ofofthetheSecuritiesSecurities ExchangeExchange ActAclofof19341934duringduring thelhep[eeedlngpreceding 1212momhsmonths (or(erforfor_u_hsuchshortershohci pado_lperiod thatthat thethe_egi_ttantregistrant w_swasteqni_edrequired totofileHiesuchsuchrepot*s),tepons),andand(2)(2)hazhasbeenbeensubjectsub)ecttotosuchsuchfilingiilingrequhementsrequirements forfoithethe 09 No CJ pastpast 9090days.days.YesYcs[_ Not2

Indicateindicate bybycheckcheckmarkmark ififdlsclosuredisclosure ofofdelinquentdelinquent filetsfit erapttrsuarapursuant totoItemhem405405ofofRegulationRegulation S.KS K(§(0229.405229 405ofofthlsthisehapt¢0chapter) isisnotnotcontainedcontained herein,'in,andandwillvria notnot bebecomalned,cenmined, tolothethehestbestooffteglstranfstegistrant's knowledge,knowled e,inin definitivede linitive proxyprexy ororininformationfotroation statementsstatements incorporatedincorporated bybyreferencereference ininpartPart IllillofofthisIbisFern1Fomi IO.K10 Kororanyany amendmentamendment totothisIbis FormPorm 10-K.10 K._JEIndicateindicale bybycheekcheck markmark whetherwhether"thethe registrantregistrant isisaalargelargeacceleratedaccelerated filer,liler an«nacceleratedaccelerated filer,Hler aanon-acceleratednon accelerated filer,Hler,orornasmallersmaller repottingrcpordng company.company. SeeSeetheIhedefinitionsdegnitions of"largeof"largeacceleratedaccelem tedfiler,"filer, "accelerated"accelmsred filer"filer"andand "smaller"smallerrcpartingreporting cort_any"company" thinRuleRule 12'o-212b 2ofoftiretheExchangeExchange Aft.Act.(Check(Check 0n¢):one)i

Non-accder'ate, d filet ISI Smaller repot ting company E_ LargeLarge acceleratedaccelerated filerHler t]13 /keedc'rate_Acmlerated fil_rHler ia Non-accclemtcd filer (3 Sm ail et vapor ling «em pany LJ (Do(Donotnotcheckcheck ifaifasmallersmaller reporlingreporting Company)company)

indieataIndicate byby Cheekcheckmarkmark Wbethctwhether th_Ihct_gls_tantregistrant isisaa zhefishell ¢orfrpartycompany (as(ssdefinnddefined IninP,Rulcul¢ 12b-212b 2ofofthetheExeher_goExchan eAft).Acl).Ye'sYesEl)JJ No_No ta

TheThe ag_cgat¢aggregate marketmarket v_du¢value ofofthethe regtstrant'sregistranfs commoncommon stock,stoc'k, $$0.fi.001001parpar vah¢value parper sfi_a#,share, heldheld byby r_n-afltnon. afliliatesflares ofoftheIhe registrantregistrmt asesof.tuneofJune 3fi,30,20082008waswas apptoxlmatelyapproximately $102,242,0_5102242 000basedbased onan 31,171,40531,1 71 405 sharesshares heldheld byby suchsuch nor.non affiliateSaffi liates _tat thethe closingclosing priceprice eraofashareshare ofofcommoncommon stockstock ofof$3.25$3 28asss reportedreported onon TheThe NASDAQNASDAQ GlobalGlobal MarketMarket onon suchsuch dam,date, AAtliiiffillatesates ofoftheIhe CompmayCompmy {'defined(defined asasolll_rs,ofHcera, directorsdirectors andand ownersowucm ofof10%10morormoremore ofoftheIheoutstanalngoutstanding shareshare ofofforemencommon stock)stock) ownedovmed 42,470,50342470503 sh_rcsshares ofofeonmlonmnunon stockstoA outslandJngoumanding onon suchsuch date.date.

IndicateIndicate theIhe numbernumber of shttrezshmes outstandingoutstanding ofol'eacheach ofoflbeIhe reglstranfsregislranfs dias_e_classes oft_ommonofcommon stock,stock, _asofofthethe latestlatest pracfieableptaclicable date.date.

Common Stock,Stack, parpar value $0.00150 001 p¢_per share, as of FebruaryFebmary ,28,20092009 71228_2871228G28

DOCUMENTS INCORPORATED BY"ItYREFERENCEREPERENCE

The following documents {'or(or parts thereot) ar_are incorporatmlincorporated by rcfercne_reference intointo th_the followingfollowing pav_pans ofthlsofthis Form 10-K:10 K: CerUtinCertain information reqtdredrequired in partPart I11ill of Ibisthls Annual Report on FormPorm 10-KJO-K is incorporatedincorporated florafrom theihe Regisrtant'_Registrant's Proxy Statement forfor tlmIhe 2009 Annual MeetingMccting of Stockbeldcts.Stockholdms.

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iBASIS,iBASIS,INC,INC.

ANNUALANNUAL REPORTREPORTONONFORMFORM10-KI0-K ForForthetheYearXearEndedEnded DecemberDecember 31,31,20082008

TableTable ofofContentsContents

P RT I PART I .[ Bus~lee s I ~IIILI, Bn_ !6 item I 16 Item lb..A. RRisks_ Fagfagtotatol____ 33 item I C B, U_oresolvedlit ~idSStaff CommeoLsi 33_ item 2 8'operties 33 Item 2, Properties 33 ItemItem 3_3 Lega_!Legal _Prorcpedi s Ltemitem 4.4. StSubmaniabmissi.o_Rion ofoffIkfhktterttoM_a a VoteYote ofofSeeSecurityuri_,:!ig.lde_sIfotdem ;636

PARTPART 11Il ' d't ItemIterkl 5_5. __Mar]_'sl_n_I'_._9_LQRk~fR I. I 0 . I_o,Ekgk.ujty_!a_oldcf~ld kk Id _!'_a_erstl a_&_dndlssn_PurchasesP h ofof~EuityE_l-uity 3737 ~Sec rities 39. ItemItem 6.6. S I~A' .0. 39 Item Manaikf~ana emem nt'snt's _iscussionDiscussion andand AnalysisAnalysis _of ~'tnafnci I ConditionCondition andand Resojlz_fO_emfionsResults Operations 4141 Item 7,7, ' of Item 7A QuantitativeQ I andSQQu,alitativ_ll I _s_01 Io_res* Ab_skAh~Sf Rlk 62262 |tern 7A ...... 03_ |±e_mitem 8,8, !5__ancj_i~la _en!aryd~d Data 1ternitem 9.,9, h_Qba_nge_rnents_Ckkt~iQE I withIhAAeemmtanls11 . on AccountingA td anddkl_fi)_closurelid!' IQS_108 ...... LOS 9A. C I L08 Item!tern 9A. __e_ dPSS 108 ItemItem 913.9B. ,O3hOtherer InInformationform alion 108

I'J__TA!!P~RT lf 109 .]t_n.aItem 10. girect~orsD r_ept_v_..QfficersExe ut'vve OIEcers and CftrporateC.t_rpprate Governance 109 t' 'o ~ttIt_mAm L _o_m_~Ex e Corn~ense ]1090_29 ~tte_12_ t2. _V 0Ownershipht offcCertainI~ SBeneficialf 110Owners anddMManagement anddRRe|_ttedt~dkhStockholder\d Matters J09i09 itemItem 1313_ CettainReCe_'tainRelationshiosio s i sandReaand Re ated TrmksaTransactionstions andndDirectDirectorrlnlnde.ne_d_eneee endence 10910_99 ~lcm 14. k~Pit__n_d,_Ss_ ~P' d. S !09_109

PAART Y lte~lb!keeL] _5. ExhibitsExh b ts__Fjna_entFinancial Stgnement ScheedLesSchdd__ 1101l0 ~SI natu'es

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PART II

Item 1.I. Business

iBasisiBasis is a leading wholesale carriercamer of internationalinternational long distance telephonetelephone calls and aa provider of retail prepaid calling services and enhanced servicesservices for mobile operators.

Company Overview

Our operations consistconsist of our wholesale trading business ("Trading"),("Trading" ), in which we connect buyers and sellers of internationalinternational telecommunications services, andand our retail servicesservices business ("Retail").("Retail" ).Our Trading business alsoalso includesindudes OutsoureingOutsourcing revenuerevenue which we generate asas thethe exclusiveexclusive provider of wholesale internationalinternational voice servicesservices forfor specific carriercamer customers. In the Trading businessbusiness we receivereceive voice traffictraffic fromfrom buyers--originatingbuyers —originating telecommunications carderscarriers who are interconnectedinterconnected to our network via Voice over lntemetInternet Protocol CVolP")("VoiP")or traditional timetime division multiplexingmulti plex ing ('TDM"){'TDM")connections, and we routeroute that traffictrafiic over ourour network toto sellers--localsellers —local service providers and telecommunications carderscamera in the destination countries with whom we have established agreements to manage the completioncompletion or termination of calls.

As a resultresult of the combination with KPN Global Carrier Services B.V.B.V. (KPN(KPN GCS) in October 2007 (described below), more than half of our traffictraific utilizesutilizes our VolPVoIP network, while thethe balancebalance is cardedcarried over our TDM network.network. The continued migration of the TDM traffic toto ourour lowerlower cost VolPVoIP networknetwork is expectedexpected to be a significantsignitlcant of synergies fromfrom the KPN transaction over thethe next several years.

We use proprietary, patented andand patent-pending technologytechnology to automateautomate the selection of routes andand terminationtermination partners based on a varietyvariety of performance, quality, and business mercies.metrics. We offer this TradingTmding service on a wholesale basis to carders,cairier, mobile operators,operators, consumer VolPVol P companies,companies, telephony resellersresell era and other service providers worldwide. We havehave callcall termination agreements with locallocal serviceservice providers inin more than 100 countries inin North America, Europe, Asia, the Middle East, Latin America, Africa and Australia.

• We continue to expand our market share in our Trading business by expanding our customercustomer base, developing terminationtermination capacity, andand by offering a comprehensive portfolio of cost-effective internationalinternational voice solutions, includingincluding completecomplete outsoureingoutsourcing of internationalinternational voice traffic.trafiic.

Our Trading products comprise aa comprehensive voice product portfolio. We have retained thethe leading product fromfrom both iBasisiBasis and KPN GCg--DireetGCS—Direct Voice and Premium Voice reepeetively,respectively, andand we completed the portfolio with two new mid-range products--Valueproducts —Value VoienVoice and Certified Voice. The fourfour products offer a progression of code coverage, pricing and featuresfeatures formulated toto meet thethe variedvaried requirementsrequirements of fixed carders,carriers, mobile operators, consumer voice over broadband carders,carriers, andand prepaid calling card service providers. Our product portfolio enables us to compete effectively in allall international voice markets and gives us psrtianlarparticular strengths inin thethe fastest-growing segments of Vo/PVolP and mobile.

tnIn targetingtargeting the emerging consumer VolPVoIP providers, we offer our DireetVolPDirectVolpiuTM and DireclSIPDirectgiprsrTM IPIP interconneetioninterconnection services, which address a range of requiremenlsrequirements thatthat are epecifiespecific to the growinggrowing consumer VoIPVolP market, includingincluding supportsupport for Session Initiation Protocol interconneefion,interconnection, which is becoming the standardstandard for voice over broadband services. DirectSIP also includesincludes our media normalization, or transcoding, solution, which enables us to provideprovide greater interoperability amongamong devicesdevises and voice applications, as well as deliver highhigh qualityquality serviceservice even over sub-optimal network connections.

Inln the mobile market, in additionaddition to meeting mobile operators' requirementsrequirements for premium quality voice service and advanced voice features, iBasis offers a portfolio of value-addedvalue-added mobile data services,services,

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calledcalled MobileMobile Matrix,Matrix, whichwhich includesincludes globalglobal signaling,signaling, mobilemobile messagingmassaging andandroamingroaming totoenhanceenhance mobilemobile operators'operators' averageaverage revenuerevenue pea'peruseruser andand customercustomer loyalty.loyalty,

OutsourcingOutsourcing offersoffers carrierscarriers aastrategicstrategic solutionsolution tototi_ethe commoditizationcommoditization ofofinternationalinternational voice.voice.ByByoutsoureingoutsourcing theirtheir intemati0nalinternational voicevoice operationsoperations totoiBasis,iBasis,carrierscarriers taketake advantageadvantage ofofourour efficienciesefficiencies ofofscale,scale, ourourspecialization,specialization, andand ourourhighlyhighly efficientefficient globalglobal infrastructure,infrastructure, whichwhich supportssupports bothboth VolPVoIPandand TDMTDMtraffic.traffic, Moreover,Moreover, theythey leverageleverage ourourterminationtermination agreementsagreements withwith hundredshundreds ofofprovidersproviders ininmoremore thanthan 100100countries.countries. OurOur OutsoureingOutsourcing customerscustomers arearebetterbetter ableable totofocusfocus theirtheir resourcesresources ononhigherhigher margin,margin, differentiatingdifferentiating consumerconsumer services.services.

OurOur RetailRetail businessbusiness consistsconsists ofofretailretail prepaidprepaid callingcalling cards,cards, whichwhicli areare marketedmarketed throughthrough distributorsdistributors primarilyprimarily totoethnicethnic communitiescommunities withinwithin majormajor metropolitanmetropolitan marketsmarkets inin thethe UnitedUnited States,States, andand Pingo@,Pingo, aaprepaidprepaid callingcalling serviceservice thatthat wewe offeroffer andand sellsell directlydirectly toto consumersconsumers viavia anan cCommerceeCommerce model.model. BothBoth cancan bebeprivate-labeledprivate-labeled foriorotherother serviceservice providers.providers. TheThe prepaidprepaid callingcalling cardcard businessbusiness andand PingoPingo leverageleverage ourour existingexisting internationalinternational networknetwork andand havehave thethe potentialpotential totodeliverdeliver higherhigher marginsmargins thanthan areare typicallytypically achievedachieved inin thethe TradingTrading business.business. InIn addition,addition, thethe retailretail prepaidprepaid callingcalling cardcard businessbusiness typicallytypically hashas aafasterfaster cashsash collectioncollection cyclecycle thanthan thethe TradingTrading business.business. InIn 2007,2007,wewe launchedlaunched PingoBusiness,PingoBusiness, enhancamentsenhancements thatthat enableenable businessesbusinesses toto managemanage multiplemultiple PingoPingo accountsaccounts throughthrough aa singlesingle administrativeadministrative account.account. ToTodate,date, revenuesrevenues fromfrom ourour PingoPingo servicesservices havehave notnot beenbeen material.material.

We were incorporatedincorporated as a DelawareDelaware corporationcorporation inin 1996. OurOur principal executiveexecutive offices areare locatedlocated atat 2020 SecondSecond Avenue, Burlington, Massachusetts 0180301803andand our telephonetelephone numbernumber isis (781(781)) 505-7500.505-7500. Our annualannual reportsreports onon FormForm 10-K,IO-K, quarterly reports on Form 10-Q, currentcurrent reportsreports on Form 8-K,8-K, andand allall amendmentsamendments toto thosethose reports,reports, areare availableavailable freefree ofof charge throughthrough thethe Securities and Exchange Commission's ("SEC")("SEC")website atat www.sec.govwww sec gov oror on ourour investorinvestor relationsrelations section of our website at http://investor.ibasls.eomhrrp //investor ibusls eom as soon asas reasonably practicable after suchsuch materials havehave beenbeen electronically filed with, or furnished to, the SEC.

ICpiVKPN TransactionTransacrien

On October I,1,2007,2007, iBasis, Inc. and KPN B.B.V.V. ("KPN"), a subsidiary of Royal KPN N.V.N.V. ("Royal("Royal KPN"), completedcompleted transactionstransactions ("KPN Transaction"Transaction") ) pursuant toto which iBasisiBesis issued 40,121,07440,121,074 shares of its common stock to KPN and acquired the outstanding shares of two subsidiaries ofofKPNKPN ("KPN GCS"), which encompassed KpbfKPN' international wholesale voice business. The Company also received $55 million in cash from KPN, subject to post-closing adjustments based on the working capitalcapital andand debt of iBasis sndand KPN GCS. ImmediatelyImmediately atterafter issuance on October I,1, 2007, the shares of iBasis common stock issuedissued to KPN represented 51%of thethe issuedissued and outstanding shares ofiBasisof iBasis common stock on a fully- diluted basis (which(which includesincludes allall of the issuedissued and outstandingoutstanding commoncommon stock and the common stock underlying outstanding "in-the-money" stockstock options, as adjusted, andand warrants toto purchase common stock),stock). As of December 31, 2008, the 40,40,121,074121,074 sharesshares ownedowned byby KPN representrepresent 56%56% ofof thethe issuedissued and outstanding common stock ofofiBasisiBasis andand 56%56% on a fully- diluteddiluted basis,basis, as defineddefined above.above.

On OctoberOctober 8,g, 2007,2007, iBasisiBasis paidpaid aa dividenddividend inin thethe amountamount ofof$113$113millionmillion atat aa raterate of $3.$3.2828 perper shareshare toto eacheach ofof itsits shareholdersshareholders onon thethe recordreenrd datedate of SeptemberSeptember 28,28, 2007,2007, thethe tradingtrading date immediatelyimmediately priorpriortoto thethe closingclosing datedate ofof thethe KPN Transaction.Transaction. InIn addition,addition, holdersholders ofof outstandingoutstanding warrantswarrants toto purchasepurchase ourour commoncommon stock vii)1will be entitledentitled toto receivereceive aa casheesh paymentpayment uponupon thethe futurefuture exerciseexercise of thesethese warrantswarrants inin anan amountamount equalequal toto thethe dividend amount thatthat wouldwould havehave beenbeen payablepayable ifif thethe warrantswarrants hadhad beenbeen exercisedexercised immediatelyimmediately priorprior toto thethe dividenddividend recordrecord date,date. CumulativelyCumulatively throughthrough DecemberDecember 31,3t, 2008,2008, wewe havehave paidpaid holdersholders ofof warrantswarrants aatotaltotal $0,$0.88 millionmillion inin dividendsdividends uponupon thethe exerciseexercise of theirtheir warrants.warrants. AsAs ofof DecemberDecember 31,31, 2008,2008, wewe havehave unexercisedtmexercised warrantswarrants representingrepresenting 432,432,000000 shares,shares, atat exerciseexercise pricesprices rangingranging fromfrom $6.$6,3030 toto $9.$9.0000 perper share,share, andand havehave $1.$1.44 millionmillion acctuedaccrued forfor dividendsdividends totobebe paidpaid uponupon thethepotentialpotential futurefuture exerciseexercise ofof thesethese warrants.warrants. InIn connectionconnection withwith thethe

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unexercised options and payment ofiheof the dividend to shareholders,shareholders, we also increasedincreased the number of shares subject toto unexereised stock options and decreased the exercise price of these stock optionoption grants toto preservepreserve theirtheir value.

The officers ofiBesisof iBasis immediatelyimmediately prior to thethe dosingclosing of thethe KPN Transaction have continuedcontinued to serve asas thethe officersofficer of the Company's Senior thethe combined company andand one executive ofKPNof KPN GCS, Mr.Mr, Edwin Van lerland,Ierland, was appointedappointed as the Company's Senior Vice Presidentpresident Worldwide Sales. Upon closing of thethe KPNKpN Transaction, Messrs. Charles Skibo and David Lee, two the board directors independent members ofiBasis'of iBasis' board of directors, resignedresigned as members of the board of directorsdirectors andand the hoard of directors the vacancies of iBasisiBasis appointed Messrs. EelaoEelco Blok and JoustJoost Farwerck,Farwcrck, two executivesexecutives of Royal KPN, asas directorsdirectors to fill the vacancies createdcreated byby thethe resignations of Messrs.Messrs, Skibo and Lea.Lee.

Although iBasisiBasis acquired all of thethe outstanding capital stockstock ofKPNof KPN GCS, afterafier thethe closingclosing of thethe transaction,transaction, KPN a future date, a holdsholds a majority of thethe outstanding common stock ofofiBasisiBasis and KPN'KpN' designeasdesignees are expected to represent, at a future date, a the KpN majority ofthethe Company's board of directors. Accordingly, for accounting andand financialfinancial statement purposes, the KPN the Transaction has been treatedtreated as a reversereverse acquisitionacquisition of iBasisi Basis by KPN GCSOCS under thethe purchase method of accounting and the historical financialiinancial resultsresults of KPN GCS have becomebecome thethe historicalhistorical financialfinancial results of the combined company andand replace the historical include financial resultsresults ofiBasisof iBasis as a stand-alun¢stand-alone company.company. Thus, thethe financial results reported for the fullfull year 2007 include the the results ofKPNof KPN GCS stand-alone for thethe first nine months of 2007 and the financial results of thethe combined company for the fourth quarter of 2007 only.

The presentation of the Statement of Stockholders' Equity reflectsreflects thethe historical stockholders'stockholders' equity of KPN GCS iBasis' through September 30, 2007. The effecteffect of thethe issuanceissuance of shares ofiBasisof iBasis commoncommon stock to KPN and the inclusioninclusion of iBasis' stockholders' equity as aa result of the closing of the KPN Transaction on October t,I, 2007 isis reflectedreflected in the year ended December 331,t, 2007.

Prior to October l,I, 2007, KPN GCS operated as an integratedintegrated partpart of KFNKPN since inceptioninception and the historical financialfinancial statements ofKPNof KPN GCS have beenbeen derived fromfi'om thethe accounting recordsrecords of KPN using thethe historical bases of assets andand liabilities. Because KPN GCS diddid not operate as a stand-alone business thethe historical financialfinancial statements may not necessarily be representative of amounts thatthat would have been reflected in the financial statementsstatements presented had KINKPN GCS operated independently of KPN.

KPN GCS benefited fromfrom certain related party revenue and purchase agreements with KPN that includedincluded sales prices administrative per minute and costscosts per minute.minute, KPN GCS also retiedrelied on KPN forfor a substantialsubstantial part of itsits operational andand administrative such as support, forfor which it was allocated costscosts primarily consisting of selling, generalgeneral and administrativeadministrative expenses, such as costscosts forfor centralized research, legal,legal, human resources, payroll,payroll, accounting,accounting, employeeemployee benefits,benefits, real estate,estate, insurance,insurance, informationinformation technology,technology, telecommunications,telecommunications, treasury and other corporatecorporate andand infrastructure costs,costs. InIn anticipation of thethe dosingclosing of thethe transactiontransaction with iBasis,iBasis, KPN GCS entered intointo a Framework Services Agreement with KPN inin 2006, which replaced thethe relatedrelated party revenue and purchase agreements andand operational andand administrative supportsupport arrangementsarrangements described above.above,

InIn 2008, we changed the name of ourour Netherlands opemlionsoperations from KPN GCS toto iBasis Netherlands.

TDC Transaction

On April 1,I, 2008,2008, we acquired certaincertain assetsassets fromfrom TDC, the leading telecommunications carrier in Denmark, as well as certain assets, contracts and four employees of TDCYTDC subsidiarysubsidiary in the U.S.,V.S.,TDC Carrier Services U.S.,V.S., for approximately $11$11 million inin cash ("TDC Transaction").Transaction" ).Pursuant to the TDC Transaction, we became the exclusive provider of internationalinternational voice services forfor TDC under aa five-yearfive-year strategic outsourcing arrangement, and TDC will be a preferred partner for terminatingteiminafing traffictraffic sent by us intointo the Nordic region,region, consistingconsisting of Denmark, Finland, Iceland, Norway and .

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ApproximatelyApproximately 130130non-Nordicnon-Nordic internationalinternational wholesalewholesale voicevoicecustomers,customers, asaswellwell asasallafiofTDC'of TDC'interconnectioninterconnection andand bilateralbilateral agreementsagreements forforinboundinbound andandoutboundoutbound internationalinternational phonephone callscallshavehavebeenbeentransferredtransferred totous.us.TDCTDCwillwillretainretainitsits NordicNordic customercustomer basebaseandand itsitspan-Nordi_pan-Nordic reach.reach.

IndustryIndustry OverviewOverview

MarketMarket Overview.Overview. BasedBasedonon thethemostmost currentcurrent informationinformation available,available, tbetheinternationalinternational voicevoice markstmarket waswasestimatedestimated bYby TeleGeography,TeleGeogmphy, aamarketmarket researchresearch firm,firm, totobebeapproximatelyapproximately $78$78billionbillion inin 2007,2007,andand internationalinternational voicevoiceminutesminutes grewgrew approximatelyapproximately 14%14%overover 2006.2006,InternationalInternational wholesalewholesale voicevoice traffictraffic representedrepresented approximatelyapproximately $11$11billionbillion inin2007,2007,andand minutesminutes ofoftraffictraffic grewgrew 17%17%overover 20062006asasmoremore traffictraffic isisoriginatedoriginated byby carrierscarriers suchsuch asasmobilemobile operators,operators, thatthat tacklark internationalinternafional networks.networks. WeWebelievebelieve thatthat wholesalewholesale traffictraffic willwill continuecontinue totogrowgrow fasterfaster thanthan thetheoveralloverall internationalinternational voicevoice marketmarket duedue totoimportantimportant trends.trends. TheseThese trendstrends involveinvolve thethe migrationmigration ofofvoicevoice traffic:traffic:

• fromfrom traditionaltradinonal vertically-integratedveriicsHy-integrated internationalintemaiiona) carrierscarriers totomoremore specializedspecialized localloral serviceservice providers;providers;

* fromfrom traditionaltraditional fixedfixed lineline offeringsofferings toto mobile;mobile; endand

fromfrom thethe TDMTDM network toto VolP.YoIP.

Moreover, directdirect connectionsconnections betweenbetween incumbentsincumbents fromfrom differentdifferent countriescountries areare only cost-effectivecost-effective forfor veryvery largelarge traffictraffic flows.flows. WholesaleWholesale carrierscaniers offer callcall terminationtermination toto manymany destinationsdestinations throughthrough aa singlesingle connectionconnection andand enableenable carderscarriers toto retainretain revenuerevenue whilewhile reducing costcost of operations.

Global deregulation combined with rapid technologicalteclmological advances hashas enabledenabled thethe emergenceemergence ofofmany internationalnewnew communicationscommunications service providersproviders in dozens oflocelof local markets. In theirtheir efforts toto remainremain competitive,competitive, national carriers areare focusing their capital spending on "last-mile""last-milev retail services and technology initiatives suchsuch asas fixed-to-mobile convergence, wireless, and cable, which deliver or promisepmmise to deliver margins that areare several timestimes greater than that of international voice service. Consequently, communications service providers are looking for ways toto expand their ability toto serveserve allafi of theirtheir customers' needs, while simultaneously reducing the cost of providing international services. As thethe internationalinternational voice business becomes increasingly commoditized, the critical success factor is the efticiencyefficiency of scale. For the vastvest majority of carders,carriers, international tratTictraffic represents a very small portionporfion of&theirtheir overall business. Therefore, many of the world's carriers are seekingseeking to leverageleverage e/ficientefficient wholesale networks, such as The iBasisiBasis NetworkNetwork™,TM, with lower infrastructureinfrastructure andand transporttransport costs thatthat cancan help improve aa carrier's competitiveness and bottom line, without compromising service quality,quality. Some carrier customerscustomers turn to usus for theirtheir biggest routes,routes, somesome for their smallestsmallest routes,routes, and others forfor afiall routes, effectively outsourcingoutsoureing their international voice traffic toto iBasis.

TheTheMainstreamingofVolP.Muinsireumfng of Vo/P. Although thethe consumerconsumer adoptionadoption of YoIPVolP servicesservices is a recentrecent development, we have been transmittingtransmitting YoIPVolP cafiscalls forformany ofof thethe world'sworld's largestlargest cameracarriers for severalseveral years.years. Managing qualityquality of service at thethe corecore of thethe network,network, which wewe pioneeredpioneered andand mastered,mastered, hashas allowedallowed phone-to.phone-to-phonephone callscalls toto bebe transmittedtransmitted overover thethe InternetInternet with qualityquality nearlynearly indistinguishableindistinguishable fromfrom thatthat ofof traditionaltraditional voicevoice networks,networks. EnabledEnabled by thethe qualityquality ofof VoIPVolP serviceservice from providersproviders likelike us,us, internationalinternational VolPVolP traffictraffic hashas growngrown rapidlyrapidly andend continues toto grovrgrow much fasterfaster thanthen internationalinternational TDMTDM traffic.traffic. AccordingAccording totoindusnyindustry analyst,analyst, TeleGeography,TeteOcography, internationalinternational YolPVolP traffictraffic grewgrew 36%36% toto 32 billionbillion minutesminutes inin 2004,2004, 42%42% toto 4545 billionbillion minutesminutes inin 2005.2005, 31%31% toto 616 l billionbillion minutesminutes inin 2006,2006, 28%28% toto 7878 billionbillion minutesminutes inin 2007,2007, andand isis expectedexpected toto havehave reachedreached nearlynearly 9595 billionbillion minutesminutes inin2008,2008, whichwhich isis approximatelyapproximately 25%25% ofof projectedprojected internationalinternational traifictraffic worldwide.

UnlikeUnlike fixed-linefixed-line telecommunicationtelecommunication networksnetworks andand managedmanaged internetintcrnet protocolprotocol ("IP")("IP") networks,networks, thethe InternetInterest hashas manymany potentialpotential pointspoints ofof congestioncongestion wherewhere information,information, ininthethe formform ofof datadata packets,packets, cancan bebe delayeddelayed oror dropped,dropped. ForFor non-real-timenon-real-time communications,communications, suchsuch asas email,email, aaslightslight delaydelay inin thethe receiptreceipt ofof aamessagemessage isisnotnot significant,significant. However,However, forfor real-timereal-time communications,communications, suchsuch asas telephonetelephone calls,calls, thethe

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resultof aa delaydelay inin transmitting thethe call, or losinglosing thethe call altogether,altogether, is significant.sigmficant. To minimize thefiskthe risk of delays or losinglosing calls over thethe [nternet,, we utilizeutilize complex and proprietary performanceperfonnance monitoring and callcall routing technologytechnology to ensure consistently high callcail completion and voice quality. We have developed patented andand patent-pending quality management technologies that enableenable usus to deliver call completion rates and average call duratiunsdurations (the standard metrics that carriers use for measuring quality) thatthat we believe areare comparable toto or better thanthan thosethose achieved by traditional fixed-linefixed-line carriers.

VolP'sVoIP's principal benefits are:are:

Cost AdvantageAdvantage/romfrom Internet Transport. Traditional voice networks use circuit-switching technology,technology, which establishes dedicateddedicated channels between an originating andand terminating point for thethe duration of a call. Physical facilities (typically(typically fiber andand assosiatedassociated equipmen0equipment) are dedicated to voice traffictraAlc between switching nodes, regardless of changes in demand. InIn contrast, VoIP is based on packet-switching technology. This technologytechnology completes a call by digitizing and dividing a speaker's voice intointo smallsmall packets that traveltravel tOto theirtheir destination along lineslines carryingcarrying packets of other IntarnetInternet traffic,traffic, inin much thethe same way as emailemail travels.travels. Using a network of service facilities connectedconnected toto thethe publicpublic InternetInteract forfor transporttransport is lessless costly than building a dedicated network as our calls shareshare thethe InteractInternet with other traffic.traAic.

Cost AdvantageAdvantagefromfrom 1PIP Technology. VolPVoIP gateway equipment which is used to convertconvert and route phone calls over thethe InteractInternet is less expensive and requiresrequires less physical space inin telecommunicationtelecommunication facilitiesfacilities thanthan traditional telecommunications equipment.

Cost Advantage frmnfroin Bypass of InternationalInternational SettlementSealement Rates.Rates, Traditional international longlong distance calls are completedcompleted through internationalinternational toll switches thatthat provideprovide access toto the terminating network.network. These networks areare oftenofien owned by governmentgovernment bodies or telecommunicationstelecominunications carriers who chargecharge settlement ratesrates well in excess of ousts.costs. Although thesethese feesfees are being reducedreduced in many countries as industry deregulation continues, thesethese charges remain significant. Calls routed overover thethe Internet can oftenoAen bypassbypass thethe toll switches, avoiding a significantsigniTicant portion of thesethese fees, which furtherfurther lowerslowers the cost ufof completing such calls.

~ PositioningforNewServlces.Positioning for New Serv/ces, InIn contrast toto the closed, proprietary structurestructure inherent inin aa traditional circuit- switched voice network.network, VoIP embracesembraces an open architecture andand open standards,standards, which facilitates innovationinnovation at a lowerlower cost. Traditional voice networks havehave been designed specifically to provide one basic service,service, making it difficultdiAicult andand costlycostly toto introduceintroduce newnew services over thosethose networks andand their proprietary platforms. As data networks convert all servicesservices intointo standard data packets, new services are delivereddelivered from industry standard servers,servers, integratingintegrating the IntenmtInternet with the revolution inin commodity computing. As a result, new services cancan bebe developed and broughtbrought to market much fasterfaster andand more cost-efficiently.

OutsourcingOursourcingInternationalInternational Voice. Given thethe advantages of VoIP,Vol p, many carriersearners have announced plans to migrate toto IP and have begun toto carry some portion of their voice traffictraffic over IP networks. However, most suchsuch projects areare focused on domestic infrastructureinfrastructure only, where thethe investment may not only reduce cost of voice servicesservices but will also enable thethe development of innovativeinnovative high margin services.services. MustMost carriers' international voice business hashas notnot achieved sufficientsufficient scale to justify the capital itwestmentinvestment required to deploy a new international IPIp network for voice. Lacking necessarynecessaty scale toto achieve thethe required efficiencyeffiiciency and unable to justifyjustify anan investmentinvestment in new lowerlower cost infrastructure,infmstructure, carriers are exploringexploring thethe outsourcing of internationalinternational traffictraffic toto providers suchsuch asas iBasls.iBasis. The reasonsreasons these carrierscamera prefer to outsourcooutsource international traffiotraffic include:include:

thethe relativelyrelatively lowlow pore_nmgepercentage of revenuerevenue and gross profit thatthat internationalinternational service representsrepresents for many large caITlerS;camers;

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thethe disproportionatedisproportionate costcostandand complexitycomplexity ofofdeployingdeploying andand supportingsupporting internationalinternational serviceservice infrastructureinfrasnucture inin contrastcontrast withwith domesticdomestic investmentinvestment opportunities;opportunities;

aahesitationhesitation totobuildbuild newnew networksnetworks andand cannibalizecannibalize traffictraftic fromfrom theirtheir traditionaltraditional voicevoicenetworks;networks;

~ concernsconcerns overover sufficientsuffiicient in-housein-house VolPVoIP expertiseexpertise totoensureensure thatthat voicevoicequalityquality andand networknetwork reliabilityreliability areare comparablecomparable totothatthat ofofthethe public-switchedpublic-switched telephonetelephone network,network, especiallyespecially whenwhen routingrouting traffictraffic overoverthethe lntemetInternet versusversus privateprivate networks;networks; andand

generallygenerally reducedreduced capitalcapital budgetsbudgets forfornetworknetwork investmentsinvestments ofofanyany kind.kind,

WholesaleWholesale TradingTrading BusinessBusiness

OurOur wholesalewholesale TradingTrading businessbusiness enablesenables carderscamera andand otherother communicationscommunications serviceservice providersproviders toto outsourceoutsource internationalinternational voicevoice andand faxfax traffic,trafflc, substantiallysubstantially loweringlowering theirtheir transporttransport andand serviceservice supportsupport costs,costs,withoutwithout compromisingcompromising quality.quality. OurOur cardercanier customerscustomers accessaccess The iBasisiBasis NetworkNetwork byby establishingestablishing anan interconnectioninterconnection throughthrough oneone ofofourour "Interact"Internet centralcentral offices"offices" or "ICOs""ICOs"strategicallystrategically locatedlocated inin major telecommunicationstelecommunications hubshubs inin thethe U.S.,U.S., Asia,Asia, andand Europe.Europe. CallsCalls areare transportedtransported overover thethe Internal,Internet, oror over TDM connections,connections, andand terminatedterminated byby ourour terminatingterminating partners--fixedpartners —fixed andand mobilemobile operators--inoperators —in moremore thanthan I0010'countries.countries. InIn thisthis way, ourour originatingoriginating customerscustomers receivereceive aasinglesingle pointpoint ofofinterconneetioninterconnecnon toto aa globalglobal networknetwork ofof terminationtermination points without thethe burdenburden ofofmanaging thethe intcallationaIinternational networknetwork logisticslogistics andand intereonnecfioninterconnection agreementsagreements onon thethe far end.end. Likewise,Likewise, ourour partners,partners, whowho sellsell usus terminationtermination capacity inin theirtheir countries,countries, receivereceive aa substantialsubstantial sourcesource ofoftraffictrafllc revenuerevenue without havinghaving toto negotiate individual agreementsagreements andand interconnectionsinterconnections withwith originatingoriginating carders.camera. OurOur servicesservices provide thethe following key benefitsbenefits toto our customers:

High Quality Call Completion. Our network, monitoring and managementmanagement technologiestechnologies enableenable usus tnto complete internationalinternational voice and faxfax calls with quality eomparsblecomparable to thatthat ofoftraditionaltraditional circuit-switched voicevoice networks.networks. ThisThis high quality is reflected in the fact thatthat carderscaniem choose to provide our VolP services toto their retail customerscustomers undifferentiatedundifferentiated fromfrom their traditional services. We achieve high quality over thethe InteractInternet through aa varietyvariety of eontrol_controls andand technologies.technologies. At our 24x7, expert-staffed global Network Operations Centers ("NOCs") inin Burlington, Massachusetts, Amsterdam, and Hong Kong, we are able to monitor our cardercamer customers'customers' voice trafflc.traffic. Using our patent-pending Assured Quality Rouling_Routing and pathEngtnetsrPathEngine TM technologiestechnologies to select optimal routing choices according to real time performance data, we dynamically route customers' traffictraftic over multiple interactInternet routes,routes, completing calls on our partners' phone networks in destination countries.

Cost Effective Services. We are able toto maintain one of the lowest cost structures in thethe international voice industryindustry becausebecause of our very largelarge scale, which provides efficiencies and leverageleverage when negotiating termination rates. Also, our call transportIxausport costscosts are lowerlower because packetpacket switching isis more etTicientefficient than traditional circuit-svritching,circuit-switching. Because we use the Internet,Internal, ratherrather thanthan aa privateprivate IPI P network,network, toto deliverdeliver muchmuch of our international voice traffic, we have greater infrastructure flexibilityflexibility and lowerlower capitalcapital costs thanthan serviceservice providersproviders thatthat employ dedicateddediuated point-to-point connections.¢onnectious. VolP equipment isis lessless costlycostly andand incursincurs lowerlower facilitiesfacilities costscosts (due(due toto itsits smallersmaller physicalphysical footprint)footprint) thanthan equivalent capacitycapacity circuitcimuit-switchedswitched equipment. We offeroffer anan open,open, scalablesealable architecturearchitecture thatthat enables cameracarders and communicationscommunications service providersproviders toto connect quicklyquickly andand withoutwithout investmentinvestment oror technicaltechnical experhse.expertise. WeWe areare alsoalso able toto bypassbypass many ofof thethe internationalinternational settlementsettlement ratesrates associatedassociated withwith somesome internationalinternational traffictraffic cernedcarded overover circuit-svritchedcircuit-switched voicevoice networks, whichwhich producesproduces additionaladditional costcost savings.savings.

OuisaurdngOuisourcing RevenueRevenue

OurOur OutsourcingOutsourcing revenuerevenue currentlycurrently consistsennsists ofof internationalinternational voicevoice traftictraffic wewe terminateterminate forfor RoyalRoyal KPNKPN andand itsits affiliatesaffiliates (KPN(KPN Mobile,Mobile, TelTelfort,fort, E-PlusE-Plus andand Base)Base) andand forforTDC,TDC, thethe leadingleading telecommunicationstelecommunications carriercerder inin Denmark.Denmark. WeWe areare aa preferredpreferred suppliersupplier ofof mobilemobile servicesservices forfor RoyalRoyal KPNKPN

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andanditsitsaffiliatesaffiliates andandwewearearethetheexclusiveexclusive providerprovider forforinternationalinternational directdirectdialing,dialing, ISDNISDNandandinmarsatlnmarsat servicesservicesforforallsll internationalinternational telephonetelephone andandfaxfaxtraffictraffic originatingoriginating fromfromororcarriedcanied overoverthetheRoyalRoyal KPNKPNfixedfixednetwork.network.

PursuantPursuant totothetheTDCTDCTransaction,Transaction, wewebecamebecame thetheexclusiveexclusive providerprovider ofofinternationalinternational voicevoiceservicesservices forforTDCTDCunderunder aa five-yearfive-year strategicstrategic outsoureingoutsourcing arrangement,arrangement, andandTDCTDCbecamebecame aapreferredpreferred partnerpartner forforterminatingterminating traffictraffic sentsentbybyususintointothethe NusdieNordic region,region, consistingconsisting ofofDenmark,Denmark, Finland,Finland, Iceland,Iceland, NorwayNorway andandSweden.Sweden. ApproximatelyApproximately 130130non-Nordicnon-Nordic internationalinternational wholesalewholesale voicevoicecustomers,customers, asaswellwell asasallall ofTDC'ofTDC'interconnectioninterconnection andandbilateralbilateral agreementsagreements forforinboundinbound andand outboundoutbound internationalinternational phonephone callscalls werewere transferredtransferred totous.us.TDCTDCretainedretained itsitsNordicNordic customercustomer basebaseandand itsitspan-Nordicpan-Nordic reach.reach.

RetailRetail BusinessBusiness

OurOur RetailRetail businessbusiness consistsconsists primarilyprimarily ofofourourprepaidprepaid callingcalling cardcardservicesservices andand Ping(>,Pingo, ourourprepaidprepaid callingcalling serviceservice soldsold directlydirectly totoconsumersconsumers throughthrough anan internetInternet website.website. OurOur prepaidprepaid callingcalling cardcard businessbusiness leveragesleverages ourourglobalglobal VolPVoIPnetworknetwork andand back-officeback-office systems,systems, includingincluding aasophisticatedsophisticated prepaidprepaid ratingrating andand billingbilling platform.platform. WeWesellsell moremore thanthan 200200brandsbrands ofofretailretail prepaidprepaid callingcalling cardscards throughthrough establishedestablished distributorsdistributors totoretailretail outletsoutlets inin majormajor metropolitanmetropolitan marketsmarkets acrossacross thetheU.S.U.S.ManyMany ofof thethe callingcalling cardcard brandsbrands areare ownedowned (trademarked)(trademarked) byby usus andand featurefeature ourour componentcomponent branding,branding, "Quality"Quality CallsCalls fromfrom iBasis",iBasis",onon thethe cards.cards. WeWe alsoalso enableenable establishedestablished carderscarriers toto leverageleverage thethe strengthstrength ofoftheirtheir brandsbrands byby takingtaking advantageadvantage ofofourour prepaidprepaid callingcalling cardcard platform,platform, productionproduction andand distribution.distribution. TheThe OiOi brandbrand caltingcalling cardcard fromfrom BrazilianBrazilian carriercarrier TelemarTelemar isis oneone example.example. We havehave establishedestablished aa dedicateddedicated operationoperation toto sellsell andand serviceservice ourour prepaidprepaid retailretail callingcalling cardcard services.services. Typically,Typically, ourour RetailRetail businessbusiness delivers higherhigher grossgross margins andand hashas aafasterfaster cashcash collectioncollection cyclecycle thanthan ourour TradingTrading business.business.

InIn SeptemberSeptember 2004, we launchedlaunched Pinged,Pingogt, our retail callingcalling serviceservice offeredoffered directlydirectly toto consumersconsumers andand businessesbusinesses throughthrough ourour eCommerceeCommerce web interface.interface. PingoPingo customers inin the United StatesStates andand 35 additionaladditional countriescountries useuse creditcredit cardscards oror alternative web-based payment methods, such as PayPal®Paypaltgt to purchase calling time overover The iBasisiffasis Network.Network, Customers areare provided with totl-frcetoll-free or local access numbers, a unique account numbernumber andand a personalpersonal identificationidentification number toto accessaccess thethe service.service, Pingo's enhanced convenience featuresfeatures includeinclude access toto on-lineon-line call and billingbilling history,history, automaticautomatic rechargingrecharging toto maintain a balance in the customer'scustomn"s Pingo account, and P1NpassPINpassvwTM PIN-less dialing,dialing, which enables a customercustomer toto avoidavoid keying inin theirtheir account number and PIN when calling from any fixedtixed or they have registered on thethe Pingo site. These features are designed toto increaseincrease the customer's convenience andand loyalty to the service.service. InIn 2007, we launchedlaunched PingoBosiness,PingoBusiness, which features enhancements that enable businesses toto manage multiple Pingo accounts throughthrough a single administrative account,account.

Our Retail servicesservices uponupon the underlying iiBasisBasis network and systems and give us opportunities to capture retail traffictraffic directlydirectly from consumers, whichwhich may provide higher margins than traffic reneivedreceived tlvoughthrough other caniers.carriers. In offering thesethese services, we cancan take advantageadvantage of our lughhigh qualityquality callcall completioncompletion andand cost effectiveeffective services.servtces.

The IBasisIBasls NetworkNetWork

OvervivtvOverview

WeWe transportedtransported 23.23.55 billionbillion minutesminutes ofof traffictraffic overover thethe iBasisiBasis NetworkNetwork inin 2008,2008, aa volumevolume ofof traffictraffic thatthat positionspositions usus amongamong thethe threethreelargestlarg_t carrierscarriers ofof internationalinternational traffictraffic inin thethe world,world, basedbased onon globalglobal traffictraffic statisticsstatistics containedcontained inin thethe industryindustry analystanalyst publicationpublication TeleOeographyTeteOeography 2009.2009.

TheThe iBasisiBasis networknetwork isiscomprisedcomprised ofofaaglobalglobal VolPVoIP infrastmcture,infrastructure, whichwhich isis thethe legacylegacy iBasisiBasis network,network, andand anan internationalinternational TDMTDM infmstructure,infrastructure, whichwhich isisthethe legacylegacy KPNKPN GCSGCS network.network.

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OurOurVoIPVoIPinfrastructureint'rastructure includesincludes InteractInternet CentralCentral OfficesOffices("ICe")("ICO")locatedlocated ininthethe majormajor telecommunicationstelecommunications marketsmarkets aroundaround thethe world--Newworld —New York,York,LosLosAngeles,Angeles, Amsterdam,Amsterdam, London,London, Frankfurt,Frankfurt, Paris,Paris, HangHong Kong,Kong, Tokyo,Tokyo, andand Sydney--andSydney —and moremore thanthan 1,0001,000IntemetInternet BranchBranch OfficesOffices ("IBO")("IBO")locatedlocated ininthethe facilitiesfacilities ofofterminationtermination partnerspartners ininmoremore thanthan 100I 00countries.countries, EachEach ICeICOincludesincludes highhigh capacitycapacity gateways,gateways, reuters,routers, sessionsession borderborder controllers,controllers, andand multiplemultiple IPIPbackbonebackbone connections.connections. CarrierCarrier customerscustomers sendsend traffictrafiic totoususbyby interconnectinginterconnecting viaviaTDMTDM ororIPIPtotooneone orormoremore ofofthethe ICes.ICOs.TheirTheir callscalls arearethenthen sentsent asasVoIPVoIP fromfrom thethe iBasisiBasis1COICOtotoaaterminationtermination partner'spartner's IBOIBOoverover thethe Interact.Internet. SomeSome h'affietraffic isissentsent totothird-partythird-party providersproviders whomwhom wewe useuse totosupplementsupplement ourour directdirect routes.routes,

OurOur TDMTDM infrastructureinfrastructure usesuses ICesICOs containingcontaining TDMTDM switchesswitches inin Amsterdam,Amsterdam, ,Rotterdam, FrankfurtFrankfurt andand NewNew YorkYork connectedconnected toto aanetworknetwork ofofterminationtermination partnerspartners viavia thethe PublicPublic SwitchedSwitched TelephoneTelephone NetworkNetwork ("PSTN").("PSTN").CustomersCustomers cancan connectconnect directlydirectly totothethe TDMTDM ICesICOs oror throughthrough ourour TransmissionTransmission PointsPoints ofofPresencePresence ("POP")("PoP')inin Miami,Miami, HangHong KongKong andand Singapore,Singapore, ororthroughthrough manymany moremore Euro-RingEuro-Ring PoPsPoPs ownedowned byby KPN.KPN. TrafficTraffic isistransportedtransported fromfrom TransmissionTransmission PoPsPoPs toto ICesICOs viavia thethe PSTN,PSTN.

Today,Today, ourour VolPVoIP andand TDMTDM networksnetworks areare combinedcombined throughthrough aa highhigh capacitycapacity connectionconnection thatthat enablesenables traffictraffic originatingoriginating onon eithereither sideside toto terminateterminate with aa suppliersupplier connectedconnected toto thethe otherother sideside ififthatthat suppliersupplier offersoffers usus lowerlower costscosts andand acceptableacceptable quality.quality. AsAs aaresult,result, anan interconnectianinterconnection toto oneone networknetwork givesgives iBasisiBasis customerscustomers accessaccess totoboth.both. ForFor example,example, callscalls thatthat comecome inin totothethe TDMTDM infrastructureinfrastructure cancan bebe terminatedterminated overover thethe VolPVoIP infrastructure.infrastructure. TheThe VolPVoIP networknetwork isisprimarilyprimarily managedmanaged throughthrough ourour NOCs inin Burlington,Burlington, MassachusettsMassachusetts and HangHong Kong,Kong, andand thethe TDMTDM networknetwork isis managedmanaged throughthrough ourour NOCNOC inin Hilversum,Hilversum, TheThe Netherlands.

During the secondsecond half ofof'2008,2008, we began thethe prOcessprocess ofofconvertingconverting aa numbernumber ofofourour customers fromfrom ourour TDM networknetwork toto our all-lPall-IP network. Over thethe next threethree toto five yearsyears wewe intendintend toto convert ourour remainingremaining customerscustomers fromfrom ourour TDM network toto our all-IP network. This will enable us toto take fullfull advantage of thethe superiorsuperior eastrost effieienciesefficiencies of VuIPVolP andand isis anan additional sourcesource ofsynergiesof synergies we expect fromfrom the transactiontransaction with KPN. iBasisifiusis VolPVofP LeadershipLeadersliip

The iBasis VoIPVolP network is based on a taelmologieally-advancedtechnologically-advanced switchlassswitchless architecture,architecture, leveraging proven hardware flomfrom industry leaders such asss CiseoCisco Systems and GenBandOenBand (formerly NexTonaNexTone and NextPoint), as well asas patented andand patent-pending iBasis software for quality management andend advanced routing. Our Assured Quality Routing and PathfinginePathEugine technology enables ongoing monitoring ofnetwerknetwork perfonnanceperformance and automatic selection of best quality routesroutes based on near zeal-timereal-time performance data,data. The switehlessswitchless architecture provides us with significant savings in operational costs and capital expense by eliminating thethe need for costly telecommunications switches and other equipment and connectivity in central offices,offices. It also has enabled us toto simplifysimplify provisioning, zeal-timereal-time route monitoring, and network management by decreasing thethe number ofnetwork componentscomponents involvedinvolved inin carryingcarrying aa ca!call.I, The result forfor our customers is higher voice quality, call completioncompletion andand call duration.

We have deployeddeployed specialized transcodingtranseoding equipmentequipment thatthat enabtesenables our network to accept traffictraffic inin a wider variety of formatsformats associated with codecscodecs-.-.cOmpr—compression/decompressionassion/decompressi on algorithms used byby consumereonsumer VoIPVolP providers to supportsupport differentdifferent devices,devices, applications andand networks. As partpart ofof ourour DirectVolp™DirectVolP TM Broadband offering, thethe transcoding_enseoding solutionsolution givesgives iBasisil3asis anan advantageadvantage inin meetingmeeting thethe interoperabilityinteroperability requirementsrequirements of emergingemerging serviceservice providers.providers.

TheThe iBasisiBasis NetworkNetwork consistsconsists ofof fourfourprincipalprincipal elements:elements:

InternetInteract CentralCentralOfficesOffices andand InternetIntemet BranchBranch OfficesOffices thatthatconvertconvert circuit-switchedcircuit-switcbed voicevoice traifictraffic intointo datadata forfor transmissiontransmission andendreceptionreception overover thethe InternetIntemet oror vicevice versa;versa;

thethe transmissiontransmission medium,medium, whichwhich isis principallyprincipally thethepublicpublic Internet;Interact;

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~ AssuredQualityRoutingand PathEnginetechnology, our proprietarytrafficmonitoringandrouting managementsoftware;soibvare; endand

our Network Operations Centers, fromfrom which we oversee and coordinate the operation of the ICesICOs and IBOs.

Internet/sterner CentralCenirai Offices and lnternetInternet Branch Offices.O/Trees. Our customerscustomers interconnectinterconnect with ourour network, atat theirtheir cost, by eormentingconnecting dedicated voice circuits fromfrom their facilities toto one of our ICes,ICOs, which areare strategieaUystrategically located in Amsterdam, Frankfurt,Frankibrt, HangHong Kong, London, Los Angeles, New York, Paris,paris, Sydney andand Tokyo. Alternatively,Alteinativel, our customers may elect toto installinstall an iBasisiBasis 1130IBO at their facilities. ICesICOs and IBOs receivereceive calls directly from a local cartiedscarriefs switched network. VoIPVolP gateways inin each IceICO or IBO digitize, compress and packetize voice and faxfax calls and then transmit themthem over thethe Intarnet.Internet. carrier's At the destination, another ICeICO or IBOIBO reversesreverses the process and thethe call isis switchedswitched back from thethe lnternetInternet toto a local carrier's circuit-switched network inin thethe destinationdestination country. Increasingly, customers are investinginvesting inin VolPVoIP equipment andand connectingconnecting toto usus using an IPIP signal.signal. As thisthis trend progresses, our already asset-effective business model gains further strength. We no longerlonger bear all thethe cost of onnvarfingconverting calls between traditionaltraditional voicevoice network and thethe lntemet,Internet, andand dedicateddedicated physical circuit- switchedswitched interconnects are eliminatedeliminated altogether.altogether.

The lnternet.internet. We usause thethe InteractInternet to transmittransmit thethe majority of our voice endand faxfax traffic because of itsits global coverage, lowlow cost and flexible connectivity. As a result,result, we havehave avoidedavoided the expense and delay of deploying andsnd maintaining a private, dedicated networkneuvork of fiber and cable connections.connections. In addition, because we do not havehave fixed,fixed, point-to-point connections,connections, we can adapt to changeschanges in internationalinternational traffictraffic flows rapidly and atat minimal cost. We effectively address thethe challengeschallenges of using thethe lntametInternet for high quality, real-time voice commonicationscommunications by:

selectingselecting onlyonly high quality,quality, service-orientedservice-oriented InteractInternet service providers as ourour vendors;vendors; Quality

purchasingpurchasing multiple, high-speed connectionsconnections into the IntametInternet backbone; and

continuously monitoring performance across our entire network.

Assured Quality Routing. We have deployed a proprietary patent-pending system of tools---._ollectivelytools —collectively knesvnknown as Assured Quality Routing toto maintain high quality serviceservice overover thethe Interact.Internet, AQR optimizes thethe quality of calls placed over The iBasis Network by integrating quality parameters intointo routing deaisions.decisions, These parameters includeinclude measures of quality thatthat are of direct importanceimportance to carriers includingincluding call duration, callcall completion and post-dial delay asas well as tmdedyingunderlying determinantsdeterminants of successfulsuccessful data transmission,transmission, namely packet loss,loss, jitter and latency. Utilizing datadata collected inin nearnear real-timereal-time by our patented PathEngine performance reportingreporting technology, AQR automatically re-routesre-routes traffictraffic in anticipationanticipation of quality droppingdropping below specific thresholds, sending subsequentsubsequent callscalls throughthrough another lntemetInternet path, to an alternative terminatingterminating IP partnerpartner or toto aa circuit-switchedcircuit-switched backup vendorvendor if nesessary.necessary.

Global NetworkNetwork Operations Centers. We manage our network and implementimplement AQR throughthrough ourour networknetwork operations centerscenters ("NOCs").("NOCsbh Our NOCs use leadingleading network management tools fromfrom Hewlett-Packard and aa number of other vendors, which areare integrated with our AQR systems to enable usus to monitor, test and diagnose all componentscomponents of The iBasisiBasis Network.Nehvork. NOCs in Burlington, M_saehusetts,Massachusetts, Hilversum, The Netherlands and HoogHong Kong are staffed by networknetwork endand traffictraffi engineersengineers to provide expert coveragecoverage 7 days a week, 24 hourshours a day, 365 days a year, andsnd are equippedequipped with:

tools thatthat supportsupport the monitoring and analysis of various components of The iBesisiBasis Network toto identifyidentify and address potentialpotential network problemsproblems before they affect our customers;

system redundancy, includingincluding power baek_up;back-up; and

a helphelp desk that allows us to respond quickly to our eustomera'customers' needs and concerns.

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EngineeringEngineering andand NetworkNetwork OperationsOperations

OurOur engineeringengineering andand networknetwork operationsoperations activitiesactivities areareprimarilyprimarily focusedfocused onondeveloping,developing, improvingimproving andand expandingexpanding TheThe iBasisiBasisVolPVolPNetworkNetwork andand increasingincreasing thethe efficiencyefficiency ofofourourinterconnectionsinterconnections withwith buyersbuyers andand sellersseiiers ofoftelecommunicationstelecommunications services.services. TheseThese activitiesactivities includeinclude thethe developmentdevelopment ofofspecificspecific toolstools forforourournetworks,networks, suchsuch asasourourpatent-pendingpatent-pending AssuredAssured QualityQuality RoutingRouting andand patentedpatented PathEnginePsthEngine technologies,technologies, asaswellwell asasspecializedspecialized interconneetioninterconnection technologiestechnologies likelikeourour DirectVolPDirectVoIP BroadbandBroadband service,service, whichwhich isisdesigneddesigned totomeetmeet theneedsthe needs ofofprovidersproviders ofcunsumerof consumer VolPVoip services.services. InIn addition,addition, ourour engineeringengineering personnelpersonnel contributecontribute toto thethe supportsupport andand operationoperation ofofourourglobalglobal networknetwork operationsoperations centers,centers, whichwhich overseeoversee andsnd coordinatecoordinate thethe operationoperation ofofourour ICesICOs andand IBOs.IBOs.EngineeringEngineering andand networknenvork operationsoperations activitiesactivities forforthethe supportsupport ofofourour TDMTDM networknetwork hashas to-dateto-date beenbeen providedprovided byby KPNKPN underunder aaserviceservice levellevel agreement.agreement.

MarketsMarkets andand CustomersCustomers

AccordingAccording totoTeleGeegraphy,TeleGeography, thethe globalglobal marketmarliet forforintematiunalinternational phonephone serviceservice waswas estimatedestimated totobebe approximatelyapproximately aa $78878billionbillion marketmarket inin 2007 andand internationalintemanonal voicevoice minutesminutes grewgrew 14%14%fromfrom 20062006toto2007.2007.AsAsaasubset,subset, internationalinternational VolPYoIp traffictraffic grewgrew 28%28%inin thatthat samesame periodperiod toto approximatelyapproximately 78 billionbillion minutes.minutes. TheTheportionportion ofofinternationalinternational traffictraffic carriedcarried byby wholesalerswholesalers likeNke us grewgrew tI7% overover thethe samesame periodperiod asasmoremore carrierscamera turnedtumed totowholesalerswholesalers totohandlehandle theirtheir internationalinternational business.business. InIn allall butbut twotwo ofofthethe 1616yearsyears fromfl'om 19921992toto 20072007 thethe raterate ofofincreaseincrease inin traffictraffic volumevolume hashas outstrippedoutstripped thethe raterate ofof declinedecline inin pricing,pricing, providingproviding thethe opportunityopportunity for continued revenuerevenue growth.growth. WithWith thethe increasingincreasing migrationmigration ofot'internationalinternational traffictraffic toto VolPYolP andand the growth inin calls thatthat are originatingoriginatin as 1PIP throughthrough incumbentincumbent andand emergingemerging providers,providers, includingincluding cablecable operators,operators, growthgrowth ofofinternationalinternational VolPVoIP traffictraffic isis likelylikely toto continue.continue. ThisThis reinfurccsreinforces thethe growthgrowth opportunitiesopportunities forfor us,us, asas ititisis natural forfor providersproviders who areare originatingoriginating theirtheir traffictraffic on IPIp toto turnturn toto VolPVolp carriers,carriers, likelike us,us, toto avoidavoid unnecessary conversionsconversions toto TDM toto complete their internationalinternational calls.calls.

As of DecamberDecember 31, 2008, we provided services to approximately 800 carrierscamera worldwide.worldwide. OtherOther thanthan revenuerevenue fromfrom Royal KPN andand itsits affiliates, no one carriarcarrier accounted forfor 10% or more ofofrevenue inin 2008, 2007 oror 2006.2006. For further discussion of geographic revenues, refer to Note 56 in our Notes to Consolidated Financial Statements.

In countries where we terminate our traffic,traific, we have established relationships with large nationalnational carrierscamera and other locallocal service providers thatthat have strong locallocal market expertise and relationships.

Increasingly, traffic flows are becomingbeeoming reciprocal--furmerlyreciprocal —formerly distinct customers and suppliers are becoming "trading- partners"partners"--as—as deregulation and competition erode the distinction between the business models of our customers and suppliers.suppliers. We expectexpect continuedcontinued growth inin both sizesize and protltabilityprofitability as this trend progresses and we furtherfurther consolidate our position asas a leading samercartier thatthat interconnectsinterconnects thethe world's local service providers.

Deregulation and increasedincreased competition inin thethe telecommunicationstelecommunications industryindustry has caused prices for longlong distance telephonetelephone servicesservices toto steadilysteadily decline, particularlyparticularly inin thethe U.U.S.S. andand . Regulatory pressure on mobile operators, particularlyparticularly inin thethe European Union,Union. areare loweringlowering mobilemobile terminationtermination rates.rates. As a wholesale providerprovider of longlong distance telephonetelephone services,services, our marginsmargins inin thisthis businessbusiness reflect thethe effecteffect ofofthasethese lower prices. We attempt to oifsetoffset thethe effect of thesethese lowerlower prices byby negotiatingnegotiating lowerlower costscosts fromfrom ourour call termination partners andand by increasing thethe cost eAiciencyefficiency and utilizationutilization ofof ourour network.network. WeWe havehave implementedimplemented aa strategystrategy toto leverageleverage retailretail traffictraffic originatingoriginating fromfrom bothboth our TradingTrading customerscustomers andand ourour ownown RetailRetail servicesservices toto attemptattempt toto drivedrive higherhigher margins thanthan wewe might typicallytypically realizerealize fromfrom ourour TradingTrading business.business. WithWith ourour prepaidprepaid callingcalling cardscards andand Pingo,Pingo, wewe areareableable toto charge per-minuteper-miunte ratesrates thatthat cancan exceedexceed ourour wholesale longlong distancedistanca rates,rates, asas weflwell asas generategenerate revenuerevenue fromfrom feesfees typicallytypically associatedassociated with thethe useuse of prepaidprepaid services.services.

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SalesSalesandMarkefingand Marketing

TradingTrading

SalesSaiesStrategy.Strategy, OurOursalessaleseffortsefforts forforthethe wholesalewholesale TradingTrading businessbusiness targettarget leadingleading fixedfixedlinelineandandwirelesswireless telecommunicationstelecommunications carrierscarriers globallyglobally asasbothboth buyersbuyers ofofinternationalinternational minutesminutes andand sellerssellers ofofterminationtermination capacity,capacity, asaswellwell asas emergingemerging providersproviders ofofconsumerconsumer VolPVolPservicesservices overoverbroadbandbroadband connections.connections. OurOursalessalesforceforceisiscomprisedcomprised ofofexperiencedexperienced personnelpersonnel withwith well-establishedwell-established relationshipsrelationships inin thethetelecommunicationstelecommunications industry,industry, basedbasedininkeykeymarketsmarkets worldwideworldwide andand typicallytypically responsibleresponsible forforbusinessbusiness developmentdevelopment ininaasmallsmall numbernumber ofofcountriescountries regionally.regionally. OurOursalessales processprocess oftenoften involvesinvolves aa testtestofofourourservicesservices bybypotentialpotential originatingoriginating customerscustomers ininwhichwhich theythey routeroute traffictrafficoveroverourournetworknetwork totoaaparticularparticular country.country. OurOur experienceexperience totodatedate hashas beenbeen thatthat onceonce aacarriercarrier hashss begunbegun totouseuse ourournetworknetwork forforaasinglesingle countrycountry andand findsfinds ourourqualityquality toto bebeacceptable,acceptable, thethe salessales processprocess forforincreasingincreasing thethe volumevoluine ofoftraffictraffictheythey sendsend totoususandsnd increasinginweasing thethenumbernumber ofofdestinationsdestinations forforwhichwhich theythey useuse ourournetworknetwork becomesbecomes incrementallyincrementafiy easier.easier. WeWe alsoalsoseekseek totocultivatecultivate relationshipsrelationships withwith serviceservire providersproviders thatthat cancan terminateterminate thethe locallocal legleg ofofinternationalinternational calls.calls. OurOur countrycountry managersmanagers activelyactively pursuepursue connectionsconnections withivith capablecapable terminationtermination partnerspartners inin theirtheir regions.regions. OurOur abilityability totodeliverdeliver aahighhigh volumevolume ofoftraffic,traffic, duedue totoourour interconneetionsinterconnections withwith moremore thanthan 800800carrierscamera withwith internationalinternational minutes,minutes, makesmakes usus anan attractiveattractive potentialpotential partnerpartner forforlocallocal ssrvieeservice providers.providera

AfterAfter thethe closingclosing ofofthethe KPNKPN Transaction,Transaction, wewe trainedtrained ourour salessales penplepeople onon thethe Company'sCompany's totaltotal productproduct portfolioportfolio totoenableenable ourour salessales personnelpersonnel totobebe ableable toto sellsell allall of ourour products.products,

AsAs deregulationderegulation andand competitioncompetition pushpush all locallocal serviceservice providersproviders toto bothboth originateoriginate andand terminateterminate asasmuchmuch ',raffletraffic asas possiblepossible on theirtheir locallocal networks, we believebelieve we will increasinglyincreasingly enjoyenjoy "reciprocal""reciprocal" relationshipsrelationships with thethe providersproviders withwith whichwhich we dodo business, furtherfurther improvingimproving sales productivity.

We have officesoffices providingproviding salessales coverage inin Europe, Africa, thethe Middle East,Bast, Latin America, thethe Asia-Pacific region,region, and North America,

Marketing Strategy. In our wholesale Trading business,business. we seek to attract termination partnerspartners as well as customers and thereforethemfora address our marketing efforts to both. A very largelarge portion ofretail origination continues to be controlledeonlrolled by large incumbent retail carriers. We believe thatthat we have largelylargely achieved our primary marketing objectives of awareness and acceptance among incumbentincumbent retail caniers,carriers, as evidenced by our penetration of these carrierscamera in the major developed regions ofof the world. WeWe continuecontinue toto reinforcereinforce our brandbrand presence with incumbent retail carriers to help increase our share of international trsffic.traffic. We alsoalso concentrate on state-owned carriers,earriars, known as PTTs, in Asia and in developing economies generally,generally, who we viewview as natural customers. InIn addition,addition, we have focused marketing efforts on raising awareness of our business amongamong emergingemerging consumer VoipVolP companies,companies, cable operators,operators, prepaid calling cardcard providers, and mobile operators,operators, which representrepresent significantsignificant growth opportunitiesopportunities forfor us.

WhileWhile wewe increasinglyincreasingly expectexpect ourour customerscustomers toto alsoalso bebe ourour terminationtermination partners,partners, locallocal cirrumstances¢iraumstancas inin many countries stillstill areare suchsuch thatthat wewe alsoalso looklook toto partnerpartner withwith ISps,ISPs, newnew Competitive LocalLocal ExchangeBxchange CarriersCarriers (eCLECs")("CL_.Cs") andand specialist terminationtermination providers,providers, manymany ofof whichwhich areare start-upsstart-ups formedformed specificallyspecifically toto terminateterminate internationalinternational traffic.traffic+ ConnectingConnecting withwith multiplemultiple terminatingterminating providersproviders inin aa givengiven destinationdestination providesprovides usus withwith greatergreater capacitycapacity andand leverageleverage inin negotiationsnegotiations toto reducereduce costs,costa.

OwOur marketingmarketing activitiesactivities includeinclude sponsoring,sponsoring, exhibitingexhibiting andand presentingpresenting atat industryindustry tradetrade showsshows andandconferences,conferences, mediamedia andand indusnyindustry analystanalyst relations,relations, aacomprehensivecomprehensive website,website, andend regularregular communicationscommunications withwith ourour existingexisting customercustomer base.base.

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RetaURara/I

OurOur salessales andand marketingmarketing strategystrategy forforourour RetailRetail servicesservices businessbusiness differsdiffers forforthethedisposabledisposable prepaidprepaid callingcalling cardcardbusinessbusiness andand thethePingoPingo eCommerceeCommerce business.business. ForForthethe callingcalling cardcard business,business, wewearearefocusedfocused ononthethefollowingfollowing areas:areas:

expandingexpanding thethe portfolioportfolio ofofiBasis-brandediBasis-branded callingcalling cards;cards;

increasingincreasing ourour shareshare ofofexistingexisting distributors'distributors' businessbusiness andand cultivatingcultivating newneiv distributors;distributors;

expandingexpanding grossgross margins;margins; andand

euhencingqu_i_J.enhancing quality.

InIn developingdeveloping ourour ownown callingcalling cardcard brands,brands, inin additionaddition totosupportingsupporting establishedestablished brandsbrands ofofourour distributors,distributors, wewe areare buildingbuilding thethe presencepresence of selectselect brandsbrands inin multiple marketsmarkets acroSsacross multiplemultiple distributors.distributors. TheseThese brandsbrands leverageleverage aa commoncommon raterate andand feefee structurestructure andand areare ableable toto leverageleverage commoncommon designdesign andand advertising,advertising, whichwhich enhancesenhances bothboth administrativeadministrative andand marketingmarketing effieieanyefficiency while buildingbuilding distributordistributor andand customercustomer loyalty.loyalty.

InIn latelate 2007, we launchedlaunched the iBasisiBasis TruePromptsTruepromptsr"'TM campaign, which we believebelieve enhancedenhanced consumers'consumers' trusttrust inin ourour prepaid calling cards by guaranteeingguaranteeing deliverydelivery of the minutesminutes advertisedadvertised oror promptedprompted onon eacheach call.call. InIn 2008,2008,wewe believebelieve TmePromptsTruePrompts temporarilytemporarily stowedslowed ourour growth inin RetailRetail as not allag competitorscompetitors throughoutthroughout thethe segmentsegment implementedimplemented similarsimilar measures asas wewe did.did, As a result,result, itit may havehave appearedappeared to lessless sophisticated consumersconsumers thatthat iBasisiBasis providedprovided fewerfewer minutesminutes onon itsits callingcalling cardscards when comparedcompared to a competitorscompetitor's callingsailing card.card. In thethe future,future, wewe believe thatthat clearclear disclosuredisclosure andand greater transparencytransparency in pricing are positivepositive developments for the prepaid callingcalling card industry overalloverall andand in particular forfor usus usas theythey willviill enhance thethe competitivecompetitive advantage of ourour lowerlower cost structure.structure.

To broaden our calling card distribution we identify the leading established distributorsdistributors inin major urban markets inin the U.S.U.S.and work to establish mutuallymulatally beneficial relationships. These distributors possess the local market knowledgeknowledge andand relationships with retail outlets required to effectively build market presencepresence forfor our calling cards. Some of our distributorsdistributors operate as master distributors supporting smaller sub-distributors that help toto broaden and reinforce their market share within various temtoriesterritories or types of outlets. We expand distribution into nownew ethnic and geographic markets by leveraging existing relationships and by pursuing new distributors as necessary. Expanding gross margins inin the prepaid calling card business is a function of managing card lifecycles. Typically, new cards are inlroducedintroduced with very aggressive promotional pricing to build distributor and retailerretailer enthusiasm and consumerconsumer interest.interest. Once the card has proven itsits quality and reliability we move beyond thethe promotional stage intointo production,production, enablingenabling us to realize higher margins. As we establish our presence inin the calling cardcard market, the overall ageage of our product portfolioportfolio will increase, essentially resulting in more products having graduated fromfrom thethe promotionalpromotional phase intointo producing higher margins,margins.

TheThe sales andand marketingmarketing strategystrategy forfor ourour PingoPingo serviceservice leveragesleverages the cost-efficiencycost-efficiency andand tracking capabilities of on-lineerr-line paid placementplacement advertising onoftmajormajor searchsearch engines,engines, suchsuch asas GoogleGoogte and Yahoo, asas well as opportunistic online banner advertisingadvertising andand editorialeditorial placement,placement, particularlyparticularly onon ethnicethnic andand travel.travel-orientedoriented websites, and occasionaloccasional print advertisingadvertising inin well-targetedwen-targeted publications.publications. WeWe alsoalso drivedrive businessbusiness thoughthough aa web-basedweb-based afilliateaffiliate salessales program,program, andand promotionpromotion of freefree trialtrial cardscards atat eventsevents andend throughthrough distributiondistribution partners.partners. InIn addition,addition, wewe leverageleverage searchsearch engineengine optimizationoptimization techniquestechniques on thethe Pingo,Pingo.eomcorn websitewebsite toto maximizemaximize naturalnatural searchsearch results.results. WeWe havehave retainedretained aa searchsearch engine marketing firmfirm and anan onlineonline creativeCreative firmfirmwithwith specificspecific expertiseexpertise andand proprietaryproprietary technologytechnology designeddesigned toto optimizeoptimize our onlineonline advertisingadvertising investments.investments. WhenWhen prospectsprospects visitvisit thethe PingoPingo website,website, wewe utilizeutilize specialspecial bonusbonus awardsawards andand promotionspromotions toto encourageencourage initialinitial purchase.purchase. WeWe alsoalso maintainmaintain communicationcommunication withwith ourour existingexisting PingoPingo customerscustomers throughthrough frequentfrequent emailemail announcementsannouncements toto encourageencourage useuse ofof thethe service,service, recharges,recharges, andand referrals,referrals, asas wellwell asas provideprovide rewardsrewards forfor theirtheir loyalty.loyalty.

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StrategicStrategic TechnologyTechnology RelationshipsRelationships

StrategicStrategic technologytechnology relationshipsrelationships areareimportantimportant becausebecause theytheygivegiveususearlyearly accessaccesstotonewnewtechnologies,technologies, aavoicevoiceininthethe vendors'vendors' developmentdevelopment direetiandirection andandbecausebecause strategicstrategic parlnerspartners engagea~gagewithwith ususininsupportsupport ofofouroursalessalesandand marketingmarketing programs.programs.

TheTheiBasisi Basis NetworkNetwork isisaaCiscoCiscoPoweredPowered"wTM networknetwork andand wewehavehave continuedcontinued totomaintainmaintain aastrongstrong technologytechnology andandbusinessbusiness relationshiprelationship withwith CiseoCiscoSystems.Systems. ThisThis designationdesignation meansmeans thatthat TheTheiBesisiBasisNetworkNetwork isisbuiltbuilt predominantlypredominantly withwith CisceCiscoproductsproducts andand technologiestechnologies andand meetsmeets aahighhigh standardstandard ofofreliabilityreliability andand performance.performance, AsAsaaCiscoCiscoPoweredPowered™TM network,network, wewehavehave enhancedenhanced aecessaccesstotoCiseoCiscotechnicaltechnical resourcesresources andsnd areare ableable totomoremore quicklyquickly deliverdeliver newnew capabilitiescapabilities andand serviceservice features.features. WeWe alsoalsohavehave formedformed relationshipsrelationships withwith GenBandGenBand (formerly(formerly NaxToneNex Tone andandNextPoin0,NextPoint), aaleadingleading providerprovider ofofsessionsession borderborder controllers,controllers, whichwhich areare deployeddeployed ininourour ICesICOsandand provideprovide intaroperabilityinteroperabiliW endandprotocolprotocol conversionconversion capabilities,capabilities, andandwithwith Digium,Digium, thethe suppliersupplier ofofourour transeodingtranscoding platform,platform, whichwhich isisdeployeddeployed asaspartpart ofofourour DirectVolPDirectVol pBroadbandBroadband offering.offering,

CompetitionCompetition

WeWe competecompete inin twotwo markets:markets: internationalinternational voicevoice terminationtermination services,services, whichwhich wewe sellsell onon aawholesalewholesale basisbasis totootherother services which we sell consumers and distributors. As described more carriers,carriers, andand retailretail prepaidprepaid callingcalling serviees" which we sell toto consumers directlydirecily and throughthrough distributors. As described more completelycompletely inin ItemItem 1AIA "Risk"Risk Factors,"Factors, thethe marketmarket forfor voicevoice servicesservices isishighlyhighly competitive.competitive. WeWe competecompete withwith otherother wholesalewholesale tradingtrading carrierscarriers worldwide.worldwide, ManyMany ofofthesethese carrierscarriers have moremore resources,resources, longerlonger operatingoperating historieshistories andand moremore establishedestablished positionspositions inin thethe eommunicationscommunications marketplace,marketplace, and,and, inin somesome cases, havehave begunbegun toto developdevelop VolPVoIP capabilities.capabihties. WeWe alsoaBoconlpetecompete with smallersmaller companies,companies, including thosethose thatthat may be specialists injustin just oneone oror twotwo routes.routes. We competecompete withwith ourour ownovm customers,customers, includingincluding retailretail carriers whowho developdevelop theirtheir own internationalinternational networksnetworks oror interconnectinterconnect withwith oneone anotheranother andand exchange internationalinternational traffictraffic by "meeting""meeting" inin a major teleeomtelecom hub.hub, WeWe competecompete prineipallyprincipally on quality of service and price.price. InIn thethe overall international longlong distance market, which was approximately 343 billionbillion minutes inin 2007,2007, basedbased on eurrontcurrent information,information, we are among the three largest carriers with approximatelyapproximately 7%7%market share.

InIn the retail prepaid calling card business, we compete with major telecommunications carriers and many smaller telecommunicationstelecommunications providers. Many of our competitors have a longer operatingoperating history and a more established market presence in the retail prepaid calling card business than we do. Also, many of these competitors have greater resources. Our Pingo business competes with other on-line sellers of prepaid calling cards and services. Many of thesethese operate on-line catalogs, selling thethe same cards that are availableavailable inin physical formform in retail stores.stores. Because we terminate our retail traffic on our own VoipVoIP network, we believe we enjoy a competitive advantage over the majority of competing calling card companies andand onlineonline retailers.

Although thethe marketmarket forfor wholesalewholesale internationalinternational traffictraffic andand retail prepaid calling services isis highly competitivecompetitive and will almostalmost certainlycertainly remainremain so, we believebelieve thatthat ourour scale, comprehensiveeomprehansive voicevoice product portfolio, global footprint, sophisticatedsophisticated andand automatedautomated back-officeback-office systems,systems, andand ourour patent-pendingpatent-pending abilityability toto manage traffictraffie across thethe low-costlow-cost InternetInternet whilewhile maintainingmaintaining requiredrequired quality,quality, collectivelycollectively representrepresent aa competitivecompetitive advantage thatthat will allow usus toto expandexpand bothboth volumevolume andand margins,margins.

GovernmentGovernment RegulationRegulation

AsAs moremore fullyfully describeddescribed inin ItemItem IA1A"Risk"Risk Factors,Factors,"" ourourbusinessbusiness isis subjectsubject totoU.U.S.S. andand foreignforeign laws,laws, whichwhich maymay includeinclude thosethose relatingrelating toto telecommunications.telecommunications.

WeWe holdhold aalicenselicense totoprovideprovide interstateinterstate andand internationalinternational telecommunicationstelecommunications servicesservices fromfrom thethe FederalFederal CommunicationsCommunications CommissionCommission ("FCC")("FCC") andand wewe havehave obtainedobtained ororareare ininthethe processprocess ofof obtainingobtaining appropriateappropriate regulatoryregulatory authority,authority, andand glingfiling appropriateappropriate tariffs,tariffs, regardingregarding thetheRetailRetail businessbusiness

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inincertaincertain states.states,AdditionalAdditional aspectsaspects ofot'ourour operationsoperations maymay currentlycutrently be,be,ororbecome,become,subjectsubjecttotostatestateororfederalfederal regulationsregulations governinggoverning licensing,licensing, universaluniversal serviceservice fundingfunding ("USF"),("USF"),advertising,advertising, disclosuredisclosure ofofconfidentialconfidential communicationscommunications ororotherother information,information, exciseexcisetaxes,taxes,U.S.U.S.embargusembargos andand otherother repottingreporting ororcompliancecompliance requirements.requirements.

WhileWhile thetheFCCFCChashssmaintainedmaintained thatthat informationinformation serviceservice providers,providers, includingincluding VolPVoIPproviders,providers, arearenotnottelecommunicationstelecommunications carrierscarriers forForregulatoryregulatory purposes,purposes, variousvarious entitiesentities havehave challengedcha)lenged thisthispremise,premise, bothbothbeforebeforethetheFCCFCCandand atatvariousvarious statestate governmentgovernment agencies.agencies. TheTheFCCFCChashas ruledruled thatthat certaincertain communicationscommunications carriedcarried ininpartpart utilizinguhlizing thethe IPIPformat,format, includingincluding prepaidprepaid callingcalling cardcard servicesservices suchsuch asasthosethose weweprovide,provide, areareregulatedregulated telecommunicationstelecommunications servicesservices forForwhichwhich certaincertain regulatoryregulatory obligations,obligations, suchsuch asasfederalfederal USFUSFpaymentspayments andand accessaccesschargecharge payments,payments, apply.apply. TheTheFCCFCCisispresidingpresiding overoverseveralseveral proceedingsproceedings relatedrelated totoVoIPVolP servieasservices andand thethe extentextent thatthat IPIPcapabilitiescapabilities insulateinsulate suchsuch offeringsofferings fromfrom traditionaltraditional regulationregulation suchsuch asasaccessaccess ehargas,charges, universaluniversal service,service, andand intereonnectioninterconnection rightsrights forforVolPVoIPproviders.providers. AdverseAdverse rulingsrulings ororrulemakingsrulemakings couldcould subjectsubject usus totolicensinglicensing andand reportingreporting requirementsrequirements andand additionaladditional feesfeesandand charges.charges.

TheThe regulatoryregulatory treatmenttreatment ofofVolPYoip andsnd otherother iBasisiBasis servicesservices variesvaries widelywidely amongamong otherother countriescountries andand isissubjectsubject toto constantconstant change.change. UntilUntil recently,recently, mostmost countriescountries diddid notnot havehave regulationsregulations addressingaddressing VolPVoIPororotherother VolPVolP servicesservices suchsuch asas callingcalling cards,cards, inin somesome easescases classifyingclassifying thesethese servicesservices asas unregulatedunregulated services.services. AsAs thethe VolPYoIP marketmarket hashas growngrown andand matured,matured, increasingincreasing numbersnumbers ofofregulatorsregulators havehave begunbegun totoreconsiderreconsider whetherwhether totoregulateregulate VoIPYoIP andand otherother VolPVolP services.services. SomeSome countriescountries currentlycurrently imposeimpose littlelittle or nono regulationregulation onon VolPYolP or VolPVoIP services.services. Conversely,Conversely, otherother countriescountries thatthat prohibitprohibit ororlimitlimit competitioncompetition forfor traditionaltraditional voicevoice telephonytelephony servicesservices generally dodo notnot permitpermit InteractInternet telephonytelephony ororVolT'VoIP servicesservices ororstrictlystrictly limitlimit thethe termsterms under whichwhich suchsuch servicesservices maymay bebe provided,provided, eveneven imposingimposing criminalcriminal penaltiespenalties forfor individualsindividuals associatedassociated withwith suchsuch offerings. StillStill otherother countriescountries regulateregulate VolPYolP andand VolPVoIP servicesservices likelike traditionaltraditional voicevoice telephonytelephony services,services, requiringrequiring VoIPVolP companiescompanies toto obtain licenses,licenses, incorporateincorporate locallocal subsidiaries,subsidiaries, make universaluniversal serviceservice contributionscontributions andand paypay otherother taxes.taxes.

We have advocatedadvocated and supportedsupported deregulation for freefree endand open market competition inin aavarietyvariety ofofenuntries.countries.

Intellectual Property

We regard our copyrights, service marks, trademarks, trade dress, trade secrets, patents, patent applications and similar intellectualintellectual property as critical to our success and we rely on trademark and copyright taw,law, trade secret proteetionprotection and confidentiality and/or license agreements with our employees, customers, partners, and others to protect our proprietary rights. Our policy isis toto seek patent protection of thethe technology,technology, inventionsinventions and improvements that we consider important to thethe development of our business.business. In March 2008, we were granted our tirstfirst patent for our methods of monitoring the quality of various routesroutes toto sendsend callscalls thmughthrough the Internet,lnternet, PathEngine. As of December 31,2008, we had several pending U.U.$.S. patentpatent applicationsapplications forfor The iBasisiBasis NetworkNetwork and otherother inventionsinventions relatedrelated to our business. We have also entered intointo aa licensing arrangementarrangement with RoyalRoyal KPN grantinggranting usus rightsrights toto Royal KPN'KPN' portfolio of patents, and Royal KPN has beenbeen grantedgranted a cross-cross- licenselicense toto our patentpatent portfolio. WeWe pursue thethe registrationregistration ofof ourour trademarkstrademarks and serviceservice marks in thethe United States and overseas.overseas. WeWe havehave beenbeen grantedgranted trademarktrademark registrationregistration forfor variousvarious marks related toto ourour business,business, includingincluding iBasis,iBasis, Pingo, AssuredAssured QualityQualily Routing,Routing, PretniumCertiBed,PremiumCertifled, TheThe lastlast callingcalling cardcard you'll ever need!,need.t, andand severalseveral marks relatedrelated totoourour prepaidprepaid callingcalling cardcardproductsproducts inin thethe UnitedUnited States, andend thethe EuropeanEuropean community.community. InIn addition,addition, wewe havehave pending registrationregistration applicationsapplications forfor otherother serviceservice marks,marks. WeWe alsoalso relyrely onon tradetrade secrets,secrets, technicaltanhnieal know-howknow-how andand continuingcontinuing innovationinnovation toto developdevelop andand maintainmaintain ourour competitivecompetitive position.position. WeWe havehave grantedgranted licenseslicenses inin thethe ordinaryordinary coursecourse ofof businessbusiness forfor occasionaloccasional useuse ofof ourour name,name, logo,logo, trademarkstrademarks and/orand/or serviceservice marksmarks toto certaincertain marketingmarketing partnempartners pursuantpursuant totojointjoint marketingmarketing and/orand/or otherother agreements.agreements. Likeviise,Likewise, wewe havehave beenbeen grantedgranted certaincertain licenseslicenses forforuseuse inin thethe ordinaryordinary coursecourse ofof business.business.

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Employees

As of December 31, 2008,2008, we employed 372 people. Our employees areare notnot represented by a laborlabor union, except that approximatelyapproximately 70 employeesemployees ofKPNof KPN GCS are subject to the Royal KPN Collective Labor Agreement.

Geographic Areas

For financial informationinformation aboutabout geographic areas, see Note 5, "Business Segment and Geographic Information" toto ourour Consolidated Financial Statements.

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ItemItem IA.IA. RiskRiskFactorsFactors

AnyAny investmentinvestment inin ourour commoncomnton stockstockinvolvestnvotves aahighhigh degreedegree ofojrisk,risk. YouYoushouldshould carefidlycareftilly considerconsider thethe risksrislts describeddescribed belowbelow togethertogether withwitli thethe informationt%rmation containedcontained elsewhereelsewliereinin thisthfi report,report, beforebeforeyouyou makemake aadecisiondectsian totoinvestinvest ininourourcompany.conipany.

FactorsFactors ThatThat MayMay AffectAffect FutureFuture ResultsResults andaud FinancialFinancial ConditionCondifiou

RisksRisks RelatedRela led totoourour HistoricalHistorian/ StockStock OptionOption GrantingG'ranting PracticesPractices

TheThe investigationinvestigation byby thethe SECSEChasbas had,hsd, andand maymay continuecontinue toto have,have, aamaterialmaterial adverseadverse effecteffect onon us.us.WeWe cannotcannot predictpredict thethe outcomeoutcome ofofthethe SEC'sSEC'sformalformal investigationinvestigation ofofourour pastpast stockstock optionoption grantinggranting practices.practices, TheThe investigationinvestigation hashas required,required, andand maymay continuecontinue toto require,require, significantsignificaut managementmanagement timetime andand attention,attention, asas wellwell asasadditionaladditional accountingaccounting andand legallegal expense,expense, andand couldcould resultresult inin civilcivil and/orand/or criminalcriminal actionsactions seeking,seeking, amongamong otherother things,things, lnlunetlveinjunctive andand monetarymonetary reliefrelief fromfrom us.us.

WeWe announcedannounced onon October 20,20,2006,2006, thatthat wewe werewere contactedcontacted byby thethe SECSECasas partpart ofofanan informalinformal inquiryinquity andand wewe furtherfurther discloseddisclosed onon MarchMarch 29,29,2007,2007,onon ourour Current Report onon FormFoun 8-K,S-K,thatthat thethe SECSEChadhad notifiednotified usus thatthat wewe wouldwould bebe receivingreceiving aa formalformal order ofofinvestigationinvestigation relatingrelating toto our stockstock option practices.practices. OnOn AprilApril 13,13,2007,2007,wewe receivedreceived thethe formalformal orderorder ofof investigation.investigation. The SEC investigationinvestigation soughtsought documents andand informationinformation fromfrom usus relatingrelating toto thethe grantgrant ofot'ourour options fromfrom 1999 throughthrough 2006.2006.The SEC has taken testimonytestimony fromfiom individualsindividuals includingincluding certaincertain ofofourour currentcurrent andand formerformer officersofficers andand directors.directors. WeWe havehave cooperatedcooperated fullyfully with thethe SEC investigationinvestigation andand wewe areare inin communicationcommunication withwith thethe SEC staffstaff regardingregarding thethe outcome ofofthethe investigation. ThereThere isis no assuranceassurance thatthat we willwill bebe ableable toto resolveresolve thethe SEC investigationinvestigation onon acceptableacceptable termsterms without the institution of enforcement proceedings by the SECSECagainstagainst us or one oror more of ourour senior executiveexecutive officersofiicers or that otherother inquiries willwifi notnot be commencedcommenced by other U.S.U.S.federal,federal, statestate or other regulatoryregulatory agencies. An SECSEC enforcementenforcement proceeding couldcould seek an injunction against futurefuture violationsviolations of thethe securities laws,laws, as civilcivil penaltypenalty and,and, asas to individual executives, disgorgemantdisgorgement and a bar order against serving asas anan officerofficer oror directordirector of aa publiclypublicly Wadedtraded company. A bar order as to any of our senior executive officersotYicers would deprive us of any suchsuch executive'sexecutive's servicesservices and could have a materielmaterial adverse affect on our business.

The SEC investigation andend requests for information have required significant management attention and resources. The period of time necessary to resolve the SEC investigation is uncertain, andsnd these matters could requirerequire significant additional attention and resources which could otherwise be devoted to the operation ofour business,business. We have incurred substantial expenses vrithwith third parties for legal, accounting, taxtax and other professional services in connection with these matters and expect toto continue to incurincur significantsignificant expensesexpenses inin thethe future, which may adversely affect our results of operations and cash flows.flows.

Following thethe Special CommitteeCommittee investigation,Investigation, twotwo derivative civilcivil action lawsuits were brought, purportedly on our behalf,behalf, which havehave requiredrequired andand maymay continuecontinue toto requirerequire significantsignificant management timefime andand attentionattention and resultresult inIn significantsignificant legallegal expenses andand may resultresult inin anan unfavorableunfavorable outcomeoutcome against our management, which could requirerequire usus toto paypay substantial judgmentsJudgments or settlementssettlements pursuant toto anyany indemnitlcatlonindemnification obligationsobggations that we may havehave with them,them, andand whichwhich couldcould havehave aa material adverseadverse effecteffect onon ourcur business,business, financialfinancial conditioncondition and results ofof operations.

Following thethe SpecialSpecial CommitteeCommittee investigation,investigation, twotwo derivativederivative civil claimsclaims were filed,filed, purportedly on our behalf,behalf, againstagainst certaincertain of ourour currentcurrent andand formerformer officersofficers andand directors.directors. TheThe suitssuits were consolidatedconsolidated intointo a singlesingle suitsuit on June 15,15, 2007,2007, allegingalleging violationsviolations ofof SectionSection 14(a)14(a) ofof thethe SecuritiesSecurities ExchangeExchange ActAct ofof 19341934 andand SectionSection 304304 ofof thethe SarbanesSarbanes OxleyOxley ActAct ofof 20022002 (SOX)(SOX) andandraisingraising statestate lawlaw claimsclaims includingincluding unjustunjust enrichment,enrichment, breachesbreaches ofof fiduciaryfiduciary trusttrust andand wastewaste ofof corporatecorporate assets.assets. TheThe courtcourt dismisseddismissed thethe easecase inin DecemberDecember 2007,2007, holdingholding thatthat thethe plaintiffsplaintiffs failedfailed totOassertassert viableviable federalfederal claimsclaims underunder eithereither SechonSection 14(a)14(a) oror SOXSOX SectionSection 304.304. The courtcourt alsoalso dismisseddismissed ihethe remainingremaining statestate lawlaw claimsclaims

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'l'ab!_t_en_ts_7'able~of Co tents

ononjurisdictionaljurisdictional grounds.grounds, Plaintiffsplaintiffs tiledfiled aamotionmotion forforreconsiderationreconsideration ininlatelateDecemberDecember 20072007whichwhich hashasbeenbeendenied.denied. AlthoughAlthough plaintiffsplaintiffs filedfiled anan appealappeal ofofthethedenialdenial ofofreconsideration,reconsideration, thetheappealappeal waswasdismissed,dismissed, ononplaintiffs'plaintiffs' motion,motion, onon FebruaryFebruary 18,18,2009.2009.PlaintiffsPlaintiffs couldcould stillstill re-tilere-filethethestatestate lawlaw claimsclaims ininstatestate courtcourt ororininfederalfederal courtcourtassertingasserting diversitydiversity jurisdiction.jurisdiction,

TheThe amountamount ofoftimetime totoresolveresolve anyany lawsuitslawsuits ororotherother proceedingsproceedings relatedrelated totoourour pastpastoptionoption grantinggranting practicespractices isis unpredictable,unpredictable, andsnd inin defendingdefending themselves,themselves, ourourmanagernent'smanagement's attentionattention maymay bebediverteddiverted fromfromthethe day-to-dayday-to-day operationsoperations ofof ourourbusiness,business, whichwhich couldcould adverselyadversely affectaffect ourour business,business, financialfinancial conditioncondition andand resultsresults ofofoperations.operations. InInaddition,addition, anan unfavorableunfavorable outcomeoutcome ofofsuchsuch litigationlitigation couldcould requirerequire usustotoincurincur signiticantsign iticant legallegal expensesexpenses andandsubstantialsubstantial judgmentsjudgments oror settlementssettlements pursuantpursuant totoanyany indemnificationindemnification obligationsobligations thatthat wewemaymay havehave withwith ourourofficersofilcers andand directors,directots, whichwhich couldcould alsoalso havehave aamaterialmaterial adverseadverse effecteffect onon ourour business,business, financialfinancial position,position, resultsresults ofofoperationsoperations ororcashcash flows.flows,

OurOur insuranceinsurance coveragecoverage maymay notnot bebe sufficientsufficient totocovercover ourour totaltotal liabilitiesliabilities ininanyany suchsuch actionsactions ififwewe areare obligatedobligated toto indemnifyindemnify (and(and advanceadvance legallegal expensesexpenses to)to) formerformer oror currentcurrent directorsdirectors ororofficersofficers inin aecurdanceaccordance withwith thethe termsterms ofofourour certificatecertificate ofofincorporation,incorporation, bylaws,bylaws, otherother applicableapplicable agreements,agreements, andand DelawareDelaware law.law. WeWe currentlycurrently holdhold insuranceinsurance policiespolicies forfor thethe benefitbenefit ofofourour directorsdirectors andand officers,officers, althoughalthough ourour insuranceinsurance coveragecoverage maymay notnot bebesufficientsufficient inin eithereither ofofthesethese matters.matters. Furthermore,Furthermore, thethe underwritersundervniters of ourour directorsdirectors andand officer'sofficer's insuranceinsurance policypolicy maymay seekseek toto rescindrescind oror otherwiseotherwise denydeny coveragecoverage inin somesome ororallall ofofthesethese matters,matters, inin which easecase wewe maymay havehave toto self-fundself-fund thethe indemnificationindemnification amountsamounts owedowed toto suchsuch directorsdirectors andand officers.ofiicers.

RisksR/sks RelatedRelated toro Our Business

Political and economiceconondc conditions andaad the current financial crisiscrlsts Inln thetbe U.S.U,S,andand globalglobal capitalcapital and credit markets may adversely affect our revenue and results of operations and overall financialfinancial growth.growth.

Our business can be affected by a number of factors that are beyond our control such as general geopolitical economic and business conditions, conditions in the financial services markets, and generalgeneral political and economic developments. Recent turmoil in the U.U.S,S.financial markets, thethe present economic slmvdownsl oivd own and thethe uncertainty over the breadth,breadth, depth and duration of the slowdown may continue to adversely impact the global economy and have a negative effect on our business. In particular, a decline in traffic from migrant workers using prepaid calling cards has undermined and maymsy continue to undermine our Trading and Retail businesses.

Further, thethe recent worldwide financialfinancial andand credit crisis has reduced the availability ofliquidity and credit to fund the continuation andend expansionexpansion ofbusinessof business operations worldwide,worldwide. The shortageshortage of liquidityliquidity and credit combined with recentrecent substantial losseslosses inin worldwideworldwide equityequity markets couldcould leadlead toto an extended economiceconomic recession inin the United States or worldwide,worldwide. As widelywidely reported,reported, financialfinancial markets inin thethe UnitedUnited States, Europe andand Asia have been experiencingexperianeing extreme disruptiondisruption inin recentrecent months,months, including,including, among other things, extreme volatility inin security prices, severelyseverely diminished liquidihliquidity andand creditcredit availability,availability, ratingrating downgradesdowngrades ofof certaincertain investmentsinvestments andand decliningdeclining valuationsvaluations of others.others. GovernmentsGovernments havehave takentaken unprecedentedunprecedented actionsactions toto stimulatestimulate theirtheir locallocal economieseconomies andand addressaddress extreme market conditionsconditions thatthat includeinclude severelyseverely restrictedrestricted creditcredit andand declinesdeclines inin realreal estateestate values.values. WhileWhile thisthis challengingchallenging economic environmentenvironment hashas notnot yetyet impairedimpaired ourour abilityability toto accessaccess creditcredit marketsmarkets andand financefinance ourour operations,operations, therethere cancan bebe nono assuranceassurance thatthat thethe deteriorationdeterioration inin financialfinancial marketsmarkets willwill notnot impairimpair ourour abilityability toto obtainobtain financingfinancing inin thethe tbture,thture, including,including, butbut notnot limitedlimited to,to, ourour abilityability toto drawdraw onon fundsfunds underunder ourour existingexisting creditcredit facilitiesfacilities andand ourour abilityability toto incurincur additions'Iadditional indebtedness.indebtedness. IfIf conditionsconditions inin thethe globalglobal economy,economy, U.U.S.S, economyeconomy oror otherother keykey verticalvertical ororgeographicgeographic marketsmarkets remainremain uncertainuncertain oror weakenweaken further,further, wewe couldcould experienceexperience materialmaterial effectseffects onon ourour business,business, financialfinancial condition,condition, resultsresults ofof operations,operations, cashcash ,flow, capitalcapital resourcesresources andand liquidity.liquidity.

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OurOur resultsresults ofofoperationsoperations maymay fluctuatefluctuate andand thethe marketmarket pricepriceofofourour commoncommon stockstockmaymayfall.fall.

OurOur revenuerevenue andand resultsresults ofofoperationsoperations havehave fluctuatedfluctuated andandwillwil)continuecontinue totofluctuatefluctuate significantlysignificantly fromfrom quarterquarter totoquarterquarter inin thethefuturefuture duedue totoaanumbernumber ofoffactors,factors, somesome ofofwhichwhich arearenotnot ininourourcontrol,control, including,including, amongamong others:others:

thethe amountamount ofoftraffictraftic wewe areabloare abletotosellsell totoourour customers,customers, andand theirtheir decisionsdecisions ononwhetherwhether totorouteroute traffictraffic overover ourournetwork;network;

increasedincreased competitivecompetitive pricingpricing pressurepressure inin thethe internationalinternational longlong distancedistance marketmarket fromfrom emergingemerging andand establishedestablished integratedintegrated carderscaniers somesome ofofwhichwhich areare muchmuch largerlarger andand havehave greatergreater financialfinancial resourcesresources thanthan wewe do;do;

. volatilityvolatility inin foreignforeign exchangeexchange ratesrates maymay reducereduce thethe competitivenesscompetitiveness andand profitabilityprofitability ofofsomesome ofofourour traffictraAlc flowsflows wherewhere customerscustomers paypay usus inin oneone currencycurrency andand wewe paypay terminatingterminating providersproviders inin another;another;

thethe percentagepercentage ofoftraffictraffic thatthat wewe areare ableable toto carrycany overover thethe IntumetInternet ratherrather thanthan overover thethe moremore costlycostly traditionaltraditional public-switchedpublic-switched telephonetelephone network;network;

thethe lossloss ofofarbitragearbitrage opportunitiesopportunities resulting fromfrom declinesdeclines inin internationalinternational settlementsettlement ratesrates oror tariffs;tariffs;

ourour ability toto negotiate lowerlower terminationtermination feesfees charged byby ourour locallocal providers;providers;

* our continuing ability toto negotiate competitive costs toto connect our networknetwork withwith thesethose of other carderscamera andand InteractInternet backbone providers;providers;

fraudulently sent or received traffictraAic which isis unbillunbillable,able, for which we may be liable;

credit card fraud inin connection with our web-based prepaid otfering;offering;

capital expenditures required to expand or upgrade our network;

changes in eallcall volume among thethe countriescountries toto whichwhich we complete calls;

thethe portion ofof ourour totaltotal traAlctraffic thatthat we canycarry over more lucrative routes could decline,decline, independentindependent ofroute-of route- specifispecific price,price, costcost oror volumevolume changes;changes;

technicaltechnical diAicultiesdifficulties oror failuresfailures of ourour networknetwork systemssystems oror thirdthird partyparty delays inin expansionexpansion oror provisioning systemsystem components;components;

* ourour abilityability totOmanagemanage distributiondistribution arrangementsarrangements andand provisionprovision ofof retailretail offerings,offerings, includingincluding cardcard prinkng,printing. marketing,marketing, usageusage tracking,tracking, web-basedweb-based offeringsofferings andand customercustomer serviceservice requirements,requirements, andand resolutionresolution of associatedassociated disputes;disputes;

ourour abilityability toto managemanage ourour tratlictraffic onon aaconstantconstant basisbasis soso thatthat routesroutes arearc profitable;profitable;

~. ourourabilityability toto coflectcollect fromfrom ourourcustomers;customers;

restrictionsrestrictions inincountriescountries wherewhere wewe operate;operate; andand

potentialpotential impairmentimpairment ofof ourour long-livedlong-lived assets.assets.

BecauseBecause ofofthesethese factorsfactors andandothers,others, youyou shouldshouldnotnotrelyrely onon quarter-to-quarterquarter-to-quarter comparisonscomparisons ofofourour resultsresults ofofoperationsoperations asas ananindicationindication ofofourourfuturefuture performance.performance. ItItisispossiblepossible that,that, ininfuturefuture periods,periods, ourour resultsresults ofofoperationsoperations willwilt bebesignificantlysignificantly lowerlower thanthanthetheestimatesestimates ofofpublicpublic marketmarket analysts,analysts, investorsinvestors ororourourownown estimates.estimates. SuchSuch aadiscrepancydiscrepancy couldcould causecausethethepriceprice

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ofofourourcommoncommon stockstocktotodeclinedecline significantlysignificantly andandadverselyad versely affectaffectourourprofitability.progt tahiti'.

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WeIVemaymay notnotbebeableabletotogenerategenerate sufficientsufficient revenuerevenue andand grossgross profitprolit totoachieveachieve ourourrevenuerevenue andand profitabilityprotitability goalsgoals inln thethelonglongtermterm Ififtelecommunicationstelecommunications carrierscarriers andand otherother communicationscommunications serviceserviceprovidersproviders arearereluctantreluctant totouseuseourour servicesservices ininsufficientsufficient volume.volume.

IfIfthethe marketmarket forforinternationalinternational wholesalewholesale VolPVolPtelephonytelephony andandnewnewservicesservices doesdoesnotnotdevelopdevelop asasweweexpect,expect, orordevelopsdevelops moremore slowlyslowly thanthan expected,expected, ourourbusiness,business, financialfinancial conditioncondition andsndresultsresults ofofoperationsoperations willwill bebemateriallymaterially andand adverselyadversely affected.affected.

OurOur customerscustomers maymay bebereluctantreluctant totouseuse ourourVolPVolPservicesservices forforaanumbernumber ofofreasons,reasons, including:including:

perceptionsperceptions thatthat thethe qualityquality ofofvoicevoice transmittedtransmitted overover thethe InteractInternet isislow;low;

~ perceptionsperceptions thatthat VolPVolP isis unreliable;unreliable;

ourour inabilityinability toto deliverdeliver traffictraffic overover thethe InteractInternet withwith significantsignificant cootcost advantages;advantages;

development ofoftheirtheir ownown capacitycapacity onon routesroutes servedserved byby us;us;

an increaseincrease inin terminationtermination costscosts of internationalinternational calls;calls;

uncertainty regardingregarding thethe regulatory smmsstatus ofofVolPVoIP services;services; andand

uncertainty regardingregarding potential patent infringement relatedrelated toto certain VolPVoIP services.

The growth of our core wholesale Trading business depends on carriers and other commtmicationscommunications service providers generating an increased volume of internationalinternational voice and fax traffiictraffic and selectingselecting our network toto carryeany at least somesome of thisthis traffic.traffic. Similarly, the growth of Retail services we offer depends on thesethese factors as well as acceptance in thethe market of thethe brands that we service, including their respective rates,rates, tenneterms and conditions.

We may not be ableable toto maintain our NASDAQ GlobalGlobal Market listing.

OurOur commoncommon stock is listedlisted onon the NASDAQ Global Market. There is no assurauceassurance that we will be able to satisfy thethe NASDAQ Global Market's continualcontinued listinglisting standards,standards, which includes,Includes, among others, aa minimumminimum perper share salessales price andand a minimumminimum marketmarket value of publiclypublicly held shares. IuIn December 200$,2008, NASDAQ announced the suspensioususpension of thethe rulesrules requiringrequiring aa minimum $1$1 closingclosing bid price perper share and minimum market value of publicly heldheld shares untiluntil AprilApril 20,20, 2009.2009. OnOn MarchMarch 6,6, 2009,2009, thethe closingclosing price ofofourour commoncommon stock was $0,$0.6161 perper share.share. IfIf our commoncommon stock lsis delisteddelisted fromfrom thethe NASDAQ Global Market,Market, wewe wouldwould bebe forcedforced toto listlist ourour commoncommon stockstock onon thethe OTC Bulletin Board oror soinesome otherother quotationquotation medium,medium. SellingSelling ourour commoncommon stockstock would be moremore difllcuitdlffieult becausebecause smallersmaller quantities ofof sharesshares wouldwould likelylikely bebe boughtbought andand soldsold andand transactionstransactions couldcould bebe delayed.delayed. TheseThese factorsfactors couldcould resultresult inin lowerlower pricesprices andand largerlarger spreadsspreads inin thethe bidbid audand askask pricesprices forfor sharesshares ofof ourour commoacommon stock.stock. IfIf thisthis happeus,happens, wewe willwill havehave greatergreater difficultydifficulty accessingaccessing thethe capitalcapital marketsmarkets toto raiseraise anyany additionaladditional necessarynecessary capital.capital.

WeWe maymay notnot bebe ableable toto collectcollect amountsamounts duedue toto usus fromfrom ourour customerscustomers andand wewe maymay havehave toto disgorgedisgorge amountsamounts alreadyalready paid.paid.

SomeSome ofofouroar customerscustomers havehave closedclosed theirtheirbusinessesbusinesses oror filedfiled forforbankruptcybankruptcy whilewhile owingowing usus significantsignificant amountsamountSforfor servicesservices wewe havehave pmvidedprovided totothemthem ininthethepast,past. DespiteDespite ouroureffortsefforts totocollectcollect thesethese overdueoverdue funds,funds, wewe msymay nevernever bebepaid.paid. TheThe bankruptcybankruptoy courtcourt maymay requirerequire usustotocontinuecontinue totoprovideprovide servicesservices totothesethese companiescompanies duringduring theirtheirreorganizations.reorganizations. OtherOther customerscustomers maymay discontinuediscontinue theirtheir useuseofofourour servicesservices atatanyany timetime andand withoutwithout notice,notice, oror delaydelay paymentspayments thatthat areare owedowed totous,us. Additionally,Additionally, wewemaymay havehave difficultydifficulty inincollectingeollechng amountsamounts fromfrom them.them. AiihoughAlthough wewe havehave internalinternal creditcredit riskrisk policiespolicies toto identifyidentify companiescompanies withwithpoorpoor creditcredithistories,histories, wewemaymay notnoteffectivelyeffectively managemanage thesethese policiespolicies andand maymayprovideprovide servicesservices toto companiescompanies thatthatrefuserefuse totopay.pay-TheThe riskriskisiseveneven greatergreater ininforeignforeign countries,countries, wherewhere thethelegallegal andandcollectioncollection systemssystems availableavailable maymaynotnotbebeadequateadequate ororimpartialimpartial forforusustoto

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enforceenforce thethe payment provisionsprovisions of ourour contracts.contracts. Our cash position will be reduced and ourour resultsresults of operationsoperations will be materially adversely affectedaffected if we are unable to collect amounts fromfrom our customers.

We havehave receivedreceived claims including lawsuitslawsuits from estates of bankrupt companies allegingalleging that we receivedreceived preferential entities payments prior to such companies'companies' bankruptcy filing.filing. We may be requiredrequired to returnreturn amountsamounts receivedreceived from entities thatthat alternative subsequentlysubsequently become bankrupt. We intendintend to employ all available defensesdefenses inin contesting suchsuch claimsclaims or, inin the alternative settlesettle suchsuch claims.claims. The results of any suit or settlement may have aa material adverse affect on resultsresults of operations.

We may not be able toto obtain sufficient or cost-effective termination capacity to particular destiuatlons.destinations.

In order to support our growthgroivth and geographic expansion,expansion, we may need to obtain additional terminationtermination capacity or destinations.destinations, As the world becomes smaller and more closely knit duedue to advancements in speed and access due toto advancements in communicationscommunications industries,industries, our abilityability toto extend our reach beyond our competitors'competitors' to new or remoteremote destinations is increasinglyincreasingly critical. We may notnot be able to obtain sufficientsufficient termination capacity fromfrom high-qualityhigh. quality vendors toto particular destinationsdes tinations or may have toto pay significantsignificant amountsamounts to obtain suchsuch capacity.capacity, A lack of sufficientsufficient or cost-effectivecost-effective terminationtermination capacity to certain destinations could result in our not being ableable toto terminateterminate all of thethe traffictrafiic we receivereceive from our customers, or incurincur a higher cost-per-minute to terminateterminate traffic to particular destinations, which couldcould adversely affect our business.

_VeWe may increase costs and risks In our business to the extent we rely on third parties.parties,

Vendors. We rely upon third-partythird-party vendorsvendors toto provideprovide us with the equipment, software,software, circuits,circuits, and other facilitiesfacilities thatthat we use to provide our services. For example, we purchase a substantialsubstantial portion of our VolPVolp equipment from Cisco Systems. We may be forced toto try toto renegotiaterenegotiate termsteens with vendors forfor products or services thatthat havehave become obsolete. Some vendors may bebe unwilling toto renegotiate suchsuch contracts,contracts, which could affect our ability toto continue toto provide services and consequently renderrender us unable to generate sufficientsufficient revenuesrevenues forfor ourour business.business.

Parties that Maintain Phone and DataDara Lines and Other TelecommunicationsTelecommunicar/one Services. Our business model dependsdepends on the availability of thethe public lntemetInternet and traditional telephone networks toto transmit voice and fax calls. Third parties maintain and ownovm thesethese networks, otherother componentscomponents that comprise the public Internal,Internet, and business relationships that allow telephonetelephone calls to be terminatedterminated over the public switched telephonetelephone network. Some of thesethese thirdthird parties are telephunetelephone companies. They may increaseincrease theirtheir chargescharges for using thesethese lineslines at any timetime andand thereby increaseincrease our expenses. They may also failfail to maintain their lineslines properly, failfail to maintain thethe ability toto terminate calls,calls, or otherwise disrupt our ability to provide service toto ourour customers. Any suchsuch failurefailure that leads to aa material disruption of our ability to complete calls or provide other services could discourage our customerscustomers fromfrom using ourour network, which could adverselyadversely affect our resultsresults of operations.

Local Communications Service Providers. We maintain relationships with local communications service providers in many countries,countties, some of whom ownovm filethe equipmentequipment thatthat translates callscalls from traditional voice networks to the Interuet,Internet, andand vice versa.versa, We rely upon thesethese thirdthird parties both to provide lineslines over which wowe complete calls andand toto increaseincrease their capacity when necessary as thethe volume of our traffic increases.increases. There is a riskrisk thatthat thesethese thirdthird parties may bebe slow, or may fail,fail, toto provide lines, which would affect our ability to completecomplete calls toto eertaincertain destinations. We may not be ableable to continuecontinue our relationships with thesethese local serviceservice providers on acceptable terms,terms, if at all. Because we rely upon enteringentering intointo relationships with local serviceservice providers toto expand intointo additional countries, we may not be ableable to increaseincrease thethe number of countries toto which wevie provide service. Finally, any technicaltechnical difficultiesdifficulties that these providers suffer, or difficulties inin theirtheir relationships with companies that manage

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thethe publicpublic switchedswitched _lephonetelephone network,network, couldcould affectaffect ourourabilityability tototransmittransmit callscalls totothethe coun_escountries thatthat thosethosep_vide_providers helphelp sere,serve,

StrategicStrategic Relationships.Retationships. WeWedependdepend ininpartpart onon ourourstrategicstrategic relationshipsrelationships totoexpandexpand ourourdistributiondistribution channelschannels andand developdevelop andand marketmarket ourour services.services. StrategicStrategic relationshiprelationship partnerspartners maymay choosechoose notnottotorenewrenew existingexisting arrangementsanangements onon commerciallycommercially acceptableacceptable terms,terms, ififatatall.alJ.InIn general,general, ififwewe loselosethesethese keykey strategicstrategic relationships,relationships, ororififwewefailfail totomaintainmaintain oror developdevelop newnew relationshipsrelationships inin thethe future,future, ourour abilityability totoexpandexpand thethe scopescope andand capacitycapacity ofofourour networknetwork andand servicesservices provided,provided, andand totomaintainmaintain state-of-the-artstate-of-the-art technology,technology, wouldwould bebcmateriallymaterially adverselyadversely affected.affected.

DistributorsDistr/buiors ofofprepaia'ca//fngprepaid calling cardscares toro retailretail outlets.eerie(s. WeWemakemake arrangementsarrangements withwith distributorsdistributors totomarketmarket andand sellseJJ prepaidprepaid callingcalling cardscards totoretailretail outlets.outlets. InIn somesome cases,cases, wewe relyrely onon thesethese distributorsdistributors totoprintprint cards,cards, prepareprepare marketingmarketing material,material, activateactivate accounts,accounts, tracktrack usageusage andand otherother data,data, andand remitremit paymentspayments collectedcollected fromfrom retailersretailers oror sub-distributors.sub-distributors. ThereThere isisaariskrisk thatthat distributorsdistributors willwill notnot properlyproperly performperform thesethese responsibilities,responsibilities, complycomply withwith legallegal requirements,requirements, ororpaypay usus moniesmonies whenwhen due.due. WeWe maymay notnot havehave adequateadequate contractualcontractual oror creditcredit protectionsprotections againstagainst thesethese risks.risks. ThereThere isisalsoalso aariskrisk thatthat wewe willwill hebeineffectiveineffective inin ourour effortsefforts toto implementimplement newnew systems,systems, policiespolicies coveringcovering customercustomer care,care, disclosure,disclosure, privacy,privacy, andand certaincertain technicaltechnical andand businessbusiness processes.processes. TheThe resultresult ofofanyany attendantattendant difficultiesdifficulties may havehave aa materialmaterial impactimpact onon ourour business.business,

We maymay notnot bebe ableable toto succeedsucceed inin thethe intenselyintensely competitivecompetitive market forfor ourour wholesalewholesale TradingTrading services,services, prepaidprepaid callingsailing and mobile operatoroperator enhanced services.

We competecompete inin our wholesale Trading businessbusiness principally on qualityquality of serviceservice andand price.price. InIn recentrecent years,years, pricesprices forfor internationalinternational longlong distance telephonetelephone servicesservices have beenbeen declining asas aaresultresult of deregulatiunderegulation andand increasedincreased competition. We face competition fromhorn the wholesale service operations of major telecommunicationstelecommunications carriers,carriers, includingincluding AT&T,ATIkT, British Telecom, ,Tel ekom, VerizonYerizon and ,@vest, as well as new emergingemerging carders.carriers. We also compete with InternetInternet protocolprotocol and other VolPYolP service providers who routeroute traffictraftic to destinations worldwide,worldwide, VolPVoIP serviceservice providersproviders thatthat presentlypresently focus on retail customers may in the future enter the wholesale market and compete with us. IfIfwe can not offer competitivecompetitive prices and quality ofservice our business could be materially adversely aFfected.affected.

TheTJte market for prepaid callingcaJiing services is extremely competitive. Hundreds of providers offer calling cardsard products andand services. We have relatively recently begun ofFeringoffering prepaid calling card and related web-based services and have little prior experience in these businesses. Advertising and pricing practices by some providers in thethe prepaid calling card industry are aggtessiveaggressive and can be misleading which may put us at a competitive disadvantage. Many of our prepaid calling services are marketed primarily to immigrant communities. If changes in immigration policy or other factors,factors, including general economic conditionsconditions cause a reduction inin thethe foreign bornborn population livingliving in thethe UU.S.S, our business may suffer,suffer. If we do not successfully maintain and expand ourour distributiondistribution channel andand enter geographic markets inin which our rates,rates, fees, sureharges,surcharges, country services, andand our other products andand service characteristics canean successfully compete, our business could be materially adversely affected.affected.

WeWe areare subjectsubject toto downwarddownward pricingpricing pressurespressures andand aa continuingcontinuing need to renegotiaterenegotlate overseas rates.

As aaresultresult ofof numerousnumerous factors,factors, includingincluding increasedincreased competitioncompetition andand global deregulationderegulation ofof telecommunicationstelecommunications services,services, pricesprices forfor internationalinternational longlong distancedistance callscalls havehave beenbeen decreasing,decreasing. This dovmwarddownward trendtrend of pricesprices toto end-usersend-users hashas causedcaused usus toto lowerlower thethe pricesprices wewe chargecharge communicationscommunications serviceservice providersproviders andand callingcalling card distributorsdistributors forfor callcall completioncompletion onon ourour network.network. IfIf thisthis downwarddownward pricingpricing pressurepressure continues,continues, wewe maymay notnot bebe ableable toto offeroffer ourour VoIPVolP services atat costscosts lowerlower than,than, oror competitivecOmpetitive with,with, thethe traditionaltraditional voicevoice networknetwork andand VoIPVolP servicesservices withwith whichwhich we compete.compete. Moreover,Moreover, inin orderorderforfor us toto lowerlower ourourprices,prices, wewe havehave toto renegotiaterenegotiate ratesrates withwith ourouroverseasoverseas locallocal serviceservice providersproviders whowho completecomplete callscalls forfor us.us. WeWe maymay notnot bebe ableable toto renegotiaterenegotiate thesethese termsterms favorablyfavorably enough,enough, ororfastfast

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enough, toto allow us to continue toto offerotTer servicesservices in aa particular countrycountry on a cost-effective basis. The continued downward pressure onon prices and our failure to renegofiaterenegotiate favorablefavorable terms inin a particular country couldcould have a material adverse effect on our ability toto operate our network andand business profitably.

A variety of risksrisks associated with our international operationsoperations could materiallymateriagy adversely affect our business,business,

Because we provide many of ourour services internationally,internationally, we areare subject toto additional risksrisks relatedrelated toto operating inin foreign countries.countries. In particular, in order toto provide services and operate facilitiesfacilities inin somesome countries, we have established subsidiaries oror other legal entities or may have forgedforged relationshipsrelationships with service partners or entities setset up by our employees. We also relyrely on our own employees to maintain certain functionsfunctions of our InteractInternet central offices and, in some eases,cases, to deploy and operate our smaller points of presencepresence installations.installations. Associated risksrisks include:

uncertaintyuncertainty regarding oror unexpectedunexpected changes in tariffs,tariffs, tradetrade barriersbamers and regulatory requirements relatingrelating toto Interactinternet accessaccess or VolP;Voip'I

economic weakness, including inflation, or political instabilityinstability in particular foreign economies and markets;

difficultydifficulty inin collectingcollecting accounts receivable;

compliancecompliance with varying tax,tax, consumerconsumer protection, telecommunications, and other laws;

compliance with tax, employment, securities, immigration, labor and other laws for employees living andand ' traveling, or conduotingconducting business, abroad,abroad, which may subjectsubject them or usus to criminalcriminal or civil penalties;penalties,

foreign currency fluctuations, which could result inin increasedincreased operating expenses and reduced revenues;revenues;

• unreliable government power to protect oarour rights andand those of our employees;employees;

exposure toto liability under the ForeignForeign Corrupt Practices Act oror similar lawslaws inin foreign countries;

other obligations or restrictions, inoluding,including, but not limited to,to, criminal penaltiespenalties againstagainst us oror our employees incident to doing business or operatingoperating aa subsidiary or other entity in another country;country,

~ thethe personalpersonal safetysaFety of our employees and theirtheir familiesfamilies who at timestimes havehave received threatsthreats of, or who may in any case be subjectsubject to,to, violence,violence, and who may not be adequatelyadequately protected by legallegal authoriti_authorities or other means; and

•~ inadequate insurance coverage to addressaddress thesethese risks.risks.

These and other risks associated with ourour internationalinternational operations may materially adversely affect ourour ability to maintain profitable operations.

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We may enter into strategic outsourclngoutsourcing transactionstraasaetions and undertake acquisitions or dispositions, or may be thethe targettarget of similar strategicstrategic initiatives, that could be difficult toto integrate or could damage our business.business.

We may enter into strategicstrategic outsoureingoutsourcing transactions and acquire businesses andsnd technologies in an attempt toto complement or augmentaugment our existing businesses,businesses, services andand technologies.technologies. The success of these transactionstransactions will depend, in part, on our ability to: identify suitablesuitable businesses andand assetsassets to buy; completecomplete the transactions on terms acceptable to us and inin thethe limeframestimeframes we expect; improve thethe financialfinancial results and operationsoperations of thethe businesses we buy;buy; and avoid or overcome potential antitrust or other concerns expressed byby regulators.regulators. We may alsoalso be subjectsubject to, or participateparticipate in,in, strategic activities by others that result inin a transfer of control of our assets or control of our outstanding shares of stock. We may need to raise additional funds through public or priv_iteprivate debt,debt, equity financing or issueissue more shares toto affect such activities, which may result inin dilution forfor shareholders and thethe ineurreneeincurrence ofindabtedness.of indebtedness, We may have difficultydifficulty integratingintegrating any additionaladditional businesses intointo our existingexisting business and the process of any acquisitions or subsequentsubsequent integration couldcould divert management's attention and expendexpend ourour resources. We may not be able to operate acquired businesses profitably or otherwiseotherwise implement our growth strategy successfully.

IfIfwe arcare unableuaable toto effectively Integrateintegrate any new business into our overall business operations, our costscosts may increaseincrease and our businessbusiness results may suffer significantly.signitlcantly.

We may needneed to sellsell existingexisting assets oror businesses in thethe future toto generategenerate cashcash or focus our efforts on making our core Trading business profitable.protitable. As with many companies inin our sector thatthat havehave experiencedexperienced rapid growth inin recent years, we may need toto reachreach profitability in one market before enteringentering another.another. InIn thethe future, we may need toto sell assets to cutcut costscosts or generate liquidity.liquidity.

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

The technology uponupon which our services depend isis changing rapidly. SignifiCantSignificant technological changeschanges could renderrender thethe hardware and softwaresotiware that we useuse obsolete, and competitors may begin to offer newnew services thatthat we are unable toto offer. If we are unable to respond successfully toto thesethese developments or do not respond inin na cost-effectivecost-effective way, we may not be able toto offer competitive services and ouroui business resultsresults may suffer.

We may not be ableable to expand and upgrade our network adequatelyadequately andand cost-effectivelycost-effectively to accommodate any futurefuture growth.

Our business requires that we handlehandle ua large number of international calls simultaneously.simultaneously. As we expand our operations, we expect toto handle significantlysignifiicantly more calls.calls, If we dodo not expand andand upgrade our hardware and softwaresofiware quickly enough, we would not havehave sufficient capacity to handle the increasedincreased lraffictraffic andand growth inin our operatingoperating performance would suffer as a result.result. Even with such expansion, we may bebe unable toto manage new deployments or utilize themthem in aa cost-effective manner. In additionaddition to lostlost growth opportunities, any suchsuch failurefailure could adversely affect customer confidence inin The iBasis Network and could resultresult in usus losing business.business.

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

Our business requires that we tracktrack enormous volumes of data so thatthat we canean manage traffic,traffic, andand assess margin, revenue, andand customer accounts.accounts. We constantly measure andand upgrade our technical capabilities, and develop new tools to addressaddress our needs. If we do not maintain thesethese systems or modify

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our themthem inin an appropriate manner, analyzeanalyze service pricing methodologies effectively,eAectively, or bill our customerscustomers properly, our businessbusiness will bebe negatively affected.

SingleSlugle points of failure onon our network may make our business vulnerable.vulnerable,

other presence WeIve operate three Network Operations Centers as well asss numerous lntarnetInternet centralcentral officesoAices and other points of presence snd taken throughout thethe world. InIn somesome eases,cases, we have designeddesigned redundant systems, provided forfor excess capacity,capacity, and taken other precautions against platform and network failuresiailures as well asas facility thituresfailures relating to power,power, air conditioning,conditioning, destrtaction,destruction, components our or theft.theA. Nonetheless, some of ourour infrastructureinfiastructure and functionality,functionality, includingincluding those associated with certain components of our Retail business, operate as aa single point of failure, meaning, failuresfailures of the type described may prohibitprohibit us from offering network, which servicesservices atat allall at anynny given time. The potential of such a failure may discourage others fromfrom usingusing our network, which may adversely impactimpact our business.

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

Our future successsuccess will del:_nd,depend, inin large part, on thethe continued service of our keykey management and technical personnel. for reason, If any of these individuals or others we employ are unable or unwilling toto continue inin their present positions for any reason, including thethe outcome of thethe SEC investigation,investigation, our business,business, financialfinancial position, resultsresults of operations or cash flows could suffer. We do not carry key person life insuranceinsurance on our personnel.

We will needused toto retain skilled personnel to execute our plans.plans,

Our future success will also depend on ourour abilityability toto attract, retainretain and motivate highly skilled employees, particularly engineering andand technical personnel. Recent reductions in our workforce, aa temporary salary freezefreeze and aa freeze onon new hiringhiring instituted at thethe beginning of 2009 may make itit difficult to motivate and retainretain employees andand contractors, which could affect our ability toto deliverdeliver our services in a timelytimely fashionfashion and otherwise negativelynegatively affect our business.

We cannot ensureensure thatthat ourour existing capital will bebe sufficient toto meet our requirements for the futurefuture and a failure to obtain necessary additional capital could jeopardize our operations,

We may need additional capital in thethe future toto fund our operations, financefinance investments inin equipmentequipment andand corporate infrastructure,infrastnicture, expand our network, increaseincrease thethe range of servicesservices we offer and respond to competitivecompetitive pressures andand perceived opportunities. We may not be able toto obtain additional financingfinancing on terms acceptable to us, ififat all. If we raise additional fundsfunds by sellingselling equity securities, thethe relative equityequity ownershipownemhip of our existingexisting investors couldcould be diluted or thethe newnew investorsinvestors could obtain termstetms more favorable than previous investors.investors. A failurefailure toto obtainobtain additional funding could prevent us from6'om making expendituresexpenditures that are needed to allow us to growgrow or maintain our operations.

Risks Related toto Regulatory MattersMaNers

The telecommunicationstelecommunications IndustryIndustry isIs subject toto domestic governmentalgovernmental regulation andaud legal uncertainties and etherother laws that could materially increaseIncrease our costs and prevent us from executing our business plan.

Under FCC rules,rules, services classified as telecommunications services have been subject toto regulation,regulation, whereas servicesservices classifiedciasstfied as information or enhancedenhanced servicesservices have been largelylargely exempt fromfrom regulation, includingincluding the requirement toto pay access charges.charges. We have takentaken the position that our wholesale Trading services are enhanced services thatthat are exempt from traditionaltraditional regulation thatthat applies to teleeommnnicatinnstelecommunications services. While the FCC hashas traditionally maintained thatthat information serviceservice providers, includingincluding VolPYolp providers,providers, do not provide telecommunications servicesservices for regulatory

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purposes,purposes, various entities have challenged thisthis policypolicy atat thethe statestate andand federal levelslevels and thethe FCC has begun to regulate certain aspects of various types of VolP services.services, For example,example, in 2004, the FCC concludedconcluded thatthat longlong distance calls lhatthat begin and end as regular callscalls but use IP toto transporttransport somesome portion of the callcall are telecommunications services. As indicated above,above, the FCC also concludedconcluded thatthat prepaid callingcalling card services thatthat utilize IP-ttansportIP-transport are telecommunications services,services, not informationinformation services.services, However, inin making thisthis rulingruling thethe FCC did not clarifyclarify what intercarrier compensation payments areare . owed byby thethe different carrierscarriers in thethe prepaid catlingcalling card context when long distaocedistance caltscalls are made usingusing local aecess.access. There hashas been increasing controversy over thisthis issue.issue. Some carrierscenters have taken thethe positionposition thatthat the prepaidprepaid calling card providers that purchase these local numbers oweowe access charges over and above the amounts alreadyalready paid to thethe provider that sells thethe access numbers. We believebelieve that we are not responsible for any additional charges.charges. There areare pending proceedings at thethe FCC designed toto clarify andand resolveresolve this issue.issue, However, recent industryindustry activityactivity suggests thatthat lawsuitslawsuits could bebe initiatedinitiated by certaincertain carderscarriers againstagainst prepaidprepaid calling card providers for recovery of arrearages of access chargescharges prior to any clarification of thethe issueissue by thethe FCC. Accordingly, therethere is a risk of additionaladditional litigationlitigation associated with thisthis issue.issue. This intercarderintercarrier compensation controversy isis alsoalso increasing thethe cost of locallocal access numbers because many carrierscarters that provideprovide this service are increasing theirtheir rates toto cover thethe costs and/or risks associated with providing the service to prepaid calling card providers inin the eventevent that theythey are found responsible forfor additional charges.charges. These cost increases have materially increased thethe costs of ourour retailretail prepaid business.

Additionally, the FCC has issued a variety of orders thatthat have imposed additional regulatory obligations on certain VolPVoIP providers. For example,example, thethe FCC found that certain VolP services thatthat interconnectinterconnect with thethe traditional publicpublic telephone network ("Interconnected("Interconnected VolP Services")Services" )must begin making Universal Service Fund, or USF, eontributiens,contributions, provide 911 andand Telecommunications Relay Services, comply with certain law enforcement intercept obligations, and also comply with otherother regulatoryregulatory reporting requirements. To date, however,however, the agency has declined to determine whether InterconnectedInterconnected VolP Service is a telecommunicationstelecommunications serviceservice or ansn information service,

As a resultresult of these and other rulings,rulings, aspectsaspects of our operations may currently be, or may become, subject to statestate or federal regulations governing licensing, USF funding,funding, interstateinterstate or intrastate access charges, advertising, disclosure of contidantialconfidential communications or otherother information, excise and other fees, taxestaxes andand surcharges, U.S.U.S.embargos andand other reporting or compliance requirements.

We hold aa licenselicense to provide interstateinterstate andand internationalinternational teleeommunieatianstelecommunications services fromfrom thethe Federal CommtmicationsCommunications Commission ("FCC") and we havehave obtained oror are inin the processpmcess of obtaining appropriate regulatory authority, and filingtiling appropriate tariffs, regarding thethe Retail business in certain states.states. Additional as-peelsaspects of our operations may currently be, oror become, subject toto state or federalfederal regulations governinggoverning licensing, universal service funding,funding, advertising, disclosure of confidential communications or otherother information,infortnation, excise taxes,taxes, U.S.U.S.embargos and other reporting or compliance requirements.requirements.

In the eventevent of anan auditaudit from the federalfederal Universal SertdceService Administrator or complaint fromfrom aa local exchange oror local access provider, we could be subject to arrearages forfor USF contributionscontributions or access charges.

Although we believebelieve that ourour interstate wholesale Trading products quali_qualify as information services thatthat are exempt from federalfederal USF contributions, we have, as of January 1,I, 2005, reported our wholesale Trading revenuesrevenues toto the FCC as telecommunications revenues,revenues, while reserving our rights.rights.

We have offered our prepaid internationalinternational calling card services on aa wholesale basisbasis toto internationalinternational carrier customers, and others, some of which provide thesethese servicesservices toto end-user customers, enabling them toto call internationally over the iBasisIBasis Network. We participate in sellingselling and marketing of callingcalling cardscards through a network of distributors on aa retailretail basis.basis, We alsoalso offer a web-based retail prepaid calling card offering.offering. Although the calling cards areare primarily used forfor internationalinternational calling,calling, we

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have notnot blockedblocked the abilityability of users to place interstate and intrastateintrastate calls and we have not inin every instanceinstance required our wholesale customers or distributors toto provide evidence of theirtheir compliance with U.S.U.S. and statestate regulations.

The Federal Telecommunications Act of 1996I 996requiresrequires that payphone service providers be compensated for all completed callscalls originatingoriginating fromfrom paypbonespayphones inin the United States. The FCC's rules require thethe lastlast switched-basedswitched-based carrier toto compensate payphone providers, andand further requirerequire thatthat all carriers in the call chain implement a call-tracking system, utilize it to identify such calls, provide an independentindependent audit of thethe adequacy of such system, andand provide a reportreport on these matters toto the FCC andand others inin thethc call chain, unless alternative contractualcontractual arrangements have been made. We havehave indirectly paid, andand intendintend toto continuecontinue paying,paying, payphenepayphone service providers asas part of our prepaid calling card business. We have contracted with a clearinghousectearinghouse toto remitremit fundsfunds directly to payphenepayphone service providers forfor calls originatingoriginating fromfrom payphones utilizing our prepaid calling cards. For all other typestypes of traffictrafiic related to ourour wholesale Trading business, we believe that we are not rsspunsresponsibleble for payphone compensationcompensation, but rather that the carriercarrier thatthat precedes us bears thatthat responsibility. In accordance therewith, for traffictraffic related to ourour wholesale Trading business, we have inin most caseseases sought toto apportion such responsresponsibilitybi ity by contract.contract.

We havehave also beenbeen questioned by regulators about our offerings. Under currentcurrent standards andand recentrecent FCC decisions, the FCC and state regulatoryregulatory authoritiesauthorities may not agree with our positions. If theythey do not, we could be penalized, become subject toto regulation atat the federalfederal and statestate level for our wholesale Trading business, in additionaddition to our Retail business, and couldcould become subject to licensinglicensing and bonding requirements, federalfederal and statestate feesfees and taxes, and other laws, all of which could materially affect our business.

We areare also subject toto federalfederal and state laws and regulations regarding consumer protection,protection, advertising, and disclosure regulations. These rulesrules could substantiallysubstantially increase thethe cost of doing business domestically and inin any particular state.state. Law enforcement authorities may utilize theirtheir powers underunder consumerconsumer protection lawslaws againstagainst us inin thethe event we do not meet legal requirements inin a given jurisdictionjurisdiction whichwhish could either increaseincrease costscosts or prevent us from doing business there.there,

We are subject toto other lawslaws related to our business dealings that are not specificallyspecifically related toto telecommunicationstelecommunications regulation. ASAs an example,example, the OfficeOtfice of Foreign Asset Control of thethe U.S.U.S.Department of the Treasury, or OFAC, administersadministers the United States' sanctionssanctions against certain countries. OFAC rulesrules restrict many businessbusiness transactionstransactions with such countriescountries and,and, in somesome cases, require thatthat licenseslicenses be obtainedobtained forfor suchsuch transactions.transactions. We may currently,currently, or in thethe future, transmit telephonetelephone callssails between thethe U.S.U.S.and countries subject to U.S.U.S, sanctions regulations and undertakeundertake other transactions related to thosethose services.services, We have undertaken suchsuch activitiesactivities via our networknetwork or through variousvarious reciprocalreciprocal traffictraffic exchange agreements toto which we areare a party.party, We havehave received licenses from OFAC toto send traffic to some countriescountries and, ifif necessary, will remainremain in contact with OFAC with regardregard to other transactions. Failure toto obtain properproper authority couldcould exposeexpose us toto legallegal and criminalcriminal liability.liability,

Foreign government telecommunications regulation could also affect our costs.

Our Retail andand wholesale Trading services are offered inin foreign jurisdictions.jurisdictions. The regulationregulation of VoIPVoip differs from jurisdiction toto jurisdiction. We cannot bebe certain that we or our partners andand distributors are in compliancecompliance with allall of the relevant regulations and lawslaws inin each of the foreign jurisdictionsjurisdictions in which we operate at any given point in time. As a result, changes inin regulationregulation in foreignforeign jurisdictionsjurisdictions or failurefailure to comply with applicable foreign lawslaws andand regulations can subject us to enforcement action andand penalties thatthat could negatively affect ourour businessbusiness and ability to continuecontinue to provide services in thesethese foreign jurisdictions.jurisdictions. In addition, in numerous countries where we operate or plan toto operate, we may be subjectsubject toto many locallocal laws and regulationsregulations that, amongamong other things, may

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restrictrestrict or limit thethe ability oftelecommunicationstelecommunications companies to provide telecommunicationstelecommunications services inin competition with state-ownedstate-owned or state-sanctioned dominant carriers.

OtherOther internationalinternational governmental regulation and legallegal uncertainties andaud other laws could limitlimit our ability toto provide our services,services, make them more expensive, or subjectsubject us or our employees toto legallegal or criminalcriminal liability.liability.

Many countries currently prohibit or limitlimit competition in thethe provision of traditionaltraditional voicevoice telephony services. InIn some of thosethose countries, licensedlicensed telephony carderscamera as well as government regulators and tawlaw enforcement authorities have questionedquestioned our legal authority and/or thethe legallegal authority of ourour s_viceservice partners or affiliated entities andand employeesemployees to offer our services. We may faceface similarsimilar questions inin additional countries. Our failurefailure toto qualifyqualify as a properlyproperly licensed serviceservice provider,provider, or to comply with otherother foreign lawslaws and regulations, could materially adverselyadversely affectaffect ourour business,business, financialfinancial conditioncondition andand results of operations, includingincluding subjectingsubjecting us or our employees toto taxes and criminal or other penalties and/or contracts in such jurisdictions, by precludinggoverning:us from,from, or limiting us in, enforcing contracts in such jurisdictions,

It is also possible that countries may apply toto our activities laws relating to services provided over thethe Interact,Internet, includingincluding lawslaws governing:

sales and other taxes, includingincluding payroll-withholding applications;

userpdvaey;user privacy;

pricingpricing controls andand termination costs;costs;

chamcterlsticscharacteristics andand qualityquality &productsof products and services;

qualification toto do business;

consumer protection;

cross-border eommaree,commerce, including laws that would imposeimpose tariffs, dutiesduties andand other import restrictions;restrictions;

copyright,copyright, trademarktrademark andand patent infringement; and

claims based onon the nature andand contentcontent of InteractInternet materials, including defamation,defamation, negligencenegligence and the failure toto meet necessary obligations.

If foreign governments or other bodies beginbegin toto imposeimpose relatedrelated restrictions on our services or otherwise enforce criminal or otherother lawslaws againstagainst us, our affiliates or our employees, suchsuch actions could have a material adverse effect on ourour operations.

The termination co_tcost for thethe terminationtermination of cal)callss to mobile networks inin many countries are increasinglyincreasingly becoming subject toto regulatory control.control, Recent decisions byby thethe German, and Portugueseportuguese regulatory authorities toto reduce the mobile terminationtermination rates,rates, or MTRs, have been challenged by thethe affected mobile network operators, or MNOs, in thethe courtscourts of suchsuch countries.countries, Although we areare not a party toto these proceedings, under ourour contracts with thesethese MNOs, as decisiondecision by a courtcourt to repeal thethe reduction of the MTR coon a retroactiveretroactive basis would permit the MNOs toto retroactively increaseincrease thethe MTR chargedcharged to usus for thethe terminationtermination of eatlscalls to theirtheir networks. Although we have takentaken stepssteps to allow us to pass thesethese potential costcost increaseincrease on toto our customers, there can be no assurance that we will be successfulsuccessful inin doing soso in all eases.cases. We can not at thisthis time assess thethe likelihood thatthat thethe courts will retroactively repeal thethe reduction inin thethe MTRs or the amountamount of anyany potential loss thatthat we might suffer as a result.

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Risks RelatedReluted tolo Our IntelleetuulIntellectual Property

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

We relyrely on patent,patent, trademark andand copyrightcopyright law,law, trade secret protection andand confidentialityconfidentiality and/or license agreements with our employees, customers, partners and others to protect our intellectualintellectual property. Unauthorized third parties may copy our services or reversereverse engineer or obtainobtain and use information thatthat we regard as proprietary. End-user license provisions protecting against unauthorized use, copying, transfertransfer andand disclosure of any licensed program may be unenforceable under thethe lawslaws of certaincertain jurisdictionsjurisdictions andand foreignforeign countrias.countries. We have obtained one patent to-date andand we may seek toto obtain patents forfor certain processes or equipment in the future.future. We do nutnot know if anyany ofoi'ourcur pending patent applications will be issued with the scope of the claims we seek, if at all.all. In addition, thethe laws of some foreign countries do not protect proprietary rights to thethe same extent as dodo the lawslaws of the United States. Our means of protecting our proprietary rights inin the United States oror abroad may not be adequateadequate andand third parties may infringeinfringe or misappropriate our copyrights, trademarks and similar proprietary rights. IfIf we fail to protect ourour intellectual propertyproperty andand proprietary rights,rights, our business, financial conditioncondition and resultsresults of operations would suffer.

Our services mightmight be found to infringeinfringe the intellectualiutellectual property rlghlsrights of others.

We believe that we do not infringe upon thethe valid proprietaryproprietaty rights of any thirdthird party,party. Nonetheless, we have receivedreceived claimsclaims that our products or brands, or those of our retail prepaid calling cardcard distributors,distributors, infringe valid patents oror trademarks.trademarks. Such claims, even ifrosolvedif resolved inin ourour favor, could be substantial, and thethe litigation couldcould divert management efforts. It is also possible thatthat such claimsolaims might be assertedasserted successfullysuccessfully against us inin the future. Our ability to provide services depends on our freedom toto operate.operate. That is,is, we must ensure thatthat we do not infringeinfringe upon the proprietary rights of others or havehave licensedlicensed all such rights.rights. A party making an infringementinfringement claim couldcould secure a substantial monetary award or obtain injunctiveinjunctive relief thatthat could effectively block our ability to provide services inin thethe United States or abroad. InIn addition, thethe assertion of infringement claims by others againstagainst our customers, includingincluding those providing consumer VolPUolp services, could adversely affect our business.business,

We rely on a variety of technologies,technologies, primarily software, which isIs licensed from third parties oror isis freely available.available.

Continued use of certain technology by us requires that we purchase new or additional licenses from thirdthird parties or, inin somesome cases, avail ourselvesourselves of"shareware"of "shareware" oror otherwise available open source code. We may not bebe able toto obtain those third-party licenseslicenses needed forfor our business or thethe technologytechnology and softwaresoibvare that we do have may not continuacontinue toto be available toto us on commerciallycommercially reasonablereasonable terms or at all. The loss or inabilityinability to maintain or obtain upgradesupgrades toto any suchsuch technology or softwaresofttvare could result in delays or breakdownsbreakdovms in our ability to continuecontinue developing and providing our servicesservices or toto enhance andand upgrade our services.

Risks Related toto the Interne_Internel andend InternalInternet Telephony IndustryIndustry

IfIfthe public Internet infrastructure isls not adequately maintained, we may be unable to maintain thethe qualityquality of our services and provide them in aa timelytimely and consistent manner.

Our futureibture success will depend upon the maintenance of the public lntemetInternet infrastructure, includingincluding a reliablereliable network backbone with the necessarynecessary speed, data capacity and security for providing reliabilityreliability andand timely lntemetlntemet access and services.services, To the extent that the InternalInternet continuescontinues toto experience increased numbers of users, frequencyfrequency of use or bandwidth requirements, the InteractInternet may become congested and be unable to support thethe demands placed on it andand its performance or reliability may decline thereby impairingimpairing our ability to eompletecomplete calls andand provide otherother services using the

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as a result of failures InteractInternet at consistently high quality. The tntemetinternet has experienced a varietyvariety of outagasoutages and other delaysdelays as a restdt of failures of portions ofits infrastcactoreinfrastructure or otherwise. Future outagesoutages or delaysdelays couldcould adversely affectatTect our ability toto completecomplete callscalls and provide other services. Moreover, critical issuesissues concerning thethe commercial use of the lntemet,Internet, includingincluding security, cost, easeease of useuse and access,access, intellectual property ownershipownership andand otherother legallegal liability issues, remainremain unresolved and couldcould materially and adverselyadversely affect both theihe growth of lnternetinternet usageusage generally andand our business inin particular.particular. Finally, importantimportant opportunities toto increaseincrease traffictraffic on The iBasisIBasis Network will not be realizedrealized if the underlying infrastructure of the Internet does not continue to bebe expanded toto more locations worldwide.

Network securitysecurity breaches could adversely affect our operations,

We currently havehave practices, policies andand procedures inin place to ensure thethe integrity and security of ourour network. Nevertheless, fromfmm time to time we have experienced fraudulentfraudulent activitiesactivities whereby perpetratorsperpetrators have disguised themselves asas ourour customers and transmitted traffictraffic to us, or have disguised themselves as us andand transmitted traffic to our communications serviceservice providersproviders and other service providersproviders forfor termination. While we have undertaken stepssteps to thwartthwart such fraud, including revamping our securitiessecurities procedures and capabilities andand alerting other members of thethe industry as well as tawlaiv enforcement personnel, suchsuch actionsactions may not be sufficientsufiicient andand financial exposure andand reputational damage from fraudulentfraudulent activitiesactivities could materially adversely affect us.

Undetected defects inin our technology could adversely affect our operations.

Our technology isis complexcomplex andand isis susceptible to errors, defects or performance problems, commonlycommonly called "bugs"."bugs", Although we regularly testtest ourour software and systems extensively, wowe can not ensure thatthat ourour testing will detect every potentialpotential bug.bug, Any such bug could materially adversely affect our business.

Our ability toio provide our services using thethe lnternetinternet may be adverselyadversely affected by computer vandalism.

IfIf the overalloverall performance of the lntemetInteniet isis seriously downgraded by website attacks, failurefailure of serviceservice attacks, or otherother actsacts of computer vandalismvandalism or viresvirus infection, our abilit'/toability to deliver our communication services over the lnternetInternet could be adversely impacted,impacted, which anuldcould cause us to have to increaseincrease thethe amount of traffic we have to carrycany over alternative networks, includingincluding the more costly public switchedswitched telephonetelephone network. InIn addition, traditional business interruption insuranceinsurance may not cover losses we could incur because of any suchsuch disruption of thethe Internet.Internet. While some insurersinsurers areare beginning toto offer productsproducts purporting to cover thesethese losses, we do not havehave any of thisthis insurance at this time.time.

Risks Related toln thelke KPNEELY TransactionTrnnsacllon

We may not be able toto timely and successfully integrateintegrate KPN' internationalinternational wholesale voice business with our operations, and thus we may fail toto realize allall of the anticipatedanticipated benefits of thethe KPN Transaction,Transaction.

Integrationintegration of KPN' international wholesale voicevoice business into our business is a complex,complex, timetime consumingconsuming andand ¢_tlycostly process. While most of the work associated withvrith this integration has been completed, remaining projects includeinclude thethe integrationintegration ofofbackback office systemssystems used in billing, market analysis, routing,routing, rating andand financial and management reporting.reporting. Difficulties we may encounter include:

operational interruptions or the lossloss of key employees, customerscustomem or suppliers;suppliers;

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thethe risksrisks related toto operating a significantly largerlarger companycompany with operations inin geographic areas in which we have not previously operated; andand

risks related to consolidatingconsolidating our corporate andand administrative functions.functions,

We are also exposed toto other risks thatthat areare commonly associatedassociated with similarsimilar transactions,transactions, such as unanticipated liabilities and costs, some of which may be material, and diversion of management's attention.attention. As a result, the anticipatedanticipated benefits of thethe KPN Transaction, including anticipatedanticipated synergies, may not be fully realized and our businessbusiness may be materially and adversely affected.

KPN owns a majority of thethe sharesshares of our common stock, and we are aa controlled company within the meaning of NASDAQ Marketplace Rules.

Because KINKPN is deemed to beneficiallybeneticially own,ovm, in the aggregate, more thanthan 50% of our common stock, we areare a "controlled company" within the meaning of NASDAQ Marketplace Rule 4350(e)(5).4350(c)(5),As a result,result, thethe Company is exemptexempt fromfmm NASDAQ rules that require listedlisted companiescompanies to have (i)(i) a majority of independent directors on thethe Board of Directors, (ii)(ii) the compensation of executive officers determined by a majority of independentindependent directors or a onmpensationcompensation committeecommittee composedcomposed solely of independent directors, andand (iii)(iii) aa majority of thethe independentindependent directors ororea nominating committee composedcomposed solely of independentindependent directors elect or recommend directordirector nominees forfor selection by the Board of Directors.Directors, Furthermore, asas part of thethe transaction,transaction, ourour by-laws were amended toto provide KPN certaincertain boardboard representation rights and certaincertain vetoveto rights.rights. As a result of thesethese changes, and KPN'KpN' majority holdings, KPNKpN has thethe ability to controlcontrol thethe outcome of will allall matters submitted toto our stockholdersstockholders forfor approvalapproval. We cannotcannot make assurancesassurances that the interestsinterests of KPN wilt be consistentconsistent with the interestsinterests of other holdersholders of our common stock,stock, or thatthat KPN will vote itsits sharesshares of commoncommon stock, oror exercise itsits veto fights,rights, in a manner that benefitsbenefits other holders of our common stock.

Finally, KIN'KPN' ownershipovmership of 56% of the shares of ourour issued and outstanding shares of common stockstock as of December 31, 2008 could discourage thethe acquisition ofour common stock by potantialpotential investorsinvestors and couldcould have an anti- takeovertakeover effect, possibly depressing the tradingtrading price of our common stock.

KPN may sell all or a substantial portion of itsits shares atat any timetime tnin thethe future, which could cause thethe market priceprice of our common stock to decline.

We have not enteredentered into any lock-up agreement with KPN. As a result,result, thethe sale, or the possibility of a sale,sale, by KPN of allall or a substantial number of its shares in the public market eouldcould causecause the market price of our common stock toto decline. The sale of a substantialsubstantial number of shares or the possibility of such a sale also couldcould make itit more difficult for us toto se/tsell our commoncommon stock or other equity securities in thethe future at a timetime and atat a priceprice that we deem appropriate.appropriate,

Provisions of our governing documents and Delaware lawlaw couldcould also discourage acquisition proposals or delay a change Iniu control.control.

Our certificatecertiTicate of incorporation and our by-laws containcontain anti-takeover provisions, including thosethose listed below, that couldcould make itit difficult forfor a thirdthird party to acquireacquire controlcontrol of our company, even if thatthat change inin control would be beneficial toto stockholders:

~ ourour Board of Directors has the authority to issue common stock and preferred stock,stock, and toto determine the price,pnce, rightsrights and preferences of any new series of preferred stock, without stockholderstockholder approval;

ourour Board of Directors is divided into threethree elassas,classes, each serving three-year terms;terms;

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a supermajoritysupermajority of votes of our stockholders is required to amend key provisions of our certificate of incorporation andand by-laws;

our by-laws contain provisionsprovisions limitinglimiting who can call special meetings of stockholders;

our stockholdersstockholders may notnot take action by written consent; andand

our stockholders must provide specifiedspecified advance notice toto nominatenominate directors or submit stockholderstockholder proposals.

InIn addition, provisionsprovisions of Delaware lawlaw and our stock incentive plans may discourage,discourage, delay or prevent a change of control of our company or anan unsolicited acquisition prop_al.proposal.

Our business could be adversely affected by changes inin ourour commercial dealings withwith Royal KPN and its Subsidiaries.subsidiaries.

Pursuant to a framework services agreementagreement negotiated as partpart of thethe consideration for thethe KPN Transaction (the "Framework"Framework Services Agreement"),Agreement" ), we areare the exclusive providerprovider ofintemationaIof international directdirect dialing, ISDN andand Immarsat servicesservices all forfor all internationalinternational telephonetelephone and faxfax traifictraffic originating fromt'rom or carriedcerned over thethe fixedfixed networks of Royal KPN, KPN and all their affiliates and subsidiariessubsidiaries (the "Royal KPN Group").Group" ).We carrycany thisthis traffictratfic atat the expected cost of providing servicesservices plus a margin as set forthforth inin the Framework ServicesServices Agreement at declining ratesrates through the year 2010. Thereafter,Theresfier, margins will be negotiated each year. The Framework Services Agreement hashas a ten year term;term; however,however, there can bebe no assurance after 2010 that we will be able to negotiate margins on this traffictrafilc on terms and conditions that are favorablefavorable toto us.

We were also appointed as as preferred supplier of mobile services forfor the Royal KPN Group pursuant to thethe Framework Services Agreement. Whileitvhfie we areare confident that we will continue toto provideprovide mobiles services for thethe Royal KPN Group, therethere can be no assurance thatthat thisthis will occur on termsterms and conditionsconditions that are favorablefavorable toto us.us.

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SPECIALSPECIALNOTENOTEREGARDINGREGARDING FORWARD-LOOKINGFOR WARD-LOOSING STATEMENTSSTATEMENTS

ThisThis AnnualAnnual ReportReport ononFormForm l10-K0-K and,and, inin particular,particular, thethedescriptiendescription ofofourourBusinessBusiness setsetforthforth ininItemItem l,1,thBthe RiskRiskFactorsFactors setset forthforth inin thisthis ItemItem IAIA andand ourour Management'siVIanagemenfs DiscussionDiscussion andand AnalysisAnalysis ofofFinancialFinancial ConditionCondition andand ResultsResults ofofOperatiousOperations setset forthforth inin ItemItem 77containcontain ororincorporateincorporate aanumbernumber ofofforward-lookingforward-looking statementsstatements withinwithin thethemeaningmeaning ofofSectionSection 27A27A&theof the SecuritiesSecurities ActAct ofof1933,1933,asasamended,amended, andand SectionSection 21E2IEofofthethe SecuritiesSecurities ExchangeExchange ActActofof1934,1934,asasamended,amended, includingincluding statementsstatements regarding;regarding;

ourour expeetatiensexpectations regardingregarding ourour abilityability totoexpandexpand ourourmarketmarket shareshare inin ourour wholesalewholesale TradingTrading business;business;

ourour expectationsexpectations regardingregarding thethe numbernumber ofofenstomerscustomers thatthat wiltwill useuse ourour wholesalewholesale TradingTrading andand RetailRetail services;services;

ourour expectationsexpectations regardingregarding thethe futurefuture marketmarket demanddemand forfor ourour wholesalewholesale TradingTrading andand RetailRetail services;services;

thethe sizesize ofofourour market;market;

ourour expectationsexpectations regardingregarding thethe limingtiming andand benefitbenefit ofofsynargiessynergies wewe maymay realizerealize fromfrom thethe KPNKPN transaction;transaction;

our expectationsexpectshons regarding ourour growth beingbeing favorablyfavorably impactedimpacted byby consolidationconsolidation inin ourour industry;industry;

our expectationsexpectations regarding benefits we may realizerealize whenwhen wewe havehave convertedconverted ourour customerscustomers fromfrom ourour TDMTDM network our all-lPall-IP network;nenvorki

our business strategy;strategy;

~' the focusfocus of our marketing efforts;

• the establishment, development sndand maintenance of relationships with strategic partners;

our estimates regarding obligations associated with our leased facilities;

~. our expectations regarding the outcome of the legallegal proceedings thatthat we are currentlycun ently a party to,to, including our defense strategies, the resultsresults of negotianonsnegotiatiens and settlements in such legal proceedings and our estimates regarding thethe amountamount of fees sndand losseslosses to be paidpaid in connection with such legal proceedings;

our expectations that thetile YelpVolP marketmarket offers significant growth potential for us;

thethe exposureexposure forfor higherhigher accessaccess costscosts relatedrelated toto ourour RetailRetail business;

~• uncertainty relatedrelated toto current economic conditionsconditions andand anyany resultingresulting decreased demanddemand for our products;

potential forfor futurefuture impairmentimpairment of ourour long-livedlong-lived assets; andand

• ourourliquidity.liquidity.

AnyAny oror sllall ofof ourour forward-1ooidngforward-looking statementsstatements ininthisthis AnnualAnnual ReportReport onon FormForm 10-K10-K maymay turnturn outout totobehe wrong.wrong. They cancan bebe affectedaffected byby inaccurateinaccurate assumptionsassumptions wewe mightmight makemake oror byby knownknown oror unknownunknown risksrisks andand uncertainties.uncertainties, ManyMany factorsfaetera mentionedmentioned ininourourdiscussiondiscussion inin thisthisAnnualAnnual ReportReport ononFormForm 10-K10-K wiwill11 bebe impottantimportant inin determiningdetermining futurefuture results.results, Consequently,Consequently, nono fonvard-lookingforward-looking statementstatement cancanbebeguaranteed.guaranteed. ActualActual futurefutureresultsresults maymay varyvary materially.materially.

WeWe alsoalso provideprovide aacautionarycautionary discussiondiscussion ofofrisksrisks andanduncertaintiesuncertainties underunder "Risk"Risk Factors"Factors" inin ItemItem IA.1A. TheseThese areare factorsfactors thatthatwewe thinkthinkcouldcould causecause ourouractualactualresuhsresults totodifferdiffermateriallymaterially fromfrom expectedexpected results.results. OtherOther factorsfactors besidesbesides thosethose listedlisted therethere couldcould alsoalso adverselyadversely affectaffect us.us.

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Table of Cont_Cont9n~t " " " Without limitinglimiting thethe foregoing, the words "believes,""believes, "anticipates,""anticipates, "plans,""plans, "expects" and similarsimilar expressionsexpressions are intendedintended toto identify forward-lookingforward-looking statements. There are aa numbernumber of factorsfactors that could causecause actual eventsevents or results toto differditfer materially from those indicatedindicated by such forward-lookingforward looking statements,statements, many of which are beyond our control,control, including the Risk Factors set forth under ItemItem 1A.IA. InIn addition, the for,forward-lookingvard-looking statementsstatements contained herein represent our estimate only as of the date of this filingfiling and should not be relied upon asas representing our estimateestimate as of any subsequentsubsequent date.date. While we may elect to update these forward-lookingforward-loohng statements at some point inin the future,future, we specifically disclaim anyany obligation toto do soso to reflectreflect actual rasults,results, changes inin assumptions or changes inin other factors affecting such forward-looking statements.statements.

Item lB.IB, UnresolvedVnresolved Staff Comments

Not applicable.

Item 2. PropertiesProperiles

The followingfollowing isis aa summary of our primary facilities:faoilities:

]LocationLocation _ Expiration of Lease Facilityuacittt Usetice Burlington, MA 59,26559,265 April 2010 Headquarters and global network operations center , The Netherlands 16,25016,250 Rented fromfrom KPN OfficeOfiice New York, NY 4,3724,372 Various, 2009-20182009-201g InteractInternet central officeoffice Los Angeles, CA 3,1563,156 April 2009 InteractInternet central office

Our office space in The Hague is rented from KPN underunder a serviceservice levellevel agreement.agreement, InIn addition toto thethe facilitiesfacilities listed above,above, we lease officeoffice space,space, or space toto househouse network equipment, in various locations around thethe world, including London, Paris, Frankfurt,Piankfurt, Sydney, Buenos Aires, Hong Kong, Beijing and Tokyo. We believebelieve that our existingexisting facilitiesfacilities are adequateadequate forfor ourout current needs and thatthat suitablesuitable additionaladditional or alternative space will be available inin thethe futurefuture on commercially reasonable terms.terms.

ItemItem 3. Legallegal Proceedings

In addition to litigationlitigation that we have initiatedinitiated or respondedresponded tOto in thethe ordinary course of business, we are currentlycurrently partypatty to thethe following potentially material legal proceedings:

Class Action Pursuant toto 1999/999 hfftialInitial Public OfferingOgerittg

In 2001, we were served with several classclass actionaction complaintscomplaints that were filedfiled inin the United States District Court for the Southern District of New York againstagainst us and severalseveml of ourour officers, directors, andand formerformer officers and directors,directors, as well as against thethe investment banking firms that underwrote our November 10,10, 1999 initial publicpublic offeringofi'ering of commoncommon stock and ourom March 9, 2000 secondary offeringoffering of common stock.stock, The complaintscomplaints were filed on behalf of a classclass of persons who purchased our commoncommon stock between November 10, 1999 and DecamberDecember 6, 2000.

The complaintscomplaints are similarsimilar toto eacheach other andand to hundreds of otherother complaints fliedfiled against other issuersissuers and their underwriters, andand allege violations of thethe Securities Act of 1933, as amendedamended (the(the "Securities Act"),Acts), and thethe Securities Exchange Act of 1934, asas amended (the(the "Exchange"Exchange Act"),Acts), primarily based on the a_ertionassertion that there was undisclosed compensationcompensation receivedreceived by our underwriters in connection with our public offerings andand that there were understandings with customerscustomers to make purchases inin thethe aftermarket.afiermarket.

In September 2001, thethe complaints were consolidated and allege that our prospectuses failedfailed toto disclose these arrangements.arrangements. The consolidated complaintcomplaint seeksseeks anan unspecifiedunspecified amount of mooetarymonetary

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damages andand other relief.relief. _nIn October 2002, thethe individualindividual defendants were dismissed fromfrom thethe litigationlitigation by stipulationstipulation and without prejudiceprejudice andand subjectsubject toto an agreement to tolltoil thethe running of time-basedtime-based defenaes.defenses. InIn February 2003,2003, thethe district court denied our motion toto dismiss.

Inln June 2004, we andand the individualindividual defendants, as well asas many other issuersissuers named as defendants in the class actionaction proceeding, entered intointo an agreement-in-principle toto settle thisthis matter, and thisthis settlement was presentedpresented to thethe court.court, The district courtcourt granted a preliminary approval of thethe settlement inin February 2005, subject toto certain modifications toto thethe proposed bar order, toto which plaintiffs and issuersissuers agreed. InIn August 2005, thethe district court issuedissued a preliminary order further approving thethe modifications toto thethe settlement, certifying the settlement classes and scheduledscheduled a fairness hearing,hearing, afteraffer notice toto thethe class. Plaintiffs have continued toto pursue theirtheir claims against thethe underwriters. The district courtcourt establishedestablished a procedure whereby six "focus""focus" casescases areare being pursued initiallyinitially and hashas certified a class of purchasers inin those cases.cases, The underwriters appealed the certificationcertiifiication order inin eacheach of the six cases and in December 2006, thethe United States Court of Appeals for thethe Second Circuit reversed the cerfifieatiuncertification orders. Motions to dismiss amended complaints filedfiled in the six focus easescases have been denied.

We anticipate additional settlement negotiationsnegotiations will occur, but there can be no assurance thatthat thosetliose negotiationsnegotiations will resultresult in a revisedrevised settlement.settlement. We believe that if thisthis matter is notnot settled,settled, we have meritorious defenses which we intendintend toto vigorously assert.

We cannot estimate potential losses,losses, ifif any, from thesethese matters or whether, in lightlight of our insurance coverage, any loss would bebe material to our financial condition,condition, results of operations or cash flows. As such,such, no amounts have been accrued as of DecembesDecember 31, 2008.

SEC OptionOpiton!nvesttguttonInvestigation

We announced onon October 20, 2006, that we were contactedcontacted by thethe SEC as part of anan informal inquiry and we further disclosed on March 29, 2007,2007, on our Current Report on FormForm 8-K,S-K, that the SEC had notified us that we would be receiving a formal order of investigationinvestigation relating to our stock option praetiens.practices. On April 13,13,2007,2007, we receivedreceived the formalformal order of investigation. The SEC investigationinvestigation sought documentsdocuments and informationinformation fromfrom us relating to the grant of ourour options fromfrom 1999 throughthrough 2006. The SEC hashas taken testimonytestimony fromfrom individualsindividuals includingincluding certaincertain of ourour current andand formerformer officers and directors. We have cooperated fullyfully with the SEC investigation andand we are inin communication with thethe SEC staffregardingstaff regarding the outcome of thethe investigation.investigation. There isis nono assuraoceassurance thatthat we will be able to resolve the SEC investigationinvestigation onon aeaeptableacceptable terms without thethe institution of enforcement proceedings by thethe SEC against us or one or more of our senior executive officers oror that otherother inquiriesinquiries will not be commenced by other U.S.U S.federal,federal, statestate oror other regulatory agencies. An SEC enforcement proceeding could seekseek anan injunctioninjunction against futurefuture violations of the securitiessecurities laws,laws, a civil penaltypenalty and, as to individual executives, disgorgementdisgorgement and aa bar order against serving asas an officer or director of aa publiclypublicly tradedtraded anmpany.company, A bar order as to anyany of our senior executiveexecutive officers would deprive us of any such executive's services and could have aa material adverse affect on our business.

We cannot estimateestimate thethe amount of losses,losses, if any, from thethe SEC investigation, or whether any loss would be material to our financial condition, resultsresults of operations or cash flows. As suoh,such, no amounts have been accruedaccrued as of December 331,t, 2008.

Sub-DtstributorSub-Dtstrtbutor Action

On September 20, 2007, J &tk J Communications ("J("J&tk J"),J"), a sub-distributor of callingcalling cards distributed through iBasisiBasis distributor Abdul Communications ("Abdur'),("Abdul"), amendedamended a complaint filedfiled inin thethe United States District Court forfor thethe District of Maryland againstagainst Abdul, toto add iBasisiBasis andand PCI, a wholesale calling-card provider ("PCI"),("PCI"), as defendants inin the matter. The complaint assertsasserts thatthat JJ &Ss J has lostlost and continues toto lose money because iBasisiBasis and PCI deactivated calling cards for which J&JJtkJ

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allegedlyallegedly paid.paid. JJ&&JJisisseekingseeking inin excessexcess ofof$1.0$1.0millionmillion dollars,dollars, plusplus punitivepunitive damages,damages, attorneysattorneys feesfeesandand litigationlitigation costscosts basedbased ononaavarietyvariety ofofclaimsclaims againstagainst Abdul,Abdul, iBasis,iBasis, andand PCLPCI,predicatedpredicated ononcontractualcontractual theories,theories, variousvarious torts,torts,conspiracyconspiracy andand ananallegedalleged violationviolation ofof§rt 201201ofofthetheTelecommunicationsTelecommunications Act.Act, WithWith respectrespect totoiBssis,iBasis,JJ&&JJallegesalleges bothboth directdirect liabilityliability andand vicariousvicarious liability,liability, forforitsitsallegedalleged statusstatus asasprincipalprincipal inin anan allegedalleged agencyagency relationshiprelationship withivith Abdul.Abdul. iBasisiBasisrespondedresponded totothethe amendedamended complaintcomplaint throughthrough anan answeranswer andand motionmotion totodismissdismiss onon FebruaryFebruary 8,8,2008.2008.OnOnJuneJune 2,2,2008,2008,thethe CourtCourt dismisseddismissed thethe conspiracyconspiracy andand TelecommunicationsTelecommunications ActAct claims.claims. DiscoveryDiscovery isisproceedingproceeding asastotothethe remainingremaining claims.claims.

WeWe cannotcannot estimateestimate thethe amountamount ofoflosses,losses, ififany,any, fromfrom thisthis matter,matter, ororwhetherwhether anyany losslosswouldwould bebematerialmaterial totoourour financialfinancial condition,condition, resultsresults ofofoperationsoperations ororcashcash flows.flows. AsAs such,such, nono amountamount hashas beanbeen accruedaccrued asasofofDecemberDecember 331,l, 2008.2008.

BankruptcyBantvr &prey PreferencePreference ClaimClaim

OnOn AprilApril 24,24,20012001 (the(the "Petition"Petition Date"),Date"),WorldWorld Access,Access, Inc.Inc.("World("World Access"),Access"),WorldxChangeWorldxChange Communications,Communications, Inc.Inc, ("WorldxChange"),("WorldxChange"), andand EaeilieomFacilicom International,International, LLCLLC("Facilicom"),("Facilicom"), togethertogether withwith otherother relatedrelated debtorsdebtors (collectively,(collectively, thethe "Debtors"),"Debtors"),filedfiled voluntaryvoluntary petitionspetitions forfor reliefrelief underunder chapterchapter 1111ofoftitletitle 1111ofofthethe UnitedUnited StatesStates CodeCode (the(the "Bankruptcy"Bankruptcy Code")Code") inin thethe UnitedUnited StatesStates BankruptcyBanluuptcy CourtCourt forfor thethe NorthernNorthern DistrictDistrict ofofIllinoisIllinois (Eastern(Eastern Division).Division). TheThe Debtors'Debtors' easescases arearejointlyjointly administeredadministered butbut havehave notnot beenbeen substantivelysubstantively consolidated.consolidated. PriorPrior toto thethe PetitionPetition Date,Date, wewe andand thethe DebtorsDebtors engagedengaged inin aa reciprocalreciprocal business relationship.relationship. OnOn oror aboutabout April 21,20032), 2003 thethe DebtorsDebtors initiatedinitiated aa largelarge numbernumber ofofavoidanceavoidance actions,actions, includingincluding an adversaryadversary proceedingpmceeding in which thethe Debtors assertedasserted claimsclaims againstagainst usus forfor allegedlyallegedly preferentialpreferential transferstransfers andand nonpayment of overdue amountsamounts owedowed by iBasisiBasis toto thethe Debtors totalingtotaling approximatelyapproximately $2.1$2.1 million.million. WeWe have assertedasserted defenses toto thethe claims, invokedinvoked statutorystatutory defensesdefenses andand filed proofsproofs ofofclaimclaim forfor approximatelyapproximately $0.5$0.5millionmillion toto whichwhich thethe trustee for thethe Debtors hashss objected. WeWe expect toto engage inin a mediation toto attemptattempt toto resolveresolve thesethese claims during thethe firstfirst quarter of 2009 and have determined that itit is probable thatthat we will incurincur a liabilityliability of approximately $0.5$0.5millionmillion and,and, accordingly, we have accruedaccrued that amount as of December 31, 2008.

Consumer Class ActionAeo'on

We were named in a putative consumer class action complaint, filed inin the United States District Court forfor thethe District of New Jersey.Jersey. We were served on May 27, 2008. The putative class action plaintiff, Orlando Ramirez, asserted violations of consumer protection statutes in New Jersey and other states on behalf of an asserted nationwide class of purchasers due to an alleged failure to adequately disclose thethe actual calling time available on iBasis' prepaid calling cards. We filed a motion to change venue toto the Eastern District of New York where named plaintiff resides and purchased the card. Plaintiffs were grantedgranted a voluntary dismissal, without prejudice,prejudice, on JulyJuly 9, 2008.2008. On December 19, 2008, a substantially similar complaint was filedfiled againstagainst us on behalf of Mr. Ramirez inin thethe United States District Court for the Eastern District of New York. As of March 6, 2009, we havehave not been servedserved with this complaint. We believe thatthat we have substantial defenses to the claims allegedalleged in the complaintcomplaint an&kand, itif served,served, we intendintend toto vigorouslyvigorously det'enddefend against the claims asserted. We cannot estimate thetb.e amountamount ofof losses,losses, ifif any,any, fromfrom thisthis matter,matter, oror whether anyany lossloss wouldwould be material toto our financialfinancial condition, results of operationsoperations oror cashcash flows.flows. As such,such, no amountamount has beenbeen accruedaccrued asas of December 31, 2008.

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Other MauersMatters

We areare also subject toto suits for collectioncollection, relatedrelated commercial disputes, elairusclaims by foruaerfawner employees,employees, ciairusclaims relatedrelated 'toto certain taxes,taxes, claims fromfrom carriers and foreign serviceservice partners over reconciliationreconciliation of payments for circuits, InteractInternet bandwidth and/or access to the public switched telephone network, and claims fromfrom estatesestates of bankruptbankrupt companies alleging that we received preferential payments fromflam such companies prior toto theirtheir bankruptcy filings.filings. We cannot estimateestimate thethe amount of losses,losses, ifif any, from thesethese matters, or whether any loss would be material to our financialfinancial condition, results of operations or cash flows.flows. As such, nono amount has been accrued as of December 31, 2008.

Itemitem 4.4, Sl_bmlsslonofMatterstoaVoteofSecurltyHoldersSttbmissiou ofMatters to a Vole ofSecurity Holders

No matters were submitted toto aa vote of securitysecurity holders during the fourth quarterquarter of thethe year ended December 31, 2008.

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PART 11II

Item 5, Marketf_rtheRegistrant_sC_njm_nEquity_Re_atedSt_kh_lderMattersand_ssuer_ur_hases_fEquItyMarket for the Regisrrant's Contmott Equity, Related Stockholder Matters and issuer Purcltases ofEqttity Securities

Market Informationfnforntation " Our commoncommon stockstock isis traded on The NASDAQ Global Market underunder thethe symbol "IBAS.""IBAS. The followingfollowing tabletable setssets forthforth the high andand low sales prices of our common stock,stock, asas reportedreported by The NASDAQ Global Market forfor the periods indicated.

~mh Low Fiscal 2008:2008t Fourth Quarter $$3.3.3838 $1.20$1.20 Third Quarter $$4,4.3232 $3.06$3.06 Second Quarter $$4.4.2626 $3.05$3.05 First Quarter $$5.5.7070 $3.54$3.54

Fiscal 2007: Fourth Quarter $10.65$10.65 $4.90$4.90 Third Quarter $10.75$10.75 $8.67$8.67 Second Quarter $10.99$10.99 $9.88$9.88 First Quarter $10.99$10.99 $8.54$8.54

Stockholders

As of February 28, 2009, we had 185 stockholdersstockholders of record. This does not reflect persons or entities thatthat hold their shares of common stock inin nominee or "street" name throughthrough various brokeragebmkerage firms.flrms.

Dividends

Following thethe closing of thethe KPN Transaction, we paidpaid toto our shareholdersshareholders of recordrecord asas of September 28, 2007, the business day immediately preceding thethe closing, a dividenddividend inin an aggregate amount of $i$11313 million, or $3.28$3.28 per shareshare of common stock. The fundsfunds used to pay thethe dividend came from cash onon hand, proceeds of $55 million receivedreceived fromI'rom KPN in connection with thethe transaction, and bank borrowings. Also, under thethe termsterms of outstanding warrants for our common stock,stock, upon exercise of such warrants afterafler thethe closing of the KPN Transaction, thethe holders of thethe warrants are entitled toto receivereceive payment of an amount inin cash equal to the amount such holder would have received inin connection with thethe dividenddividend payment if suohsuch warrants had been exercised immediatelyimmediately prior to thethe closing of thethe KPN Trausaetion,Transaction, inin additionaddition to the number of shares of common stockstock isanableissuable upon suchsuch exercise. Cumulatively throughthrough December 331,t, 2008, we have paid holders of warrants a totaltotal $0.8$0.8 million inin dividendsdividends upon thethe exercise of theirtheir warrants. As ofDecember 31, 2008, we have unexercised warrants representing 432,000432,000 shares, at exercise prices ranging fromfrom $6.30$6.30 to $9.00$9,00 per share, andand have $1.4$1.4 million accruedaeerued for dividends to be paid upon the potential futurefuture exercise of these warrants.

Other thanthan as discloseddisclosed above, we have no current intentionintention of declaring or paying cashcash dividends on our common stock in thethe future.

Stock RepurchaseRepurchose Program

In April 2008, we annotincedannounced that our board of directors had approved a stockstock repurchaserepurchase program, autlmrizingauthorizing us to purchase upup to $15.0$15.0 million of our common stockstock overover thethe nextnext sixsix months.months, Between May and August 2008, we completedcompleted this program byby purchasing 3.93.9 million sharesshares of our

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common stock forfor a totaltotal cost of $15.0$15,0 million, as setset forth in thethe tabletable below. The repurchasesrepurchases were made in the open market and in privately negotiatednegotiated purchases.purchases. The timingtiming andand amount of the shares we purchasedpurchased were be determined by our management basedbased onon our evaluation of market conditions andand other factors.factors, No shares were purchased from KPN as part of this program.

Total Sh_resShares AverageAverage PdcePrice periodPariad Purcl_ssedPurchased ~Paid er Share May 1,I,2008--May2008—May 31, 2008 886,300886,300 $$3.3.3333 JuneJune 1,I,2008--June2008—June 30, 2008 536,100536,100 $$3.3.5858 JulyJuly i,I, 2008---July2008—July 31, 2008 331,400331,400 $$3.3.7171 August 1,I, 2008-.-August2008—August 331,I, 2008 2,153,1402, 153,140 $$4,4.1414 Total 3,906,9403,906940 $$3.3.8484

Securities Authorized for IssuanceIssuance Under Equity Compensation Plans

The information required by this itemitem is includedincluded under thethe caption "Equity Compensation Plan Information"Information" in thethe 2009 Proxy Statement and is incorporated herein byby reference.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among iBasis,IBasis, Inc.,inca The NASDAQ Composite Index And The NASDAQ Telecommunications Index

$ieo

$140' 4 sso ~ouuua --ee- gtso

$100_II -,- ...... w _1%_%

t , I , I t I 12/03 12/04 12/_. 12/06 12/07 12/08

+ ISasle,ISssls, Inc.Itto. -...A--— - NASDAQNASIJAQ Compoalte ---e-----+ -- NASDAONASDA0 Telecommunications ~ 4-- Composlht *$100'$100 investedinvested on 12/31/03 inin stock or index,index, includingincluding reinvestment of dividends. Fiscal year ending December 331.I.

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Item 6.6, Selected Financial Data

The followingfolloiving selectedselected consolidated financialfinancial data should be readread in conjunctionconjunction with ItemItem 7. "Managem.ent'saManagement's Discussion and Analysis of Financial Condition andand Results of Operations" and our eensolidatedconsolidated financial statementsstatements and relatedrelated notes included elsewhereelsewhere inin this Annual Report on Form 10-K. Although iBasis acquiredacquired all of thethe outstanding capital stock ofKPNof KPN GCS on October 1,I, 2007,200 7, forfor accounting endand financialfinancial statement purposes, the KPN Transaction hashss been treated as a reverse acquisition of iBasis by KPN GCS under thethe purchase method of accountingaccounting and the financial results of KPN GCS have becomebecome the historical financialfinancial results of the combined companycompany and replace the historical financial results of iBasis as aa stand-alonestand-alone company. As aa result, revenue andand operating expensesexpenses for thethe yearsyears ended December 31, 2008 andand 2007 increased substantially, as more fully discussed inin Item 7. The ennsolidatedconsolidated statementstatement of operations forfor thethe year ended December 31, 2007, reflects thethe resultsresults of KPN GCS only forfor the firsttirst nine months of 2007 andand the resultsresults oftbeof the combinedcombined company,company, followingfoflowing thethe ¢losingclosing of the KPN Transaction onon October 1,I, 2007, forfor the fourth quarterquarter of 2007.2007, This selectedselected financialfmsncial data has been derived fromfrom our audited consolidated financial statements.stalements. The consolidated statement of operations data for each oftbeof the three years ended December 31, 2006, 2005, and 20042004 and thethe balance sheetsheet data at December 331,I, 20062006 andand 2005 are derived from the audited consolidated financialfinancial statements of KPN GCS. The balance sheet data at December 31,3 I, 2004 has been derived from KPN GCSGCS'' unaudited consolidated financialfinancial statements.statements.

From inception untiluntil October 1,I, 2007, KPN GCS operated asas integratedintegrated part of KPN and within the Royal KPN infrastructure,infrastructure, As a consequence, KPN GCS has not operated as a stand-alonestand-alone business. The KPN GCS combined financial statementsstatements were derivedderived fromfrom the accounting records of KPN using the historical basesbases of assets andand liabilities.liabilities. However, these historical financial statementsstatements may not necessarilynecessarily be representativerepresentative of amounts that would have been reflected in suchsuch combined financialfinancial statements hadhad KPN GCS operated independentlyindependently of KPN. For example,example, KgNKPN GCS benefited from certainceitain related party revenuerevenue andand purchasepurchase agreementsagreements with KPN thatthat includedincluded sale prices perper minute and costs per minute that were not necessarily representativerepresentative oftbeof the amounts that would havehave been reflected inin the financialfinancial statements had KPN GCS operated independently of KPN.

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Year EndedEnded December 31T31 20082000 2007 20062005 2005 2004 On_housauds)Qn ibnneande) StatementStatemeot of Operations0 erations Data: Net revenuerevenue fromfrom external parties $1,097,515$1,097,515 $741,293$741,293 $605,031$605,031 $540,574$540,574 $498,357$498,357 Net revenuerevenue from related parties 226,070226,070 197,265197,265 209,158209,158 249,502249,502 216,559216,559 Total revenue 1,323,5851,323,585 9381558938,558 ' 814,189814,189 790,076790,076 714,914714,916 Costs andand operating expenses: Data communicationscommunications andand telecommunications costs--costs- exte'malexternsl parties 1,081,4601,081,460 733,160733,160 573,966573,966 533,055533,055 475,814475,814 Data communicationscommunications andand telecommunications costs--costs— related parties 105,840105,840 114,242114,242 134,134,347347 138,138,584584 161,347161,347 Engineering and network operations 23,32023,320 13,22213,222 8,8958,895 11,43811,438 -- Selling, general and administrative 74,84974,849 38,36838,368 29,81229,812 34,46834,468 18,56918,569 Merger related expensesexpenses -- 2,2,0t9019 ------Depreciation and amortization 31,99831,998 12,74312,743 5,6935,693 11,41511,415 13,66513,665 Impairment of goodwill 214,651214,651 .... Total costs and operating expens_expenses 1,532,1181,532,118 913,754913,754 752,713752,713 728,960728,960 669,395669,395 Income (loss) from operationsoperations (208,533)(208,533) 24,80424,804 61,47661,476 61,11661,116 45,52145,521 Interest incomeincome (expense), net (982)(982) 949 237 (107) (I01)(101) ForeignPoreign exchangeexchange gaingain (loss) 3,0893,089 (1,101)(1,101) (I,339)(1,339) (1,545)(1,545) (4,291)(4,291) Other income 1,7791,779 .... Income (toss)before(loss) before income taxes (204,647)(204,647) 24,65224,652 60,37460,374 59,46459,464 41,12941,129 Income taxtax expense 26,34226,342 8,5298,529 17,88417,884 18,84818,848 13,54613,546 Net incomeincome (loss) $ (230,989)(230,989) $$16,16,123123 $$42,42,490490 $$40,40,616616 $$27,27,583583 Basic and diluteddiluted net income (loss)(loss) per share $ (3.t5)(3.15) $$0.03333 $$1.1.0606 $$1.1.0101 $$0.0£969 Weighted averageaverage shares:shares: Basic 73,26073,260 48,77848,778 40,12140, 121 40,12140,121 40,12140, 121 Diluted 73,26073,260 49,18649,186 40,12140,121 40,12140,121 40,12140, 121

Balance Sheet Data: Cash, cashcash equivalents andand short-term marketable securities $56,56,912912 $$65,65,735735 $$2222,411411 $$2020,630630 $$29,29,903903 Working capitalcapital (deficit)(deftcit) (21,444)(21,444) (20,756)(20,756) 12,96712,967 . (3,633)(3,633) 3,8603,860 Total assets 441,327441,327 659,659,8738'/3 233,269233,269 223,999223,999 285,256285,256 Long-term debt, net of current portion 27_38027,380 25,00025,000 -- -- 1,0871,087 Stockholders' equity 88,51888,518 334,490334,490 23,97823,978 7,709/, 709 20,62620&626

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Item7.'l. Management'sDiscussionandAnalyslsofFlnancialConditionandResultsofOperafions/tfanagement's Discussion and Analysis ofFinancial Condition attd Results of Operations

Company Overview

We are aa leading wholesale carrier of international long distance telephone calls and a providerprovider of retsilretail prepaid calling services and enhanced services forfor mobile operators.operators,

Our operations consist of ourour wholesale tradingtrading businessbusiness ("Trading"),("Trading" ), inin which we connect buyers andand sellers of internationalinternational telecommunicationstelecommunications services,services, and our retail services business ("Retail").("Retail" ).Our Trading businessbusiness also includes Outsourcing revenuerevenue which we generate asss thethe exclusiveexclusive provider of whohisalewholesale intematienalinternational voice services forfor specific carrier customers.

In the Trading business we receivereceive voice traffic fromfrom buyers---originatingbuyers —originating telecommunicationstelecommunications carrierscamera who are interconnected to our network via Voice overover InteractInternet Protocol ("VolP")("VoIP")or traditional timetime division multiplexing ("TDM") connections,connections, and we route thatthat traffictraffic over our network toto sellers--localsellers —local service providers and telecommunicationstelecommunications carriers in thethe destination countriescountries with whom we have establishedestablished agreementsagreements to manage the completion or termination of calls. We offer ourour Trading serviceservice on a wholesale basis toto carriers,camera, mobile operators, consumer VoIP companies,companies, telephony resellers andand other service providers worldwide. Our Outsourcing revenuerevenue currently consists of internationalinternational voice traffictraAic we temtinatetemtinate for Royal KPN and itsits affiliatesaifiliates (KPN Mobile, E-Plus and Base) and forfor TDC, the leadingleading telecommunications carrier inin Denmark. We seek toto expand our market share in our TradingTmding business by expandingexpanding our customer base and by introducingintroducing cost-effectivecost-eifective international voice solutionssolutions for our customers, includingincluding complete outsoumingoutsourcing ofiuternatiunalof international operations.

As a result of the combinationcombination with KPN GCS in October 20072007 (described below), more than halfhalf of our traffictraffic utilizes our VolP network, while the balance isis carriedcerned over our TDM network. The continued migration of thethe TDM traffictraffic toto our lowerlower costcost VolPVoIP network is expected toto be a significant source of synergies from the KPN transactiontransaction overover the next several years.

Our Retail business consistsconsists of retsilretail prepaid calling cards, which areare marketed throughthrough distributors primarily toto ethnic communitiescommunities within major metropolitan markets in the United States, and Pinged,Pingo, a prepaid calling service thatthat we offeroffer and sell directly to consumers via an eCommerce model. Both can be private-labeled for other serviceservice providers.providers, The prepaid calling cardcard business and Pingo leverageleverage our existing international network and have the potential toto deliver higherhigher margins than areare typically achieved in thethe wholesale Trading business. InIn addition, the retailretaii prepaidprepaid callingcalling cardcard business typicallytypically has aa faster cash collection cycle thanthan thethe wholesale Trading business. In 2007 we launchedlaunched PingoBusiness, enhancementsenhancements that enable businesses toto manage multiple Pingo accounts throughthrough a singlesingle administrativeadministrative account.account.

We useuse proprietary, patented and patent-pending technologytechnology in our global VolP network toto automate thethe sdeetionselection of routes and termination partners based on a variety of performance, quality, and business metrics. We have call terminationtermination agreements with locallocal service providers in more than 100 countriescountries inin North America,Americs, Europe, Asia, the Middle East, Latin America, Africa and Australia.

KPN Transaction

On October 1,I, 2007, iBasis,iBasis, Inc. andsnd KPN completedcomp! eted transactionstransactions ("KPN("KPN Transaction")Transaction" )pursuant to which iBasisi Basis issuedissued 40,121,07440,1 21,074 shares of itsits common stock toto KPN and acquiredacquired the outstanding shares of two subsidiaries ofKPNof KPN CKPN("KPN GCS"), which encompassed KPN'KPPP international wholesale voice business. The Company also received $55 million in cash fromflom KPN,KpN, subject to post-closing adjustments based on thethe working capitalcapital andand debt of iBesisiBasis and KPNKpN GCS. Immediately afterafier issuance on October 1,I, 2007, thethe sharesshares ofiBaslsof iBasis common stock issuedissued toto KPN represented 51% of the issuedissued and outstanding shares of iBasis common stockstock on aa fuUy-dihitedfully-diluted basis (which(which includesincludes all of thethe issuedissued and outstandingoutstanding common stockstock and the commoncommon stock underlying outstanding "in-the-money" stock

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options, as adjusted, and warrants to purchase commoncommon stock).stock). As of December 331,t, 2008, the 40,121,07440, 121,074 shares owned by KPN represent 56% of thethe issuedissued and outstanding common stock of iBasis and 56% on a fully-diluted basis,basis, asas defineddefined above.

On October 8, 2007, iBaslsiBasis paid a dividend in thethe amount of $113 million atat aareterate of $3.28$3.28 per shareshare toto each of itsits shareholders on thethe recordrecord date of September 28, 2007, thethe trading date immediatelyimmediately prior to the closing date of thethe KPN Transaction. InIn addition,addition, holders of outstandingoutstanding wan'antswartants toto purchase ourour common stock will be entitled to receive a cashcash payment upon thethe futurefuture exercise ofoFthesethese warrants inin an amountamount equal to thethe dividend amount that would have been payable if the warrants hadhad been exercisedexercised immediatelyimmediately prior toto the record date of thethe dividend.dividend. Cumulatively through December 31, 2008, we have paid holders ofwarrantaof warrants aa total $0.8$0.8 million inin dividendsdividends upon thethe exerciseexercise of theirtheir warrants. As of December 31, 2008, we have unexercised warrants representing 432,000432,000 shares,shares, at exercise prices ranging from $6.30$6.30toto $9.00$9.00perper share,share, and have $1.4$1,4 million accrued for dividends to be paid upon the potential futurefuture exercise of these warrants. InIn connection with thethe payment of the dividenddividend to shareholders,shareholders, we also increasedincreased the number of sherasshares subjectsubject to unexercised stockstock options and decreased thethe exerciseexercise price of these stock option grants toto preserve theirtheir value.

The officers of iBasisiBasis immediately prior toto thethe closing of thethe KPN Transaction havehave continuedcontinued toto serve asas thethe officers of thethe combinedcombined company and one executive ofKPNof KPN GCS, Mr. Edwin Van leriand,lerland, was appointedappointed asas thethe Company's Senior Vice PresidentPresident Worldwide Sales. Upon closingclosing of thethe KPN Transaction, Messrs. Charles Skibo and David Lee, two independentindependent members ofiBasis'of iBasis' board of directors, resigned asas members of the board of directors and the board of directors ofiBasisof iBasis appointedappointed Messrs. Eelco Blok and Joost Farwerck,Parwerck, twotwo executives of Royal KPN N.V.,N.V., asas directors toto fill the vacancies createdcreated by thethe resignations of Messrs.Messrs, Skibo and Lee.

Although iBasis acquiredacquired all oftbeof the outstanding capital stock ofKPNof KPN GCS, afterafier the dosingclosing of the transaction,transaction, KPN holds a majority of the outstanding cofiamoncommon stock ofiBasisof iBasis and KPN'KpN' designeasdesignees are expected toto represent,represent, at a futurefuture date, a majority ofthe Company's board of directors. Accordingly, forfor accounting andand financial statement purposes, the KPN Transaction hashas beenbeen treated as a reversereverse acquisitionacquisition ofiBasisof iBasis by KPN GCS under thethe purchasepurchase method of ascountingaccounting and the financial results ofKPNof KPN GCS have become the historical financial resultsresults of the combined company andand replacereplace the historical financialfinancial rasultsresults ofiBasisof iBasis as a stand-alone company. Thus, thethe financial results reported for thethe full year 2007 include thethe resultsresults ofKPNof KPN GCS alone forfor the first nine months of 2007 and thethe financial results of thethe combinedcombined companycompany forfor thethe roughfourth quarter of 2007 only.only.

The presentation of thethe StatementStatement of Stockholders' Equity reflectsreilects thethe historicalhistorical stockholders' equity of KPN GCS through September 30, 2007.200/. The effect of thethe issuanceissuance of shares ofiBasisof iBasis common stock toto KPN and the inclusioninclusion ofiBasis'of iBasis' stockholders' equity as a resultresult of thethe dosingclosing of thethe KPN Transaction on October 1,I,20072007 are reflectedreflected in the year ended December 31, 2007.

Prior to October I,I, 2007, KPN OCSGCS operated as anan integratedintegrated part of KPN since inception andand the historical financial statements of KPN 0C$GCS havehave been derived fromfrom thethe accounting recordsrecords of KPN using the historical bases of assets and liabilities. Because KPN GCS did not operate as aa stand-alonestand-alone business thethe historical financialfinancial statementsstatements may not necessarily be representativerepresentative of amounts that would have been reflectedinreflected in thethe financialfinancial statementsstatements presented had KPN GCS operated independentlyindependently of KPN.

KPN GCS benefitedbenefited from&om certain relatedrelated party revenue and purchase agreements with KPN that includedincluded sales prices per minute and costs per minute. KPN GCS alsoalso reliedrelied on KPN forfor a substantial part of its operational and administrative support, forfor which itit was allocated costs primarily consisting of setling,selling, general and administrative expenses,expenses, such as costs for centralized research,research, legal,legal, humanhuman resources, payroll,payroll, accounting, employee benefits,benefits, realreal estate, insurance, informationinformation technology, telecommunications,telecommunications, treasurytreasury and other eorporatacorporate and infrastructureinfrastructure costs. In anticipation of the closingclosing of the lransactiontransaction with iBasis, KPN GCS entered into a Framework Services Agreement with KINKPN inin

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2006, which replacedrep]seed the related party revenuerevenue and purchasepurchase agreements and operational and administrativeadministrative support arrangements described above.

Purchasepurcliose AccountingAccounthrg anduud Goodwill lmpuirmentImpairment

' KPN GCS has beenbeen designated as thethe accounting acquirer because immediatelyimmediately following the completion of thethe transaction,transaction, thethe former shareholdershareholder of KPN (3CS,GCS, KPN, held 51%5 t /b of thethe common stock of the combined company on a fully-fully- diluted basisbasis and KlanKpN'' designeasdesignees are expectedexpected toto represent, at a futurefuture date, a majority of thethe combined company's board of directors. As a result,result, thethe transaction hashss been accounted forfor asas a reverse acquisitionacquisition under the purchase method of accounting.accounting. Under thisthis accounting,accounting, KPN GCS is consideredconsidered the acquiringacquiring entity andand iBasis isis considered the acquired entity forfor financial reportingreporting purposes.purposes.

Under thothe purchase method of accounting,accounting, thethe purchasepurchase price waswss allocated to the tangible andand identifiable intangible assetsassets and liabilitiesliabilities ofiBasisof iBasis on thethe basis of their fair valuesvalues on October 1, 2007, thethe dosingclosing date of the transaction. As KPN GCS was not a publicly tradedtraded entity, thethe purchase price forfor thisthis transaction was based, in part, on thethe fair market value of iBasis'iBasis' common stock.stock. The market price usedused toto value iBasis' shares of$10.75of$10 75 waswss thethe dosingclosing price of the stockstock on September 28, 2007, the business day immediatelyimmediately prior toto thethe dosingclosing of'theof the KPN Transaction.

The total purchase price forfor thisthis transactiontransaction consisted of the following:

~lh tbausands iBasisiBasis outstanding shares on October 1, 20072007 of 34,45134,451 at $10.75$10.75 perper shareshare $$370,370,353353 Fair value of outstanding vested and unvestcdunvested stock options, lessless unearned compensation 13,42513,425 FairPair value of outstanding warrants toto purchase common shares 4,6244,624 Direct acquisition costs 2,4532,453 Dividend to iBasis shareholdersshareholders paid fromfrom existing iBasisiBasis cash and short-termshort-tenn marketable securities (58,000)(58,000) AcevaedAccrued dividend payable forfor outstandingoutstanding warrants to purchase common shares (2,468)(2,468) Amount payable to KPN for iBasisiBasis working capital adjustmentadjustment (I(11,1,577)577) Accrued severan_severance (135) Total purchase price $$318,318,675675

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Theallocation of thethe purchase toto the fairfair values ofiBasis'of iBasis' assets and liabilitiesliabilities onon October 1,I, 2007, which resultedresulted inin the recording of $248.8$248,8 million inin goodwill,goodwiil, was as follows:follows:

~uthovrsads Current assets $$128,128,875875 Property and equipmentequipment 23,25823,258 Other assets 520 Trade names andand trademarks 21,80021,800 WstomerCustomer relationships 34,20034,200 Termination partnerpartner relationshipsrelationships 8,4008,400 Technology 33,30033,300 Total assets 250,353"250,353 DeferredrevenueDeferred revenue 11,3311,331f Dividend payable 60,46860,468 Other current liabilitiesliabilities 103,469103,469 Deferred taxtax liabilities,liabilities, tonglong termterm 3,5563,556 Other non-currentnon-cuirent liabilities 1,6491,649 Total liabilities 180,473"1801473 Net assets 69,88069,880 Goodwill 248,795248,795 Total purchase price $$318,318,675675

The totaltotal $248,8$248.8 million of goodwill was assignedassigned to the Company's wholesale Trading reporting unit. In accordanceaccordance with SFAS No,No. 142, "Goodwill and Other Intangible Assets,"Assets, "thisthis goodwill has not been amortized. In the fourthfourth quarter of 2008, thethe Company determined thatthat thethe carrying value of goodwillgoodwill was impaired.impaired. As a result, thethe Company recorded a chargecharge forfor thethe impairment of goodwillgoodwill inin the amount of $214.$2 t4.77 million. As a result of thisthis impairment chargecharge and a furtherfurther reduction toto the carryingcarrying value ofgondwtitof goodwill of $16.8$16.8 million forfor the utilization of previously reserved propre acquisition net operating losses,losses, thethe carrying value of goodwill has beenbeen reducedreduced toto $17,3$17,3 million as of December 31, 2008. See furtherfurther discussion of the goodwill impairment charge recorded inin 2008 in thethe Results of Operations section of thethe Management's DiscussionDiscussicn and Analysis of Financial Condition and inin Note 8 toto the Consolidated FinancialFinancial Statements.

Working CapitalCapryal andaud Debt Adjustmentsrtdj usrmenis

InIn accordanceaccordance with the Share Purchase Agreement forfor thethe KPN Transaction, a post-closing adjustmentadjustment was required ifif (i) iBasis'iBasis' working capital was lowerlower than or exceededexceeded $37,100,000;$37,100,000; (ii) iBasis'iBasis' debt exceeded or was lower thanthan $2,900,000;$2,900,000; (ill)(iii) thethe combined working capital ofKIPNof KPN GCS was lower thanthan or exceeded ($6,100,000);($6,100,000); and/or (iv) thethe combined debt of KPN GCS exceededexceeded $0, asas of the date of the closing of the KPN Transaction. Based on iBasisiBasis'_balance sheet position on the date of the closingclosing of the KPN Transaction, working capitalcapital was $13,353,000$13,353,000 lessless than the specifiedspecified level of $37,100,000,$37,100,000, and debtdebt was $$1,t ,776,000776000 less than the specifiedspecitled levellevel of $2,900,000.$2900000. As a result,resul, a paymentpayment of $11,577,000$1 1,577000 was due toto KPNKpN from iBasis.iBasis. Based on KPN GCS's balance sheet position onon the date of thethe closing of thethe KPN Transaction, working capital exceeded the specified level of ($6,($6,100,000)100,000)byby $3,945,000$3,945,000 and debtdebt was atat the specified level of $0. As a result,result, paymentpayment of $3,945,000$3,945,000 waswss duedue to KPN from iBasis.

In 2008, KPN forgave $1.3$1.3 million inin expenses incurredincurred by KPN GCS since thethe dosingclosing of thethe KPN Transaction. As a result, thethe amount duedue to KPN has beenbeen reduced by thisthis amount and was recordedrecorded asas aa contribution toto equity. These expenses have beenbeen recordedrecorded in our resultsresults of operations. The totaltotal

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amount of 814.7$14.7 million due to KPN was scheduled toto be paid by iBasisiBesis inin threethree successive quarterly installments throughthrough the thirdthird quarter of 2008, with interestinterest at thethe raterate of 6% per annum. In May 2008, we made the firstfust payment of $5.2$5,2 million, including interest, toto KPN. InIn September 2008, we revised the termstenne of thethe remaining balance of $10.3$10.3 million duedue to KPN toto extend the payment date onon the second installmentinstallment payment to March 2009 and thethe finalhnal installment toto JuneJune 2009. InIn addition, thethe interest rate was increasedincreased to 7% on thethe principalprincipal amount due, effective October 1,I, 2008, and we paid additional interest of $60,000$60,000 relating to thethe extension of the secondsecond installmentinstallment thatthat was due JuneJune 30, 2008.

As of December 331,I, 2008 andand 2007, unpaidunpaid principal and accrued interest due KPN was $10.58 I 0 5 million and $.15.5$15.5 million, respectively.respectively.

TDC TransacttottTronsacrion

On April 1,I, 2008, we acquired certain assetsassets fromfrom TDC, the leading telecommunicationstelecommunications carrier in Denmark, as well asas certain assets, contracts and four employees of TDC' subsidiary in thethe U.S.,V.S., TDC Carrier ServicesServices U.S.,V.S., for approximately $$11I I million inin cash ("TDC Transaction").Transaction" ).Pursuant to thethe TDC Transaction, we became thethe exolusiveexclusive provider of internationalinternational voicevoice services forfor TDC underunder aa five-yearfive-year strategic outsourcing arrangement, and TDC will be a preferred parinerpartner for terminatingterminating traffic sentsent by us intointo thethe Nordic region, consisting of Denmark, Finland,Finland, Iceland,Iceland, Norway and Sweden.

Approximately 130 non-Nordicnon-Nordic, international wholesale voice customers, as well as all ofTDCof TDC interconneotioninterconnection and bilateral agreements for inbound and outbound international phonephone calls have beenbeen transferred to us. TDC will retainretain itsits Nordic customer base andand itsits pen-Nordicpan-Nordic reach.

InIn cormeetionconnection with the closing of thethe TDC transaction,transaction, we recorded $t0.1$10.1 million ofintsngibleof intangible assets, primarily wholesale customer relationships.relationships, The wholesale customercustomer relationships are being amortizedamortized over a 5 toto 10 year period using thethe economiceronomic consumptionconsumption method to reflect thethe diminishing cash flows fromfrom thesethese relationships inin the future.

Critical AccountingAccountlug Policies and Estimates

Our discussion andand analysis of our financial condition and resultsresults of operations are:are basedbased upon our consolidated financial statements. The preparation of these financialfinancial statements andand relatedrelated disclosures in conformity with accounting pr/nclplesprinciples generally aCCeptedaccepted in the United States of America requires us toto (i) make judgments, assumptions and estimates that affect the reportedreported amounts of assets, liabilities,liabilities, revenuerevenue and expenses; andand (ii) disclose contingent assetsassets and liabilities. A critical accounting estimate is an assumption that could have a material effect on our onnsolidatodconsolidated financial statements ifif another, also reasonable, amount were usedused or a changechange inin the estimates isis reasonably likely fromfrom period to period. We base our accountingaccounting estimates onon historical experience and other factorsfactors that we consider reasonable under the circumstances. However, actual resultsresults may differdiffer fromfrom these estimates. To the extent therethere are material differences between our estimates and thethe actual results,results, our future financialfinancial condition and resultsresults of operations will be affected. The following isis a summary of our critical aeaountingaccounting policies andand estimates.

RevenueRevenueRecognftion.Recognition. For our Trading business, revenue is derived from the sale of minutes of calling time.time. We recognizerecognize revenue in thethe period the service isis provided, net of estimates forfor incentiveincentive rebates,rebates, customer disputesdisputes and other allowances. These estimatesestimates are based upon contracted terms, historical experienceexperience and informationinformation currentlycurrently available to management with respectrespect to business and economic trends.trends. Revisions toto thesethese estimates are recordedrecorded in thethe periodperiod inin which thethe facts thatthat give riserise to the revision become known. In cases where we have to estimate the monthly revenues relatedrelated toto traffictraflic terminatedterminated in that month, we record a receivable that is based upon internalinternal lraffictraffic reporting which will thenthen be billed and collected inin the subsequentsubsequent months. For our Retail business, revenue isis

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TableofContents deferred uponactivationofthecallingcards,orpurehesepurchase ofour web-basedcalling services,andisonly recognized as thethe prepaidprepaid balances are reducedreduced based upon minute usage and service charges.

AllowanceA/iowaace for Doub¢tlDoubtfid Accounts. We perform ongoing credit evaluations of our customers and adjust credit limitslimits based upon their payment history and current credit worthiness, as determined by our reviewreview of their current creditcredit information.information. We continuouslycontinuously monitor collections and payments from our customerscustomers and record a provision forfor estimated credit losseslosses based uponupon our historical experience and anyany specific customer collectioncollechon issues that we have identified.identified. We believe that the allowancealloivance forfor doubtful accbentsaccounts isis adequate toto cover estimated lasseslosses inin customer accounts receivablereceivable balances under currentcurrent conditions. However, changes in thethe allowancealloivance forfor doubtful accountsaccounts may be necessarynecessary in the event that the financial condition of our customerscustomers improvesimproves or deteriorates. In addition,addition, changeschanges may be necessary ifif we adjust credit limitslimits forfor new customerscustomers or changechange our collection practices. Either of these situations may result in write-off patterns that differ from our experience. We have been ableable toto mitigate our credit risk,risk, in part, by using reciprocalreciprocal arrangementsarrangements with customers, who are also our suppliers, to offset our outstandingoutstanding receivables.

IntangibleInrangibleAssets.Assets. Our intangibleintangible assetsassets consistconsist ofgondwill,of goodwill, which has an indefiniteindefinite life and is not being amortized, and idantifiableidentifiable intangibleintangible assets, consisting of trade name andand trade marks, customer relationships, terminationtermination partner relationshipsrelationships andand technology.technology. The estimated useful lifelife of tradetrade namename andand trademarkstrademarks is 15 yearsyears and is being amortized on a straight-linestraight-line basis. The estimated useful life of easternercustomer relationships isis 10 years forfor wholesale customerscustomers and 55 years forfor retailretail distributor relationships,relationships, andand these intangible assetsassets arcare being amortizedamortized using an economic consumption method toto reflectreflect diminishing cash flows fromfrom thesethese relationships in thethe future.future. The estimated useful life of terminationtermination partner relationships isis 5 yearsyears and is being amortized using anan economic consumptionconsumption method. The estimatedestimated usefuluseful life of technologytechnology is 5 years andand is being amortized on aa straight-line basis.

Valuation of Long-lived Assets. Valuation of certain long-livedlong-lived assets includingincluding property and equipment, intangibleintangible assets,assets, andand goodwill requiresrequires significantsignitlcant judgment.judgment, Assumptions andand estimates are used inin determining thethe fairfair value of assets acquiredacquired and liabilitiesliabilities assumed in aa business combination. A significantsigniTicant portion of the purchase price in the KPN Transaction was assigned to intangible assets and goodwill. Assigning value to intangibleintangible assets requiresrequires thatthat we useuse signifi_ntsignificant judgmentjudgment inin determining (i) thethe fair value;value; andand (it)(ii) whether suchsuch intangiblesintangibles are _mostizahieamortizable or non-amortizablenon-amortizable and, if the former, the period and the method by which thethe intangible assets wiltwill be amortized. We utilize commonly acceptedaccepted valuation techniques,techniques, such asas thethe incomeincome approachapproach and the cost approach,approach, as appropriate, inin establishing the fairfair value of long-lived assets. Typically, key assumptions inehideinclude projected revenue and expenseexpense levelslevels used inin establishingestablishing thethe fair value of businassbusiness acquisitions asas well as diseoantdiscount rates based on anan analysisanalysis of our weighted average cost of capital, adjusted for specificspeciTic risks associated with the assets.assets, Changes inin the initial assumptions could leadlead to changes inin amortization expense recorded inin our future financialfinancial statements.statements.

For intangibleintangible assets and property andand equipment, we assess the carrying value of thesethese assets whenever events or changes inin circumstances indicateindicate thatthat the carrying value may not be recoverable.recoverable. Factors we consider important which could trigger an impairmentimpairment reviewreview includeinclude but are not limited to the following:following;

significantsignificant decline inin the share price of our common stock andand our overall market capitalization;

significant underperformanceunderperform ance relativerelative toto expected historicalhistorical or projectedprojected futurefuture operating results;

significantsignificant negativenegative industryindustry or economic trends; or

significant changeschanges or devdopmentsdevelopments in strategystrategy or operations which affect our intellectualintellectual or tangibletangible properties.propert'ies.

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Should weive determine thatthat the carrying value of long-livedlong-lived assets andand intangibleintangible assets may not be recoverable, we will measure any impairment based on the current fair valuevalue of thethe assets calculated usingusing aa projected discounted cash flow with thethe discount rate determined by management to be commensurate with thethe riskrisk inherent in our current business model. Signifi.cantSignificant judgmantsjudgments are required toto estimateestimate futurefuture cash flows,flows, including the selection of appropriate discount rates andand otherother assumptions. Changes in these estimates and assumptionsassumptions couldcould materially affect thethe determinationdetermination of fair value for thesethese assets.assets,

We perform annual reviews for impairmentimpairment of goodwill, or whenever events or changes inin circumstancescircumstances would more likelylikely thanthan not reduce the fairfair value of a reporting unit below its carrying value. We also perfermperform reviewsreviews for impairmentimpairment forfor other long-lived assets whenever events or changes in circumstances indicateindicate that thethe carrying valuevalue of these other long.livedlong-lived assetsassets may notnot be recoverable. Goodwill may be considered to be impaired ifwe determine that thethe carryingcarrying value of the reporting unit, includingincluding goodwill, exceeds the reportingreporting unit's fairfair value.value, Assessing the impairment ofgoodwill requires us toto make certain significantsigniticant assumptions, estimatesestimates andand judgmantsjudgments includingincluding future revenue,revenue, expenses and cash flows,flows, discount rates andand control premiums relative to the fair value of the net assets of our reportingreporting units. We estimate the fair valuevalue of ourour reportingreporting units using a combinationcombination of&valuationvaluation techniques, includingincluding discounted c_shcash flows, and compare thethe valuesvalues to our estimated overall market capitalization. The actual results may differ from these assumptionsaSsumptions and estimates and itit is possible that suchsuch differences could have a material impact on our financialfinancial statements. We based the valuation of our Trading reporting unit, inin part, on i)i) our actualactual historicalhistorical performance; it)ii) ourour estimate ofthethe future performance of ourour Trading reporting unit andand iii) projections developed by an independent analyst. For further information regarding our impairmentimpairment analysis of good,viiigoodwill andand other intangible assets, see Note 8, Goodwill and Other brtangibleIntangible Assets, inin the Notes toto Consulida!edConsolidated FinancialFinancial Statements.

Income Tares.Taxes. We utilize the liability method of accounting for incomeincome taxes inin accordance with Statement of Financial Accounting Standards No.No, 109, Accounting forfor IncomeIncome Taxes ("SFAS 109"), whichivhich requitesrequires thatthat deferred tax assets and liabilities be recognized using enacted tax ratesrates for thethe effect of temporary differences betweenbenveen the bookbook andand tax bases of recorded assets andand liabilities.liabilities.

We recordrecord aa valuation allowance toto reduce ore"our deferred tax assets toto thethe amountamount that we believe is more likelylikely thanthan not toto be realized.realized, In assessing thethe need for a valuation allowance,allowance, we consider all positive andand negative evidence, includingincluding scheduledscheduled reversals of deferred taxtax liabilities,liabilities, projectedprojected future taxable income,income, taxtax planning strategies,strategies, and recentrecent financialfinancial performance. Forming a conelusiunconclusion thatthat aa valuation allowance isis not requiredrequired isis difficultdifficult when therethere isis negative evidence suchsuch _as cumulative losseslosses inin recent yeai-_.years. As a resultresult of our cumulativecumulative losseslosses in thethe U.S.U.S.andand the inavailability of loss carrybaekcarryback opportunities, we have concluded that aa valuation allowance against thethe full amount of our net deferred tax assets is appropriateappropriste in such jurisdictions.jurisdictions. In addition, we have a valuation allowance _elatedrelated to taxtax benefitsbenetlts fromfrom stock option exercises which will increaseincrease equityequity when recognized,recognized, and lossloss carry forwardsforwards acquired in thethe acquisition ofKPNof KFN GCS (a reverse aequisitiun),acquisition), lhethe recognition of which will reducereduce goodwill.

InIn certain otherother foreign jurisdictionsjurisdictions where we do not have cumulativecumulative losses,losses, we may recordrecord valuationvaluation allowancesallowances to reduce our net deferreddefetved taxtax assets to the amount we believe is more likelylikely thanthan not toto bebe realized. InIn thethe future,future, if we realize a deferred taxtax assetasset thatthat currentlycurrently carriescames aa valuation allowance, we may recordrecord a reductionreduction toto incomeincome laxtax expenseexpense inin the periodperiod of such realization.realization.

In July 2006, the Financial AeenuntingAccounting Standards Board, or FASB, issuedissued InterpretationInterpretation No. 48, "Aecountingfor"Accounting for UncertaintyIIrrcerrainry inirr lncomelrr come Tares--AnTaxes—An InterpretationInrerirrerarion of FASB StatementSiaiemeni No.Itro. 109"I09"(("FINFIN 48"), which requires incomeincome taxtax positions to meet a more-likely-than-not recognitionrecognition threshold to be recognized inin the financialfinancial statements. Under FIN 48, tax positions that previously failedfailed toto meet the more-likely-than-not threshold should bebe recognized inin the firstfirst subsequent flnanoialfinancial reportingreporting periodperiod in

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which that thresholdthreshold is met. PreviouslyPreviously recognized tax positions that nono longerlonger meet the more-likely-than-not thresholdthreshold should be derecognized inin thethe firstfirst subsequentsubsequent financialfinancial reporting period in which that threshold is no longer met. Prior toto 2007 we recorded estimatedestimated income taxtax liabilitiesliabilities to thethe extent theythey were probable and could bebe reasonablyreasonably estimated.

Judgment is required in determining our incomeincome taxtax provision. In the ordinary course of ennduetingconducting a0 global business enterprise,enterprise, therethere are many transactions and calculations undertaken whose ultimate tax outcomeoutcome cannot be certain. Some of thesethese uncertainties arise as a consequence of transactionstransactions andand arrangements made amongamong relatedrelated parties, transfertransfer pricing forfor transactionstransactions with our subsidiaries,subsidiaries, m_dand potential challenges toto nexusnexus and credit estimates.estimates. As a multinational corporation, we areare subject toto taxation in many jurisdictions,jurisdictions, and the calculation of our taxtax liabilitiesliabilities involvesinvolves dealingdealing with uncertainties in thethe application of complex taxtax laws and regulations in various taxingtaxing jurisdictions.jurisdictions. Although we believe our judgments are reasonable, no assurance can be given that the final taxtax outcomeoutcome of thesethese matters will not be different fromfrom what is reflected inin ourour historical incomeincome taxtax provisions, returnsreturns and accruals. Such differences,differences, or changes in estimates relating to potential differences, couldcould have a material impact,impact, unfavorable or favorable, on ourour income taxtax provision andand operating resultsresults inin thethe period inin which suchsuch a determination isis made. If we ultimately determine that the payment of aa liability will bebe unnecessary, we reverse the liabilityliability andand recognize a0 taxtax benefit during the period in which we determinedetermine thethe liability no longer applies.applies. Conversely, we record additionaladditional tax charges inin a period inin which we determine that an assessment isis greater than the recordedrecorded liability.

Results of Operations

The followingfollowing table setssets forthforth for the periods indicatedindicated the principal items included inin thethe Consolidated Statements of Operations as percentages of net revenue.revenue.

Yearvew EndedKnees DeCemberDecember 31_31

20082000 2O072007 .20O62006 Net revenue fromfrom external parties 82.9%g2 9% 79.0%79 0% 74.3%74 3% Net revenue from relatedrelated partiesparties 17.117.1 21.021,0 25.725.7 .TotalTotal net revenuerevenue I00.0100.0 100.0100.0 100.0100 0 Costs and operatingoperating expenses: Data communications and telecommunicationstelecommunications costs---externalcosts—external parties 81.781.7 78.178.1 70.570.5 Data communications and telecommunicationstelecommunications costs--relatedcosts—related parties 8.08.0 12.212.2 16.516.5 Engineering and networknetwork operations expenses 1.81.8 1.41.4 1.11.1 Selling, generalgeneral and administrativeadministrative expensesexpenses 5.65.6 4.t4.1 3.63.6 Merger related expensesexpenses -- 0.20.2 -- Depreciation andand amortization 2.52.5 1.41.4 0.70.7 ImpairmentImpairment of goodwill 16.216.2 -- -- Total Costscosts and operatingoperating expensesexpenses 115.8115.8 97.497.4 92.492A Income (loss)(loss) from operations (15.8)(15,8) 2.62.6 7.67.6 InterestInterest incomeincome (expense),(expense), net (0.I)(0.1) 0.10.1 0.00.0 Foreign exchangeexchange gain (loss) 0.20,2 (O.l)(0.1) (0.(0.2)2) Other income 0.I0.1 -- -- Income (loss)(loss) beforebefore inenmeincome taxestaxes (15.5)(15.5) 2.62.6 7.47.4 Income tax expenseexpense 2.02.0 0.90.9 2.22,2 Net income (loss) (17.5)%(17.5)% 1.7%1.7% 5.2%5.2%

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Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Results of operations forfor the year ended December 31, 2008 includesincludes the results of the combined companycompany followingfollowing the dosingclosing of the KPN Transaction on October 1, 2007. Results of operations for thethe yearyear ended December 331,t, 2007 includesincludes the resultsresults of operations of KPN GCS onlyonly forfor the first nine months of 2007 and the results of thethe combined company for the fourthfourth quarter of 2007. As a result, revenuerevenue and operatingoperating expenses forfor thethe year ended December 31, 2008 increased substantiallysubstantially over the year ended December 31,2007.31,2007.

Net¹Irevemte.reveaiie, Our primary source of revenue fromfrom external parliesparties areare thethe feesfees thatthat we charge customers for completingcoinpleting voice andand faxfax calls over our network. We charge our customerscustomers fees, per minute of traffic, that areare dependent on thethe lengthlength and destination oftbeof the callcall andand recognize thisthis revenue inin thethe period inin which thethe call isis completed.completed, Revenue from related parties consists of feesfees that we charge KPN and its affiliatesaiflliates for the traffictraffic theythey sendsend to us to complete over ourour network.network, The fees thatthat we chargecharge KPN and itsits affiliates are basedbased on thethe pricing inin established service level agreements or other pricing arrangements.arrangements, Our average revenue per minute ("ARPM") isis based upon ourour total net revenue divided by thethe number of minutes of traffictraffic overover our network for the applicable period. ARPM isis a key telecommunicationstelecommunications industryindustry financial measurement. We believebeiieve thisthis measurement isis useful in understanding our financialtinancial performance, as well asss industryindustry trends.trends. Although the longlong distance telecommunicationstelecommunications industry has been experiencing declining prices inin recentrecent years due toto thethe effects of deregulation and increased competition, our average revenuerevenue per minute can fluctuate from periodperiod toto period as a result of shifisshifls inin traffictraflic over our network toto higher priced, or lower priced, destinations.destinations.

Total revenuerevenue was $1,323.6$1,323.6 million for 2008 compared to $938.6$938.6 million for 2007. Revenue from external parties was $1,097.5$1,097.5 million inin 2008 compared toto $741.3$741.3 million inin 2007,2007. The significantsignificant increaseincrease in revenue from external parties reflects thethe combination ofiBasisof iBasis midand KPN GCS for all of 2008, compared toto 2007, where the first nine months includedincluded only the revenue ofKPNof KPN GCS. The strengtheningstrengthening oftbeof the euroeuro againstagainst the US dollar during 2008 resulted in aa 6.5%6.5% increase, or approximately $36 million, inin the US dollar amount of our cure-basedeuro-based revenue. InIn addition,addition, thethe TDC Transaction contributed toto revenuerevenue fromfrom external parties in 2008.

During thethe second half of 2008, we sawsaw a decline inin ourour Trading revenuerevenue fi'omfrom externalexternal customerscustomers relativerelative toto thethe firstfirst half of thethe year. We believe this decline reflectedreflected the downturn in thethe U.S.U.S.prepaid calling cardcard market as traffic we receive fromItem prepaid calling card providers andand certain wholesale Trading customers whose traffictraffic comes from prepaidprepaid calling card providers, declined significantly. The downturn inin the U.S.V.S.prepaidprepaid calling card market is primarily as result of thethe effect of thethe current adverseadverse economic conditions inin the U.S.U.S, on immigrant communities thatthat comprisecomprise thethe majority of this market.

Revenue fromfrom related parties inin 2008 was $226.1$226 1 million, compared to $197.38197 3 million inin 2007. The higher revenue primarily reflects an increaseincrease in traffic from KPN' mobile entities, as well as the effecteffect of thethe strongerstronger cureeuro against the U.S.U.S. dollar, duringduring 2008.

Minutes of traffic in 2008 were 23.523.5 billion minutes compared to 13.113.1 billion minutes for 2007. Average revenue per minute was 5.635.63 centscents perper minute in 20082008 compared to 7.187.18cents per minute in 2007.

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For thethe year ended December 31,2008,31,2008„thethe breakdown of minutes, total revenuerevenue and gross profit, which is total revenuerevenue lessless data communications and telecommunicationstelecommunications costs, andand grossgross margin percent isis asas follows:follows:

Cress Gross Revenue Profii _~ntev ln bllnutesliunuies (Intin millionsmt alone)I (%) (In billions)billions) Trading $$985.985.00 $$80.80.66 8,2%8,2/o 18.618,6 OutsoumingOutsourcing 242.242.00 42.942.9 17.7%17.7'/o 2.62.6 Retail 96.696.6 12.812.8 13.3%13.3o/o 2.32.3 Total $1,323.6$1,323.6 $136.3$136.3 10.3'%10.3/o 23.523,5

Data communicalionscammiinicaiiamv andand telecommtmiealionsie/ecammunicaiions costs.costs. Data communications and telecommunicationstelecommunications costs are composedcomposed primarily of termination and circuit costs. Termination costs areare paid toto local service providers, or toto KPN and itsits affiliates,affiliates, to terminate voice and fax calls received from ourour network.network. Termination costs are negotiated with the locallocal serviceservice providers andand termination costs forFor traffic we send toto KPN and its affiliates are based primarily on pricingpricing in service levellevel agreements. Circuit costs primarily includeinclude feesfees forfor connections between our network and our customers and/or service provider partnerspartners and charges for IntemetInternet access atat ourour lnternetInternet Central Offices.Offices,

Total data communications and telecommunicationstelecommunications costscosts were $1,187.3$1,187.3 million inin 2008, compared to $847.4$847.4 million inin 2007, Data communicationscommunications and telecommunications costs from external parties were $I,081.5$1,081.5 million inin 2008, compared to $733.2$733.2 million inin 2007.2007. The increaseincrease primarilyprimarily relatesrelates toto the increaseincrease inin total revenuerevenue in 2008 compared toto 2007. Data eommunicatienscommumcations and teleenmmunicationstelecommunications costs from relatedrelated partiesparties were $105.8$105.8 million in 2008, compared toto $$114.I 14.22 million inin 2007.2007, The lower costs from relatedrelated parties were primarilyprimarily due to thethe closing ofoFanan interconneetieninterconnection with a KPN affiliate andand lower pricing associated with the service levellevel agreementsagreements established with KPN forfor 2007. As a percentage of total net revenue, totaltotal datadata communications and telecommunicationstelecommunications costs were 89.7%89.7'/o inin 2008 compared to 90.3%90.3o/o inin 2007.

Engineering andaiid network operations expenses.urpanses. Engineering and network operations expenses include thethe expensesexpenses associated with developing, operating endand supporting our network andand expenses forfor operatingoperating our network operations centers. Also included in this category are engineering expenses ineurredincurred in developing, enhancing and supporting ourour network endand our proprietary software applications. Engineering and network operations support of our TDM network areare provided by KPN andand charged toto us under a service level agreement.

Engineering and network operations expenses were $23.3$23.3 million forfor 2008 compared toto $13.2$13,2 million forfor 2007. The significant increase in expenses inin 2008 reflectsreflects the combination ofiBasisofi Basis and KPN GCS forfor all of 2008,2008, compared to 2007 where the firstfirst nine months includedincluded only thethe expenses of KPN GCS. Costs relatedrelated to our service levellevel agreementagreement with KINKPN inin 2008 were $2.2$2.2 million lowerlower compared to 2007.

Selling, general and administrativeadaiiii/srpai/pe expenses. Selling, generalgeneral aridand administrative expenses includeinclude salaries, payroll taxtax endand benefit expenses,expenses, and other costs for sales endand marketing functionsfunctions andand general corporate functions, including executive management, finance, legal, facilities, information technology andand humanhuman resources.resources. KPN hashss historically provided certain corporate functions, includingincluding finance, informationinformation technologytechnology and human resources, andand charged KF'NKPN GCS for this support underunder a serviceservice levellevel agreement.

Selling, generalgeneral and adminislrativeadministrative expenses were $74.8$74.8 million in 2008, compared to $38.4$38.4 million in 2007. The significantsignificant increaseincrease in expenses inin 2008 reflects thethe combination ofiBasisof iBasis and KPN CrCSGCS

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for all of 2008, comparedcompared toto 2007 where the firstfirst nine months included only thethe expenses of KPN GCS. This increaseincrease was partiallypartiafiy offsetoffset by lowerlower costscosts related to serviceservice levellevel agreement with KPN during 2008. Since thethe date of thethe KPN transaction,transaction, as part of our integrationintegration process,process, we havehave reducedreduced the levellevel of services andand support requiredrequired from KPN forfor our Netherlands operations.operations. In certain cases,eases, suchsuch as audit fees,fees, we are nownow directlydirectly respousibleresponsible for these costs. As aa result of our integration effortsefforts to-date,to-date, selling, generalgeneral and administrative costs incurredincurred directly from Kt'NKPN in 2008 were reduced by $10.8$10.8 million from 2007. InIn 2008, we capitalizedcapitalized approximatelyapproximately $1.2$1.2 million inin costs associated with the development of softwaresotbvare used internallyinternally by the Company. InIn 2007, costs associated with thethe developmentdevelopment of software used internallyintemafly by thethe Company which were capitalized were insignificant. In addition, wesve incurredincurred $1.0$1.0 million in costs inin 20082008 relatedrelated toto a potential transaction thatthat we discontinued pursuing.

InIn thethe fourthfourth quarter of 2007, we took a charge of $2.6$2.6 million relatedrelated to retroactive Universal Service fund and other regulatoryregulatory fees,fees, relatingrelating to our prepaid callingeafling service revenue prior to JulyIuty 2006. This chargecharge resultedresulted fromfrom a decisiondecision byby thethe U.S.U.S. Court of Appeals, inin early December 2007,2007, which denieddenied our appealappeal of thethe retroactiveretroactive aspect of aa Federal Communications Commission order issued in Junelune 2006.

Merger related expenses.expenses. There were no mergarmerger related expensesexpenses inin 2008. Merger relatedrelated expenses of $2.0$2.0 miltioomillion inin 2007 primarily relate to costs incurredincurred for the preparation and reviewreview of the historical financialfinancial statements ofKPNof KPN GCS inin anticipationanticipation of thethe transactiontransaction with iBasis. These costscosts were paid by KPN but are reflected in our resultsresults of operatiousoperations for 2007.

Depreciation andanr/arnorrizar/onamortization ¢rpenses.erpenses. Depreciation and amortization expensesexpenses were $32.0$32.0 million in 2008, compared toto $12.7$12.7 million in 2007. Amortization expense inin 2008 includes $16.7$16.7 million in amortizationamortization of identified intangible assets, includingincluding $15.4$13,4 million forfor identifiedidentitied intangible assets restdtedresulted fromfrom thethe allocation of thethe purchase price of iBasisi Basis to thethe fairfair value ofiBasis'of iBasis' netnet assets as of October 1,2007I, 2007 andand $1,3$1 3 million for intangible assetsassets resultingresulting fromfrom the TDC Transaction inin 2008.2008. Depreciation and amortizationamortization expense in 2007 alsoalso includedincluded aa $1.8$1.8 million charge in the fourth quarter of 2007 for the write-off of ecrtaincertain costs previously capitalizedcapitalized by KPN GCS.

Impairment/mpairmenr ofofgoodwil!.goodwitl. Subsequent toto th0the end of the thirdthird quarter of 2008, we experienced a sharpsharp decline inin our stock price. We believe this decline was principally drivendriven by circumstancescircumstances thatthat occurred subsequent to thethe end ofthe thirdthird quarter including, but not limitedlimited to,to, an extraordinary decline in thethe stock market as a whole and otherother factors specific toto our stock price. As a result, when we performed our annualannual impairmentimpairment test as of December 31,2008,31, 2008, we determined that we had an impairmentimpairment loss on goodwill of $214.7$214.7 million. Since December 31, 2008, our market capitalization has continued to decline. As a result,result, it is reasonably possible that there couldcould be anan impairmentimpairment of ourour intangible assets and/or ourour remaining goodwill inin the near termterm and thethe amountsamounts could be material. For further information on our annual impairment test of goodwill, see Note 8, Goodwil/andGoodwill and OtherOrher IntangibleInrang/6/e Assets, inin thethe Notes toto Consolidated Financial Statements.

InterestInterest income.income, Interest incomeincome was $2.1$2.1 million in 2008, comparedcompared toto $1.7$1.7 million inin 2007. The increaseincrease inin interest income primarily relatesrelates to higherhigher averageaverage cashcash balancesbalances inin 2008, partially offset by lowerlower interestinterest rates.

Interest/nieresr e_pense.expense. InterestInterest expense was $3.0$3.0 million irtin 2008, comparedcompared toto $0.7$0.7 million in 2007. InterestInterest expenseexpense in 20082008 includesincludes interestinterest on bank borrowings and capital leases, as wellwefl as interestinterest uf$1.0of$1.0 million onon the amount due to KPN for the post-closing working capital adjustment.

Foreign exchangeerchange gain (loss),f/oss), net.nec Foreign exchange gain, net waswss $3.$3.11 million inin 2008, compared to a foreignforeign exchangeexchange lossloss of$1Aof $1.1 million in 2007. The foreign exchangeexchange gain inin 2008, asas weltweil as the

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foreignforeign exchange loss in 2007, was primadlyprimarily a resultresult ofthethe change inin exchangeexchange ratesrates between the cureeuro and U.S.U.S.dollar on our cure-denominatedeuro-denominated assetsassets and liabilities.liabilities.

Other income.income. Other incomeincome of $1.8$1.8 million inin 2008 reflectsreflects aa one-time benefit relatingrelating to thethe reversalreversal of a liability for which thethe statutestatute of limitationslimitations had expired.expired. This liability relatedrelated to traffic terminationtermination costs claimedclaimed by a banlauptbankrupt carrier.

IncomeJncorae taxes. Income tax expenseexpense was $26,3$26.3 millionmiliion inin 2008 compared toto $8.5$8,5 million in 2007. In 2008, we recordedrecorded an additional non-cash incomeincome taxtax expense of $16.8$16 8 million as a resultresult of the utilization of previously reservedreserved pro-pre- acquisition net operating loss carry-forwards. The use of tbesethese pro-acquisitionpre-acquisition net operating losseslosses cannot reducereduce incomeincome taxtax expense but, instead,instead, must reducereduce thethe carrying valuevalue of goodwill.goodwill. This additional income taxtax expense does not represent income tax payments we will havehave to make now, or at any limetime in the future. Effective January 1,2009,1, 2009, with the adoption of FASPAS 141141R,R, suchsuch pre-aequisitionpre-acquisition net operating losses will reduce incomeincome taxtax expense,expense, when utilized or when the valuation allowance forfor suchsuch net operating losseslosses isis released.

The balancebaiance of thethe 2008 incomeincome tax expense of $9.5$9.5 million, andand the taxtax expenseexpense of $8.5$8.5 million inin 2007, primarily relates toto incomeincome taxestaxes on the taxable income of our Netherlands operations.

Year Ended December 31, 2007 Compared toto Year Ended December 31, 2006

Results of operationsoperations for the yearyear endedended December 31,3I, 2007 includes thethe resultsresults of operations of KPN GCS only for the firstfirst ninenine months of 2007 and thethe resultsresults of thethe combined companycompany following thethe closing of KPN Transaction on October 1.I, 2007, for the fourth quarter of 2007. Results of operationsoperations for the year ended December 31.31, 2006 are thethe results of operations of KPN GCS only. As a result,result, revenuerevenue andand operating expenses forfor the year ended December 31,200731,2007 increasedincreased substantially.

Net/Ver revenue,revenue. Total revenue was $938.6$938,6 million forfor 2007 compared to $8$814.t 4.22 million for 2006. Revenue from external parties was $741.3$741.3 million inin 2007 compared to $605.0$605.0million inin 2006. The increase inin revenue fromfrom externalexternal parties reflectsreflects a combination of thethe strengthening of the cureeuro against thethe US dollardollar and the inclusion of iBasisiBasis revenuerevenue of$143.9of$143.9 million for thethe fourth quarter of 2007. As thethe revenue ofKPNof KPN GCS isis primarily denominated in cures,euros, thethe strongerstronger cureeuro inin 20072007 resulted inin an increaseincrease inin revenuerevenue from external parties of approximately 8% in U.U.S.S.dollars inin 2007. Excluding thethe effect of thethe strongerstronger cureeuro in 2007 and thethe inelus;,oninclusion of iBasisiBasis revenue forfor thethe fourth quarter of 2007.2007, revenue from external parties declined approximately 9% from 2006.2006, The decrease was primarily due toto thethe focusfocus on maximizing margins in 2007, which resulted inin a decrease inin revenuerevenue and minutes from lowerlower margin traffic,trafftc,

Revenue fromfrom related parties in 2007200? was $197.3$197.3 million, comparedcompared toto $209.2$209.2 million inin 2006. The lowerlower revenue primarilyprimarily reflectsreflects thethe pricing inin service levellevel agreements established between KINKPN GCS and KPN in mid 2006, in anticipation of the completioncompletion of the KPN Transaction. Prior toto these nownew service levellevel agreements, KPN GCS hadhad more favorablefavorable pricing arrangementsarrangements with KPN.

Minutes of traffic inin 20072007 were 13.113.1 billion minutes comparedcompared toto 9.09.0 billion minutes inin 2006. Excluding the effect of the inclusioninclusion of iBasis traffictraffic for the fourthfourth quarter of 2007, minutes of traffictraffic increasedincreased by 0.50.5 billion minutes, oroi 5%, inin 2007 overover 2006. Average revenuerevenue per minute was 7.t87.18 cents per minute inin 2007 compared to 9.029.02 cents per minute inin 2006.

DataDora communicationscomninnicariens and lelecommunicationstelecommunications eosls.costs. Total data communications and telecommunicationstelecommunications costs were $847.4$847.4 million in 2007, comparedcompared toto $708.3$708.3 million in 2006. Data communications andand telecommunications costs from externalexternal parsesparties were $733.2$733.2 million in 2007.2007, compared to $574.0$574,0 million in 2006. This increaseincrease was primarily duedue toto the effecteffect of thethe stronger cure,euro, compared to thethe U.S.U.S.dollar, inin 2007 on KPN GCS's euro-dcnominatedeuro-denominated costs andand the inclusioninclusion of iBasisiBasis costs of $126.$126.44 million for thethe fourthfourth quarter of 2007. Data communications andand

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telecommunicationstelecommunications costs fromfrom related parties were $114.2$114.2 million inin 2007, comparedcompared to $134.3$134.3 million inin 2006.2006, The lowerlower costs from relatedrelated parties were primarily due to thethe closingclosing of an intereonnectioninterconnection with a K_ONKPN affiliateaffihate and lowerlower pricing associated with thethe serviceservice levellevel agreements established with KPN for 2007.2007, As a percentage of totaltotal net revenue,revenue, totaltotal data communications and telecommunicationstdecommunications costs were 90.3%90.3%inin 20072007 compared toto 87.0%87.0%inin 2006.

Engineering and network operationsoperations expenses.expenses. Engineering andand networknetwork operations expenses were $13.2$13.2 million for 2007 compared toto $8.9$8.9million for 2006. The higherhigher expensesexpenses inin 2007 relaterelate toto the costs of iBasis'iflasis' engineeringengineering and network operations expenses of $4.8$4.8 million for thethe fourthfourth quarter of 2007, partiallypartially offset by lower chargescharges under the serviceservice level agreement betweenbenveen KPN and KPN GCS inin 2007, compared to 2006.

Selling,Selling, general and administrativeadministrative expenses.expenses. Selling, general and administrativeadministrative expenses warewere $38.4$38.4 million in 2007, comparedcompared to $29.8$29.8 million inin 2006. The increaseincrease inin 2007 primarily reflestsreflects thethe inclusion of thethe selling,selling, general and administrativecostsadministrative costs ofiBasisof iBasis of $16,9$16.9 million for thethe fourthfourth quarter of 2007. In addition, the stronger euro compared to thethe U.S.U.S, dollar resultedresulted inin anan increaseincrease in thethe cure-denominatedeuro-denominated expensesexpenses of KPN GCS. These increasesincreases were partially offset by lowerlower costs in the 2007 service level agreement forfor supportsupport frmnfrom KPN. In addition, inin thethe fourth quarterquarter of 2007, we tooktook aa charge of $2,6$2,6 million related to retroactiveretroactive Universal Service fund and other regulatory fees, relatingrelating to our prepaidprepaid calling service revenue priorprior to JulyJuly 2006. This charge resulted fcomfl om aa decisiondanision by thethe U.S.U S.Court of Appeals, in early December 2007, which denied ourour appeal of fl_ethe retroactiveretroactive aspect eraof a Federal Communications Commission order issuedissued in June 2006.

Merger relatedre/ared expenses.expensar. Merger related expensesexpenses of $2.0$2.0 million in 2007 primarilyprimarily relate toto costscosts incurredincurred forfor the preparation and reviewreview oftbeof the historical financialfinancial statements ofKPNof KPN GCS inin anticipation of the transactiontransaction with iBasis.iBasis. These costs have been paidpaid by KPN butbut are reflected inin our resultsresults of operationsoperations for 2007.

Depreciation andand amortizationomoriixarioii expenses. Depreciation andand amortization expenses were $12.7$12.7 million inin 2007, compared toto $5.7$5.7 million in 2006.2006, Amortization expense in 2007 includes $3.9$3.9million inin amortization of identified intangibleintangible assets.assets. These identified intangibleintangible assets resulted from the allocationallocation of thethe purchase price ofiBasisof iBasis toto the fair value ofiBasis'of iBasis' net assets as of October 1, 2007. Depreciation and amortization expense in 2007 alsoalso ioctudedincluded a $1.8$1.8 million charge in thethe fourth quarter of 2007 forfor thethe write-off of certaincertain costs previously capitalized by KPN GCS,GCS.

InterestInterest income.incoiae. Interest incomeincome was $t$1,,77 million for 2007, comparedcompared toto $0,3$0.3 million inin 2006.2006, The increase inin interest income primarily relates toto higherlflgher averageaverage cash balances inin 2007.2007.

Interest expense,expense. InterestInterest expense was $0.7$0.7 million inin 2007,2007, comparedcompared to $32,000$32,000 inin 2006. InterestInterest expense in 2007 includes interestinterest of $0.5$0.5 million on bank borrowingsborrowings of $25.0$25.0 million early inin thethe fourthfourth quarter of 2007 under our lineline of credit with Silicon Valley Bank,

Foreignexchangeloss,Foreign exchange loss, net.ner. Foreign exchange less,loss, net was $1.l$1.1 million inin 2007, compared to $1.3$1.3 million in 2006. These foreign exchange losses are primarily aa resultresult of thethe change in exchangeexchange rates betweenbetween thethe cureeuro andand U.S.U.S.dollar on foreignforeign currency contracts.

Income taxes.taxes. The income tax provision of $8.5$8.5 million inin 2007 and $17.9$17.9million inin 20062006 primarily relatesrelates to incomeincome iaxeataxes on thethe taxabletaxable incomeincome of The Netherlands operations ofKPNof KPN GC$.GCS, The effective taxtax raterate inin 2007 andand 2006 was 34.6%34.6% and 29.6%,29.6%, respectively.respectively, The higher effective tax raterate in 2007 isis due to U.S.U.S. operating losseslosses forfor which there isis no current tax benefit. The effective taxtax raterate inin 2006 approximates thethe statutory rate inin The Netherlands.

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Liquidity and Capital Resources

Prior to October 1,I, 2007, KPN GCS operated from inception as an integrated part of KPN and withinwitlnn the KPN infrastructure.infrastructure. KPN uses a centralized approach to cash management and financingflnancing of itsits operations. Historically, cash was remitted to KPN on a regular basis and cash disbursements were funded from KPN cashcash accounts on behalfbehalf of KPN GCS. Cash remittances toto KPN, net of disbursements byby KPN onon behalf of KPN GCS, are reflected as net distributions to relatedrelated parties in thethe Consolidated Statements of Stockholders' Equity.

Cash provided by operating activitiesactivities of $33.0$33.0 million in 2008 was primarily thethe result of thethe netnet loss 0f$231.0of $231.0 million, offset by non-cash charges ofot'$267.$267.55 million. Non-cash charges inin 2008 included impairment of goodwingoodwill of$214.7of $214.7 million, depreciation and amortizationamortization of $32.0$32.0 million, non-cash incomeincome taxtax expense relatingrelating to thethe utilizationutilization of pre acquisition net operating losseslosses of $16.8$16 8 million, stock-basedstock based compensationcompensation of $2.5$2 5 million and aa provisionprovision for doubtfuldoubtful accounts receivablereceivable of $1.6$1.6 million. During 2008,2008, cashcash was used inin operating activities for changes in other assetsassets and liabilitiesliabilities 0f$3.5of$3,5 million. Changes inin other assetsassets and liabilitiesliabilities includedincluded a payment of $7.$7.66 million relatedrelated toto 2007 incomeincome taxestaxes due for KPN GCS. Excluding thethe prior yearyear taxtax paymentpayment of $7.6$7.6 million, changeschanges in Operatingoperating assets and liabilities provided $4.1$4.1 million inin cash andand cash flow fromfrom operating activities for 2008 was $40.6$40.6 million.

Cash provided byby operating activities of $58.1$58.1 million in 2007 was primarily thethe result of netnet incomeincome of $16.1$16.1 million, non-cash charges of $13.2$13.2 million, primarily depreciation and amortization, and changes in other assets andand liabilitiesliabilities of $28.8$28.8 million. Changes inin other assets and liabilities included aa decline inin accounts receivable--externalreceivable —external partiesparties of S22.7$22.7 million andand in accountsaccounts receivabl_relatedreceivable —related parties 0f$33.8of$33.8million, partiallypartiafly offset by aa decline inin accounts payable of $32.2$32.2 million.million,

Cash providedprovided by operating activitiesactivities inin 2006 0f$32.5of$32 5 million was thethe resultresult of net income of $42.5$42 5 million, non-cash charges of $5.7$5.7 million for depreciation and amortization, andand changeschanges in other assets andand liabilities of $(15.$(15.7)7) million. Changes inin other assets and liabilitiesliabilities inin 2006 included anan Increaseincrease inin accounts receivable---relatedreceivable —related parties of $25.1$25.1 million endand a decrease in accounts payable of $43.6$43.6 million, partially offsetoffset by a decrease in accounts receivable---externalreceivable —external parties of $37.0$37.0 million.

Cash used inin investing activities in 2008 was $20.0$20.0 million. Additions toto property andand equipment were $16.0$16.0 million inin 2008. On April 1,I, 2008, we acquired certain assets fromfrom TDC, the leading telecommunicationstelecommunications cardercarrier inin Denmark.Denmark, asss well as certain assets, contracts and employees of TDC'sTDCs subsidiarysubsidiary inin the U.S.,U.S.,TDC CarderCarrier Services U.S.,U.S., for approximatelyapproximately $11.0$11.0 million in cash. Cash providedprovided by investinginvesting activities included a reduction in other assets,assets, relating toto investing activities, of $5.0$5 0 million and maturities of short.termshort-term marketable securities of $2.0$2 0 million.

Cash provided by investinginvesting activitiesactivities inin 2007 of $42.1$42. 1 million includedincluded thethe acquisition of $54.7$54.7 million of existingexisting cash and cashcash equivalents ofiBasisof iBasis on thethe date of thethe dosingclosing of the KPN Transaction. Additions toto property andsnd equipment were $9.6$9 6 million inin 2007 and maturities of short-termshort term marketable securities werewerc $2.0$2 0 million. The increaseIncrease of $5.0$5 0million inin other assets relatesrelates toto otherother investing activities.

Cash usedused inin investinginvesting activities inin 2006 of $3.9$3.9million relate to additions to property and equipment,equipment,

• Cash usedused in financingfinancing activities in 2008 was $19.0$19.0 million. We used $15.0$15.0 million in cashcash for the purchase of our enmmoncommon stock under a stock repurchase program, $t.6$1.6 million in payments of capital lease obligations and $0.3$0.3 million in dividend payments on the exercise of warrants.warrants, During 2008, we borrowed,borrowed, net, an additional $2.t$2.1 million underunder our Loan Agreement with Silicon ValleyYaltey Bank andand received $0.6$0.6 million inin proceeds onon the exerciseexercise of stockstock options. In addition,addition, we paid $4.7$4.7 million of the $14.7$14,7 million due toto KPN forfor thethe pestpost closing working capitalcapital adjustment.adjustment.

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Cash used inin financingfinancing activities inin 2007 was $61.1$61.1 million andand includedinc!uded $55.0$55 0 million paid by KPN as partial consideration for the acquisition of 51% of the outstanding sharesshares of iBasisiBasis on October I, 2007. InIn early October, following the completion of thethe KPN Transaction, we paid a $113,$113.00 million dividend to iBasis shareholdersshareholders ofreenrdof record immediately.immediately . precedingpreceding the closing of thethe KPN Transaetien.Transaction. InIn addition, we paid $0.5$0.5 million in dividendsdividends to warrantwarmnt holders who exercised theirtheir warrants during the fourth quarterquarter of 2007. Net distributionsdistributions toto KPN in 2007 were $27.8$27.8 million. InIn the fourthfourth quarter of 2007, we borrowed $25.0$25 0million underunder our second amendedamended and restatedrestated loan and security agreementagreement with Silicon Valley Bank. Proceeds fromfrom exercises of stock options and warrants were $0.5$0.5 million in 2007 and paymentspayments of capital leaselease obligationsobligations were $0.4$0.4 million.

Cash used in financingfinancing activities in 2006 was $28.9$28,9million and consisted of net distributions to KPN of $27.9$27.9millionmifiion andand payment of a note payable toto aa KPN affiliate of $1.0$1,0 million.

In April 2008, we announcedannounced that our board of directors had approved aa stockstock repurchaserepurchase program, authorizing us toto purchase up to $15.0$15.0 million of our cerumencommon stock over the next six months. Between May and August 2008, we completed thisthis program by purchasingpurchasing 3.93.9 million shares of our commoncommon stockstock forfor a total costcost of $15.0$15.0 million, as set fodhforth inin the table below. The repurchases were made inin thethe open market and inin privately negotiated purchases.purchases, The timing and amountamount of the shares we purchasedpurchased were be determined by our management based on our evaluation of market ennditionsconditions and otherother factors. I'4oNo shares were purchased fromfrom KPN as partpart of thisthis program.

TotalTotal SharesSharav Average Price periodPeriod PurebredFurehaaed ~raid ev Shave May 1,I, 2008-May 31,31,20082008 886,300886,300 $$3333.33 June I, 2008-June 30, 2008 536,100536,100 $$3.3.5858 July 1,2008-JulyI, 2008-July 331,I, 2008 331,400331,400 $$3.3.7171 August 1,2008-AugustI, 2008-August 31, 2008 2,153,1402,153,140 $$4.4.1414 Total 3,906,9403,906,940 $$3.3.8484

In accordance with the Share Purchase Agreement for thethe KPN Transaction, a post-clesingpost. closing adjustmentadjustment was required if (i) iBasis' working capitalcapital was lowerlower than oror exceeded $37,100,000;$37,100,000; (it)(ii) iBasis' debt exceeded or was lowerlower thanthan $2,$2,900,000;900,000; (iii) thethe combined working capitalcapital of KPN GCS was lowerlower thanthan oror exceededexceeded ($6,100,000);($6,100 000); and/or (iv) the combinedcombined debt of KPN GCS exceededexceeded $0, as of the date of thethe closing of thethe KPN Transaction. Based on iBasis'iBasis' balance sheet positionposition on thethe date of the closingclosing of thethe KPN Transaction,Tmnsaction, working capital was $13,353,000$13,353,000 less than the specified level of $37,100,000,$37,100,000, and debt was $1,776,000$1,776,000lessless than thethe specifiedspecified levellevel of $2,900,000.$2,900,000.As a result, a payment of$11,577,000of$11,577,000 isis due toto KPN from iBasis.iBasis. Based on KPN GCS's balancebalance sheet position on the datedate of thethe closing of the KPN Transaction, working capital exceeded the specified levellevel of ($6,100,000)($6,100,000) by $3,945,000$3,945,000andand debt wuswas at thethe specified level of $0. As a result, payment of $3,945,000$3,945„000was due toto KPN from iBaais.iBasis.

In 2008, KPN forgave $0.8$0,8 million in expenses inetn'redincurred by KPN GCS since thethe closing of thethe KPN Transaction. As a result, thethe amountamount due to KPN has beenbeen reduced by this amount and was recorded as a contribution toto equity. These expensesexpenses have been recorded inin our resultsresults of operatiens.operations. The totaltotal amount of$14.7of$14.7 million due toto KPN was scheduled toto bebe paid by iBasis in threethree successivesuccessive quarterly installmentsinstallments through thethe third quarter of 2008, with interestinterest at thethe raterate of 6% per annum. In May 2008, we made the first payment of $5.2$5.2 million, includingincluding interest,interest, toto KPN. InIn September 2008, we revised thethe termstenne oftbeof the remaining balance of $10.3$10.3 million due toto KPN toto extendextend thethe payment date on thethe secondsecond installment payment toto March 2009 and the finalfinal installmentinstallment toto JuneJune 2009. In addition, thethe interest raterate was increasedincreased to 7% on the principal amountamount due, effective October t,I,2008, andand we paid additionaladditional interestinterest of $60,000$60,000relatingrelating to the extension of thethe second installment that was due June 30,30, 2008.

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Asof DeeamberDecember 31, 2008 and 2007, unpaid principal and accruedaccrued interestinterest due toto KPN was $10.5$10.5 million andand $15.5$15,5 million, respectively.respectively.

In October 2007, we entered into a Second Amended and Restated Loan and Security Agreement (the(the "Loan Agreement")Agreement" ) with Silicon Valley Bank, which amended andand restated a certain Amended and Restated Loan and SecuritySecurity Agreement dated as of December 29, 2003, We enteredentered into thethe LoartLoan Agreement to obtain funding forfor working capital purposes andand in support of thethe KPN Transaction.Transaction, Pursuant to thethe Loan Agreement, which was subsequently amendedamended as described below,below, we could borrow up to $35.0$35.0 million fromfrom timetime to timetime underunder a secured revolvingrevolving credit facility forfor a two-two- year period.perio. Except as describeddescribed below, borrowings under thethe Loan Agreement are onon aa formulaformula basis, based onon eligible domestic and foreignforeign accounts receivable.receivable. The Loan Agreement containscontains quarterly financial covenants, consisting primarilyprimarily of minimum profitabilityprofitability and minimum liquidityliquidity requirements. Interest onon borrowings underunder our Loan Agreement were based, inin part, on our quarterly profitability,profitability, with the maximum interestinterest raterate being thethe bank'sbank's prime rate, plus 0.5%,0.5%, oror L1BOR,LIBOR, plus 2.75%.2.75%.The Loan Agreement has aa quarterly commitment feefee of 0.63%0.63%on anyany unused portion of thethe lineline of credit and we paid an up-front, one-timeone-time facilityfacility fee of 0.75%,0.75%,or $263,000.$263,000.The Loan Agreement is also guaranteedguaranteed by all our domestic wholly-ownedwholly-ovmed subsidiaries and is collateralized by a first priority lienlien and security interestinterest on our and such guarantor's assets. In addition, we pledged 66,2%66.2%of all of our ownershipoivnership in KPN Global CarderCarrier Services (now known as iBasis Netherlands), a wholly-owned subsidiarysubsidiary based inin The Netherlands, as collateral. Pursuant to the termsterms of the Loan Agreement, we may use the proceeds solely (i)(i) forfor working capital, (ii)(ii) toto fund our general business requirements, andand (iii)(iii) to fundfund thethe dividend paid byby usus in connection with thethe KPN Transaction.

InIn April 2008, we modified thethe Loan Agreement to increase our maximum borrowing availabilityavailability fromfrom $35.0$35.0 million toto $50.0$50.0 million,million. In addition, to reflectreflect ourour current operating results andand financial position, we modified thethe minimum profitability financial covenant and added a minimum cashcash flow financialfinancial requirement pursuant to aa slidingsliding scale thatthat decreases over time.time. A portion of the additionaladditional $15.0$15.0 million inin fundsfunds isis subjectsubject to a non-formulanon-formula borrowing base through February 2009. The modifientionmodification alsoalso permitted us toto repurchase up to $15million sharesshares of ourour common stockstock under a steekstock repurchaserepurchase program approvedapproved byby our board of directors inin April 2008. We paid anan up-front, one-time supplemental COmmitmentcommitment feefee of $150,$150,000000 and anan up-front, one-time modification feefee of $75,000.$75,000,

InIn September 2008, we modifiedmoditied the financialfinancial covenants under thethe Loan Agreement toto reflectreflect our current operating resultsresults andsnd financial position as follows:

(i) We reducedreduced the minimum profitabilityprofitability covenant for thethe quarterquarter ended September 30, 2008;

(ii) We reducedreduced the minimum liquidityliquidity covenant forfor thethe quarter ended September 30, 20082008 throughthrough February 2009;2009;andand

0ii)(iii) We replacedreplaced thethe minimum cash flow covenant with a requirement to maintain at least $$10I0 million in combined cash and borrowing availability with Silicon Valley Bank for the quarter ended SeptemberSeptember 30, 2008 through FebruaryPebruary 2009.2009, andand Increasingincreasing to $15 million thereafter.thereafier.

In addition, the interestinterest raterate on borrowings under thethe Loan Agreement was increased by 1%per annum and we paid an up-front,up-&out, one-time modification fee of $125,000.$125,000.At September 30, 2008, we were in compliance with all of the financialfinancial covanants,covenants, as modified inin SeptemberSeptember 2008, under thethe Loan Agreement.

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On JanuaryJanuary 26,20, 2009, the Company and Silicon Valley Bank modified the Loan Agreement, effective as of December 30, 2008. The modification to the Loan Agreement contains thethc followingfollowing amendments, amongamong others:others;

(i) We decreased thethe am_untamount avai_ab_eavailable under th_the LoanL_an Agreeme_tAgreement fr_mfrom $5___$50.0 mi__i_nmillion t_to $35__$35.0 mi__i_n;million;

(ii) We extended thethe maturity date of the Loan Agreement toto September 30, 2010;20101

0ii)(iii) We established minimum interestinterest rates payable onon amounts drawn under thethe Loan Agreement, which includeinclude an interest rate floorfloor of 4.25%4.25% on amounts subjectsubject to Silicon Valley Bank's primeprime raterate andand an interestinterest rate floor of 2.0%2,0%onon amounts subjectsubject toto the LIBOR rate;rate;

(iv) WeWc changed formulas for determiningdetermining quarterly adjustments to margins applicableapplicable to prime rate and LIBOR raterate and formulaformula for unused revolving lineline fee fromfrom formulas basedbased on the totaltotal funded debt ratio to formulasformulas based on EBITDA (earnings(earnings before interest,interest, taxes,taxes, depreciation and amortization) minus capital expenditures;

(v) We increasedincreased the frequency ofofcertaincertain financial reportingreporting requirements from quarterlyquarterly to monthly as requested by Silicon Valley Bank;

(vi) We'iVe modified the minimum adjusted quick ratioratio financialfinancial covenant to requirerequire a minimum adjustedadjusted quick ratio of 0.800,80 to 1.001.00 forfor the fiscal quarter ended December 331,l, 2008 and as of thethe end of each fiscaltiscaI quarter thereafter;

(vii) We deleted the minimum consolidatedconsolidated EBITDA financial covenant;

(viii) We added a financial covenant requiringrequiring consolidated EBITDA minus capital expenditures to be atat leastleast (a) ($1,000,000)($1,000,000) with respect toto thethe fiscal quarters ending December 31, 2008 and March 31, 2009, (b) $1.00$1.00 with respectrespect to thethe fiscal quarter ending JuneJune 30, 2009, (c) $1,750,000$1,750,000 with respect to the fiscal quarter ending September 30, 2009, and (d) $3,500,000$3,500,000 with respect to the fiscal quarter ending December 31,200931,2009 and each fiscal quarter thereafter;thereafler; andand

(ix)(ix) We modified thethe minimum liquidity financial covenant toto require a minimum liquidityliquidity amount of $$17.t7.55 million measured at the end of eacheach fiscalfiscal month throughthrough August 31, 2009 and a minimum of $20 million at'theat the endend of eacheach fiscalfiscal month thereatter.thereaiter. In addition,addition, we are requiredrequired to maintain at leastleast 40% ofoF our totaltotal cash, cash equivalentsequivalents and short-termshort-term investments with SiliconSilicon ValleyVafley Bank.

As of December 31,2008,31,2008, we were inin violationviolation of our minimum profitability covenantcovenant under the Loan Agreement. However, Silicon Valley Bank subsequently waived non-compliance of thisthis covenant in thethe form of the modificationmodiiication toto thethe Loan Agreement executed on January 26, 2009.2009, ]InIn connection with this modification, we paidpaid Silicon Valley Bank a modification feefee of $52,500$52,500 and aa revolving lineline renewal feefee of $175,$175,000.000.

At December 31, 2008 and 2007, we had $27.1$27.1 million and $25.0$25.0 million, respectively, inin borrowings outstanding, and had issued outstanding standby lettersletters of credit of $2.6$2.6 million andand $2.9$29 million, respectively, under thethe Loan Agreement.

To further capture cost savingssavings fromfrom our integration efforts,efforts, we are restructuring ourour operations min The Netherlands. We expect thatthat our operations inin The Netherlands will become primarily salessales andand product management.,nianagement, with strategicstrategic supportsupport from locations outside The Netherlands. As this plan has not yet beenbeen finalized,hnalized, we caunotcannot yet determine thethe amountamount of any futurefuture restructuring charges we may incurincur and thethe timingtiming of such charges. In addition,addition, in thethe future, we will be further reducing the operational servicesservices we purchase fromfrom KPN as integrationintegration projects are completed.

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We anticipate that the December 331,t, 20082008 balance of $56.9$56.9million inin cash and cash equivalents, together with expectedexpected net cash flowflow generated from operationsoperations and bank borrowing availability,avaiiability, wiltwill be sufficient toto fundfund ourour operations and capital asset expenditures for the next twelve months. We expect capital asset expenditures to be approximately $15.$15.00 million inin 2009.

Year Ended December 31, 2008 Compared to Unaudited Pro FormaForms Year Ended December 31, 2007

The following tabletable presents Qurour results of operationsoperations forfor thethe year endedended December 31, 2008 compared toto our pro formafonna combinedcombined results of operations for the year ended December 31,2007.31,2007, The comparison of our resultsresults of operations forfor thethe year endedended December 31, 20082008 compared toto propro formafonna combined results of operations for thethe yearyear ended December 31, 2007 isis being provided as supplemental information. We believe the comparison ofol'ourour results of operatiansoperations for the year ended December 31,200831,2008 to thethe pro formaforms combined results of operations for thethe year ended December 31, 2007 isis a more meaningful comparison than the comparison to our actual resultsresults of operations forfor thethe yearyear ended December 331,I, 2007.2007, as these resultsresults contain thethe historical results ofKPNof KPN GCS for the firstfirst nine months of 20072007 andand the resultsresults of the combined company forfor the fourth quarter of 2007.

The proprOformaforms results of operations forfor the yearyear ended December 31,200731,2007 reflect the combined historicalhistorical results of iBa_isiBasis and KPN GCS asas if the KPN Transaction had occurred as of thethe beginningbeginning of this period, includingincluding certain pro formaforms adjustments. These pro formaforms adjustments includeinclude amortizationamortization expenseexpense of$11.0of $11.0 million related to certain intangible assets resultingresulting fromfrom the KPN Transaction, and the elimination of $2.9$2.9 million inin revenue andand data communicationscommunications and telecommunicationstelecommunications costscosts for revenue transactionstransactions betweenbetween iBasis and KPNKIN GCS during thethe periodperiod of 2007 prior to the KPN Transaction.

IJllauUn au diteddl lcd Pro FormFormsa Year ]EndedBaaed YeiuY_ar Ended EleCelllberDecember 31_st, ][IccelnberDecember 31_3I, 20_82000 20072002 (In(rn millions,mlulons, except per shareshare data)data) Total net revenue $$1,1,323.6323.6 $$1,1,390.6390.6 Data communicationscommunications and telecorrmamfieationstelecommunications costscosts 1,187.31,187.3 1,248.21,248,2 Gross profit* 136.3136,3 142.t42.44 Gross margin 10,3%10.3/o 10._%10 2% Engineering and network operations endand selling, generalgeneral and administrative expensesexpenses 98.298.2 101.4101.4 Depreciation and amortization 32.032.0 30A30.1 ImpairmentImpairment of goodwill 214,7214,7 Income (loss)(loss) fromfi om operations (208.6)(208.6) 10.910.9 Net income (loss)floss) $ (231.0)(231.0) $$3.3A9 Basic andand diluted net incomeincome (loss)floss) per share $ (3,15)(3,15) $$0.0.1010

Net revenuerevenue lessless data communications and telecommunications costs.

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Total revenue forfor thethe year ended December 31,200831,2008 of $1,323.6$1,323,6 million was 5% lower than pro formafonna revenuerevenue of $1,390.6$1,390.6 million forfor 2007. The breakdown of'totalof total revenue forfor thethe yearyear ended December 31, 2008 compared to pro formaforms year ended December 331,I, 20082008 isis as follows:

UnaudnedUneedited proPro FormaForme YtarVeer Ended Year Ended December al,3l, December 3Lst, 20082000 20072007 ttn(In millionmalune)J) Trading $$985.985.00 $$1,1,082.8082,8 OutsoercingOutsourcing 242.0242.0 197.3197.3 Retail 96.696.6 110.5110.5 Total $$1,1,323.6323.6 $$1,1,390.6390.6

The decrease in Trading revenue reflects,reflects, inin part, thethe current downturn inin the U.S.V.S.prepaid callingcalling card market. Traffic we receive from prepaid callingcalling card providersproviders andand certaincertain wholesale Trading easternerscustomers whose traffictrafiic comes fromfrom prepaid calling card providers, declined significantly in the second tialfhalf of 2008. The downtttmdownturn in thethe U.S.US. prepaidprepaid calling card market is primarily a resultresult of thethe effect of thethe currentcurrent adverse economic conditionsconditions in thethe U.S.V.S.on immigrant communities that comprise filethe majority of this market. Our Outsourcing revenue increasedincreased to $242.0$242.0 million forfor the year ended December 31, 2008 fromfrom pro formafonna $197.3$197.3 million inin 2007. The year-over-year increase is due to increasedincreased traffic fromfrom KPN and itsits affiliates and thethe inclusion of the TDC traffic,traffic, which began inin thethe second quarter of 2008. Retail revenuerevenue declineddeclined to $96.6$96.6 million inin the year endedended December 31, 2008 from pro formaforms $1105$110.5 million in 2007. Our Retail revenue was impacted by our transparenttransparent pricingpricing initiativeinitiative in the firstfirst half of 2008. In addition, thethe U.S.U.S.recession andand changes inin immigration patterns flattened our growth year-over-year.

Minutes of traffic were 23.523.5 billion inin thethe year endedended December 31, 2008,2008, approximatelyapproximately fiatflat with pro formafonna combined minutes of 23.623.6 billion inin 2007. Average revenuerevenue per minute was 5,635,63 centscents forfor thethe year ended December 31, 2008, compared toto pro formaforms 5.885.88 cents inin 2007. Average cost per minute, defined asas totaltotal data communications and telecommunications costs divided by minutes of traffitraffic,e, was 5.055.05 cents for the year endedended December 331,t, 2008, compared toto pro forma 5.285,28 cents inin 2007. Average margin per minute, defined as totaltotal revenue lessless totaltotal data communicationscommunications and telecommunications costs divideddivided by minutes of traffic,truffic, was 0.580.58 cents for year ended December 31, 2008, compared to pro formaforms 0.600.60 centscents inin 2007.

Total operatingoperating expenses were $98.2$98.2 million in the year ended December 31, 2008, compared toto pro formaforma $101.4$101.4 million inin 2007. Pro formaforms resultsresults for 2007 include $4.5$4.5 million inin one-time charges, which included retroactiveretroactive regulatory feesfees of $2.6$2.6 million, stock option analysisanalysis expensesexpenses of $0.7$0,7million, merger related and purchase accounting adjustmentsadjustments of $0.9$0 9 million andand other adjustments of $0.3$0 3 million. Excluding one-timeone time charges inin 2007, operatingoperating expenses increased slightlyslightly inin thethe year ended December 31, 2008 compared toto pro formaforms 2007. The year-to-year increaseincrease in expenses primanilyprimarily reflects investmentsinvestments we havehave made to integrateintegrate thethe operations of thethe combined companycompany toto achieveachieve operational synerg_es.synergi as.

Depreciation and amortization was $32.0$32.0 million in the yearyear endedended December 31, 2008, compared to pro formsforms $30,1$30,1 million inin 2007. The increase primarily relates to additionsadditions to property andand equipment to support our integration efforts, as well as additionaladditional amortizationamortization of tangible and intangibleintangible assetsassets acquired in the TDC transactiontransaction on April I,1,2008.

Subsequent to the end of the thirdthird quarter of 2008, we experienced a sharpshaft decline inin ourour stock price. We believe this decline was principally driven byby circumstancescircumstances that oecorredoccurred subsequent to thethe end of thethe third quarterquarter including,including, but not limited1imited to, an extraordinary declinedecline inin thethe stock market as a

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wholeand otherfactorsspecific to oarour stockstock price. As a result,result, when we performedperformed our annual impairment testtest as of December 31, 2008, we determined that we had snan impairmentimpairment lossloss on goodwill of $214.7$214.7 million.

Since December 31, 2008, ourour market capitalization has continuedcontinued toto decline. As aa result, itit isis reasonablyreasonably possiblepossible thatthat there could be anan impairment of our intangible assets and/orand/or our remaining goodwill in thethe nearnear termterm andand the amounts could be material.

Off-BalanceOft'-Balance Sheet Arrangements

Under accountingaccounting principlesprinciples generally accepted inin the U.S.,U.S., certaincertain obligations and enmmitmentscommitments are not requiredrequired to bebe includedincluded inin the consolidated balance sheets and statements of operations. These obligations and commitments, while entered intointo in thethe normal course of business,business, may have a material impact onon liquidity. We do not havehave any rdationsitipsrelationships with uneonsolidatadunconsolidated entitiesentities or financialtinancial partnerships, suchsuch asas entities often referredreferred toto as structured financefinance or special purpose entities,entities, which would havehave beenbeen established for the purposepuqiose of facilitatingfacilitating off-balance sheetsheet arrangementsarrangements or other contractually narrownarrow or limited purposes.puqsoses. As such,such, we areare notnot exposed to any financing,financing, liquidity,liquidity, market or credit riskrisk that could arise ififwe hadhad engaged in such relationships.relationships,

Contractual Obligations

The following table summarizessummarizes our futurefuture contractual obligations asas of December 31, 2008:

l'ayraentPs wentpueDstesDueDate$ Le.thanLest than 11o23 iox 2to33to3 3to5 Afteratter Tolalzotel . ti Year YeatsYears Yea._.___Years Years 5S Years Onps thousands)thoussucs) Bank borrowings $27,080$27,080 $ -- $27,080$27,080 $-$—$-$ —$ -- InterestInterest on bank borrowings(t)borrowings(l) 2,3692,369 1,3541,354 1,0151,015 Capital leaselease obligations 877 577 300 Operating leasesleases 6,1406,140 2,7842,784 877 392 570 1,5171,517 Purchase commitmentscommitments forfor termination of minutes 20,54320,543 20,54320,543 -- -- Total $57,009$57,009 $25,258$25,258 $29,272$29,272 $392 $570 $1,517$1,517

(I)(1) InterestInterest payment amounts onon bank borrowingsborrowings are projected using market rates as of December 331,I, 2008. Future interestinterest payments may differdifFer from these projections based on changeschanges inin market interestinterest rates.

We adopted FIN 48 as of JanuaryJanuary 1,I, 2007. As of December 31, 2008, the total amount of netnet unrecognized tax benefits for uncertainuncertain tax positions andand the accraalaccrual forfor thethe related interestinterest and penalties was $0,$0.99 million. We areare unable to make a reasonablyreasonably reliable estimate of when cash settlement, if any, will occur with a tax authorityauthofity as the timingtiming of examinations andand ultimate resolution &theseof those examinations is uncertain.

As of December 31, 20082008 and 2007, we diddid not have anyany material purchase obligations, or other material long-termlong term commitments reflectedreflected on our consolidatedconsolidated balance sheet.sheet.

New Accounting Pronouncements

InIn September 2006, thethe Financial Accounting Standards Board (FASB) issuedissued SFAS No. 157, "Fair Value Measurements",Mettsurententr", ("SFAS(nSFAS No. 157").157n). SFAS No. 157 establishes a framework for measuring fair value andand requires expanded disclosures regardingregarding fairfair value measurements. This accounting standard isis effectiveeffective for financial statements issued for fiscal yearsyears beginning afterafier November 15, 2007. However, in

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January2008,the FASBissuedFASBStaffPositionFAStFAS 157b,57-b,Effective Date of FASB Statement No.Na, 157/57 ("FSP FAS 157- b"). FSP FAS 157-b157-b permitspermits entities toto elect to defer thethe effective date of SFAS No. 157 for allail nonfinancial assets and nonfinancial liabilities, except thosethose thatthat are recognized or disclosed at fairfair value in the financialfinancial statements on a recurringrecurring basis. We have elected toto deferdefer the adoptionadoption of SEASSFAS No. 157 forfor thosethose assets andand liabilities included inin FSP FAS 157-b. The adoption of SFAS No. 157 diddid not have a material effect on ourour financial position, resultsresults of opemtiousoperations and cash flowstlows forfor thethe year ended December 31, 2008.

On January l,1, 2008, weive adopted Statement of Financial Accounting Standards (SFAS) No.No, 159, "The Fair ValueYalue Option forfor FinancialFinanciai Assets and Financial Liabilities, Including an amendmentamendment of FASB Statement NO.No. 115" (SFAS(SFAS No. 159).159).SFAS No. 159 permits entities to choosechoose to measure many financialfinancial instrumentsinstruments andand certain other items at fair value, which areare not otherwiseotherwise currentlycutrently requiredrequired to be measured at fairfair value. Under SFAS No. 159, thethe decision toto measure items at fair value isis made atat specified electionelection dates onon anan instrument-by-instrumentinstrument-by-instrument basis andand is irrevocable.irrevocable. Entities electing thethe fairfair value option are required to recognize changes inin fair value in earnings and toto expense upfront costacosts and fees associated with thethe itemitem for which the fair value option is elected. The adoption of SFAS No. 159 did not have a material effect on our financial position, results of operations and cash flows forfor thethe yearyear endedended December 31, 2008.

InIn December 2007, thethe FASB issuedissued SFAS No. t4t141 (revised(revised 2007) ("SFAS No. I41W'),141R"),"Business"Busiiicss Combinations" andand SFAS No.No, 160 ("SFAS("SFASNo. 160"), "Noncontrolling"Noncantrolling Interests in ConsolidatedCoiisolidated Financial Statements, an amendment ofof Accounting Research BulletinBattettn No. 51."51."SFAS No. 141R will change how business acquisitions are accounted forfor and will impactimpact financial statements both on the acquisitionacquisition date andand in subsequent periods. SPASSFAS No. 160 will change thethe accountingaccounting and reporting for minority interests, which will be reeharacterizedrecharacterized as noncontrollingnoncontrolling interestsinterests and classified as a component of equity.equity, SFAS No. 141R141Randand SPASSFAS No. 160 areare effective beginningbeginning thethe firstfirst fiscal quarter of 2009. Early adoptionadoption isis not permilted.permitted, SFAS No. 141R may give rise to more volatility inin our resultsresults of operationsopemtions forfor futurefuture acquisitions.acquisitions.

In March 2008, thethe FASB issued SFAS No. 161 ("SFAS No.No, 161"), "Disclosures aboutabou t Derivative Instn_mentsInstrunr en re and Hedging Activities--anActivities —an amendmentaniendment of FASB Statement No.Na. 133."I33."The standard is intendedintended to enhanceenhance thethe current disclosure frameworkfinmework inin StatementStatement 133, Accounting for Derivative Instruments and Hedging Activities. The standard requires thatthat objectives forfor using derivative instrumentsinstruments be disclosed in terms of underlying risk and accountingaccounting designation. SFAS No. 161 isis effective forfor fiscalfiscal years and interiminterim periods beginning afterafier November 15, 2008, with early adoption encouraged,encouraged. We donotdo not expect thethe adoption of SPASSFAS No. 161161 will have a material effectetYect on ourour financialfinancial position,position, resultsresults of operations endand cash flows,tlows.

In April 2008, the FASB issuedissued FASB Staff Position No. FAS 142-3, "Determination"Determtnatian of thethe UsefulUs%I Life of Intangible Assets" ("FSP("FSP 142-3"). FSP 142-3 is effectiveeifective forfor financialfinancial statementstatement issuedissued for fiscalfiscal years beginning after December 15, 2008 and interiminterim period within thesethose years. FSP 142-3 amendsamends thethe factorsfactors thatthat shouldshould be considered in developing renewal or extensionextension assumptionsassumptions used to determine the usefuluseibl life eraof a recognized intangible asset, under SFAS No. 142, "Goodwill"Goadwl fl anda&id OtherGiber IntangibleIntangible Assets" ("SFAS No. 142"). FSP 142-3142 3isis intended to improveimprove the consistency betweenbetween thethe usefuluseful lifelife of an intangible asset determined under SFAS No. 142 and thethe periodperiod of expected cash flows usedused to measure thethe fair value of the asset under SFAS No. 141R and otherother generally acceptedaccepted accountingaccounting principles. We do not expectexpect thethe adoption of FSP 142-3 to have a material effect on our financial position, results of operations and cash flows.fiows.

In May"2008, the FASB issuedissued SFAS ("SFAS("SPAS No. 162"), "The HierarchyHierarchy of Generally AcceptedAccountingAccepted Accounting Prlneiples."Prirrciptes. SFAS No. 162 identifiesidentifies filethe sourcessources of accountingaccounting principles and the frameworkframework for selecting thethe principles used in the preparation of financial statements thatthat are presented inin conformityconformity with generally acceptedaccepted accounting principles.principles. SFAS No. 162 becomes effective 60 days

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followingthe SecuritiesandExchangeBxchange Commission's approval of the Public Company Accounting Oversight Board amendmentsamendments to AU Section 411, "The Meaning of Present Fairly in Conformity With GeneeallyGenerally Acceptedttccepted Accounting Principles."principles n We do not expectexpect thatthat thethe adoption of SFAS No. 162162 toto have aa material effect onon our financial position, results of operations andand cash flows.

Item 7A.VA. QuaniitativeandQualitativeDtselosuresAboutMarketRiskQuantitative and {tualitative DlsclosurasAbaut Market Risk

Our primary market risk exposure isis related to interestinterest rates and foreignforeign currency exchangeexchange rates. We are exposed toto foreign currencycurrency risk which cancan createcreate volatility in earnings andand cash flows fromfrom period toto period. Historically, KPN GCS sought toto economically hedgehedge a portion of its foreignforeign currency riskrisk arising from foreign exchange receivablesreceivables andand foreignforeign currency-denominated forecastedforecasted transactions.transactions. Foreign exchange contracts were used to fix or protect thethe exchangeexchange rate to be used for foreign currency-denominated transactions. Hedge accounting was not appliedapplied in the historical financial statements of KPN GCS. We do notnot currently engageengage inin trading market risk sensitive instruments or purchasing hedginghedging instruments, whether interestinterest rate, foreign currency exchange, commodity price oror equity price risk and have notnot purchased options oror enteredentered intointo swaps or forward or futures contracts.

Our revenuesrevenues are primarily denominated inin U.S.U.S.dollars or autos.euros. Thus, we are exposed toio foreign currencycurrency exchangeexchange rate fluctuationsfluctuations asas the financialfinancial results and balances of ourour foreignforeign entities are translatedtranslated into U.S.U.S.dollars.doliars. As exchange ratesrates vary, these results, when translated, may vary fromI'rom expectations andand may adverselyadversely impactimpact our resultsresults of operations andand financialfinancial condition.condition. For example,example, ififthethe dollar weakens relative toto thethe euro,euro, ourour auroeuro denominated revenues and expenses would increaseincrease when stated in U.S.U.S.dollars. Conversely, if thethe U.S.U.S.dollar strengthensstrengthens relativerelative toto the euro, our euroeuro denominated revenuesrevenues andand expenses would decrease.decrease.

Our primaryprimary interest rate risk isis thethe risk on borrowings under our bank lineline of credit, which isis subject to interest mtearates based on thethe bank's primeprime raterate or LIBOR, plusplus a margin. We had $27.1$27.1 million inin borrowings under our bank lineline of credit at December 31,3I, 2008. A change inin the applicable interest rates would also affectaffect thethe rate at which we couldcould borrow fundsfunds or finance equipment purchases.purchases. Our capital leaselease obligations are fixedfixed rate debt.

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Item 8. Financial Statements and SupplementarySupplementary Data

IndexIndex to Consolidated Financial Statements

~PE 0 _Cg_n.,_QJIdatedC, lld. 000FinancialI S_tateme__nts:'.I.. Itdi_epo!_nt~fld d Regislercdltd PPIEPublic Account, jng_Fjrr__fi 64 _onsolidateddConsolidated Ba_nce_She¢Balance Sheetss_as_as o~fDof_mbe_cember 331,, 20Q_82008 an__2007anA 21007 6666 .C..o.!lsol_id_a_t&d_S_tCo!Isolidatnd Stateta!_rt_n«!Its1;_of Qp_orOperatriets for thehe"Three".!tee Yea_Years ERdedEnded Dcccn_berDecember 3!,3 l,2_Q.08~20S 6767 'l £onsgl_i_daledConsolidated StatemenlsStatcftaen s o£ofStStock~cholders'oe_k_uSty E forfor tthehe TbThree'ee Year_;.Years Endefl__erEnded Dither %_2008l 2008 68_68 (2_t_.te_nentaCalid d «ea!~ICof Cash. hPFlows for_.lhef kh~hEThree )(__Ej_fledd dhDecember0 331 , 2008.000 69 _nsolidated~MC Ild dEFinancialI 1hStatements 7070

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

InIn our opinion, the consolidated financial statementsstatements listed in the accompanyingaccompanying index present fairly,fairly, in all material respects, the financial position of iBasis, Inc. and itsits subsidiariessubsidiaries at December 331,I, 2008 and 2007, andand the results of theirtheir operations andand their cash flows for thethe years then ended inin conformity with accounting principlesprinciples generally accepted inin the United States of America. Also inin ourour opinion,opinion, thethe Company maintained, inin all material respects, effective internalinternal control over financial reporting as of December 31, 2008, based on criteriacriteria established in lnternalInternal Control--IntegratedConn oi—/niegrared FrameworkFrarrreivork issued by/heby the Committee of SponsorlngSponsoring Organizations of thethe Treadway Commission (COSO). The Company's management isis responsibleresponsible forfor thesethese financialfinancial statements,statements, forfor maintaining effective internal control over financialfinancial reporting and forfor itsits assessmentassessment of thethe effectiveness of internalinternal control over financialfinancial reporting, includedincluded in Management's Report on InternalInternal Control over Financial Reporting appearing under ItemItem 9A. Our responsibilityresponsibility isis to expressexpress opinions on thesethese financial statements andand on thethe Company's internal control over financialfinancial reporting based on our integratedintegrated audits.audits. We conductedconducted our audits inin accordance with thethe standardsstandards of the Public Company Accounting Oversight Board (United States).States), Those standards require thatthat we plan and perform the audits toto obtain reasonablereasonable assuranceassurance about whether the financialfinancial statements are freeflee of material misstatement and whether effectiveeffective internalinternal control over financial reporting was maintained inin all material respects.respects, Our audits of thethe financial statements includedincluded examining, on a testtest basis, evidence supporting the amounts andand disclosures inin the financialtinancial statements, assessing the accounting principles used and significantsignificant estimates made by management, andand evaluating thethe overall financialtinancial statement presentation. Our audit of internal controlcontrol over financialfinancial reporting includedincluded obtaining an understandingunderstanding of internal control over financialfinanoial reporting,reporting, assessing thethe risk thatthat aa material weakness exists, and testingtesting andand evaluating the design andand operatingoperating effectiveness of internalinternal control based on the assessed risk.risk. Our auditsaudits also includedincluded performing such otherother procedures asas we consideredconsidered necessary inin thethe circumstances.circumstances, We believe that ourour audits provide aa reasonable basis forfor our opinions.

As discussed inin Notes 1 and 15 to the consolidatedconsolidated financialfinancial statements, thethe Company hashss enteredentere.d intointo significantsignificant _ansactionstransactions with Royal KPN N.V.N.V, (parent Company),company), aa relatedrelated party.party,

A company'scompany's internalinternal control over financial reporting is a process designed to provide reasonable assuranceassurance regarding the reliabilityreliability of financialfinancial reporting and thethe preparation of financial statements forfor external purposes in accordance with generally accepted accounting prineiplas.principles. A company's internalinternal control over financial reporting includes thosethose policies and procedures thatthat (i) pertain toto thethe maintenance of recordsrecords that, in reasonablereasonable detail, accurately and fairly reflect the transactions and dispositions ofthethe assets of the company; (ii) provide reasonable assurance thatthat transactions are recorded as necessary toto permit preparationpreparation of financialfinancial statementsstatements in accordanceaccordance with generallygenerally accepted accounting principles, and thatthat receiptsreceipts andand expendituresexpenditures of thethe companycompany are being made only inin accordance with authorizations of management and directors of the company;company; and (iii) provideprovide reasonablereasonable assuranceassurance regarding prevention or timely detection of unauthorized acquisition, use, oror disposition of thethe company's assets that could have a material effecteffect on thethe financial statements.

Because of its inherent limitations, internalinternal control over financial reportingreporung may not prevent or detect misstatements. Also, projectionsprojections of anyany evaluation of effectiveness toto future periods are subjectsubject toto the risk that controls may become inadequate because of changes inin conditions, or thatthat the degree of compliance with the policies or procedures may deteriorate.

PricewaterhoaseCoopersPricewaterhouseCoopers LLP Boston, Massachusetts March 13, 2009

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Table2'able ofC.ont_Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TothcTo the Board of Directors and Stockholders of iBasis,iBasis, Inc.Inc.

In ourour opinion, the accompanying combined statementsstatements of operations, of stockholders equityequity and of cash flows present fairly, in allall material respects, the financialfinancial position ofKPNof KPN GCS (predecessor toto iBasis,iBasis, Inc.)inc.) and itsits subsidiaries, at December 31, 2006, and thethe resultsresults of theirtheir operations and theirtheir cash flowsfiows for thethe year inin thetile period thenthen ended, inin conformity with accounting principles generally accepted inin the United States of America. These financialfinancial statements are the responsibilityresponsibility of the Company's management. Our responsibilityresponsibility is to express an opinionopinion on thesethese financial statements based on our audits.audits, We conductedconducted our auditsaudits of these statements in accordance with the standards of the Publicpublic Company Accounting Oversight Board (United(United States). Those standardsstandards require that we plan and perform thethe audit to obtain reasonablereasonable assuranceassurance aboutabout whether thethe consolidated financialfinancial statements are free ofmatarialof material misstatement. An auditaudit includesincludes examining,examining, on a test basis, evidence supporting thethe amountsamounts andand disclosures inin the consolidated financial statements, assessingassessing thethe accounting principlesprinciples used and significantsignificant estimates made by management, and evaluating thethe overall financialfiinancial statement presentation.presentation. We believebelieve that our auditsaudits provideprovide a reasonablereasonable basis for our opinion.

As discussed inin Notes I1 and 15 to the consolidated financialfmancial statements, thethe Company has entered into significantsignificant transactions withivith Royal KPN N.V.N.V. (the(the parentparent company), aa relatedrelated party.party.

June t19,9, 2007, except for Note 22 "Net"Net incomeincome (loss)(loss) per share" and Note 17 "Foreign currency translation of historical KPN GCS financial statements", asas to which thethe date is March 14, 2008.200g.

Priee'.vatcrhouseCoopcrsPricewaterhouseCoopers AccountantsN.V,N.V.

/s/H.C./s/ H.C. WOSTW()ST RA

H.C.H.C.WltstWtlst RA

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iBasls,iBasis, Inc.lne.

Consolidated Balance Sheets

DecemberDecesnber 31731 ., 20082000 20072002 (Inun thousand_thousands, except perpec shAredata)share data) Assets Current assets:assets: Cash andsnd cashcash equivalents $$56,56,912912 $$63,63,735735 Short-term marketable securities -- 1,9991,999 Accounts receivable andand unbitiedunbilled revenue-_extemalrevenue —external parties, natnet of allowanceallowance for doubtful accounts of $5,178$5,178 andand $12,924,$12,924, respectively 234.946234,946 204,883204,883 Accounts receivable--relatedreceivable —related parties 2,0532,053 Prepaid expensesexpenses andand other current assets 6,4776,477 4,6874,687 Total currantcurrent assets 300,388300,388 275,304275,304 Property and equipment, net 34,83634,836 34,96634,966 Other assets 1,5731,573 7,0087,008 IntangibleIntangible assets, net 87,20687,206 93,80093,800 Goodwill t7,32417 324 248,795248 795 Total assets $$441,441,327327 $$659,659,873873 Liabilities andand Stockholders' Equity Current liabilities:liabilitiest Accounts payable---externalpayable —external parties $$155,155,676676 $$135,135,060060 Accounts payable--relatedpayable —related parties -- 11,83911,839 Accrued expensesexpenses 151,685151,685 136,903136,903 DeferredDefened revenuerevenue 13,89413,894 11,50311,503 Current portion of long-term debt 577 755 Total current liabilities 321,8_"321,832 296,060296,060 Long-term debt, netnet of currantcurrent portion 27,38027,380 25,00025,000 DeferredDefened incomeincome taxes 2,5342,534 2,9422,942 Other long-term liabilitiesliabilities 1,0631,063 1,3811,381 Total liabilitiesliabilities 352,809352,809 325,383325,383 Commitments andand contingenciescontingencies (Note(Note 14) Stockholders'Stockholders' equityequity PreferredPrefened stock, $0,001$0,001 par value,value, anthorized--15,000authorized —15,000 shares; issued andand outstanding;--naneoutstanding; —none Common stock, $0,001$0,001 parpar value,value, anthorized--170,000authorized —170,000 shares; issued_76,204issued —76,204 sharesshares and 75,91275,912 shares, respectively; outstanding--71,228outstanding —71328sharesshares andand 74,84374,843 shares,shares, respectively 76 76 Treasury stock, 4,9764,976 andand 1.,0691,069 shares,shares, respectively,respectively, at cost 05,000)(15,000) Additional paid-in capitalcapital 337,337,590590 333,278333,278 Accumulated other comprehensive income (loss) (1,140)(1,140) 3,1553,155 Contributed capital/retained earnings (accumulated deficit) (233,008)(233,008) (2,019)(2,019) Total stockholders'stockholders' equityequity 88,51888,518 334,490334,490 Total liabilities and stoeldaolders'stockholders' equity $$441,441,327327 $$659,659,873873

The accompanying notes are an integral part ofthese consolidatedconsolidated financialfinancial statements.statements.

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T_T~abl ofof~CtuentaCo_t_t,_

iBasts,iBasis, Inc.

Consolidated Statements of Operations

Years EndedEnded DecemberDecen&her 3l_St 20082000 20072002 20062000 On(tn thousands,shansands, except per shareshsr» data)data) Net revenuerevenue from external parties $1,097,515$1,097,515 $741,293$741,293 $605,031$605,031 Net revenuerevenue fromfrom related parties 226,070226,070 197,265197,265 209,158209,158 Total net revenuerevenue $1,323,585$1,323,585 938,558938,558 814,189814,189 Costs artdand operating expenses:expenses: Data communications and telecommunicationsteleconununications eosts-_extamalcosts external parties (excluding depreciation and amortization)amortization} 1,081,4601,081,460 733,160733,160 573,966573,966 Data communications and telecommunicationstelecommunications costs--relatedcosts—related partiesparties (excluding(excluding depreciation and amortization) t05,840105,840 114,242114&242 134,347134,347 Engineering and network operations expenses 23,32023,320 13,22213,222 8,8958,895 Selling, general andand administrative expenses 74,84974,849 38,36838,368 29,81229,812 Merger related expenses -- 2,0192,019 -- Depreciation andand amortization 31,99831,998 12,74312,743 5,6935&693 Impairment of goodwill 214,651214,651 -- -- Total costs andand operatingoperating expenses 1,532,1181,532,118 913,754913,754 752,7t3752,713 Income (loss)(loss) fromfrom operations (208,533)(208,533) 24,80424,804 61,47661,476 InterestInterestincomeincome 2,0672,067 t,6801,680 269 Interest expenseexpense (3,049)(3,049) (731)(731) (32) Foreign exchange gain (loss)(loss) 3,0893,089 (1,101)(1,101) (1,339)(1,339) Other income 1,7791,779 -- -- IncOmeIncome (loss)Qoss) before income taxes (204,647)(204,647) 24,65224,652 60,37460,374 Income taxtax expense 26,34226,342 8,5298,529 17,88417,884 Net incomeincome (loss)Qoss) $ (230,989)(230,989) $$16,16,12"--"-_123 $$42,42,490490 Net incomeincome (loss)Qoss) per share:share'. Basic $ (3.15)(3.15) $$0.0.3333 $$1.1.0606 Diluted $ (3.15)(3.15) $$0.0.3333 $$1.t.0606 Weighted averageaverage commoncommon sharesshares outstanding:outstanding: Basic 73,26073,260 48,77848,778 40.12140, 121 Diluted 73,26073,260 49,18649,186 40,12t40, 121

The accompanying notes are an integral partpart of thesethese consolidated financial statements.statements.

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iBasls_igasis, lne,inc,

Consolidated Statements of Stockholders' Equity

ConlrlbutedContributed Capital/Capltas Common Stock Treasury See_k R¢l_lnedRelnlned A¢_:umACCumulatedulaled Number $0.001Sd.edl Number AdditionalAddalonal EarningsEarnlnas OIherOther Tolalrural ofat Par ofof Pakl-lnPaid-In (A¢¢uraulatcd(Accumulated Coraprchen_iveComprehensive Stockholders"Stockholdecs' Shares ValveValue Shares AmountAmount ~Ca ital ~nercctt (Ia(In thous_mdS)thousands) Balance, December 31, 20052005 $ 8,4178,41'/ $ (708)$(708) $7,7,709709 Foreign currency translationtranslation adjustments 1,0871.087 1,0871,087 Adoption of FAS 158 520 520 Net income 42,49042,490 42,49042,490 Comprehensive income 44,09744,097 Stock-based compensation 65 65 Net distributions toto related parties (27,893)(27,893) (27,893)(27,893) Balance, December 31, 20062006 23,07923,079 899 23,97823,978 Net incomeincome ofKPNof KPN GCS forfor thethe nine months endedended September 30, 2007 18,14218,142 18,14218,142 Net distributions toto related parties (27,799)(27&799) (27,799)(27,799) Stock-based compensation 63 63 Balance, September 30, 2007 13,48513,485 899 14,38414,384 KPN Transaction (see Note 3) 75,641/5, 641 $$7676 0,069)(1,069) --$332,084—$332,084 (13_85)(13,485) 318,675318,675 Exercise ofstonkof stock options 123 323 323 Exercise of warrants 148 433 433 Stock-based compensation 438 438 Net lossloss post October 1, 2007 (2,019)(2,019) (2,019)(2,019) Foreign currency translationtranslation adjustments 2,2502,250 2,2502,250 UnrealizedUnreatixed gaingain on short-term markatsbl¢marketable securitiessecurities 6 6 Comprehensive income(l)income{1) 18,37918,379 Balance, December 31, 20072007 75,9t275,912 76 (1,069){1,069) --—333,278333,278 (2,019)(2,019) 3,1553,155 334,490334,490 Stock repurchases (3,907){3,907) (15,000)(15,000) (15,000)(15,000) Exercise of stock options and warrants 292 563 563 Stock-basedStock.based compensation 2,4502,450 2,4502,450 Related partypatty contribution to equity, net of taxtax effects 1,2991,299 1,2991,299 NetNetlossloss (230,989)(230,989) (230,989)(230,989) Foreign currency translationtranslation adjustments (4,295).(4,295) (4,295)(4,295) Comprehensive lossloss (235,284)(235,284) Balance, December 31, 20082008 76,20476,204 $$7676 (4,976)$(15,000)$337,590(4,976)$(15,000)$337,590 $ (233,008)(233,008) $ (1,140)$(1,140)$88,88,518518

(i)(1) Comprehensive incomeincome for thethe year endedended December 31, 2007 includes net income of KPN GCS for thethe nine months endedended SeptemberSeptember 30, 2007 of $18,142.$18,142.

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

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iBasis,iBastsr lne.inc.

Consolidated Statements of Cash Flows

]/earsYears endedended Decem6erDecember 31_31 2008'1008 2007'1007 . 2006 (In(ln thousands)thousands) Cash flows flromOom operating activltle_activities NetNel incomeincome (loss)(loss) $(230,989)$(230,989) $5 J6,12316,123 542,4905 42,490 Adjustments toto re¢tmcilereconcile net incomeincome (loss)(loss) tolo netnet cashcash provided by operahoope rating8 activities:activitiesr ImpairmentImpairment of gondwillgoodwin 214,651214,651 -- -- DupteciatlonDepreciation endand amortizationantortization 31,99831,998 12,74312,743 5,6935,693 Tax provision related toto utilizationutilization ofpreofpre acqulsi6onacquisition net operating losses 16,82016,820 -- -- S1ock-ba_edStock-based ¢ompemahoncompensation 2,4502,450 501 65 Provision for doabtdoubtlbifitl accountsaccounts receivablereceivable 1,6221,622 -- -- ChangesChanges inin assetsassets and llabili6es,liabilities, exdttdingexcluding theIhe effecteircet of a_uisltions:acquisitions: A¢¢OtlMSAccounts refely_bl¢receivable trodsnd talbilledunbiged revenue--externalrevenu~ternai p_'6esparsee (31,685)(31,685) 22,73622,736 36,96236,962 AccountsAc coun u recelvablc--relatedwee ivsble —related pardcsparties (2,053)(2,053) 33,80733,807 (25,058)(25,058) PrupaldPrepaid expenses and other ctu_entcwrent asse_assets (1,790)(1,790) 2,9442,944 1,3431,343 OtherOker assetsmmes 435 (462) --, AccotmtsAccounts payablc-,-extemalpayabl~xtemal parties 20,61620,616 (32,206)(32,206} (43,627)(43,627) AccotmtsAccounts payable-4elatedpayable —related parties (5,798)(5,798) (926) -- DeDefacedletted re','_auerevenue 2,3912,391 172172 -- Accrued cxper_¢sexpenses 15,10515,105 3,4753,475 14,68214,682 DcfortedDeferred ir_ameincome t2_testaxes (4os)(408) (614) -- OtherOrher long-termlong. tenn llabilihosIiabflitfes (31s)(318) (207) -- N_tNet cash provided by operatingoperating aetivi6esactivines 33,04733,f147 58,086SS,OS6 32,55032,550 Cash flowsflows fromfrom tnve_hoginvesting acdvi6es:acdviries: CashCash andand cashcmh _ulvalcntsequivalents ofiBasisof iBasis onon OctoberOctolmr I, 2007 acquired in gJ'NKPN TransachonTransaction -- 5431154,711 -- PurchasesPurchases of propartyproperty andand equipment (15,955) (9,605) (3,854) Pu_cha._Pmcbase ofofccttslncertain _.¢_assetse_ florafrom TDC'rDC (11,o5o)(11,050) -- -- Matmi6_Maturities of availaNe-available-for-salefor-sale shoa-tennshort-lerm maAuiablomarketable investmentsinvcstmenls 1,9991,999 1,9941,994 -- IncreaseIncrease (decrease)(dscream) in otherother long-termIong term assetsamets 5,0CO5,000 (5.0_0)(5,000) -- Net cashcash provided byby (used(used in)In) Investing activi6esactivities (20,_)(20,006) 42,1_42,100 (3,_!)(3,854) Cash aowsflows hornBom tta,_¢ingBaancing ac6vihos:activities: P_chascsPurcitescs of common steakstock (is,00o)(H,ooo) -- -- ParilalPartial paymentpayment ooff va_tklngworking capitalcapital leanImm toto relatedrelated partyparty (4,742)(4,742) -- -- Paymentpayment fi'omflom KpNKIN relatedreated to KPNKpN Tramac[lonTransaction 55,000 DividendDividend payment toto iB_isIBasis shareholdersshareholders -- (113,0(_)(113,tklo) -- DividendDividead payment _atedrelated toto w_rrantwananl exercises (323)(3231 (468) -- Bank horrowingsborrowings 5,_05,000 25,00025,000 -- Repayment ofofbankbank horto_4ngsbowowinss (2,920)(2,920) -- -- Paymen_Payments of principalprincipal onon capitalcapital leasehase obligations (1,609)(I,dto) (369) -- Net dis_buhonsdistributions toto relatndrelated partypmty -- (27,799)(27,799) (27,893)(27,893) PayrrmntsPaymcnls on note payable totoaffillateatTiliate -- -- (1,016)(1,016) Procee._Proccerb _'omBom exerciwexercise of w0arantswanants -- 195 -- • Proceeds ftomfrom cxerctseexercise of common stock ophonsoptions 563 323 -- NetNe1 cashcash u_iinused in financingBnancing _ttvilieaace vitlcs (19,031)(19,031) (61,118"-_)(61,118) (28,----_)(28,909) EffectPffe el ofofcha_gescban fes in exchangeratestates _on cashcash an4and ¢.a_hcash equlvalemscquivaim tv (833)(833) 2,2562,256 1,9941,994 Net increaseincrease (decrease) in cash and cash equivalentsequivalents (6,823)(6,823) 41,32441,324 1,7811,781 Cash andand cashcash equlvalents_equivalents, beginning of year 63,73563,735 22,41122,411 20,20,630630 Cash andand cashcash equivalents,equivalents, end ooff year $56.56,912912 $$63,63,735735 $22,4115 22,411 SupplementalSupplmtrental di$clostm_disclosure of cubcash flow information:information. Cash paldpaM duringduring thethe yearyear forfor interest $S 2,6042,604 $5 731'131 $$3232 Cash paid dmlngduring thethe year&um forfor incomeincome taxesmaes $$20,20,549549 $$14,14,6_$608 $S 281 SupplementalSupplemeatal di_cla_odisclosure ofnen-cashofnoncash investinginvesting andand financingflnamqng ectivtti_acti vl tice Shares Issuedissued inin KINKPN Tron._achonTmnmction $$ --— $376,675$376,675 $5 -- Exercise of warrantswammts onon a net basisbasis $$6464 $$760760 $ -- PurchasesPutchases ooff prupertypmperty and equipmentcquipmcnt underumler capitalcapital le_g_leases 5$1,133l731 $8 -- $5 -- RelatedRelatedpartyparty contn'buiioncontribution tolo equityequity $$1,1,299299 $5 -- $ --

The accompanyingaccompanying notes are anan integral part of these consolidated financial statements.

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Table_f_onten_of&entente

tBasis,iBasis, Inc.lac.

Notes toto Consolidated Financial Statements

(1)(I) Business

Bush;essBusiness

retail We are aa leading wholesale carrier of internationalinternational tonglong distance telephone callscalls andand a provider of retail prepaid calling servicesservires and enhanced servicesservices for mobile operators.

Our operations consist &ourof our wholesale trading business ("Trading"),("Trading" ), in which we connect buyers and sellerssellers of international telecommuniestiunstelecommunications services,services, and our retailretail servicesservices businessbusiness ("Retail").("Retaitx). Our Trading business also includesincludes OutsoureingOutsourcing revenuerevenue whichivhich we generate asas thethe exclusive providerprovider of wholesale international voice services for specific carriercanier customers.

InIn the Trading businessbusiness we receive voice traffictraftic from buyers--originatingbuyers —originating telecommunications oarrierscamera who are interconnected toto our network via Voice over InteractInternet Protocol ("VolP")("Yolp") or traditional time divisiondivision multiplexing ('TDM")('TDM") connections, and we routeroute that traffictraffic over our network to sellers--localsellers —local service providers andand telecommunicationstelecommunications carriers inin the destination countries with whom we have established agreements toto manage thethe completion or termination of eslls.calls. We resellers offer our Trading serviceservice on a wholesale basis to earners,carriers, mobile operators, consumer VolP companies, telephony resellers terminate and otherother serviceservice providers worldwide. Our Outsourcing revenuerevenue currentlycurrently consistsconsists of intematiunalinternational voice traffic we terminate for Royal KPN and itsits affiliatesatftliates (KlaN(KPN Mobile, E-Plus and Base) and for TDC)TDC, thethe leadingleading telecommunicationstelecommunications carrier inin Denmark.

As a result of thethe combination with KPN GCS in October 20072007 (described below), more thanthan halfhalf of our traffictraffic utilizes our VolPVoIP network, while thethe balance is carried over our TDM network. The continuedcontinued migration of thethe TDM traffictraAic to our lower cost VolPVoIP network is expected toto bebe a significantsigmficant sourcesource of synergies from the KPN transactiontransaction over thethe next several years.

Our Retail business consists of retail prepaid calling cards, which are marketed through distributors primarilyprimarily toto ethnic communities within major metropolitan markets in tilethe United States, and Pingo@,pingogt, a prepaid calling service that we offeroffer and sell directly toto consumers via an eCommercoeCommerce model. Both can be private-labeled forfor other serviceservice providers. The prepaidprepaid calling card business andand Pingo leverageleverage our existing internationalinternational network and have the potential toto deliverdeliver higher margins than are typically achieved inin the wholesale Trading business.business. Iri addition,addition, the retail prepaid calling cardcardbusinessbusiness typically has a faster cash collentioncollection cyclecycle than thethe wholesale Trading business. InIn 2007 we launchedlaunched PingoBusiness, enhancements that enable businesses toto manage multiple Pingo accounts through a singlesingle administrative account.account,

We useuse proprietary, patentedpatented and patent-pending technology inin our global YelPVolP network to automateautomate the selection of routes and termination partners based on a variety of performance,performance, quality, and business metrics. We have callcall terminationtermination Asia, the Middle East, Latin agreements with local service providesprovi dere in more than 100 countries inin North America, Europe, Asia, the Middle East, Latin America, Africa and Australia.

KPNTransae_onEPN Transacrfau

On October 1,I, 2007, iBasis, Inc. andand KlaNKPN B.V.B.V, ("KPN"),(xKPNx), a subsidiarysubsidiary of Royal KPN NN.N.Y.("Royal("Royal KPN"), completedcompleted transactions ("KPN("KPN TransactionTransaction")'))pursuant to which iBasisiBasis issued 40,121,07440,121,074 sharesshares of its common stock to KPN and acquired thethe outstanding sharesshares of hvotwo subsidiaries of KPNKPiV (')KPN("KPN GCS"), which encompassedencompassed KPN' intematiortalinternational wholesale voice business. The Company alsoalso receivedreceived $55 million inin cash fromfrom KPN,KpN, subject toto post-closing adjustmentsadjustments based on thethe working capital and debt ofiBasisof iBasis and KPN GCS. ImmediatelyImmediately aideratter issuanceissuance on October I, 2007, thethe sharesshares of iBasis

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tBasis,IBasis, Inc,inc.

Notes toto Consolidated Financial Statements (Continued)

(I) Business (Continued)

common stock issuedissued to KPN representedrepresented 51% of the issuedissued and outstanding shamsshares of iBasis common stockstock on a fully- diluted basis (which included allafi of the issuedissued andand outstanding commoncommon stock and the common stock underlying outstanding "in-the-money" stockstock optionS,options, as adjusted,adjusted, and warrants to purchase common stock).

On October 8, 2007, iBasisiBasis paid a dividend inin the amountamount of $113 million at a rate of $3.28$3.28 per share to each of its shareholdersshareholders on thethe record date of September 28, 2007, the tradingtrading date immediately prior to thethe closing date of the KPN Transaction. InIn addition,addition, holdersholders of outstanding warrantswanants toto purchase our common stock will be entitledentitled to receive ua cash payment upon the futurefuture exerciseexercise of these warrants equal toto the dividend amount that would have been payable if the warrants had been exercisedexercised immediatelyimmediately prior toto the record date of thethe dividend.dividend. As of December 31, 2008, we have unexereisedunexercised warrants representingrepresenting 432,000432,000 shares, at exercise prices ranging from $6.30$6.30 to $9.00$9.00 perper share,share, andand have $1.4$1.4 million accrued forfor dividendsdividends toto be paid upon thethe potential futurefuture exercise oflheseof these warrants. InIn connection with the payment ofoflhethe dividendditddend toto shareholders,shareholders, we atsoalso increasedincreased thethe number &sharesof shares subject to unexercised stock optionsoptions and decreased thethe exercise price of thesethese stockstock option grants toto preservepreserve their value.

The officers ofiBasisof iBasis immediatelyimmediately prior toto the closingclosing of the KPN Transaction have continued toto serve as thethe officers of the combined company and one executiveexecutive OfKPNof KPN GCS, Mr. Edwin Van Ierland, was appointed as thethe Company's Senior Vice President Worldwide Sales. Upon closing of thethe KPN Transaction, Messrs.Messrs, Charles Skibo andand David Lee, twotwo independent members ofiBasis'of iBasis' boardboard of directors, resigned as membersmembem of the board of directors and thethe board of directors of iBasis appointedappointed Messrs. Eelco Blok and Joost Farwerck, twotwo executives of Royal KPN N.V.,N.V., as directors to fill the vacancies createdcreated by the resignations of Messrs. Skibo and Lee.Lee,

Although iBasis acquired all of the outstanding capitalcapital stock of KPN GCS, aiderafter the dosingclosing of thethe _ansaetion,transaction, KPN holds a majority of thethe outstanding common stockstock of iBasis andand KPN' designees are expectedexpected toto represent, atat aa futurefuture date, a majority of the Company's board of directors. Accordingly, for accountingaccounting and financialhnancial statementstatement purposes, the KPN Transaction has beenbeen treatedtreated as aa reversereverse acquisition ofiBasisof iBasis by KPN GCS underunder the purchase method of accountingaccounting andand thethe financial results of KPN GCS have become the historical financial results of thethe combined company and replace the historical financialfinancial results ofiBasisof iBasis as a stand-alone company. Thus, thethe financialfinancial results reportedreported forfor the full year 2007 include thethe resultsresults of KPN GCS alone for the firstfirst nine months of 2007 endand the financialfinancial results of thethe combined company for the fourthfourth quarter of 2007 only.

The presentation of the Statement of Stockholders'Stockholdem' Equity reflectsreflects the historical stockholders'stockholders' equity of KPN GCS throughthrough September 30, 2007. The effecteffect of thethe issuance of shamsshares ofiBasisof iBasis common stock to KPN and thethe inclusion ofiBasis'of iBasis' stockholders'stockholders' equity asas aa resultresult of thethe closing of thethe KPNKEN Transaction on October 1, 2007 is reflected in the year endedended December 31, 2007.

Prior to October i,I, 2007, KPN GCS operated as an integrated part of KPN sincesince inceptioninception and the historicalhistorical financialfinancial statementsstatements ofKPNof KPN GCS have been derived from thethe accounting recordsrecords of KPN using thethe historical basis of assets andand liabilities.liabilities. As a result, KPN GCS did not operate asas a stand-alone business and thethe historical combined financial statementsstatements may not necessarilynecessarily be representativerepresentative of amountsamounts that would havehave beenbeen reflected inin the financialfinancial statements presented had KPN GCS operatedoperated independentlyindependently of KPN.

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"[)bteTgkble c,fof CoutantsConte~nt

iBasis, Ine,Inc.

Notes toto ConsolidatedConsofldated Financialpinandal Statements (Continued)(Continued)

(I) Business (Continued)(Continued)

sales KPN GCS benefited fromfrom certain related party revenuerevenue andand purchase agreements with KPN that includedincluded sales pricesprices administrative per minute and costscosts per minute. KPN GCS also relied onon KPN for aa substantial part of itsits operational and administrative administrative such as costs support, for which it was allocatedallocated costs primarily consistingconsisting of selling, general and administrative expenses, such as costs for centralizedcentralized research,research, legal,legal, human resources,resources, payroll,payrol I,accounting, employee benefits, real estate, insurance,in suran re, informationinformation technology,technology, telecommunications,teleeommunieations, treasury and other corporate andand infrastractureinfrastructure costs. In anticipation &theof the closing oftbeof the transactiontransaction with iBasis, KPN GCS entered intointo a Framework Services Agreement with KPN in 2006, which replaced thethe revenue andand purchase agreements andand operational andand administrative support arrangements described above.

TDC Transaction

well as On April 1,I, 2008, we acquiredacquired certain assets from TDC, thethe leadingleading telecommunications carrier inin Denmark, as well as certain assets, contracts and fourfour employeesemployees of TDC'TDC subsidiarysubsidiary in thethe U.S.,U,S.,TDC Carrier Services U,S.,U.S., forfor approximately $1$11t millionmiflion inin cashcash ("TDC Transaction").Transaction" ).Pursuant toto thethe TDC Transaction, we became thethe exclusive providerprovider of a preferred internationalinternational voice services forfor TDC under a five-yeartive-year strategic outsourcingoutsourcing arrangement,anangement, and TDC will be a preferred partnerpartner for terminating traffictraffic sentsent by us intointo thethe Nordic region, consisting of Denmark, Finland,Pinland, Iceland,Iceland, Norway and Sweden.

Approximately 130 non-Nordic internationalinternational wholesale voice customers,customers, as well as allail ofTDC'ofTDC interconneetioninterconnection and bilateral agreements for inbound and outbound internationalinternational phone calls havehave been transferred toto us.us. TDC will retain its Nordic customercustomer base andand itsits pan-Nordicpan-Nordic reach.

InIn connection with the closing of the TDC transaction, we recorded $10.1$10.1 million of intangibleintangible assets,assets, primarily wholesale customer relationships.relationships. The wholesale customer relationships are beingbeing amortized over aa 5 to 10 year period using the economic consumptionconsumption method toto reflectreflect thethe diminishing cash flowsRows fromfrom these relationships in thethe future.future.

(2)(2) Summary of SignificantSignifican AccountingAccountiug Policies

Principlesprinc/pier ofConsolidation The accompanying consolidated financialfinancial statements asas of and for the year ended December 31, 2008, includeinclude thethe accounts of iBasis,i Basis, Ine.inc. and its subsidiaries. AllAN intercompany balances and transactions have beenbeen eliminated on consolidation. The accompanyingaccompanying consolidated financialfinancial statements as of andand for the year ended December 31, 2007 include thethe accountsaccounts of KPN GCS forfor the full year aridand the accountsaccounts ofiBasis,of iBasis, Inc.Inc. sincesince October 1,I, 2007. AllAN intereompanyintercompany balancesbalances and transactionstransactions between KPN GCS and iBesisiBasis since October 1,I,20072007 have beenbeen eliminated inin consolidation. The consolidatedconsolidated financial statementsstatements for thethe year ended December 31, 2006 are thethe combi_..edcombined accounts of KPN GCS, which include KPN Global CarrierCamer Services B.V.,B.V.,aa Netherlands company,company, and KPN INS,INS, Inc.,Inc., a Delaware corporation, both of which were wholly-owned by KPN prior toto October 1,I, 2007. AllAN significant intercompanyintercompany balances and transactions within these combined entities have been eliminated. Intercompany balances and transactionstransactions with KPN and itsits other subsidiariessubsidiaries ("related("related parties" or "affiliates")"affiliates" )have not beenbeen eliminated, but areare presented herein asas balances andand transactions with related parties.

UseofEstlmatesUse ofEsfirnares The preparation of thesethese financial statementsstatements andand relatedrelated disclosures inin cunformityconformity with accounting principles generally accepted inin the United States of AmerleaAmenca requiresrequires usus to (i)(i) make judgments,judgments, assumptions and estimates thatthat affectaifect thethe reported amounts of assets, liabilities,

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Table_ofTable ofContentsContents

IBasis,tBasis,Inc.Ine,

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(2)(2) SummarySummary ofofSignificantSiguiiicant AccountingAccounting PoliciesPolicies (Continued)(Continued)

revenuerevenue andand expenses;expenses; andand (ii)(ii)disclosedisclose contingentcontingent assetsassets andand liabilities,liabilities. AAcriticalcritical accountingaccounting estimateestimate isisansnassumptionassumption thatthat couldcould havehave aamaterialmaterial effecteffectononourour consolidatedconsolidated financialfinancial statementsstatements ififanother,another, alsoalsoreasonable,reasonable, amountamount werewere usedused ororaa changechange ininthethe estimatesestimates isisreasonablyreasonably likelylikely fromfrom periodperiod totoperiod.period. WeWebasebaseourouraccountingaccounting estimatesestimates ononhistoricalhistorical experienceexperience andand otherother factorsfactors thatthat wewe considerconsider reasonablereasonable underunder thethecircumstances.circumstances. However,However, actualactual resultsresults maymay differdiffer fromfrom thesetliese esthnates.estimates. ToTothethe extentextent therethere arearematerialmaterial differencesdifferences betweenbetween ourour estimatesestimates andand thethe actualactual results,results, ourour futurefuture financialfinancial conditioncondition andand resultsresults ofofoperationsoperations willwill bebeaffected.affected.

ForeignForeign CurrencyCiirreuey TranslationTranslation andaad TransactionsTraasaedans TheThe functionalfunctional currencycurrency ofofKPNKPN GCSGCSisisthethe cure.euro. ForForthethe purposespurposes ofofpresentingpresenting thethe consolidatedconsolidated financialfinancial statements,statements, thethe functionalfunctional currencycurrency ofofKPNKPN GCSGCShashas beenbeen convertedconverted intointo U.S.U.S.dollarsdollars forforbalancebalance sheetsheet aCCountsaccounts usingusing thethe exchangeexchange raterate inin effecteffect onon thethe balancebalance sheetsheet date.date. RevenueRevenue andand expensesexpenses areare Wanslatedtranslated intointo U.S.U.S.dollarsdoflars at thethe weightedweighted averageaverage exchangeexchange ratesrates inin effecteffect duringduring thethe period.period. TileThe effecteffect ofofthesethese translationtranslation adjustmentsadjustments areare reportedreported within AccumulatedAccumulated OtherOther ComprehensiveComprehensive Income,Income, aacomponentcomponent ofofstockholders'stockholders' equity.equity. TransactionsTransactions inin foreignforeign currencycurrency areare recordedrecorded atat thethe originaloriginal ratesrates ofofexchangeexchange inin forceforce atatthethe timetime thethe transactionstransactions areare effeeted.effected. ExchangeExchange differences arisingarising on (i) settlementsettlement ofoftransactionstransactions andand (ii)(ii) translationtranslation ofofsuchsuch transactions,transactions, givengiven thatthat nono settlement hashss occurred,occurred, are recognizedrecognized inin resultsresults of operations.

We have, inin thethe past, entered intointo foreign currency forward contractscontracts toto manage foreign currency exposuresexposures relatedrelated toto sales toto foreignforeign customers. We do not have designated hedges in accordanceaccordance withwith Statement ofofFinancialFinancial Accounting Standards ("SFAS")("SFASv) No. 133,"Accounting for DerivativeDen'varlve Instruments andand HedgingHedgirrg Activities", endand accordingly, any unrealized gains and losses are recorded in thethe Consolidated Statements of Operations and inin the Consolidated Balance Sheets within Prepaid expenses and other current assets or AccruedAenmed expensesexpenses and other currentcurrent liabilities.liabilities.

OtherOtherComprehenstvelneome(Loss)Camprehensivelneeme (Loss) Other comprehensive inenmeincome 0oss)(loss) primarily relates to foreignforeign enrrencycunency translation adjustments from entities with functional currencies other thanthan thethe U.U.S.S.dollar. Components of other comprehensive incomeincome 0oss)(loss) nreare includedincluded withinw th n the ConsolidatedConsohdated Statements of Stockholders'Stockholders Equity.

Cash andand CashCash Equivalents CashCash andand cashcash equivalentsequivalents consist ofof allall highlyhighty liquidliquid investmentsinvestrnents thatthat areare readilyreadily convertibleconvertible intointo cash andand havehave originaloriginal maturities of threethree months or less.

Short-termShort-term MarketableMarketable SecuritiesSecuritles Short-termShort.term marketablemarketable securitiessecurities atat DecemberDeeember 31,31, 2007 werewere classified as available-for-saleavailable-for-sale andend cernede_ried atat fairfair valuevalue andand consistconsist ofof corporatecorporate bonds,bonds, withwith onginaloriginal maturitiesmaturities atat thethe datedate of acquisitionacquisition rangingranging flfi'omom 9090 daysdays toto oneone year.yesr.

Accountsdccot_ntsRecelvableandUnbilledRevenueReceivable and Unhiiied Revenue AccountsAeenunls receivablere¢eivahl¢ andand unbilledunbilled revenuerevenue areare statedstated atat faceface value,value, lessless anan allowanceallowance forfordoubtfuldoubtful accounts.accounts. CollectibilityCollectibility ofof accountsaccotmts receivablereceivable isis reviewedreviewed regularlyregularly andand isisbasedbased uponupon ourour knowledgeknowledge ofof customerscustomers andand compliancecompliance withwith creditcreditterms.terms. TheThe allowanceallowance forfor doubtfuldoubtful accountsaccounts isisadjustedadjusted basedbased onon suchsuch evaluation,evaluation, withwith aacorrespondingcorresponding chargecharge includedincluded ininselling,selling, generalgeneral andand administrativeadministrative expense.expense. AccountsAccounts receivablereceivable and_d theirtheir relatedrelated allowancealtowence balancesbalances arearewritten-offwritten-offwhenwhen wewedeemdeem themthem uncollectible.uncollectible.

PropertyPropertyandEquipmentaad Eguipmenr PropertyProperty andandequipmentequipment arearestatedstated atatcostenst lessless accumulatedaeeumulated depreciationdepreciation andand anyanyrecognizedrecognized impairmentimpairmentloss.loss•AdditionsAdditions andandimprovementsimprovements thatthat extendextend thetheusefuluseful lifelife ofofananassetasset

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Table of ContanlfiContenjs

iBasis,iBasts, Inc.Inc.

Notes toto Consolidated Financial Statements (Continued)(Contiuued)

(2) Summary of SignificantSignifican Accounting PoliciesPoliclcs (Continued)(Continued)

are capitalized;capitalized; maintenance and repairs oreare expensedexpensed asas incurred.incurred. When assets are retired or disposed of, thethe assets and related accumulated depreciation are removedremoved from thethe balance sheetsheet and thethe resultingresulting gain or loss, ififany,any, isis reflected in thethe Consolidated Statements of Operations. In accordance with Statement of Position 98-1, "Accounting for tilethe Costs of v ComputerCompuler SoftwareSoftware Developed or Obtained forfor Internalinternal Use"Use ("SOP("SOp 98-1"), costs associated developing software for internal use arcare capitalized when both thethe preliminary project stagestage isis completed andand management has authorized furtherfurther fundingfunding forfor the project which itit deems probable of being completed. Capitalization of such costs ceasesceases no laterlater thanthan thethe pointpoint at which the project isis substantially complete and ready forfor its intendedintended use.use,

The cost of property and equipment isis depreciateddepreciated using thethe slraight-linestraight-line method over thethe following estimated usefuluseful lives of the respectiverespective assets:assets;

Asset CtassiaeattouClas$1fi¢ation EsnmEstimated2ted Usefuluseful Life Network equipmentequipment 3-73—7 years So.rareSotbvare 3 yearsyears Leasehold improvementsimprovements Lesser of Useful Life or Lease Term Other tangibletangible fixed assets 3-7 yearsyears

GoodwillGaaduill andaad Other lntangibleIntangibleAssetsAssets IntangibleIntangible assetsassets consist of goodwill, which has an indefinitaindefinite life and isis not amortized,amortized, and identifiableidentifiable intangible assets,assets, consisting of tradetrade name andand lredemarks,trademarks, customer relationships,relationships, terminationtermination partner relationships endand technology.technology.

Identifiable intangible assetsassets are being amortizedamortized using either thethe straight-linestraight-line method or economic consumption method over the followingfollowing estimatedestimated useful lives:lives:

Inl_ible Asset Amorliz.atlonAmottiaatlou Method Estimalt'daellmaled U_¢ruluseful Life Trade name and trademarks Straight-line t515 years Customer relationships Economic consumption 5-105-10 years Termination partner relationships Economic consumptionconsumption 55 years Technology Straight-line 55 years

Impairment of Propertyproperty and Equ_mentEqutpment andlntangibleaadlutaaglbleAssetsAssets tnIn accordance with SFAS No. 144 ("SFAS(oSFAS No. 144"),144), "Accounting forfor thethe ImpairmentImpairment or Disposal of Long.LivedLong Lived Assets",Asses", we reviewreview thethe valuevalue of ourour property andand equipment and intangibleintangible assetsassets for impairment whenever events or changes in circumstances indicateindicate that the canyingcarrying amount of thethe assets may not be fullyfufiy recoverable. Recoverehilit)'Recoverability of assets toto be held and used isis measured by comparing the carrying amount of anan asset group to thethe future undisceuntedundiscounted net cash flowsflows expected toto be generated by thethe asset.asset, If such assetsassets are considered toto be impaired,impaired, the impairmentimpairment recognizedrecognized isis measured asas thethe amount by which the carryingcarrying amount of the assets exceeds theirtheir fairfair value.value. Assets toto be disposed of are rcportadreported at filethe lower of the carrying amount or fairfair valuevalue lessless costacosts to sellsell.

ImpalrmentIatpalrmeut of GoodwlllGoodwill SFAS No. 142, "Goodwlll"Goodwill and OtherOther lntangibleIntangible Assets" ("SFAS(aSFAS No. 142"),142a),requirasrequires goodwill to be testedtested forfor impairment onon an annualannual basis and between annualannual teststests when events or circumstancescircumstances would more likely thanthan not reducereduce thethe fair value of a reporting unit belowbelow its carrying value.value, We test our goodwill forfor impairmentimpairment annuallyannually as of the end of the fiscaltiscal year. SFAS No. 142 requires thatthat thethe impairmentimpairment testtest be performed through the application of a two-step process. The firstfirst

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Tableof Contents

iBasis,iBasis, Inn,Inc.

Notes to Consolidated Financial Statements (Continued)(Continued)

(2) Summary of SigniticantSignificant Accounting PoliciesPoficies (Continued)(Continued)

step compares thethe carrying valuevalue of our reporting units, which are our Trading and Retail operating segments,segments, toto their estimated fair values as of thethe testtest date.date, If fairfair valuevalue isis less thanthan carrying value, aa second step must be performed to quantify the amount of the impairment,impairment, if any. The amountamount of any impairmentimpairment isis measured by the excessexcess of the implied fair value of goodwill overover its carryingcanying value.value.

RevenueRaveuueRacoguittouRecognition In accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 104, "Revenueviievemte Recognition" ("SAB("SAB 104'%104"),we recognize revenuerevenue when it isis realizedrealized or realizable and earned.earned. We considereonsidar revenue realized or realizable and earned when therethere is persuasive evidence of an arrangement, delivery has occurred or thethe service has been provided, thethe sales price isis fixed or determinable and ootloctibititycol lectibility iais reasonablyreasonably assured.

For our Trading business, traffictraffic feesfees are chargedcharged atat anan agreed priceprice forfor aa fixedAxed duration of time or capacity andand are recognized as revenuerevenue based upon usage of our network and facilities. Estimates for incentive rebates, customercustomer disputes and other allowancesallowances are reenrdedrecorded asas a reduction ofrevenucaof revenues inin thethe periodperiod thethe relatedrdated revenues are recorded. These estimates are based upon eontraetedcontmcted terms, historical experienceexperience and informationinformation currently available toto management with respect to business and economiceconomic trends.trends, Revisions toto thesethese estimates are recordedrecorded in the period in which the factsfacts thatthat give riserise toto thethe revisionrevision becomebecome known.

For our Retail business, revenue isis deferred upon activation of thethe prepaid calling cards,cards, or purchase of our web-based calling services, andand isis recognized as the prepaidprepaid balances are reduced basedbased uponupon minute usage andand service charges.

Concentration of Credit Risk andSignbqeantaud Significant Customers Financial instruments that potentially subject us toto significantsignificant concentrations of credit riskrisk areare primarily c_hcash equivalents,equivalents, short-termshort-t«rm marketable securities and accounts receivable.receivable. No external customers represented 10% or more of our total accountsaccounts receivablereceivable or net revenues for thethe periods presented. Concentrations of creditcredit risk with respectrespect toto accounts receivable are limitedlimited due toto the largelarge numbernumber of customers comprising our customer base and theirtheir dispersion acrossacross different industriesindustries and geographies.

Fair Value of FinanclalFinancial Instruments FinannialFinancial instruments anusistconsist principally of cash and cash equivalents,equivalents, short- termterm marketable securities, accountsaccounts receivable, accounts payable, accrued expenses and long-termlong-term debt. The estimated fair value of thesethese instrumentsinstruments approximatesapproximates theirtheir carryingcarrying value.

Stock-basedStork-based Compensation We account for equityequity awardsawards toto our employees under the provisions of SFAS No.No, 123R, "Share-Ba_ed"Share-Sased Payment,"Payment, "which requires us to record compensationcompensation expense based on thethe fair value of our stock-based compensation awards.

lneomeInterne Taxes We a_untaccount furfor in_meincome taxestaxes in a_rdanceaccordance witilwith SFAS N_.No. _9_109, _'Acc_unting"Accounting f_r1ncomefor income Taxes_"ThisTaxes. "This statement requires an asset andand liabilityliability approach toto accounting for incomeincome taxestaxes based upon thethe futurefuture expected values of thethe relatedrelated assets and liabilities.liabilities. Deferred incomeincome taxestaxes are provided forfor taxtax and financial reporting basisbasis differences between assets and liabilitiesliabilities at taxtax rates expected toto be in effecteffect when the basis differences reverse. Valuation allowances are providedprovided in situations where recoverability of defarreddeferred laxtax assetsassets isis notnot considered more likelylikely thanthan not.

NetIt/et lneomeIncome (Loss)(Less) Per Share Basic andand diluteddiluted net loss per common shareshare isis detarmiueddetermined by dividing net loss by thethe weighted average commoncommon shares outstanding during thethe period. Basic and

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_nlentsTable ofbontents

IBasls,iBasls,lnc,Inc,

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(2)(2) SummarySummary ofofSignificantSignificant AccountingAccounting PollelcsPoficies (Continued)(Continued)

diluteddiluted netnetincomeincome perper commoncommon shareshare isisdetermineddetermined bybydividingdividing netnetincomeincome bybythethe weightedweighted averageaverage commoncommon sharesshares andand commoncommon equivalentequivalent sharesshares outstandingoutstanding duringduring thethe period.period. InIn2007,2007,asasKPNKPN GCSGCSwaswaswholly-ownedwholly-owned bybyKPNKPNpriorprior toto OctoberOctober 1,I,2007,2007,basicbasic weightedweighted averageaverage sharesshares outstandingoutstanding waswas basedbased onon thethe 40.140. 1 millionmillion sharesshares issuedissued bybyiBasisiBasis totoKPNKPN onon thethe closingclosing ofofthethe KPNKPN TransactionTransaction forforthethe firstfirst ninenine monthsmonths ofof2007,2007,andand thethetotaltotal weightedweighted averageaverage sharesshares outstandingoutstanding &theof the CompanyCompany ofof74.774.7millionmillion sharesshares forforthethe fourthfourth quarterquarter ofof2007.2007.DilutedDiluted weightedweighted averageaverage sharesshares inin 20072007includesincludes thethe dilutivedilutive effecteffect ofiBasisofiBasis outstandingoutstanding stockstock optionsoptions andand warrantswarrants forfor thethe fourthfourth quarterquarter ofof20072007only.only, InIn2006,2006,basicbasic andand diluteddiluted weightedweighted averageaverage sharesshares representrepresent thethe 40.140.1 millionmillion sharesshares issuedissued byby iBasisiBasis totoKPN.KPN.

Neroiyew AccountingAccounrlug PronouncementsPronouncements

InIn SeptemberSeptember 2006,2006,thethe FinancialFinancial AecountingAccounting Standards Board (FASB)(FASB)issuedissued SFASSFAS No.No. 157,157,"Fair"Fair ValueValue Measarements",Measuremenrs", ("SFAS("SFASNo.No. 157").157").SFASSFASNo.No. 157157establishesestablishes aa frameworkframework forfor measuringmeasuring fairfair valuevalue andand requiresrequires expandedexpanded disclosuresdisclosures regardingregarding fairfair valuevalue measurements.measurements, ThisThis acenuntingaccounting standardstandard isis effectiveeffective forfor financialfinancial statementsstatements issuedissued forfor fiscalfiscal yearsyears beginning afterafier November 15,15,2007. However,However, in JanuaryJanuary 2008.2008, thethe FASBFASB issuedissued FASBFASB Staff Position FASFAS 157-b,157-b, EffectiveEJFective Date of FASBFASB Statement No,No. 157/51 ("FSP(FSP FAS 157-b").157b").FSP FASFAS 157-b157bpermitspermits entitiesentities toto electelect toto deferdefer thethe effectiveeffective date of SFAS No. 157 for all nonfinancialnoniinancial assetsassets and nonfinaneialnonfinancial liabilities,liabi'lities, except thosethose thatthat areare recognizedrecognized or disclosed atat fair value inin the financialfinancial statements onon a recurringrecumng basis.basis, We have electedelected toto deferdefer thethe adoption of SFASSFAS NO.No. 157157forfor thosethose assetsassets and liabilitiesliabilities includedincluded in FSP FAS 157-b. The adoption of SFAS No. 157157diddid notnot haveliave aa material effect on ourour financial position, resultsresults of operations and cash fiowsflows for the year ended December 31, 2008.

On January 1,2008,I, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, IncludingInnluding an amendment of FASB Statement No. 115" (SFAS No. 159).SFAS No. 159 permits entities to choose to measure many financial instrumentsinstruments and certain other items at fair value, which are not otherwise currentlycurrently requiredrequired toto hebe measured atat fairfair value,value. Under SFAS No. 159, the decision to measure items at fair value is made atat specifiedspecified election dates onon anan instrument-by-instrumentinstrument-by-instrument basis andand isis irrevocable. Entities electing thethe fairfair value option are requiredrequired toto recognize changes inin fair value inin earnings and toto expense up fcontfront costs andand feesfees associatedasseciated with thethe itemitem forfor which thethe fairfair valuevalue optionoption isis elected.elected. The adoptionadoption ofof SFAS No. 159159 diddid not have a material effecteffect onon our financial position, resultsresults of operations andand cashcash flows forfor thethe year endedended December 31, 2008.2008.

InIn DecemberDecember 2007,2007, thethe FASBFASB issuedissued SFASSFAS No.No. 141141 (revistxI(revised 2007) ("("SFASSFAS No.No. 141R"),g"), "Business_'Business Combinations"Combinations" and SFASSFAS No.No. 160160 ("SFAS("SFAS No.No. 160"),160"), "Nonconrroliiug"Noneontrolling InieresisInterests inin ConsolidatedConsolidated FinancialFinancial Statements, an amendment ofof AccountingAccounting ResearchResearch BulletinBulletin Pfo.No. 5/.51.""SFASSFAS No.No. 14141RIR vrifiwill changechange howhow business acquisitionsacquisitions areare accountedaccounted I'foror andand will impactimpact financialfinancial statementsstatements bothboth onon thethe acquisitionacquisition datedate andand inin subsequentsubsequent periods,periods. SFASSFAS No.No. 160160 willwill changechange thethe accountingaccounting andand reportingreporting forfor minorityminority interests,interests, whichwhich willwill bebe recharacterizedreeharacterized asas noncontrollingnoncont_olting interestsinterests andand ctassifiedclassified asas aa componentcomponent ofof equity.equity. SFASSFAS No.No. 141R141R andand SFASSFAS No.No. 160160 areare effectiveeffective beginningbeginning thethe firstfirst fiscalfiscal quarterquarter ofof 2009.2009. EarlyEarly adoptionadoption isis notnot perndtted.permitted. SFASSFAS No.No. 141R141R maymay givegive riserise toto moremore volatilityvolatility inin ourour resultsresults ofof operationsoperations forfor futuret'uture acquisitions,acquisitions.

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TableTableofofContentsContents

iBasis,igasis, inc.Inc.

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(2)(2) SummarySummary ofofSignificantSlgnificant AccountingAccounting PoliciesPolicies (Continued)(Continued)

InInMarchMarch 2008,2008,thetheFASBFASBissuedissued SFASSFASNo.No.161161("SFAS("SFASNo.No. 161"),161"),"Disclosures"Disclosures aboutabout DerivativeDerivative InstrumentsIruirumenis andaad HedgingHen'ging Activities_nActivities —an amendmentaaiendmenr ofojFASBFASB StatementBraremenr No.No. 133."/33."TheThestandardstandard isisintendedintended totoenhanceenhance thethe currentcurrent disclosuredisclosure frameworkframework inin StatementStatement 133,133,AccountingAccounting forforDerivativeDerivative Instrumentsinstruments andand HedgingHedging Activities.Activities. TheThestandardstandard requiresrequires thatthat objectivesobjectives forforusingusing derivativederivative instrumentsinstruments bebediscloseddisclosed inin termsterms ofofunderlyingunderlying riskrisk andand accountingaccounting designation.designation. SFASSFAS No.No. 161161isiseffectiveeffective forforfiscalfiscal yearsyears andand interiminterim periodsperiods beginningbeginning afteraflerNovemberNovember 15,15,2008,2008,withwith earlyearly adoptionadoption encouraged.encouraged, WeWe dodo notnot expectexpect thethe adoptionadoption ofofSFASSFASNo.No. 161161willwill havehave aa materialmaterial effecteffect onon ourour financialfinancial position,position, resultsresults ofofoperationsoperations andand cashcash flows.flows.

InIn AprilApril 2008,2008, thethe FASBFASBissuedissued FASBFASBStaffPositionStaff Posifion No.No. FASFAS 142-3,142-3,"Determination"Determination ofojibethe UsefulUseful LifeLife oflntangibleofIntangible Assets"Assets" ("FSP(vFSp 142-3").142-3").FSPFSp 142-3142-3isiseffectiveeffective forforfinancialfinancial statementstatement issuedissued forforfiscalfiscal yearsyears beginningbeginning afterafter DecemberDecember 15,15, 20082008andand interiminterim periodperiod withinivithin thosethose years.years. FSPFSP142-3142-3amendsamends thethe factorsfactors thatthat shouldshould bebe consideredconsidered inin developingdeveloping renewalrenewal oror extensionextension assumptionsassumptions usedused toto determinedetermine thethe usefuluseful lifelife of aa recognizedrecognized intangibleintangible asset,asset, underunder SFASSFASNo.No. 142,142, "Goodwill"Goodwill andavid OtherOilier IntangibleIntangible Assets"Assets" CSFASCSFAS No.No, 142").142v). FSPFSp 142-3142-3isis intendedintended totoimproveimprove thethe consistencyconsistency betweenbeuvcen thethe usefuluseful lifelife ofofanan intangibleintangible assetasset determineddetermined under SFAS No. 142142andand thethe periodperiod of expectedexpected cashcash flowsflows usedused toto measuremeasure thethe fairfair valuevalue ofofthethe asset under SFAS No.No. 141R andand other generally acceptedaccepted accountingaccounting principles.principles. WeWe dodo notnot expectexpect thethe adoptionadoption ofofFSP 142-3142-3 toto havehave a material effecteffect onon ourour financialfinancial position,position, resultsresults of operations andand cashcash tin,vs.flows.

"The InIn May"2008, the FASB issuedissued SFAS ("SFAS(vSFAS No. 162"),162v), "The Hierarchy ofojGenerallyGenerally Accepted AccountingAccounting Principles."Principles. SFAS No. 162 identifiesidentiTies the sources of aeeoantingaccounting principles and thethe frameworkfi'amework for selecting thethe principlesprinciples used in the preparation offinancialflnancial statements that are presented in conformity with generallygenetully accepted accountingaccounting principles. SFAS No.No, 162 becomes effective 60 days following the Securities and Exchange Commission's approval of thethe Public Company Accounting Oversight Board amendments to AUAV Section 411, "The Meaning ofojpreseniPresent FairlyFair/y inin Conformity WithWit/i GenerallyAcceptedGenerally Accepted Accounting Principles.Principles." "We do not expect that thethe adoption ofSFAS No. 162 toto have a material effect on our financial position, resultsresults of operations and cash flows.

(3) Purchase Accounting for KPN Transaction

VnderUnder thethe purchase method of accounting,accounting, thethe purchase price for the KPN Transaction was allocated toto the tangible and identifiableidentifiable intangibleintangible assetsassets and liabilitiesliabilities ofof iBasisiBasis onon thethe basis of theirtheir fair values on October 1, 2007, thethe closingdosing date of thethe transaction.transaction. AsAs KPN GCSGCS was notnot a publicly tradedtraded entity, thethe pwchasepurchase price for this transaction was based, inin part,pad, on thethe fairfair marketmarket valuevalue ofofiBasis'i Basis' commoncommon stock,stock. The market priceprice used toto value iBasis' sharesshares of $10.$10.75'IS was thethe dosing priceprice of thethe stockstock onon SeptemberSeptember 28,28, 2007,2007, thethe businessbusiness dayday immediatelyimmediately prior toto thethe closingclosing ofof thethe KPNKPN Transaction.

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Table_£Table stCont_}_Conteata

iBasls,iBasis,Ine,inc.

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Coutluued)

(3)(3) PurchasePurchase AccountingAccountiug forforKPNKPN TransactionTransaction (Contlnned)(Continued)

TheThe totaltotal purchasepurchase priceprice forforthisthis transactiontransaction consistedconsisted ofofthethefollowing:following:

~lo thousands iBasisoutstandingshare2onOetoberiBasis outstanding shares on October 1,2007of34,451I, 2007 of 34,451at$10.75persharoat $10.75 per share $$370,370,353353 FairFairvaluevalue ofofoutstandingoutstanding vestedvested andand unvestedunvested stockstock options,options, lessless unearnedunearned compensationcompensation 13,42513,425 FairFairvaluevalue ofofoutstandingoutstanding warrantswarrants totopurchasepurchase commoncommon sharesshares 4,6244,624 DirectDirect acquisitionacquisition costscosts 2,4532,453 DividendDividend totoiBasisiBasis shareholdersshareholders paidpaid fromfrom existingexisting iBasisiBasis cashcash andand short-termshort-term marketablemarketable securitiessecurities (58,000)(58,000) AccruedAccrued dividenddividend payablepayable fort'or outstandingoutstanding warrantswarrants toto purchasepurchase commoncommon sharesshares (2,468)(2,468) AmountAmount payablepayable totoKPNKPN forfor iBasisiBasis workingworking capitalcapital adjustmentadjustment (11,577)(11,577) Accrued severanceseverance (135)(I35) TotatTotal purchase priceprice $$3318,675I8,675

InIn determiningdetermining thethe fairfair valuevalue ofiBasis'of iBasis' identifiableidentifiable assetsassets and liabilitiesliabilities asas of October l,I,2007,2007, wewe recordedrecorded $97.7$977millionmillion of amortizing intangibleintangible assets, includingincluding tradetrade namesnames andand trademarks,trademarks, customercustomer relationships,relationships, terminationtermination partnerpartner relationships, andsnd technology.technology. The estimated useful lifelife of tradetrade namesnames andand trademarkstrademarks isis t155 yearsyears and isis being amortizedamortized onon a stl'aight-linestraight line basis. The estimated useful lifelife of customer relationshipsrelationships is 10 yearsyears forfor wholesalewholesale customerscustomers and 5 yearsyears forfor retailretail distributor relationshipsrelationships and thesethese intangible assets are being amortized usingusing anan economiceconomic consumptionconsumption methodmethod to reflectreflec diminishing cash flowsIlowh fromfram these relationships inin thethe future. The estimated usefuluseful life ofofterminationtermination partnerpartner relationships is 5 years and is being amortized using an economic consumptionconsumption method. The estimated usefuluseful lifelife of technology is 5 years and isis being amortized on a s_'aight-lin¢straight-line basis.

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TLbl_.Conten!sTdbi~eo Contents

iBasis,igasis, Inc.

Notes toto Consolidated Financial Statements (Continued)(Continued)

(3) Purchase Accounting forfor KPN Transaction (Continued)

The allocation of the purchase price to the fairfair valuesvalues of iBasis' assets andsnd liabilitiesliabilities onon October 1,1, 2007,whiehresultcd2007, which resulted in thethe recordingrecording of $248.8$248.8 million in goodwill, was as follows:foHows:

In thousands CurrantCurrent assetsassets $$128,128,875875 Property and equipmentequipment 23,25823,258 Other assets 520 Trade names andand trademarks 21,80021,800 Customer relationships 34,20034,200 Termination partner relationshipsrelationships 8,4008,400 Technology 33,30033,300 Total assets 250,353250,353 Deferred revenue I11,1,331331 Dividend payablepayable 60,46860,468 Other currentcun ant liabilities 103,469103,469 Deferred taxtax liabilities,liabilities, long term 3,5563,556 Other non-current liabilitiesliabilities 1,6491,649 Total liabilities 180,473180,473 Net assets 69,88069,880 Goodwill 248,795248,795 Total purchase price $$318,318,675675

unit. In The total $248.8$248.8 million of goedwillgoodwill has beenbeen assignedassigned toto thethe Company's" wholesale Trading reportingreporting unit. In accordance with SFAS No. 142, "Goodwill and Other IntangibleIntangible Assets,"Assets, goodwill is not being amortized. InIn thethe fourthfourth quarter of 2008, thethe Company determined thatthat the carryingcanying value of goodwill was impaired.impaired. As a result,result, thethe Company recorded a charge for the impairment of goodwill in thethe amount of $214.7$214.7 million. As as result of this impairment chargecharge and aa furtherfurther reductionreduction to the carryingcanying value of$16.8of$16.8 million forfor the utilizationutilization of praviooslypreviously reservedreserved pro-acquisitionpre-acquisition net operating losses, thethe carrying valuevalue of goodwillgoodwill has been reduced to $17.3$17,3 million as of December 31,2008.31,2008.See further diseossiondiscussion of thethe goodwill impairment chargecharge recorded inin 2008 inin Note 8 to thethe Consolidated FinancialFinancial Statements.Statements,

Working Cnp/tatCapital and Debt AdjustmentsAdjusttnents

InIn accordance with thethe ShamShare Purchase Agreement for thethe KPN Transaction, a post-closingpost closing adjustmentadjustment was required ifif (i)(i) iBasis'iBasis' working capital was lowerlower thanthan or exceededexceeded $37,100,000;$37,100,000; (ii) iBasis'iBasis' debt exceeded or was lowerlower thanthan $2,900,000;$2,900,000; (ill)(iii) the combinedcombined working capital of KPN GCS was lower than or exceeded ($6,100,000);($6,100,000);and/orand/or (iv)(iv) the combined debt of KPN GCS exceeded $0, as of thethe date of the closing of the KPN Transaction. Based on iBasis' balancebalance sheet position on the date of the dosingclosing of the KPN Transaction, working capitalcapital was $13,353,000$13,353,000 lessless thanthan thethe specified level of $37,100,000,$37,100,000, and debtdebt was $1,776,000$1,776,000 less than the specifiedspecified level of $2,900,000.$2,900,000. As a result,result, a paymentpayment of $11,577,000$1 1,577,000 was duedue toto KPN from iBasis.iBasis. Based on KPN GCS's balance sheet position onon the date of the closing of thethe KPN Transaction, working capital exceeded thethe specified level ofof($6,($6,100,000)100,000) by

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T_be.ofContentsTable of Contents

JBasls,igasls, Inc.Inc.

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(3)(3) PurchasePurchase AccountingAccounting forforKPNKPN TransactionTransaction (Continued)(Continued)

$3,945,000$3,945,000andand debtdebt waswas atatthethe specifiedspecified levellevel ofof$0.$0.AsAs aaresult,result, paymentpayment ofof$3,945,000$3,945,000waswas duedue totoKPNKPN fromfromiBesis.iBasis.

InIn2008,2008,KPNKPN forgaveforgave $0.8$0.8millionmillion inin expensesexpenses incurredincurred byby KPNKPN GCSGCSsincesince thethe closingclosing ofofthethe KPNKPNTransaction.Transaction. AsAsaa result,result, thethe amountamount duedue toto KPNKPN hashas beenbeen reducedreduced byby thisthis amountamount andand waswas recordedrecorded asasaacontributioncontribution totoequity.equity. TheseThese expensesexpenses havehave beenbeen recordedrecorded inin ourour resultsresults ofofoperations.operations. TheThe totaltotal amountamount ofof$14.7$14.7millionmillion duedue toto KPNKPN waswas scheduledscheduled toto bebepaidpaid byby iBasisiBasis inin threethree successivesuccessive quarterlyquarterly installmentsinstallments throughthrough thethe thirdthird quarterquarter ofof2008,2008,withwith interestinterest atatthethe raterate ofof6%6%perper annum.annum. InIn MayMay 2008,2008, wewe mademade thethe firstfirst paymentpayment ofof$5.2$5.2 million,million, includingincluding interest,interest, toloKPN.KPN. InIn SeptemberSeptember 2008,2008,wewerevisedrevised thethe termsterms of thethe remainingremaining balancebalance ofof$10.3$10.3 million duedue toto KPNKPN toto extendextend thethe paymentpayment datedate onon thethe secondsecond installmentinstallment paymentpayment toto Marchlrlarch 2009 andand thethe finalfinal installmentinstallment toto JaneJune 2009. InIn addition,addition, thethe interestinterest raterate waswas increasedincreased toto 7%7%onon thethe principalprincipal amountamount due, effectiveeffective OctoberOctober 1,I, 2008,2008, andand wewe paidpaid additionaladditional interestinterest of $60,000$60,000relatingrelating toto thethe extensionextension ofofthethe secondsecond installmentinstallment thatthat waswas duedue JuneJune 30, 2008.

As of DecemberDecember 31,200831,2008 andand 2007,2007, unpaidunpaid principal andand accruedaccrued interestinterest duedue toto KPN wasives $10.5$10 5millionmillion andand $15.5$15.5 million,million, respectively.respectively.

Pro FormaEorrna Disclosures (Unaudited)(Un aud/red)

The following unaudited pro formaforms consolidated results of operations forfor thethe yearsyears endedended December 31, 2007 andand 2006 assumes that the KPN Transaction occurred as of the beginning of eacheach year.year.

YearYeargndedEnded Year Ended Btcembtruecember 31,3], December 31, 2007seer sassaooa trn(In thousands, exceptexcept perptr share data) Total net revenuerevenue $14390,$1,390,580580 $1,296,651$1&296,651 Total costs and expenses 1,1,379,654379,654 1,1,271,625271,625 Income fromfrom operationsoperations 10,10,926926 25,02625,026 Net incomeincome $3,$ 3,854854 $$14,14,331331 Basic net incomeincomeperper shareshare $0.$ 0.0505 $0.$ 0.2020 DilutedDiluted netnet incomeincome perper shareshare $0.$ 0.0505 $0.$ 0.1919

These pro formaforma amountsamounts do notnot purport totobebe indicativeindicative of the resultsresults that would havehave actually been obtained if thethe transactiontransaction hadhad occurred asas of thethe beginning of thethe periodperiod presented oror thatthat maymay bebe obtainedobtained inin thethe future.future.

(4)(4) StockStock BasedBased CompensationCompensation

WeWe issueissue stockstock optionsoptions asas anan equityequity incentiveincentive toto employeesemployees andand outsideoutside directorsdirectors underunder ourour 20072007 StockStock planPlan (the(the u2007"2007 Plan"Plan").).TheThe stockstock optionsoptions wewe issueissue underunder ourour 20072007 PlanPlan areare forfor aa fixedfixed numbernumber ofof sharesshares with anan exerciseexercise priceprice equalequal toto thethe fairfair marketmarket valuevalue ofof ourour stockstock onon thethe datedate ofof grant.grant. TheThe employeeemployee stockstock optionoption grantsgrants underunder thethe 20072007 Plan typicallytypically vestvest quarterlyquarterly inin equalequal installmentsinstallments overover fourfour years,years, providedprovided thatthat nono optionsoptions shallshall vestvest duringduring thethe employees'employees' firstfirst yearyear of employment,employment, andand havehave aatermterm ofoftenten years.years.

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I~abl ctfContents

IBasis,iBases, Inc.inc,

Notes to ConsolidatedCousolidated Financial Statements (Continued)

(4) Stock Based Compensation (Continued)(Coatinued)

The 2007 Stock PlanPlan replaced thethe 1997 Stock IncentiveIncentive Plan, which expired on August 11, 2007. All outstanding stock options underunder this plan will remainremain inin effect untiluntil they expire by theirtheir terms.tenne.

As of thethe date of the closingclosing oftbeof the KPN Transaction, we had 2.42.4 million sharesshares of vastedvested and unvested outstanding stockstock options, almostalmost all Ofofwhich had been granted under aa prior stock optionoption plan, andand thesethese outstanding stock optionsoptions were as fair valuedvalued as of that date. The aggregate fair value of $4.0$4.0 million relatingrelating toto 0.60,6 million shares of unvested stockstock options as these stock of thatthat date isis being charged to resultsresults of operations onon a stl"aight-linestraight-line basis overover thethe remaining vesting period for these stock options. The fair value of thesethese outstanding unvested stock options,options, as of the date of the KPN Transaction and of newly issuedissued grants sincesince thatthat date,date, was estimatedestimated using thethe Blaek-SeholesBlack-Scholes model and the following assumptions:assumptions'.

Yea_Year Ended December 311st 20083000 2_73007 Risk free interestinterest raterate 2.89%2 89% 44.88%88% Dividend yield 0.0%00% 0.0%0 0'/ — Expected volatilityvolatility 100% 60°/_-60'te 100% Expected lifelife 6.256.25 years 2.382.38 toto 6.256.25 years

Our estimate of thethe expected lifelife was determined using the simplified method as our stock options qualifyqualify as "plain vanilla" options.

Stock-based compensation expense charged toto engineeringengineering and network operations expensesexpenses andand selling, general and administrative expensesexpenses related toto thesethese stock options was $1.8$1.8 million and $0.7$0.7 million, respectively, for 2008,2008, and $0.1$0.1 million and $0.3$0.3 million, respectively, for 2007.

Dividend-Related AdjustmentAdj nsttnen t toto StockStock Options

Upon dosingclosing ofthethe KPNKpN Transaction, andand inin conjunction with the $113 million dividend we paid to iBasis shareholders on October 8, 2007, we increasedincreased thethe number of shares subject to unexercised stock option grants and reducedreduced thethe exercise price of thasethese stock optionoption grantsScents to preserve theirtheir value,value, as requiredrequired by the anti-dilutionanti-dilution provision of our stockstock option plan. The adjustment to thethe number of shares and exercise price was based on thethe dosingclosing price of $10.$I 0.7575 per share of iBssisiBasis common stock on September 28, 2007, the tradingtrading date immediatelyimmediately precedingpreceding thethe closing of the merger, reduced byby the dividend per share amount of $3.28$3.28 per share. Shares underlying outstanding stock options were increasedincreased by a factor of 11.A391,4391,which reflectedreflected the ratioratio of $10.75$10.75perper share divideddivided by $7A7$7.47 per share ($10.75($10.75 perper shareshare lessless thethe dividend of $3.28$3.28 per share)share) and the per share exercise priceprice of outstandingoutstanding stockstock options was reducedreduced by dividing thethe exercise price by this same factor. As a result, thethe numbernumber of shares underlyingunderlying outstanding stock options, as of thethe datedate of thisthis adjustment, increasedincreased fromfrom 2.42.4 million shares to 3.53.5 million shares andand thethe average exerciseexemise price of outstanding stock optionsoptions was reduced from $6.07$6.07 per share toto $4.22$4.22 per share.share.

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iBasis,IBasis,Inc.lac.

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(4)(4) StockStock BasedBased CompensationCompensation (Continued)(Continued)

StockStockOptionOption ActivityActivity

TheThe followingfollowing tabletable presentspresents thethe stockstock optionoption activityactivity forforyearyear endedended DecemberDecember 331,I, 2008:2008:

WeightedWeighted AverageAverage Sharesshares ExerciseExercisePricePrice (Intfn thousands)thomands) OutstandingOutstanding atat DecemberDecember 31,31,20072007 3,4263,426 $$4.4,3030 GrantedGranted 1,3371,337 4.464.46 ExercisedExercised (233)(233) 2.422.42 CanedledCancelled (284){284) 5.945.94 Outstanding atat December 31,31,20082008 4,2464.246 $s 4.344, 34 Vested andand unvested expectedexpected toto vestvest atat December 31,31,20082008 3,9713,971 $$4.4.3232 Exercisable atat December 31.31,2008 2,7932,793 $$4.4.1010 Available forfor futurefuture grantsgrants atat December 31,31,2008 2,3842,384

The followingfollowing table presents weightedvreighted average price and contract life informationinformation aboutabout significantsignificant optionoption groupsgmups outstanding and exercisable asas of December 31, 2008:2008t

Outst_mdlngOulsland'm Weighted Average ExerclsahleExercisable Remaining OumandingOltutandlllg Contractual Life Weighted Average Options Weighted Average RangeofFaerclsePrRes Ofl_ _ . ExerclsePrleeExercisePrlce ~nutstandtnOutstandl_ . ExerclsePrlceEzerclsePrlee (Its(Ill tllnllssslds)thous_mds/ Pn{In thousands) $$0,0.52-$52-$1.1.5050 265 2.922.92 $ I1,44A4 265 $1A4$ 1.44 1.1.83-83- 2.2.2121 391 4.4,6969 2.2.0101 384 2.2.0101 2.2,44-44— 3.3.9898 839 5.5.0303 2.2.9494 778 2.2.8888 4.4.25-25- 4.4.5454 1,1,915915 8.8.2828 4.4,5151 791 4.4.5050 4.4.71-71— 5.5.8787 263 6.6.6767 5.5,1313 247247 5,5.0909 6.6.02-02- 6.6.8888 482482 7.7,9696 6.6.5555 237237 &.6.6363 7.7.73-73- 10.10.4242 5252 1.1.2020 9.9.1818 52 9.9.1818 $22.$22.93-$59,9393-$59,93 3939 1.1.4040 30.30.2121 39 30.30.2121 4,4,246246 6.6.6969 $ 4.4.3434 2,2,793793 $4.$ 4.1010

TheThe aggregateaggregate intrinsicintrinsic valuevalue ofof exercisableexercisable optionsoptions outstandingoutstanding asas ofof DecemberDecember 31,31,2008,2008, whichwhich representsrepresents the amountamount optionoption holdersholders wouldwould havehave receivedreceived hadhadtheythey exercisedexercised theirtheir optionsoptions asas ofof thatthat date,date, waswas lesstess thanthan $0.$0.11 million. TheThe intrinsicintrinsic valuevalue isisthethe differencedifference betweenbetween ourour closingdosing stockstock priceprice onon thethe lastlast tradingtrading dayday ofof thethe yearyear endedended DecemberDecember 31,31, 20082008 andand thethe stockstock optionoption exerciseexercise price,price, multipliedmultiplied byby thethenumbernumber ofofstockstock opiionoption shares.shares.

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TableofContents

IBasis_lflasis, Inc.

Notes toto Consolidated Financial Statements (Continued)

(4) Stock Based Compensation (Continued)(Continued)

The following tabletable presents thethe non-vested sharesshares for the year ended December 31,2008.31,2008.

WeightedWelghled AverageArerage Non-vesttd Stock Options __Sh Sharesas'es FairFair Value (In(Iu thousands)Ihausands) Non-vested at December 31, 2007 868 $ 5.795.79 Granted 1,3371,337 3.593.59 Vested (689)(689) 4.974.97 Forfeited (63) 3.593.59 Non-vested at December 31, 2008 1,4531,453 $ 4.234,23

As of December 31, 2008, unrecognized compensation expense relatedrelated toto the unvested portion of our stock options was $5.3$5.3 million and is expected toto be recognized over a weighted-average period of approximately 2.82.8 years.years.

Stock Options GrantsGrarsts Under(/ader KPN Option Plans

Prior toto thethe KPN Transaction, certaincertain employees ofKPNof KPN GCS were provided with stock options forfor KPN stock under thethe terms of KPN' stockstock option plans. These stock optionsoptions provided for a fixed numbernumber of shares with anan exercise price equal toto the fair value of KPN' stock on the date of grant,grant, unless otherwise stated,stated, andand vest threethree years from thethe date of grant. There were no grantSgrants made toto employees ofKPNof KPN GCS under KPN' stock option plans in 2007 or 2006.

Effective JanuaryJanuary 1,2006,1, 2006, KPN GCS adopted SFAS No. 123(R), "Share-Based*Payment"(SFAS"Share-Based-Payment" (SFAS 123(R)) usingusing the modified prospective method. As KlaNKPN GCS had previously applied the fairfair value recognition provisions of SFAS 123, the adoption of SFAS 123(R)123(9,) did not have aa material impact on itsits financial position oror resultsresults of operations. KPN GCS elected toto use the modified prospective transitiontransition method asas permittedpermitted under SFAS 123R and, therefore, did notnot restaterestate itsits financialfinancial results for thethe prior periods toto reflect thethe fairfair valuevalue of stock-basedstack-based compensationcompensation awards in such periods. Under this transitiontransition method, stock-based compensation expense forfor thethe yearyear endedended December 31, 2006 included compensation expenseexpense forfor all stockstock optionoption awardsawards granted prior to, but not yet vested, as of December 31, 2005, based on the grant date fair valuevalue estimatedestimated inin accordance with thethe originaloriginal provisionsprovisions of SFAS 123.

Total share based compensation with respect toto these stock option awardsawards amounted toto $9,000,$9,000, $36,000$36,000 andand $47,000$4'/, 000 forfor thethe years ended December 31, 2008, 2007 and 2006, respectively and was charged to selling,selling, generalgeneral and administrative expenses.expanses.

All oplionsoptions grantedgranted are equity settled optionsoptions and amare forfeitedforfeited when employees leave forfor reasons other than retiremant,retirement, disabilitydisability oror death (except(except for smnesome personnel plans). All options were granted with exerciseexerrise prices equal toto market value unlessunless otherwise noted below. The profits for options exercisable immediately fromfrom any exercise prior to thethe end of the 3- individuals, yearyear vesting period are heldheld in escrow until the sharesshares are vested. The profit wiltwi 1 1 be released to the relevantrelevant individuals, providedprovided thatthat the individualsindividuals remain employed by us.

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l_ble1'able ofof~CntentsC9_.nt_ta

IBasls,iBasis, Inc.Inc.

Notes to Consolidated Financial Statements (Continued)

(4) Stock Based Compensation (Continued)

The following table summarizessummarizes stockstock optionoption activity of our employees under thethe KPN stockstock option plans duringduring 2008, 2007 andand 2006.

Weighted Average Shares PerPce Share ~under 0 non gserelse,,Pricegxerclse PrlCe . Outstanding at December 31, 2007 37.25037,250 $ 9.629.62 Options exercised Transfer toto and from other KPN entities Outstanding at December 31, 2008 37,25037, se $s 9.62962 *=:===mmm==mm=a

The following isis a summary of outstanding and exercisable stock optionsoptions held by our employees under thethe KPN stock option plans as of December 31, 2008:2008l

Options0 liens Oumandlngoutslandln Opllon50 lions Exercisable Weighted Weighted Average AverageAvwage RemainingRemuniag Weighted Remaining Weightedweighted Number ofor ConlractualConlraccual LifeLslc Average Number orof ContractualConlraciual LifeLire Average Rtnge ofgxercisePrlces ~Otiose _ Exer¢isePrlceExercise Price Options~eiions _ ExercisePrlee 5.50-6.005.50-6.00 5,8005,800 -- $$8.8.7474 5,8005,800 -- $$8.8.7474 6.00-6.506.00—6.50 9,6009,600 1.21,2 9.509.50 9,6009,600 1.21.2 9.509.50 6.50-7.006.50—7.00 2t,85021,850 2.62.6 9.919.91 21,85021,850 2.62.6 9.919.91 Total 37,25037,250 1.81.8 $$9.9.6262 37,25037,250 1.81.8 $$9.9.2121

The aggregateaggregate intrinsicintrinsic value of options outstanding andand exercisable asas of December 31,200831,2008 was $0.2$0.2 million, which represents the amount optionoption holders would have receivedreceived had theythey exercised their options as of that date. The intrinsicintrinsic value isis the difference between KPN' dosingclosing stockstock price on the lastlast tradingtrading day of 2008 and the stockstock option exerciseexen:ise price.price, multiplied by the number of stock option shares. The intrinsic value of options exercised inin 2008, 2007 and 2006 was $0, $98,000$98,000 andand $144,000$144,000 respectively. The amount of cashcash KPN receivedreceived as a result of options exercised by KPN GCS employeesemployees in 2008, 2007 and 2006 was $0, $104,000,$104,000, and $180,000.$180,000.

In April 2006, KPN GCS grantedgranted 5,1005,100restrictedrestricted KPN shares toto itsits management which vest over aa three-year period depending on KPN'Kpbf totaltotal shareholdershareholder return position rankingmnking relative toto aa peer group. Once vested thethe restrictedrestncted shares have a lock-uplock-up period of two years and thereforetherefore are notnot availableavailable toto be traded fromfrom April 2009 through April 2011. The totaltotal compensationcompensation expense associated withwilh these awards inin 2008, 2007 and 2006 was $0, $27,000$27,000 andand $18,000,$18,000, respectively and was chargedcharged toto selling, generalgeneral and administrativeadministrative expenses.expenses.

(5) Business Segment and Geographic Informationinformation

During thethe yearsyears ended December 331,t, 2008 and 2007, we operated inin twotwo business segments, Trading and Retail. Our Trading business segment includes revenue fromfrom wholesale Trading andand Outsourcing. We consider Outsourcing as part of our Trading segmentsegment as the products we sellsell are primarily the same products that we sell toto our wholesale Trading customers and Outsourcing and wholesale Trading are managed as oneone business. Our Retail business consistsconsists primarily of our prepaid

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Tabl9Table ofC_Contentso_.ents

iBusis,iBasis, Inc.1uc.

Notes toto Consolidatedconsolidated Financial Statementsstatements (Continued)(continued)

(5) BnslnassBusiness Segment andand GangraphicGeographic InformationInformation (Continued)(Continued)

consumers through sn Internet website. For the calling card services and Piego,Pingo, our prepaid calling service sold directly toto consumers through an Interact website. For the year ended December 31, 2006,2006, we operatedoperated inin only one business segment, wholesale Trading.Trading,

A breakdown of our revenuerevenue and grossgross profit, defineddetined as netnet revenue less data communicationscommunications and telecommunicationstelecommunications costa,costs, forfor thethe years ended December 31,200831,2008 and 2007 is as follows:follows;

Year EndedKnded yearYear Ended December 31_ 2008 December 31T 2007 Revenue Gross Profit Revenu...... _eReveuue GrossGrow ProaProfit! Trading $$985.985.00 $$80.80.66 $716.1$716.1 $46,$ 46.22 OutsoureingOutsourcing 242.0242.0 42.942.9 197.3197,3 41.441.4 Retail 96.696.6 12.812.8 25.25.22 3.63.6 Total $1,323.6$1,323.6 $$136.136.33 5938.6$938,6 $91.$ 91.""--'"-_2

We use net revenue and gross profit, which isis net revenuerevenue less datadata communications and telecommunicationstelecommunications costs, as thethe basisbasis for measuring profit or loss and making decisions on our Trading andand RetailRata i I businesses.bus inesses. We do not allocate our engineering andand network operations expenses, selling,selling, generalgeneral and administrative expenses, and depreciation and amortization between Trading and Retail.

Operating results, excluding interestinterest incomeincome and expense,expense, foreignfot'sign exchange gainsgains or losses, and incomeincome taxtax expense for our twotwo business segmentssegments are asas follows:follows:

yearYear EndedEnded De_t_alaerDecember 31rSi 20_3S2eea ~Tradtn RetailRebel TOtalTotal (Inttn thousands) Net revenue from external partiesparties $1,000,964$1,000,964 $96,551$96,551 $1,097,515$1,097,515 Net revenue from relatedrelated parties 226,070226,070 --— 226,070226,070 Total net revenue "1,227,0341,227,034 ' 96,55196,551 1,323,5851,323,585 Data communications and tdeeommunicationtelecommunication costs----externalcosts—external partiesparties 997,735997,735 83,72483,724 1,081,4591,081,459 Data communicationscommunicatiuns and telecommunicationtelecommunication costs---relatedcosts—related parties 105,841105,841 --— 105,841105,84 I Total data communications and telecommunications costs 1,t03,5761,103,576 83,72483,724 1,187,3001,187,300 Gross profit $$123,123,458458 $12,827$12,827 136,285136,285 Engineering and networknetwork operations expenses 23,32023,320 74,849 Selling, general and administrativeadministmtive expensesexpenses 74,849 Depreciation andand amortizationamortization 31,99831,998 Impairment of goodwill 214,651214,651 -- 214,651214,651 Loss from operations $ (208,533)(208,533)

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Table~of C ))tents

iBasis, Inc.Inc.

Notes toto Consolidated Financial Statements (Continued)(Continued)

(5)(5) BusinessBustness Segment and Geographic Information (Continued)

Year Ended December31 t 20073007 Tr_dln_ Retail Total (In(Insheasands)thDmands) Net revenue from external partiesparties $716,088$716,088 $25,205$25,205 $741,293$741,293 Net revenuerevenue from related parties 197,265197,265 --— 197,265197,265 Total net revenue 913,353913,353 25,20525,205 938,558938,558 DatacommunicationsandtelecommtmicationeOsts--extemalpsrtiesData communications and telecormnunication costs —external parties 711,57-"-"_711,575 "-21,58521,585 733,160733,160 Data communications and telecommunicationteteannmunicatton costs--relatedcoats—related partiesparties 114,242114,242 --— 114,242114&242 Total data communicationscommunications and telecommunicationstelecommunications costscosts 825,825,817817 21.58521,585 847,402847,402 OrossprofitGross profit _$$87,87,536536 _$$3,3,620620 91,15691,156 Engineering andand networknetwork operations expenses 13,22213,222 Selling,Selling, general andand administrative expenses 38,36838,368 2,019 Merger relatedrelated expenses 2,019 DepreeiafonDepreciation and amortization 12,74312,743 Incomeincome from operations $$24,24,804804

Other than revenuerevenue fromfrom Royal KPN and its affiliates,aifiliates, no one customer accounted for 10% or more of totattotal netnet revenue in thethe years ended December 31, 2008, 2007 or 2006.

Assets relating toto ourour Trading and Retail businessesbusinesses consistconsist of accounts receivable, net of allowance for doubtful aecounts,accounts, intangibleintangible assets related to customercustomer relationshipsrelations)dps andand goodwill. We do notnot allocate eushcash andand cash equivalents, short-term marketable investments, prepaid expenses and other current assets,assets, property andand equipment,equipment, net, other intangibleintangible assets and otherother assets between Trading and Retail.

, z_As erof D',_ctmbcrDecember 31_31 20083000

Retail Total (111on thousands)slsessslnsds) Segment assets: Accounts receivable---externalreceivable-external parties $224,883$224,883 $10,063$10,063 $234,946$234,946 Intangible aasets--customcrassets —customer relationships 26,14726,147 10,10,420420 36,56736,567 Goodwill 17,32417,324 --— 17,32417,324 $268,354$268,354 $20,483$20,483 288,837288,837 Non-segmentNon. segment assetsassets 152,490152,490 Total assets $441,327$441,327

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Ta_ble1'able ofofCuntentsContents

iBasis,iflasis, Inc,Inc.

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(5)(5) BusinessBusiness SegmentSegment andand GeographicGeographic InformationInformation (Continued)(Continued)

AAbreakdownbreakdovm ofoftotaltotal revenuerevenue byby geographicgeographic region,region, basedbased ononwherewhere weweterminateterminate thethetraffictraffic wewereceivereceive fromfrom ourour customers,customers, fortorthethe yearyear endedended DecemberDecember 31,31,20082008 isisasas follows;follows;

%%ofofTotalrotel NetNetR_VenuI_Revenue EuropeEurope 43%43% LatinLatin AmericaAmerica 28%28% MiddleMiddle EastEast andand AfricaAfrica 19%19% AsiaAsia Pacific 8%8% NorthNorth AmericaAmerica 2%2% TotalTotal 100%100%

A breakdownbreakdown ofoftotal netnet revenue byby geographicgeographic region forfor thethe yearsyears endedended December 31, 20072007 andand 20062006 isis notnot shownshown asas itit was impracticalimpractical toto obtain this information.information. Essentially all ofofthethe Company'sCompany's lung-livedlong-lived assetsassets areare locatedlocated inin thethe UnitedUnited States.

(6) Accounts Receivable and Unbilled Revenue--ExternalRevenue —External Parties

AccountSAccounts receivable---externalreceivable —external parties, net,net, consists of thethe following at December 31:

2o08sees 2oo7xssr (In(tn thous_,uds)thousands) Accounts receivable $183,763$183,763 $168,498$168,498 UnbilledUnbitled revenue 56,56,361361 49,30949&309 240,240,124124 217,807217.807 Allowance for doubtful accounts (5,178)(5,178) (12,924)(12,924) Total accountsaccounts receivablereceivable--_xtemal—external parties $234,946$234,946 $204,883$204,883

The majority of unbiunbilledlied revenuerevenue relates to thethe previous month's traffic volume for which an invoice has not yet been sent.sent, The allowanceallowance forfor doubtfuldoubtful accounts reflectsreflects our bestbest estimateestimate of probable losseslosses inherentinherent in thethe accounts receivable balance. WeWe determine thethe allowanceallowance based onon specificspecific knownknown troubledtroubled accounts, historicalhistorical experience, sndand otherother currentlycurrently availableavailable evidence,evidence.

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"£abl'I'ableeoLCo_nts_ofC~on ents

iBasis,IBasis,Inc.Inc.

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(7)(7) PropertyProperty andaud EquipmentEquipment

PropertyProperty andand equipmentequiptnent consistsconsists ofofthethe followingFollowing atatDecemberDecember 3131::

200_sess . sootscar (Inttn Ihou_andOthon&nnnk) NetworkNetwork equipmentequipment $$44,44,332332 $$4I,41,861861 SottwareSoitware 17,53817,538 8,2588,258 LeaseholdLeasehold improvementsimprovements t,6291,629 1,5911,591 OtherOther tangibletangible fixedfixed assetsassets 3,5943,594 3,7983,798 TotalTotal atat costcost 67,09367,093 55,50855,508 AccumulatedAccumulated depreciation (32,257)(32357) (20,542)(20,542) NetNet bookbook valuevalue $$34,34,836836 $$34&96634,966

Total depreciationdepreciation and amortizationamortization expenseexpense relatedrelated toto property andand equipmentequipment was $I$15.5.33million,million, $8.8$8.8millionmillion andand $5.7$5.7millionmillion for thethe yearsyears endedended DecemberDecember 31, 2008,2008, 2007 and 2006,2006, respectively.respectively.

(8)(8) Goodwill and Other IntangibleIntangible Assets

In conjunction with the closing of the KPN TransantionTransaction on October 1,I, 2007, we recorded $248.8$248.8millionmillion ofofgoodwill, which is not being amortized. Additionally, in connection with the KPN Transaction, we recorded $97.7$97.7 million of amortizing intangible assets, including trademarkstrademarks and trade names, Trading customercustomer and Retail distributor relationships,relationships, termination partner relationships and technology. The estimated useful life of trade mark and tradetrade names is 15 yearsyears and isis being amortized on a straightstraight-lineline basis. The estimatedeshmated useful life ofTrading customercustomer relationships isis 10 yearsyears and the estimated useful lifelife of Retail distributor relationshipsrdafionships is 5 years and these intangible assets are being amortized using an economic consumption method to1oreflect the diminishing cash flowsflows from these relationships in the future. The estimated useful lifelife of terminationterminaflon partner relationships isis 5 years and isis being amortized using an economic consumption method to reflect diminishingdiminishing cashcash flows from thesethese relationshipsrelationships inin thethe future. The estimated useful life of technology isis 5 years and is beingbeing amortizedamortized on a straight-line basis.

lnIn connectionconnection withwith thethe closingclosing ofof thethe TDCTDC transaction'a'ansaction on April I,1, 2008, we recordedrecorded $10.$10.1I million of intangible assets,assets, primarilyprimarily Trading customercustomer relationships. TheThe Trading customercustomer relationships areare being amortized over aa 5 toto 10 yearyear period usingusing thethe economiceconomic consumptionconsumption method toto reflectreflect thethe diminishingdiminishing cashcash flows from thesethese relationships inin thethe future.future.

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TabTabletegfofCo.ntsntsContents

JBasis,IBasis, Inc.Iuc.

NotesNottm to Consolidated Financial Statements (Continued)(Continued)

(8) Goodwill and Other Intangibleintangible AssetaAssets (Continued)

The following tabletable summarizessummarizes other intangible assets:

As of December 3It 2008 AS of December 31_ 2007 Accumulated Accumulated At CostCtnt AmortizationAmortization AtAl CostCott Amortization (Inun tboueandz)thousands) Trademarks andand tradetrade names $$21,21,800800 $ (1,817)$21,800(1,817) $21,800 $ (363) Wholesale customercustomer relationshipsrelationships 30,74730,747 (4,616)(4,616) 20,70020,700 (663)(663) Retail distributor relationships 13,50013,500 0,080)(3&080) 13,50013,500 (621) Termination partner relationshipsrelationships 8,4008,400 (2,719)(2,719) 8,4008,400 (588)(588) Technology 33,30033,300 (8,325)(8,325) 33,30033,300 (1,665)(1,665) Other 64 (48) -- $107,811$107,811 $ (20,605)(20,605) 97,70097,700 $ (3,900)(3,900)

Amortization expense was $16.7$16.7 million and $3.9$3.9 million in 2008 and 2007, respectively. There was no amortization of other intangible assets inin 2006.2006, We currentlycunently expectexpect toto amortize the followingfollowing remaining amounts of intangibleintangible assets as of December 31, 2008 inin thethe fiscaltiscal periods as follows:follows:

Year endedended December 311st n tbouzandz 2009 $$19,19,366366 2010 17,91617,916 2011 16,38216,382 2012 t2,51712,517 2013 3,8753,875 Thereafter 17,15017,150 Total "$$87,87,206206

ImpairmentImpairment

We have two operating segments which are also our reporting units: (1)(I)Trading and (2)(2)Retail.RetaiL As of DanemberDecember 31, 2008 and 2007, all goodwillgoodwill was assigned toto our Trading reporting unit.unit. The Company performs an annual impairmentimpairment test of itsits goodwillgoodwill asss required underunder thethe provisions of SFAS 142 on December 31 and whenever events or changes inin circumstances would more likelylikely thanthan not reducereduce thethe fair value of a reporting unit below itsits carrying value.value, In fiscal 2007, the Company performed its annual impairmentimpairment test for goodwill at thethe reporting unit levellevel andand determined nono adjustment toto goodwillgoodwill was necessary. For intangible assets, we assess the carrying value of thesethese assetsassets whenever events or circumstancescircumstances indieataindicate thatthat thethe carrying value may not be recoverable. Recoverability of assets toto be heldheld and used isis measured by comparing the carrying amount of anan asset, or asset group, toto the future undiseountedundiscounted cash flows expected toto be generated by thethe asset, or asset group.

Through September 30, 2008, therethere were no eventsevents or changes inin circumstances thatihat indicated thethe carryingcarrying amountamount of our intangible assets may not be recoverable.recoverable. However, asas a resultresult of the Company's market capitalization remaining below the Company's book value since thethe first quarter of 2008, we considered this toto bebe an indicationindication that the carrying value of our goodwill may bebe impaired.impaired.

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"I__ble'1'able oLC_ni¢rttsof Gmtents

iBasis,ifiasis, Inc.

Notes to Consolidated Financial Statements (Continued)

(8) GoodwlnGoadwfil and Other Intangibleintangible AasetsAssets (Continued)(Continued)

Accordingly, we conducted an analysis to determine if there had been an impairment of thethe carrying value of gnodwilIgoodwill of as of September 30, 2008.

SFAS No. 142 requiresrequires thatthat the impairment testtest be performed throughthrough thethe application of aa two-steptwo-step process. The first their step compares the carryingcarrying value of our reporting units, which areare our Trading andand Retail operating segments, to their estimated fair values asas of thethe testtest date. Ifif fair valuevalue is lessless thanthan carryingcarrying value, a second step must bebe performed to quantify the amount of the impairment,impairment, if any.any, We estimatedestimated the fairfair value of our reporting antisunits usingusing anan income approach, which estimates fairfair value based upon futurefuture cash flowsflows discounted to theirtheir presentpresent value. We thenthen reconciled the estimated fairfair value of our reporting units to our overall market capitalization. Based on thethe results,results, we determined our Trading reporting unit's fair value was greater thanthan itsits carryingcarrying value. Assessing the impairmentimpairment of goodwill requires us toto make certain significant assumptions, estimatesestimates andand judgments,judgments, includingincluding futurefuture revenue, expenses,expenses, cashcash flows,flows, discount ratesrates andand impliedimplied control premiums.premiums. The actual resultsresults may differdifFer fromfrom these essumiationsassumptions andand estimates and itit is possible thatthat such differences could have a material impact on our financial statements. We b_edbased thethe valuationvaluation of our Trading reportingreporting unit, inin part, on i) our actual historicalhistorical performance; ii)it) our estimateestimate of thethe future performance of our Trading reportingreporting unitunit and iii) projections developed byby an independent analyst.analyst. As a resultresult of this analysis, we concluded therethere had beenbeen no impairmentimpairment of the carryingcarrying value of gnodwillgoodwill asas of SeptemherSeptember 30, 2008.

Since September 30, 2008, therethere has been distress inin thethe global economy and ourour market capitalizationcapitalization declined significantly inin thethe fourth quarter.quarter. ASAs noted above, thethe Company performed itsits annual goodwillgoodwill impairmentimpairment assessmentassessment as of December 31, 2008. This assessment was performed using thethe samesame valuation techniques as described above. Step one of this assessment resultedresulted in thethe carryingcarrying value of the Trading reportingreporting unit exeeediugexceeding itsits fairfair value. The second step then determines thethe impliedimplied fair value of goodwill by comparing thethe fairfair valuevalue of thethe Trading reporting unit toto thethe aggregate fair value of all the assets and liabilities of thethe unit.unit. In stepstep twotwo of thethe impairmentimpairment analysis,analysis, thethe Company compared thethe implied fair value of gnodwillgoodwill to its carrying value. We determined the fairfair value of goodwill was $34.1$34.1 million. The carryingcarrying value of goodwill was $248.8$248.8 million. As a result,result, we recorded a non cash impairment charge to our goodwill of $214.7$214.7 million. In addition, the carrying value of goodwill was further reduced byby $16.8$16.8 million, to $17.3$17.3 million, as aa resultresult of thethe utilization of previously reserved pre acquisition net operatingoperating losses. The primary reasons for thethe differencedifFerence in conclusions thatthat gnodwillgoodwill was notnet impaired asas of September 30, 2008, but was impaired as of December 31, 2008, were the continued decline in thethe price of our commoncommon stock during thethe quarter ended December 31,2008,31,2008, forecasts of futurefuture revenues which were lower than the forecasts used inin the impairmentimpairment analysis performed as of September 30, 2008, andand lowerlower revenues in the quarterquarter endedended December 31, 2008 as compared to thethe quarterquarter endedended September 30, 2008 and comparedcompared to the Company's expectations forfor that quarter. The forecastedforecasted revenues and long-term growth rates used inin the December 31, 2008 analysis were lower than those used at September 30, 2008 as a resultresult of the maeroeeonomicmacroeconomic conditions andand events thatthat transpiredtranspired in the global markets during the fourthfourth quarter of 2008.

As described above,above, for intangibleintangible assets,assets, we assess thethe can'yingcarrying value of these assets whenever events oror circumstancescirrumstances indicate that the carryingcanying value may not be recoverable. We determined that thethe adverse business climate andand the significantsigmficant drop inin our market capitalization experiencedexperienced during thethe fourthfourth quarter of fiscalfiscal 2008 were significantsignificant eventsevents thatthat indicatedindicated that thethe carrying amountamount of our intangible assetsassets might not be recoverable.recoverable. SFAS No. 144 isis a two-steptwo. step testtest which is required totobebe

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TabTable_ ofCfonte ts

tBas|s,iBasis,Inc.Inc.

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(8)(8) GoodwillGoodw)ti andand OtherOther Intang|bleIntangible AssetsAssets (Continued)(Continued)

performedperformed priorprior totoassessingassessing thethe impairmentimpairment ofofgoodwill.goodwill. TheThe firstflrst stepstep comparescompares thethecarryingcarrying valuevalue ofofthethe asset,asset, ororassetasset group,group, totothethe undiscountedundiscounted cashcash flowsflows ofofthethe asset,asset, ororassetasset group.group. IfIfthethe asset,asset, ororassetassetgroup's,group's, carryingcarrying valuevalue exceedsexceeds thethe undiseountedundiscounted cashcash flows,flows, stepstep twotwo ofofthethe testtest isisrequiredrequired totomeasuremeasure thethe impairmentimpairment loss,loss, ififany.any. AnAn asset,asset, ororassetasset group,group, cannotcannot bebeimpairedimpaired belowbelow thethe assetasset ororassetasset group'sgroup's fairfairvalue.value.

AsAs requiredrequired byby SFASSFASNo.No. 144,144,wewe performedperformed ourour assessmentassessment atatthethe assetasset groupgroup levellevel whichwhich representedrepresented thethe lowestlowest levellevel ofofcashcash flowsflows thatthat areare largelylargely independentindependent ofofcashcash flowsflows ofofotherother assetsassets andand liabilities.liabilities. ForForiBasis,iflasis, thisthis assetasset groupinggrouping isisatatthethe reportingreporting unitunit level.level. WhenWhen performingperforming thisthis testtest atat thethe reportingreporting unitunit level,level, goodwillgoodwill isis includedincluded inin thethe carryingcarrying valuevalue ofofthethe assetasset group.group. TheThe carryingcarrying valuevalue of thethe tradingtrading reportingreporting unit,unit, includingincluding goodwillgoodwill (prior(prior totothethe goodwillgoodwill impairmentimpairment chargecharge desedbeddescribed above),above), waswas greatergreater thanthan thethe uudiscoantedundiscounted cashcash flowsflows whilewhile thethe retailretail reportingreporting unit'sunit's undiscountedundiscounted cashcash flOWSflows exceededexceeded thethe carryingcarrying value.value, ForFor ourour lradingtrading reportingreporting unit,unit, wewe performed stepstep twotwo ofofthethe impairmentimpairment testtest andand determineddetermined therethere waswas nono impairmentimpairment of ourour intangibleintangible assets asas thethe fairfair valuevalue ofofthethe assetasset group,group, excludingexcluding goodwill,goodwilb waswas greatergreater thanthan thethe carrying value.value. The projectionsprojections andand assumptions usedused inin calculating thethe fairfair valuevalue of thethe _ssetsassets werewere consistentconsistent withwith thethe projeetiansprojections used in thethe goodwill impairmentimpairment test.test. The CompanyCompany alsoalso reassessedreassessed thethe amortizationamortization methodmethod andand remainingremaining amortization period forfor thethe assets,assets, andand determined thatthat no changeschanges toto thethe amortizationamortization periodperiod orormethodmethod werewere necessary.necessary,

Since December 331,I, 2008, our market capitalization has continuedcontinued to decline.decline. As aa result, itit isis reasonably possiblepossible thatthat there could be an impairment of our intangible assetsassets and/or our remaining goodwill inin thethe near termterm and thethe amounts could be material.

(9) AeeruedExpensesAccrued Expenses

Accrued expenses consist of the following at December 31;31:

zeea2_S 2CS12_7 ttsfin thousands)thkkkkkCk) Termination fees and circuit costs $136,$136,655655 $109,883$109,883 Compensation 3,3,224224 3,3,644644 DividendDividand payablepayable 1,1,421421 1,1,744744 Accrued other 10,10,385385 21,21,632632 TotalTotal accrued expensesexpanses $151,$151,685685 $136,2136,903903

(10)(10) IncomeIncome TaxesTaxes

TheThe componentscomponents ofof incomeincome (loss)(loss) beforebefore provist'onprovision forfor incomeincome taxestaxes sreare asas followsfollows forfor thethe yearsyears endedended December 31:31:

2200_sos ztbvr2007 22scc2006 1th(In kbkkkkkCk)thou_sLndS) DomesticDomestic $(239365)$(239,265) $(13,$(13,479)479) $430$ 430 ForeignForeign 34,34,618618 38,38,131131 59,59,944944 TotalTotal $(204,$(204,647)647) $24,$ 24,652652 $60,$60,374374

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Table'ill offCCol,ten_ I

iBasis,IBasis,lnc.Inc.

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(10)(10) IncomeIncome TaxesTaxes (Continued)(Continued)

TheThe componentscomponents ofofthethe provisionprovision forforincomeincome taxestaxes areareasas followsfollows forforthethe yearsyears endedended DecemberDecember 31:31:

20082000 20072007 20062006 -- (In(tsthousanas)ihdsaaldl) CUlTCnt;Current: FederalFederal $15,637$15,637 $$8989 $$9393 StateState 1,t271,127 1818 1818 ForeignForeign 9,3879,387 _10"11410,114 .19'19419,194 CurrentCurrent 26,15126, 151 10,22110,221 t9,30519,305 Deferred: Federal (208)(208) t166 2626 State 205205 (612)(612) 33 Foreign 194194 _(1,096)(1,096) (1,450)(1,450) DeferredDeferred 191191 (I,692)(1,692) (1,421)(1,421) ProvisionProvision forfor incomeincome taxes $26,34"--"_$26,342 $$8,8,52"----"_529 $17,884$17,884

InIn 2008, ourour incomeincome tax provision includesincludes a non-cash expense 0f$16.8of$16,8 million relatedrelated toto thethe utilization of our previously reserved netnet operating lossloss carry-forwards.carry-forwards. The use of these pro-acquisitionpre-acquisition net operating losseslosses cancan not reducereduce income taxtax expense but, instead,instead, must reduce the book value ofgoodwill. TheThe income laxtax expenseexpense of $16.8$16.8 millionmillion does not represent incomeinonme taxtax payments we will have to make now, or at anyany time inin thethe future. Effective JanuaryJanuary 1,2009,I, 2009, with the adoption ofofFASFAS 141R,such pro-acquisitionpre-acquisition net operating losses will reduce incomeincome taxtax expense, when utilized or when thethe valuation allowance for such net operating losseslosses isis released.

The effective income tax raterate differed fromI'rom the statutorystatutory federal income tax rate due to the following for the years ended December 31:

20002_8 20072O67 20062_6 0U(In ihdulaads)thousands) StatutoryStatutory federalfederal incomeincome taxtax $(71.$(71,589)589) $ 8,8,628628 $21,$21,131131 StateState incomeincome taxes,taxes, therethere is nono federalfederal taxtax benefit 866 1313 20 GoodwillGoodwill impairmentimpairm_t 75,75,128128 Intercompanylntercompany dividendsdividends 19,19,423423 Other permanentpermanent differences 916 146 ForeignForeign taxtax raterate differentiadifferential (3,(3,296)296) (3,(3,578)578) (3,(3,267)267) LossesLosses notnot benefitedbenefited 16,16,032032 3,3,247247 TaxTax creditseredits (I(13,148)3,148) ChangeChange ininvaluationvaluation aHowanceallowance 6,6,010010 OtherOther (4,(4,000)000) 7373 ProvisionProvision forfor incomeincome taxestaxes $26,$ 26,342342 $8,$ 8,529529 $17,$17,884884

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TablgTable.ofCo3)3euts(Egiitents

iBasis_i Basis, Inc.inc.

Notes to Consolidated Financial StatementsStatemeuts (Continued)(Contluued)

(10)(10) IncomeIncome Taxes (Continued)(Coutiuued)

Deferred incomeincome taxestaxes at December 31, 2008 andsnd 2007 reflect thethe net tax effects of net operating lossloss and taxtax creditcredit financial statement carry forwardsforwards and temporary differencesdifferences betweenbetween thethe carryingcanying amounts of assetsassets and liabilities for financial statement purposes and thethe amounts usedused for taxtax purposes.purposes.

The components of our net deferred tax assets (liabilities)(liabilities) are as followfollow as of December 3131;:

2_8zses 2_7assr {InOn thousand_thseraeakl Net operating losstoss carry fopvardforward $$56,56,3t6316 $$76,76,629629 Acquired intangibleintangible assets (34,467)(34,467) (40,633)(40,633) Depreciation 7,7257,725 2,1392,139 Tax creditseredita 14,23214,232 793 Accruals (2,754)(2,754) (2,486)(2,486) Stock eompansationcompensation 2,1112,111 1,5631,563 Accounts receivables 1,4571,457 769 Capital lossloss carrycany forwardforward 2,0002,000 2,0002,000 Net deferred tax assets 46,62046,620 40,77440,774 Less: valuation allowance (48,124)(48,124) (42,t(42,114)14) _;$ (1,504)(1,504) $$ (1,340)(1,340)

We have recognized aa fullfull valuation aUowanceallowance toto offset the net deferred taxtax assets asas our history of losses doesdoes not support thatthat it isis more likely than notnot thatthat these assets will be realized,reahzed.

At December 31, 2008,2008, we have foreignforeign tax and research andand experimentation ("R&E")(eR/kE") credit carry forwards for federal and state purposes of approximately $14 million, available toto offsetoffset futurefuture taxable income.income. The foreign taxtax credit carrycarry forwards generally expire inin 2018•2018.The R&ERdsE credit carry forwards generallygenerally expire betweenbehveen 2012 and 2028.

As of December 31, 2008, we hadhsd available U.SIU.S.and state net operating loss carrycarry forwards ("NOLs'9("NOLs") of approximatelyapproximately $146 million. The majority of these NOLs were acquiredacquired throughtluough the KPN Transaction. The operating loss carry forwards expire between 2009 and 2027. These carrycarry forwards may be usedused toto offset future incomeincome taxes payable atat thethe federal and statestate levels,levels, ififany,any, andand are subjectsubject toto reviewreview by thethe U.S.U,S.lntemalinternal Revenue Service ("IRS")("1RS")and various statestate taxingtaxing authorities.authorities.

• In general, thethe rules of Section 382 of thethe InternalInternal Revenue Code ("Code")("Code") apply toto limit a corporation's ability to utilizeutilize existingexisting net operating tossloss carryovers if the corporationcorporation experiences anan Ownership Change. An ownership changechange results from transactionstransactions increasing the ownershipovmership of certain existing stockholdersstockholders and, or, newnew stuekholdarsstockholders inin thethe stock of a corporationcorporation by more thanthan 50 percentage points during aa three year tastingtesting period.

During 2007,2007, the Company determined thatthat itsits NOLs were subject toto Section 382 limitations.limitations. As a resultresult of several ownershipovmership changes,changes, the utilization of our NOLs was subject toto annual limitations.limitations. The limitation caused approximately $111 million of thethe federal NOLs toto expireexpire unused and thereforetherefore not available toto be used by thethe Company.Company, These expired NOLs were not reflectedreflected asas deferred tax assetsassets at December 31, 2007.2007.

We have two annual limitationlimitation amounts, computedcomputed pursuant to IRC1RC Section 382. The firstfirst annualannual limitation for NOLs generated beforebefore August 2005 isis approximatelyapproximately $5$5 million•million. The second annual

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iBasis,iBasis, Inc.Inc.

NotesNates toto Consolidated Financial Statements (Continued)(Continued)

(10) IncomeIncome Taxes (Continued)

limitation forfor NOLs generated between August 2005 andand September 2007 is approximatelyapproximately $16 million. Any unused 1RCIRC Section 382 annual lossloss limitation amountamount may be carried forwardforward toto thethe following year. Those unused limitation losseslosses are thenthen added toto the current Code Section 382 annualannual limitation amount.amount.

We adopted the provisions of FASB Interpretation No. 48, "Accounting"Accounting for Uncertainty inin Incomeincome Taxes-an interpretation of FASB StatementStatement No. 109" ("FIN 48"), on January 1,2007.1, 2007. FIN 48 clarifiesclarifies thethe accountingaccounting for uncertainty inin income taxes recognizedrecognized inin an enterprise's financialtinancial statementsstatements inin accordance with FASB Statement 109, "Accounting forfor Income Taxes", and prescribes a recognitionrecognition threshold and measurement process for financialfinancial statementstatement recognitionrecognition and measurement of a tax position taken or expected to be takentaken inin aa tax return. FIN 48 also provides guidance on derecognitiun,derecognition, elessifieation,classification, interestinterest andand penalties, accountingaccounting in interim periods, disclosure and transition.transition. Prior to 2007 we recorded estimated income tax liabilities to thethe extentextent they were probable and couldcould be reasonablyreasonably estimated. The adoptionadoption of FIN 48 had no effect onon our financialfinancial statements at January I, 2007.2007.

We filefile U.S.US. federal, statestate and foreignforeign incomeincome tax returns in jurisdictions with varyingvarying statutesstatutes of limitations. We areare subject toto U.S.U.S.federalfederal income tax,tax, as well as income tax in multiple state andand foreignforeign jurisdictions. As of December 31, 2008, we were subjectsubject to examinationexamination in thethe U.S.U.S. federal andsnd state taxtax jurisdietiousjurisdictions for the 2005 toto 20072007 tax years. Although we are no longerlonger generally subjectsubject to IRS or state examination forfor the years prior toto 2005, carryforward attributes thatthat were generated priorprior toto 2005 may be adjusted upon examinationexamination byby the IRSIRS ififthey either have been or will be used inin a futurefuture period. We are also subject toto examination inin significant foreign jurisdictionsjurisdictions forfor thethe 2004 mto 2007 tax years.

The following tabletable summarizes thethe activity related to our unrecognized tax benefits:benetitsi

2008tees 2007start (hitnr tlleusand_)thoshhack) Balance at JanuaryJanuary 1I (for 2007 at adoption) $476 $-$— Acquisition of acquired company liability -- 307 Additions oror reductionsreductions for taxtax positions relatedrelated to the currentcurrent year 64 169 Additions oror reductions for tax positions relatedrelated toto prior years Decreases relating to settlementssettlements with tax authoritiesauthonties Reductions in benefits related toto lapse of statute of lim|tationslimitations Balance at December 31 $540 $476

At December 31,2008, we had approximatelyapproximately $540,000$540,000of unrecognized taxtax benefits, all of which will impactimpact the effective taxtax rata,rate, ififrecognized. In addition we had $367,000$367 000 of accrued interestinterest andand penalties.penalties, We do not expect the balancebalance of uoreeognizedunrecognized tax benefits to changechange significantlysignificantly during thethe next 12 months. We may distribute the currentcurrent year's earnings of our non-U.non-U.SS operations, howeverhowever it is our intention toto pemaanentlypermanently reinvest thethe prior year's earningsearnings indefinitely.indefinitely, Therefore, we have not provided forfor taxes on thesethese undistributed earnings.earnings. We had approximatelyapproximately $23 million andand $19 million inin undistributedundistributed earnings at December 31,200831,2008 andand 2007, respectively, forfor which taxes were not provided. It isis not practicablepracticable to estimate thethe amount of thethe deferred tax liability on suchsuch undistributed earnings.earnings.

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iBasis,iBasis,Inc.lnc.

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(11)(11)Long-TerraLong-Term DebtDebt

Long-termLong-term debtdebt consistsconsists ofofthethe followingfollowing asas ofofDecemberDecember 31:31:

2008tees 2007iee"i (Intrn thous_mds)thawsnss) BankBank borrowingsborrowings $27,080$27,080 $25,000$25,000 CapitalCapital leaselease obligationsobligations . 877877 755755 27,95727,957 25,75525,755 Less: Current portionportion (577)(577) (755)(755) Long-termLong-term portionportion $27,380$27,380 $25,000$25,000

InIn October 2007,2007,wewe enteredentered intointo a SecondSecond AmendedAmended andand RestatedRestated LoanLoan andand SecuritySecurity AgreementAgreement (the(the "Loan"Loan Agreement")Agreement" )withwith Silicon Valley Bank, which amendedamended and restatedrestated aa certaincertain AmendedAmended andand Restated LoanLoan andand SecuritySecurity Agreement dated asas ofofDecember 29, 2003. We enteredentered intointo thethe Loan Agreement toto obtain fundingfunding forfor workingworking capitalcapital purposes and inin supportsupport of thethe KPN Transaction. Pursuant toto thethe Loan Agreement,Agreement, whichwhich was subsequentlysubsequently amendedamended asas described below,below, we couldcould borrowbon ow up toto $35.0$35 0 million fromfrom timetime toto timetime underunder aa securedsecured revolvingrevolving creditcredit facilityfacility forfor aatwo-two- year period.period, Except asas described below, borrowings under thethe Loan Agreement areare on aa formula basis,basis, based onon eligibleeligible domestic and foreign accounts receivable. The Loan Agreement containscontains quarterly financial covenants,covenants, consistingconsisting primarilyprimarily of minimum profitability and minimum liquidityliquidity requirements.requirements. InterestInterest onon borrowingsborrowings under thethe Loan Agreement were based, in part, on our quarterly profitability, with theihe maximum interestinterest raterate beingbeing thethe bank's prime rate,rate, plus 0.5%,0.5%, or LIBOR, plus 2.2.75%.75%.The Loan Agreement has a quarterly commitment fee of 0.63%0.63%on any unused portion of the lineline of credit and we paid an up-front, one-time facility fee of 0.0.75%,75%, or $263,000.$263,000.The Loan Agreement is also guaranteed by all our domestic wholly-owned subsidiaries and is collateralized byby a firstfirst priority lienlien and security interestinterest nnon our andand such guarantor's assets. In addition, we pledged 66.2%66.2% of all of our ownership in KPN Global CartierCatrier Services (now{now knownknovm as iBasis Netherlands), a wholly-ownedwholly ovmed subsidiary based in The Netherlands, as collateral. Pursuant to the terms of the Loan Agreement, we may use the proceeds solely (i) forfor working capital, (ii)0i) to fundfund our general business requirements, and Off)(iii) toto fund the dividend paid by us in connection with the KPN Transaodon.Transaction.

In April 2008, we modified thethe Loan Agreement toto increaseinereuse our maximum borrowing availability from $35.$35.00 million to $50.$50.00 million. In addition, to reflectreflect our currentcurrent operating results and financial position, we modifltxtmodified thethe minimum profitability financialfinancial covenant andand added a minimum cash flowflow financialfinancial requirement pursuant to a sliding scale that decreasesdecreases overover time, aa portion of thethe additionaladditional $15.$15.00 miflionmillion inin flmdsfunds is subjectsubject to aa non-formula bonborrowingowing base through PebruaryFebruary 2009. The modificationmodification alsoalso permitted usus toto repurchaserepurchase upup toto $15 million of our commoncommon stockstock under aa stockstock repurchaserepurchase programprogram approvedapproved by ourourboardboard ofof directors inin April 2008. We paid anan up-front, one-time supplementalsupplemental commitmentcommitment feefee ofof $150,$150,000000 andand an up-front, one-timeone-time modificationmodification feefee ofof $75,$75,000.000.

InIn SeptemberSeptember 2008,2008, wewe modifiedmodified thethe financialfinancial covenantscovenants underunder thethe LoanLoan AgreementAgreement toto reflect our currentcurrant operatingoperating resultsresults andand financialfinancial positionposition asas follows:follows;

i)i) WeWe reducedreduced thetheminimumminimum profitabilityprofitability covenantcovenant forfor thethe quarterquarter endedended SeptemberSeptember 30,30, 2008;2008;

ii)ii) WeWe reducedreduced thetheminimumminimum liquidityliquidity covenantcovenant forfor thethe quarterquarter endedended SeptemberSeptember 30,30, 2008 throughthrough FebmaryFebruary 2009;2009; andand

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TableTable_ofofCementsContents

iBasls,iBasis,Inc.Inc.

NotesNotes totoConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(11)(11)Long-TermLong-Term DebtDebt (Continued)(Coutlnued)

iii)iii) WeWereplacedreplaced thetheminimumminimum cashcash flowflow covenantcovenant withwith aarequirementrequirement totomaintainmaintain atatleastleast $10gl0millionmillion inincombinedcombined cashcash andand borrow'_ngborrowing availabilityavailability withwith SiliconSilicon ValleyValley BankBankforforthethe quarterquarter endedended SeptemberSeptember 30,30,20082008throughthrough FebruaryFebruary 2009,2009,andand increasingincreasing toto$15$15millionmillion thereafter.thereafier.

Inln addition,addition, thethe interestinterest raterate onon borrowingsborrowings underunder thethe LoanLoan AgreementAgreement waswas increasedincreased byby 1%l%perperannumannum andand wewe paidpaid anan up-front,up-front, one-timeone-time modificationmodification feefeeofof$125,000.$125000.AtAt SeptemberSeptember 30,30,2008,2008,wewewerewere inin complianceccmphance ofofallall ofofthethefinancialfinancial covenants,covenants, asas modifiedmodified inin SeptemberSeptember 2008,2008, underunder thethe LoanLoan Agreement.Agreement.

OnOn JanuaryJanuary 26,26,2009,2009,thethe CompanyCompany andand SiliconSilicon ValleyValley BankBank modifiedmodified thethe LoanLoan Agreement,Agreement, effectiveeffective asasofof December 30,30,2008. TheThe modificationmodificstion toto thethe LoanLoan AgreementAgreement containscontains thethe followingfollowing amendments,amendments, amongamong others:others:

i)i) WeWe decreaseddecreased thethe amountamount availableavailable underunder thethe LoanLoan AgreementAgreement fromfrom $50.0$50.0millionmillion toto$35.0$35.0million;million;

it)ii) WeWe extendedextended filethe maturitymaturity date ofofthethe Loan Agreement toto SeptemberSeptember 30, 2010;2010;

iii)iii) We establishedestablished minimum interest ratesrates payable on amounts drawndravm underunder thethe LoanLoan Agreement, which includeinclude anan interest raterate floor of 4.25%4.25% on amounts subject to Silicon ValleyValley Bank'sBank's primeprime raterate endsnd anan interestinterest raterate floorfloor of 2.0%2.0% on amountsamounts subject toto the L1BORLIBOR rate;rate;

iv)iv) We changed formulas for determining quarterly adjustments toto margins applicableapplicable toto prime raterate andand LIBOR raterate and formula for unused revolving line fee from formulas based on thethe total funded debt ratio to formulasformulas based on EBITDA (earnings before interest, taxes,taxes, depreciation and amortization) minus capital expenditures;

v) We increased thethe frequency of certain financialfinancial reporting requirements fiomfrom quarterly to monthly as requestedrequested by Silicon Valley Bank;

vi) We modified the minimumminimum adjusted quickmtioquick ratio financial covenant to require a minimum adjusted quick ratio of0.0.8080 toto 1.1.0000 forfor thethe fiscalfiscal quarterquarter endedended December 31, 2008 and as of thethe endend of eacheach fiscalfiscal quarter thereafier;thereafter;

vii)vii) We deleteddeleted thethe mirdmumminimum consolidatedconsolidated EBITDA financiafinancial covenant;

viii)viii) WeWe addedadded aafinancialfinancial covenantrequiringcovenant requiring consolidatedconsolidated EBITDAEB1TDA minus capitalcapital expendituresexpenditures toto bebeatat leastleast (a)(a) ($1,($1,000,000)000,000) withwith respectraspeet toto thethe fiscalfiscal quartersquartersendingending DecemberDeaember 31,3 I, 20082008 andand MarchMereh 31,31, 2009,2009, (b)(b) $1.$1.0000 withwith respectrespect toto thethe fiscalfiscal quarterquarterendingending JuneJune 30,30, 2009,2009, (e)(e) $1,$1,750,000'750,000 withwith respectrespect toto thethe fiscalfiscal quarterquarter endingending SeptemberSeptember 30,30, 2009,2009, andand (d)(d) $3,$3,500,000500,000 withwith respectrespect toto thethe fiscalfiscal quarterquarter endingending DecemberDecember 31,31, 20092009 andand eacheach fiscalfiscal quarterquarterthereafier;thereafter; andand

ix)ix) WeWe modifiedmodified thetheminimumminimum liquidityliquidity financialfinancial covenanteovanant toto requirerequire aaminimumminimum liquidityliquidity amountamount ofof $17.$17.55 mifiionmillion measuredmeasured atatthethe endendofof eacheach fiscalfiscal monthmonth throughthrough AugustAugust 31,3 I,20092009 andandaa minimumminimum oFof $20$20 millionmillion atatthetheendend ofof eacheach fiscalfiscal monthmonth thereafter.thereaRer. InInaddition,addition, wewe areare requiredrequired totomaintainmaintain atat leastleast 40%40% ofof ourourtotaltotal sash,cash, cashcash equivalentsequivalents andand short-ternishort-term investmentsinvestments withwith SiliconSilicon ValleyValley Bank.Bank.

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iBasis,ig asia, Inc.lnc.

NotesNotes to Consolidated Financial Statements (Continued)(Continued)

(11)(11)Long-Term Debt (Continued)

As of December 31, 2008, we were inin violationviolation of our minimum profitability covenant under thethe Loan Agreement.Agreement, However, Silicon Valley Bank subsequently waived non-compliance of this covenant in the form of the modification toto thethe Loan Agreement executed on JanuaryJanuary 26, 2009.2009, InIn connectionconnection with this modification, we paid Silicon Valley Bank a modificationmedi iication fee of $52,500$52,500 andsnd a revolvingrevolving line renewalrenewal feefee orsof $175,175,000.000,

At December 31,200831,2008 andand 2007, we hadhad $27.1$27. I million and $25.0$25.0 million, respectively, in borrowings outstanding,outstanding, and had issued outstanding standby letters of credit of $2.6$2.6million and $2.9$2.9 million, respectively, under the Loan Agreement.Agreement,

During the year ended December 31, 2008, we purchased certain software licenseslicenses for $1.7$1,7million under a 30-month financing agreement,agreement, with payments due on a semi-annual basis throughthrough JtmeJune 2010.

(12)(12)Accrued Restructuring Costs

At December 31, 2008, we hadhad accruedacaued restructuringrestructuring costs of $1.1$1.1 million, which consisted of $0.5$0 5 million remainingremaining inin future paymentpayment obligations relatingrelating to a terminatedterminated New York City faailityfacility lease and $0.6$0.6 million of costs accrued for future leaselease obligations for certaincertain vacant leased facilities,facilities, net of futurefuture subleasesublease payments. Payments of these restructuring costs will bebe made through February 2011.

A summary of accrued restructuring costs isis as follows:

Future PalrmentPayment ObngationObligation Contractual Leasetome ononiemeLtase Obligations RelatingRebtlng Ter_...._m|natlonTermination toto Vacantvacant Fa¢iliti¢_Faculties TotTotala_..L Acquisition of acquired companycompany liability $$771771 $$1,1,119119 $1.890$1,890 Cash payments (5t)(5 I) (132) (183)(I83) Balance, December 31, 2007 720720 987 1,7071,707 Additional accrual 11 133 144144 Cash payments (241)(241) (509)(509) (750) Balance, December 31, 2008 $ 490 $ 611 $1,101$1,101 Current portion, includedincluded in aeemedaccrued expensesexpenses $ 758 Long-term portion, included in other long-termlong-term liabilitiesliabilities 343 Total $1,101$1,101

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IBas_,Inc.iBasis, Inc.

Notes toto Consolidated Financial Statements (Conllnued)(Continued)

(13)(13)Pensions and Postretirement Plans

Substantially allail employees ofKPNof KPN GCSOCS areare participants in various defined benefit pensionpension plans andand defineddetined contribution plans administeredadministered and sponsored by Royal KPN. Benefits under the pension plans are basedbased primarilyprimarily onon years of serviceservice and employees'employees' compensation.compensation. The majority of thethe pension expenses relaterelate toto pension plans inin The Netherlands and thethe United States.

These consolidated financialfinancial statements reflectretlect thethe defined benefit plans on a multi-employer basis inin accordance with SFAS No. 87, "Employers'Accounting"Entployers'dccounu'ng for Pensions':Pensions". As such,such, Royal KPN allocated costscosts associated with the pension plans toto KPN GCS based upon a ratio of weighted pensionable incomeincome for serviceservice costscosts and allocates eatscosts a_ociatedassociated withivith other componentscomponents of pension expense, such as interest costs, amortization of actuarial gains/losses,gains/losses, etc.,etc., based on projected benefit obligations relativerelative to the total projected benefit obligationobligation of the plans.

Pension expense allocated to KPN GCS from Royal KPN forfor itsits employees participating inin Royal KPN pension plans wasivas approximatelyapproximately $0.5$0.5 million, $0.1$0.1 million, and $0A$0.4 million, forfor the years ended December 31,2008,31,2008, 2007 and 2006, respectively.

Dutch employees of Royal KPN are also eligibleeligible forfor early retirementretirement benefits. This plan is accounted forfor inin accordance with SFAS No.No, 87 (as amended by FAS 158). The earlyearly retirement planplan is neither fundedfunded nor inanredinsured through aa third party, but is paid directly byby KPN GCS toto thethe early retirementretirement employees.employees, Royal KPN allocated early retirementretirement expenses (service(service costs, interest costs, prior service costs, and actuarial gainsgains and losses)losses) toto KPN GCS based on aa ratioratio of service costs relating to its employeesempioyees relativerelative to the Royal KPN early retirement costs.costs. Until September 30, 2007,2007, Royal KPN allocated thethe earlyearly retirementretirement provision to KPNKpN GCS based on a ratioratio of the projected benefit obligation relatingrelating to itsits employees relative.torelative to Royal KPN'KpN' projected benefitbenetit obligation. Early retirement expensesexpensos were $0, $2,000,$2,000, andand $62,000$62,000 for the years ended December 31, 2008, 2007200'7 and 2006, respectively.

As a resdtresult of thethe dosingclosing of thethe KPN Transaction on October 1,2007,1, 2007, the liability relating to earlyearly retirement obligations isis no longerlonger being allocatedallocated to usus byby Royal KPN. Accordingly, there was no obligation forfor early retirement benefits inin our consolidated balance sheetsheet as of December 31,3t, 2008 andand 2007.

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iBasls,IBasis, Inc.Inc.

Notes to Consolidated Financial Statements (Continued)(Continued)

(14)(14) Commitments and Contingencies

CommitmentsConimltmen to

WeIVe lease our administsativeadministrative andand operating facilities, which expire at various datesdates through 2018.2018, The future approximateapproximate minimum leaselease payments under such operating leasesleases asas of December 31,200831,2008 consistconsist of the following:following:

Year ended December 31_ iu Ihsuumds 2009 $$2,2,784784 2010 877 2011 392 2012 277 2013 293 Thereafter 1,5171,517 Total futurefuture minimum lease payments $$6,6,140140

At DecomberDecember 31, 2008, we had commitments with certain telecommunications carriers for the terminationtermination of minutes for thethe yearyear ended December 31, 2008 totaling $20.5$20.5 million. As of December 31,2008,31,2008, we did not have anyany other material purchase obligations, or other material long-termIong-term commitmentscommitments reflectedreilected on our consolidated balance sheet.

Lio'gaaonLegal/on

In addition to litigationlitigation thatthat we have initiatedinitiated or responded toto in the ordinary coursecourse of business, we areare currently party toto the following potentially material legallegal proceedings:proceedings:

Class Actionrfction Pursuant toto 1999l999 Initialinitial PublicPublic Offering0/ferlng

Inin 2002001,I, we were servedserved with severalseveral classclass actionaetiort complaints that were filed in thethe United States District Court for thethe Southern District of New York against usus and several of ourour officers, directors, andsnd formerformer officersofficers and directors, as well asas against thethe investmentinvestment banking firmsfirms that underwrote our November 10, 1999 initial public offering of commoncommon stock and our March 9, 2000 secondary offering of common stock. The complaints were filed on behalf of a class of personspersons who purchased our commoncommon stock between November 10, 1999 aridand December 6, 2000.

The complaints are similar toto each other and to hundredshundreds of otherother complaints filedfi le d against other issuersiasu era and theirtheir underwriters, andsnd allege violations of thethe Securities Act of 1933, as amended (the "Securities"Securities Act"),Actu), andsnd thethe Securities Exchange Act of 1934, as amendedamended (the "Exchange"Exchange Act"), primarilyprimarily basedbased onon the assertionassertion that there was undisclosedundisc! osed ¢ompensationcompensation receivedreceived by our underwriters in connection with ourow public offerings and that therethere were understandings with customers to make purchases in thethe aRermarket,afiermarket,

InIn SeptemberSeptember 2001, thethe complaints were consolidated endand allege thatthat our prospectusesprospectuses failedfailed toto disclose thesethese arrangements. The consolidated complaint seeksseeks an unspecified amount of munetarymonetary damages endand other relief.relief. InIn October 2002, the individual defendants were dismissed fromfmm the litigation by stipulationstipulation andand without prejudice and subjectsubject toto an agreement to tolltoll the runningrunning of time-basedtime-based defenses. In February 2003, thethe district courtcourt denied ourour motion to dismiss.

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iBasls_iflasls, Inc.

Notes to Consolidated Financial Statements (Continued)(Continued)

(14) Commitments and Contingencies (Continued)(Contloued)

InIn June 2004, we andand the individualindividual defendants, as well as many other issuers namednamed asas defendants inin thethe class action proceeding, entered into an agreement-in-principle to settle thisthis matter, and this setllementsettlement was presented toto the court. The district courtcourt granted a preliminary approval of thethe settlementsettlement inin February 2005, subject toto certain modifications toto the proposed bar order, toto which plaintiffs and issuersissuers agreed.agreed. InIn August 2005, the district court issuedissued a preliminary order further approving the modifications toto thethe settlement, certifying the settlementseitlemcnt classesclasses and scheduledscheduled a fairness hearing, afterafler notice toto thethe class. Plaintiffs have continued toto pursuepursue theirtheir claims against thethe underwriters. The district court established a procedure whereby six *'focus""focus" casescases areare being pursued initiallyinitially andand has certified a classclass of purchaserspurchasers inin thosethose cases. The underwriters appealed the certificationcertification order inin each of thethe six cases and inin December 2006.2006, thethe United States Court of Appeals for the Second Circuit reversed the certification orders. Motions to dismiss amended complaints filedfiled inin the six focus easescases have been denied.denied,

We anticipate additional settlementsettlement negotiationsnegotiations will occur, but there canran be no assurance thatthat those negotiations will result inin a revisedrevised settlement.settlement. We believebelieve that if thisthis matter isis not settled, we have meritorious defenses which we intendintend to vigorously assert.

We cannot estimateestimate potential losses,losses, ifif any, from these matters or whether, inin light of our insurance coverage,coverage, any tossloss would be material to our financialfinancial condition,condition, resultsresults of operations or cash flows.flows. As such, no amounts have been accrued asas of December 31, 2008.

SEC Option lnvesn'gationInvestigation

We announced on October 20, 2006, thatthat we were contacted by the SEC asas part of anan informal inquiryinquiry and we furtherfurther disclosed on March 29, 2007, on our Current Report on Form 8-K,S-K, that thethe SEC had notified us that we would be receivingreceiving aa formal order of investigation relating to our stock option practices. On April 13, 2007, we receivedreceived the formal order of investigation.investigation, The SEC investigationinvestigation sought documents and informationinformation fromfrom us relatingrelating toto thethe grant of our options from 1999 throughthrough 2006. The SEC hashas takentaken testimonytestimony from individualsindividuals including certain of our current and formerformer officers andand directors. We have cooperated fullyfully with the SEC investigation and we areare in communication with thethe SEC staffregardingstaff regarding the outcome of thethe investigation.investigation. There isis nono assuranceassurance thatthat we will be ableable to resolve the SEC investigationinvestigation on acceptableacceptable termsterms without the institution of enfor_mantenforcement proceedings byby the SEC against us or one or more of our senior executive officers or that other inquiries will not be commenced by other U,S.U, S, federal, statestate or other regulatoryregulatory agencies. An SEC enforcement proceeding couldcould seekseek anan injunctioninjunction againstagainst future violations of the securities laws,laws, a civil penalty and, as to individual executives, disgorgement and aa bar order against serving asas an officer or director of a publicly tradedtraded company.rompany. A bar order as to any of our seniorsenior executive officers would deprive us of anyany such executive's servicesservices and could have a material adverse affect on our business.

We cannot estimateestimate tbethe amount of losses,losses, if any,any, fromfrom the SEC investigation, or whether any loss would be material to our financial condition, resulksresults of operations or cash flows.flows. As such,such, no amountsamounts have been accrued as of December 31,31.2008.

Sub-DistribuWrSttb-JJt'stribe tor ActionAct/an

On September 20, 2007, JI &gr J Communications ("J &(k J"),3"),a sub-distributor of calling cards distributed through iBesisiBasis distributor Abdul Communications CAbdut"),("Abdul"), amended a complaint filedfiled inin the United States District Court forfor thethe District of Maryland againstagainst Abdul, toto add iBasisiBasis and PCI, a

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iBasis,iBasis, Inc.Inc.

Notes to Consolidated Financial Statements (Continued)

(14)(14) CommitmentsCommitmeuts and Contingencies (Continued)(Continued)

wholesale calling-card provider ("PCI"),("PCI"), as defendants in thethe matter. The complaint asserts thatthat JI & JI has lost and continues excess toto lose money because iBasis and PCI deactivated callingcalling cardscards forfor which JI & 3J allegedly paid. J & JJ isis seekingseeking in excess of against Abdul, $1.0$].0million dollars,dollars, plus punitive damages, attomeysattorneys fees and litigationlitigation costs based on a variety of claimsclaims against Abdut, iBasis,iBasis, andand PCI, predicated on contractualcontractual theories,theories, variousvarious torts,torte, conspiracy and anan alleged violation of §8 201 of thethc Telecommunications Act. With respect toto iBasis,iBasis, JI & J alleges bothboth directdirect liabilityliability and vicarious liability,liability, for its allegedalleged status answer and asas principal in anan alleged agency relationship with AbduLAbdul. iBaslsiBasis respondedresponded to the amended complaint throughthrough an answer and motion to dismiss on February 8,8, 2008.200& On JuneJune 2, 2008, the Court dismissed the conspiracy and Telecommunications Act claims.claims, Discovery is proceeding as to the remaining claims.

We cannot estimate the amount of losses,losses, if any, fromfrom thisthis matter, or whether any lossloss would be material to our financialfinancial condition,condition, results of operations or cash flows. As such,such, no amount hashas beanbeen accrued as of December 31, 2008.

Bankr_tptcyBankn play Preference ClaimClaim

On April 24, 2001 (the(the "Petition Date"),Date"), World Access, Inc. ("World("World Access"),Access"), WoddxChangeWorldxChange Communications, Inc. ("WorldxChange"),("WorldxChange"), andand FacilicomFaciiicom International,International, LLC ("Facilieom"),("Facilicom"), togethertogether with other relatedrelated debtors (collectively, thethe Code" "Debtors"),"Debtors" ),filedtiled voluntary petitions for relief underundet' chapter 11 of title II 1I of thethe United States Code (the(the "Bankruptcy Code")) inin the United States Bankruptcy Court forfor thethe Northern District of lllinoisIllinois (Eastern(Bastem Division). The Debtors' cases areare jointlyjointly administered but have not been substantivelysubstantively consolidated. Prior to the Petition Date, we and thethe Debtors engaged in a reciprocalreciprocal business relationship.relationship. On or aboutabout April 21, 2003 thethe Debtors initiated a large numbernumber ofavoidancaof avoidance actions, includingincluding anan adversary proceeding inin which thethe Debtors asserted claims againstagainst usus forfor allegedly preferential transferstransfers and asserted nonpayment of overdue amounts owed byby iBasisi Basis toto the Debtors totalingtotaling approximately $2.1$2.1 million.million, We have asserted defenses to the claims, invoked statutory defenses and filedfiled proofs of claim for approximately $0.5$0.5 million toto which thethe trustee forfor thethe Debtors has objected. We expectexpect toto engage inin a medJationmediation to attempt toto resolveresolve these claims during the first quarter of 2009 and have determined thatthat itit isis probable that we will incur aa liability of approximately $0.5$0.5 millionmi I I ion and,and, accordingly, we have accrued that amount as of December 31, 2008.

Consumer Class ActionAcr/on

We were named in aa putativeputative consumer classclass aedonaction complaint, filed inin thethe UnitedUnlttxi States District Court for the District of New Jersey.Jersey. We were served on May 27, 2008. The putative classclass action plaintiff, Orlando Ramirez, asserted violations of consumer protection statutes in New Jersey andand other statesstates onon behalf of an assertedasserted nationwide classclass of purchaserspurchasers due to anan alleged failurefailure toto adequately disclose thethe actual calling time availableavailable on iBasis' prepaid callingcalling cards.cards. We filedfiled aa motion toto change venue toto thethe Eastern District of New York where named plaintiff resides and purchased thethe card. Plaintiffs wereivere granted a voluntary dismissal, without prejudice, on July 9, 2008. On December 19, 2008, aa substantiallysubstantially similarsimflar complaint was filed againstagainst us on bebalfbehalf of Mr. Ramirez in the United States District Court for the Eastern DistrietDistrict of New York. As of MarchMarch,_2__9_2009, we have n_tnot bennbeen served with thisthis comp_aint.complaint, We b__ievebelieve thatthat we have _ubstan_a_substantial defansesdefenses __to thethe e_aimsclaims alleged in the complaint and,and, ifif served, we intendintend to vigorously defend against the claims asserted. We cannot estimate the amount of losses,losses, if any, from this matter, or whether anyany loss would be material toto our financialfmancial

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iBasis, inc.Inc.

Notes to Consolidated Financial Statements (Continued)

(14) Commitments and Contingencies (Continued)(Continued)

condition, results of operations or cash rio,vs.flows. As such, no amount has been accrued as of December 331,I, 2008.

Other Matters

We are alsoalso subject toto suits for collection, relatedrelated commercial disputes, claims byby former employees, claims relatedrelated toto certain taxes,taxes, claims fromfrom carriers and foreign servieeservice partners overover reconciliationreconciliation of payments forfor circuits, lntemetInternet bandwidth end/orand/or access to thethe public switched telephonetelephone network,network, andand claimsclaims from estates of bankrupt companies alleging that we receivedreceived preferential payments from anehsuch companies prior toto their bankruptcy filings.filings. We cannotcannot estimateestimate the amount of losses,losses, if any, from these matters,mattem, or whether any loss would be material to our financialfinanclal condition,condition, resultsresults of operations or cash flows.flows. As such,such, no amount has been accruedaccrued as of December 331,I, 2008.

(15) Related Party Transactions

FrameworkFrametvorh ServicesSera/ces AgreementAgreetnent

As requiredrequired by and inin anticipation of the closing of the KPN Transaction, KPN GCS entered intointo aa Framework Services Agreement with KPN in June 2006. Under thesethese agreements,agreements, revenues earned andand costscosts incurredincutred fromfrom KPN changed toto primarily reflect market prices.

Pursuant toto the Framework Services Agreement:

KPN appointedappointed KPN OCSGCS as a preferred supplier of mobile services for KPN and allal! their affiliates and subsidiaries;subsidianes; and

KPN appointed KPN GCS as its exclusive providerprovider for intarnationalinternational directdirect dialing, ISDNISDN and InmarsatInmarsat services forfor all internationalinternational telephone and fax traffictraffic originating from or carriedcarried overover KPN'sKFN's fixed networks.

The Framework Services Agreement has aa ten-yearten-year term,term, which isis automatically extendedextended forfor subsequentsubsequent one-year periods unless eithereither party provides at least tltree monthsmontlis writtenvnitten notice prior toto the endend oftbeofthe thenthen ¢unrentcurrent term.tenn. The FramewerkFramework Services Agreement includes:includes:

A Service Agreement for hlternaticntalInternational Direct Dial Services andand ISDNISDN Services: KPN GCS provides intemaf,internationalonal direct dialing, ISDN and lnmarsatInmarsat services for internationalinternational telephone and fax traffictraffic over KPN's fixedfixed network atat aa price equal toto tbethe expected cost of providing servicesservices which isis determined in advance of thethe period plus a margin as set forth in thethe agreement at declining ratesrates through the year 2010.2010.Thereafter,Thereafler, margins shall be negotiated eacheach year.

A Service Agreement for Management Fee for Shared Services: KPN GCS andsnd KPN will shareshare the following: financialfinancial services, human resources, legallegal services, 1TIT systems, office space, insu_nceinsurance premiums, and administrative and professional support services,

A ServiceService Agreement forfor Transmission Path Services: The parties agreed upon certaincertain measurable performance parameters for specific activities relating toto various transmission pathpath services that KPN provides toto KPN OCS.GCS. In addition,additiou, thethe parties also agreed to certain specifiedspecified service deliverahlesdeliverables that KINKPN GCS is toto provideprovide as a system provider andand service provider to KPN.

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iBasts,igasis, Inc.Inc.

NotesNotes toto ConsolidatedConsolidated FinancialFinancial StatementsStatements (Continued)(Continued)

(15)(15) RelatedRelated PartyParty TransactlonsTransactions (Conttuued)(Continued)

AAServiceService AgreementAgreement forfor ITITSystemSystem SupportSupport andand Maintenance:Maintenance: TheThe partiesparties agreedagreed uponupon certaincertain measurablemeasurable performanceperformance parametersparameters forforthethe supportsupport andand maintenancemaintenance servicesservices thatthat KPNKPN providesprovides totocertaincertain informationinformation technologytechnology ("IT")("IT")systemssystems ofKPNof KPN GCS,GCS,iocluding:including: serviceservice provisioning,provisioning, ITITarchitecture,architecture, pricingpricing arrangementsanangements furfor ITITmaintenancemaintenance andand support,support, keykey perfomaanceperfonnance indicators,indicators, operationaloperational proceduresprocedures forforuseruser incidents,incidents, settlementsettlement andand reportingreporting proceduresprocedures andand otherother detaileddetailed operationaloperational ITITmaintenancemaintenance andand supportsup port relatedrelated specifications.specifications.

A ServiceService AgreementAgreementinternationalforforNationalNational TransmissionTransmission Backbone:Backbone: TheThe partiesparties agreedagreed uponupon certaincertain performance,performance, financial,financial, andand reportingreporting parameters forfor KPN's deliverydelivery andand maintenancemaintenance ofofbeckbonebackbone transmissiontransmission capacitycapacity betweenbetween thethe international domaindomain andand thethe nationalnational domaindomain forforKPNKPN GCS.GCS,

A ServiceService Agreement forfor Support andand Maintenance forfor TechnicalTechnical Infrastructure:infrastructure: TheThe partiesparties agreedagreed uponupon certaincertain performance, reporting,reporting, and financial parametersparameters relatingrelating toto maintenancemaintenance andand supportsupport of thethe technicaltechnical infrastractureinfrastructure thatthat KPN providesprovides toto KPN GCS. These maintenance andand supportsupport activitiesactivities include:include: capacitycapacity management, innovation, deliverydelivery of signalingsignaling services,services, andand network maintenance.maintenance.

Prior to thethe Framework Services Agreement, KPN GCS entered intointo agreements with KPN andand itsits affiliatesatfiliates andand subsidiaries for thethe sale of internationalinternational wholesale minutes and thethe provision ofofcorporatecorporate administrativeadministrative services.services, The agreementsagreements for thethe sale and purchase of traffic from and to KPN and itsits affiliatesaffiliates and subsidiariessubsidiaries werewere mademade annuallyannually andand reviewed periodically. These agreements were based on the internal pricing policies of KPN and relevantrelevant regulatory requirements. These historical internal pricing policies were not necessarily indicative of the prices KINKPN GCS would have paid or received had KPN GCS been a stand alone company.

Intellectualfute/ieeruai Property Cross-Licenses

In connection with thethe closing of the KPN Transaction, iBasisiBasis entered into an Intellectual Property License Agreement with Royal KPN.KIN. Pursuant to the agreement, iBasisiBasis has been granted a worldwide, nonnon.transferable,transferable, andend nonnon-exclusiveexdusive licenselicense toto use Royal KPN' portfolioportfolio ofof patents andand certaincertain other Royal KPN intellectualinteneetual property, and Royal KPN has been granted aa worldwide, non.non-transferable,transferable, and non-exclusive license toto use iBasis' portfolio of patents.

Revenue audand Da(aData andand Te!ecommTelecommunicationun/car/on CosrsCosts

Revenue fromfront KPN andand itsits subsidiariessubsidiaries amountedamounted toto $226.$226.11 million, $197,$19%33 million, andand $209.$209.22 million for thethe years endedended December 331,I, 2008,2008, 2007 andand 2006, respectively,respectively, andand isis reportedreported in Net revenue fromfrom relatedrelated parties inin thethe ConsolidatedConsolidated StatementStatement of Operations.Operations.

Under thethe FrameworkFramework ServicesServices AgreementAgreement thatthat waswas establishedestablished inin JuneJune2006, therethere was aareductionreduction inin priceprice forfor the terminationtermination of internationalinternational voicevoice traffictraffic comingcoming I'romfrom thethe retailretail organization of KPN,KPN, comparedcompared toto thethe priorprior pricingpricing modelmodel inin effect.effect. AsAs aaresult,result, netnet revenuerevenue fromfrom relatedrelated partiesparties decreaseddecreased approximatelyapproximately $31.$31.44 millionmillion inin thethe periodperiod fromfrom JuneJune 20062006 throughthrough DecemberDecember 331,2006.I, 2006. CostsCosts alsoalso decreaseddecreased asas aaresultresult ofof lowerlower pricesprices forfor nationalnational andand internadonalinternational transmissiontransmission (approximately(approximately $0.$0.99 million)million) andand corporatecorporate servicesservices (approximately(approximately $5.$5.00 million)million) overover thethe samesame periodperiod duedue thethe pricingpricing underunder thethe FrameworkFramework ServicesServices Agreement,Agreement, comparedcompared toto thethe priorprior pricingpricing model inin effect.effect. InIn AprilApril 2005,2005, thethe KPNKIN internalinternal pricingpricing modelmode/waswas adjustedadjusted asasaaresultresult ofof organizationalorganizational changeschanges atat RoyalRoyal KPN,KPN,

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iBasis,IBasts, Inc.Ine.

NotesIqotes toto Consolidated Financial Statements (Continued)

(15) Related Party Transactions (Continued)

resulting in an increaseincrease in Net revenuerevenue from related panics,parties, and a decrease in data and telecommunicationtelecommunication costs--relatedcosts—related parties.

Data and telecommunicationtelecommunication costscosts purchasedpurchased fromfrom KPN and itsits subsidiaries amounted toto $105.8$105.8 million, $I$114,14.22 million and $134.3$134,3 million forfor the years ended December 31,2008,31,2008, 2007 and 2006, respectively, and isis reported in Data and telecommunications costs--relatedcosts —related parties inin thethe Consolidated StatementStatement of Operations. These costs relate to services forfor thethe prOcurementprocurement and transmissiontransmission of sending and receiving traffic (provided(provided toto KPN GCS by KPN andand its subsidiaries). Agreements betweenbetween KPN OCSGCS and KINKPN and itsits subsidiaries for the sale of whnlesalewholesale internationalinternational minutes were made atat various pricesprices and quantities.quantities.

Allocated expenses

Historically, KINKPN GCS relied on KINKPN forfor a substantial part of its operational and administrative support,support, forfor which it was allocated costs primarily consisting of costscosts for centralized research,research, legal,legal, human resources, payroll, accounting, employee benefits,benetits, facilities, insurance,insurance, informationinformation technology,technology, telecommunications, treasury and other corporate and infrastructure costs. These expenses were allocatedallocated based on thethe ratioratio ofKPNof KPN GCS revenue, operating expenses, andand number of employees COmparedcompared to comparablecomparable revenue, operating expenses, andand numbernumber of employees of KIN,KPN, as appropriateappropriate forfor each cost category. However, thesethese allocated expenses did not necessarilynecessarily reflectreflect the utilizationutilization ofservieasof services providedprovided toto or the benefits received by KINKPN GCS.

Since the date of the KINKPN Transaction, as partpart of ourour integration process, we have reducedreduced thethe levellevel of servicesservices and supportsupport requiredrequired from KPN for our Netherlands operations.operations. InIn certain cases, such as audit fees,fees, we arcare now directly responsible for thesethese costs.costs, As a resultresult of our integrationintegration efforts to-date,to-date, eostscosts incurredincurred directly fromfrom KINKPN havehave been substantiallysubstantially reducedreduced from previous periods. To further capture cost savings from our integration efforts, we are restructuring our operations in The Netherlands. We expect that our operations in The Netherlands will become primarily sales andand product management, with strategic supportsupport fromfrom locations outside The Netherlands. As thisthis plan has not yet been finalized,finalized, we cannot yet determine the amount of any future restructuring charges we may incurincur andand the timing of such charges. In addition,addition, inin the future,future, we will be furtherfurther reducingreducing the operationaloperational services we purchase from KINKPN as integration projects areare completed.completed,

Engineering and network operations expensesexpenses include allocated costs from KPN, which were $6.2$6.2 million, $8A$8,4 million andand $8.9$8.9 million forfor thethe years ended December 31, 2008, 2007 andand 2006, respectively. The decline in nestscosts inin 2008 compared toto 2007 reflectsreflects lessless requiredrequired support from KPN for ourour TDM network.

Selling, general and administrative expenses include allocated corporate and divisional costs from KPN, which were $2.5$2.5 million, $13.3$13.3 million and $20.8$20.8 million for thethe years endedended DeeamberDecember 31, 2008, 2007 and 2006, respectively. The significantsignificant decline inin costs inin 2008 compared toto 2007 reflects significantlysignificantly lowerlower costscosts forfor information services and other corporate administrativeadministrative support.

PriorPnor toto the KINKPN Transaction, there was no allocation of interestinterest expense from KPN as therethere was nono debtdebt specificspecific to KINKPN GCS.

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IBasis,iflasis, Inc.Ine.

Notes toto Consolidated Financial Statements (Continued)(Continued)

(15)(15) Related Party Transactions (Continue6)(Continued)

Epty' WorkblgWorkbtg Capital and Debt AdjustmentsAd/ ustmerits related to KIN TransactionTransactfon

InIn accordanceaccordance with thethe Share Purchase Agreement for the KPN Transaction, a post-closing adjustment was required ifif (i)(i) iBasis' working capital was lowerlower than or exceededexceeded $37,100,000;$37,100,000; (ii) iBasis' debt exceeded or was lower than $2,900,000;$2,900,000; (iii)(iii) thethe combined working capital of KPN GCS was lower thanthan or exceededexceeded ($6,100,000);($6, 100,000); and/or (iv)(iv) the combinedcombined debt of KPN OCSGCS exceeded $0, as of thethe date of the dosingclosing of thethe KPN Transaction. Based on iBasis'iBasis' balance sheet position on thethe date of the closing of the KPN Transaction, working capital was $13,353,000$13,353,000lessless than thethe specifiedspecitled levellevel of $37,100,Ol_0,$37,100,000, and debt was $1,776,000$1,776,000 less than the specified levellevel of $2,900,000.$2,900,000.As a result, a payment orS11,577,000of $11,577,000 is duedue to KPN from iBasis.iBasis. Based on KPN GCS's balance sheet position on the date of the dosingclosing of thethe KINKPN Transaction, working capitalcapital exceeded the specifiedspecifled level of ($6,100,000)($6,100,000)byby $3,945,000$3,945,000 and debt was at the specified levellevel of $0. As aa result,result, paymentpayment of $3,945,000$3,945,000 is due to KINKPN from iBasis.iBasis.

InIn 2008, KPN forgave $0.8$0.8 million inin expenses incurred by KINKPN GCS since the dosingclosing of thethe KPN Transaction. As aa result, the amountamount duedue toto KINKPN has beenbeen reduced by thisthis amount and was recordedrecorded asas a contribution toto equity.equity. These expenses have beenbeen recordedrecorded in our results of operations. The total amountamount of $14.7$14.7 million due to KINKPN was scheduledscheduled toto be paid by iBasis in threethree successive quarterly installmentsinstallments throughthrough thethe thirdthird quarter of 2008, with interestinterest at the rate of 6%6%per annum.annum, In May 2008, we made thethe first payment of $5.2$5.2 million, including interest, toto KIN.KPN, In September 2008, we revisedrevised the terms of the remaining balance of $10.3$10.3 million due to KPN toto extendextend thethe paymentpayment date on the second installmentinstallment payment toto March 2009 and the final installmentinstallment to JuneJune 2009. InIn addition,addition, the interest rate was increasedincreased to 7% on thethe principal amountamount due, effective October 1,I, 2008, and we paid additional interest of $60,000$60,000 relatingrelating to thethe extension of the secondsecond installment that was due JuneJune 30, 2008,

As of December 331,I, 2008 and 2007, unpaid principal and aeerundaccrued interestinterest due to KPN was $10.5$10,5 million and $15.5$15.5 million, respectively.

Accounts Payable aridand Accounts ReceivableRecei sable to Related PartiesParti es

As of December 31, 2008, we had accounts receivable due fromfrom KINKPN andand its subsidiaries of $2.1$2. 1 million endand thisthis amount isis reflectedreflected inin Accounts receivable--relatedreceivable —related parties on thethe Consolidated Balance Sheets. This amount is net of $10.5$10.5 million outstanding thatthat isis due to KPN,KpN, includingincluding interest,interest, for the post-closingpast-closing working capitalcapital andand debt adjustmentsadjustments of iBasis and KINKPN GCS. As of December 31, 2007,2007, we hadhad accounts payable toto KINKPN andand its subsidiaries of $11,8$11.8million and this amount is reflected inin Accounts payable--_elatedpayable —related parties on the Consolidated Balance Sheets. This bataneebalance includedincluded the $15.5$15.5 million due to KINKpN for thethe post-dosingpost-closing working capital and debt adjustments ofiBasisof iBasis andand KPNKpN GCS.

(16) Stockholders' Equity

AuthorizedAuthorised Capital Stock

We havehave authorizedauthorized forfor iasuanceissuance 170 million sharesshares of commoncommon stock,rock, $0.001$0.001 par value per share.

We also have authorized forfor issuance 15 million shares of preferred steelstock, $0.001$0.001 par value per share. There are no shares ofpreferred stockstock issued or outstanding.outstanding,

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iBasis,IBasis, Inc.Inc.

Notes to Consolidated Financial Statements (Continued)(Continued)

(16) Stockholders' Equity (Continued)

StockSracR Incentivelncenliee Plan

At thethe Annual Meeting of Shareholders held on September 27, 2007, the shareholdersshareholders of iBasis, Inc.Inc. approvedappmved the adoption of the iBasis, Inc. 2007 Stock Plan.Plan, The 2007 Stock Plan authorizesauthorizes thethe grant of up toto 3,500,0003,500,000 sharesshares of common stockstock forfor the issuanceissuance of stock options, restricted and unrestricted stock awardsawards and other stock-basedstock-based awardsawards toto employees, consultants and directors ofiBasis.of iBasis. Under thethe terms of the 2007 Stock Plan,Plan, thethe exercise price of options grantedgranted shallshall be determined by the Board of Directors and forfor incentiveincentive stock options shallshall not be lessless than fairfair market valocvalue of ourour common stock on thethe date of grant. Options vestvest quarterly inin equalequal installments over four years, provided that no options shallshall vestvest during the employees' first year of employment. The expiration date of each stockstock option shall be determined byby the Board of Directors, butbut shall not exceed 10 years from thethe date of grant. The 2007 Stock Plan replacesreplaces the iBasis, Inc. Amended and Restated 1997 Stock IncentiveIncentive Plan, which expired onon August 11, 2007. Pursuant to thethe terms of the Amended and Restated 1997 Stock Incentive Plan, all outStandingoutstanding options under such plan wiltwill remainremain inin effect until they expire by theirtheir terms.terms.

WarrantsIYarranls

At December 31,2008,31,2008, we had the following warrants to purchase sharesshares of ourour common stockstock outstanding:

_erclseEserctse Price ShaftsSberss Per ~cutstsedieOutstanding_ Share tintie thou*andibeessedsi0 Warrantytrarrant issuedissued for investmentinvestment banking services in connection with private equity placement of iBasisiBasis inin September 2004 365 $S 6.306.30 Warrantwarrant issuedissued forfor investment banking advisory services forfor iBasisiBasis inin 2006 67 9.009.00 Total warrants outstanding 432

(17) ForetgnForeign Currency Translation of HistorlcalHistorical KPN GCS FlnanelalFinancial Statements

The historical KPN C,-CSGCS financial statementsstatements were denominateddenominated in Euros,Eurus, thethe reporting currency ofKPNof KPN CrCS.GCS, The financial statementsstatements were translatedtranslated intointo US dollars forfor inclusioninclusion in thisthis Form 10-K.IO-K.

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iBasis_igasis, Inc.Inc.

Notes to Consolidated Financial Statements (Continued)(Continued)

(18)(18) Summary of QuartarlyI)uarterly InformationInformation (Unaudited)i Unaudited)

The followingfollowing table reflectsreflects ourour quarterly results of operations for the years ended December 31, 2008 and 2007.2007,

FirStFlret Second Third Fourth TOtMTotal i Year Year Ended December31December 32r20082000 _ stuatter _~uarter _~uarter _~uarter Year TolalTotal net revenue $324,903$324,903 $360,840$360,840 $338,023$338,023 $299,819$299,819 $1,$1,323,585323,585 Total costs andand operating expenses 323,178323,178 357,310357,310 336,820336,820 5t4,810514,810 1,532,1181,532,118 lneome(loss)Income {loss) fromoperatiensfrom operations 1,72""--'"_1,725 - 3,5303,530 1,203t &203 "-(214,99t)(214,991) - (208,533)(208c533) Net income(loss)income loss) $$ (2,072_)(2,072) $$1313 _$3,3,294294 $(232,224)$(232,224) $ (230,989)(230,989) Basicanddilutednetincomo(loss)pershareBasic and diluted net income (loss) per share $ (0.03)(0.03) $$0.0.0000 $$0.0.0505 $ (3.26)(3.26) $ (3.15)(3.15)

Year RudraEnded DecemberDcccmber 31,32 2007 _ Se¢_*nd Qutrter(2) _ _ Total Year TotalnetrevenueTotal net revenue $$178,178,550550 $$193,193,684684 $$215,215,679679 $$350,350,645645 $938,558$938,558 Total costscosts and operating expense_expenses 170,867170,867 182,508182,508 210,002210,002 350,377350,377 913,754913,754 IncomeIncome from operationsoperations 7,6837,683 11,17611,176 5,6775,677 268 24,80424,804 Net income (loss)floss) $$5,5,639639 $ 8,3578,357 $ 4,1464,146 $ (2,019)(2,019) $$16,16,123123 Basicanddilutadnetincome(loss)perahareBasic and diluted net income (toss) per share $$0.0.1414 '$$0.0.2121 $$0.0.1010 $ (0.03)(0,03) $$0.0.3333

(1) Total costs and operating expenses includesincludes goodwillgoodwill impairment chargecharge 0f$214.7of$214.7 million (see(see Note 8).

(2) First quarterquarter 2007 costscosts and operatingoperating expenses andand income from operations has been revisedrevised for $1.3M$1.3M of costs thatthat were previously capitalized thatthat shouldshould have been expensed. Included in this amountamount is $964,000$964,000 of oustscosts related tOto the year ended DeeamberDecember 331,I, 20062006 thatthat were corrected inin the firstfirst quarterquarter of 2007. This adjustmentadjustment reduced net incomeincome by $1.0$1.0 million andand basic and diluted netnet income per share by $0,02.$0,02. Second quarter 2007 costs andand operating expensesexpenses and incomeincome from operationsoperations has also beenbeen revised forfor $357,000$357 000 of costscosts thatthat were previously capitalized that should have beenbeen expensed.expensed. This adjustment reducedreduced net income by $266,000$266,000 and basic and diluted net incomeincome per share by $0.01$0.01 per share.share.

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TabLeTable of_Cgnt_of Cont sss item 9. Change inia andaad Disagreements with Accountants onaa AccountingAccountiag and Financial Disclosure

Not applicable

ItemIiem 9A. Controls and,Proceduresaud Procedures

Conclusion Regarding thethe Effectiveness of Disclosure Controls and Procedures

(a) Evaluation of DisclasureDisdosure Controls and Proeeduras.Procedures.

Our management, with thethe participationparticipation of our chief executive officer and chief financial officer,ofticer, evaluated the effectiveness of oreour disclosure controlscontrols andand procedures pursuant to Rule 13a-1513a-15 under thethe Securities Exchange Act of 1934, as amended (the "Exchange Act"). InIn designing and evaluating thethe disclosure controls and procedures, management recognizesrecognizes thatthat anyany controls and procedures, no matter howhow well designed and operated, cancan provide only reasonablereasonable assurance of achieving thethe desired controlcontrol objectives. In addition, thethe design of disclosure controls andand proceduresprocedures mastmust reflectreflect the factfact thatthat there areare resourceresource constraintsconstraints andand thatthat management is required to applyapply itsits judgmentjudgment inin evaluating thethe benefitsbenetits of possible controls and procedures relative toto theirtheir costs.

Based on management's evaluation, our chief executive officer andand chief financialfinancial officer concluded that, as of December 331,t, 2008, ourour disclosure controlscontrols and procedures areare designed at aa reasonable assurance level andand are effective toto provide reasonable sssumnceassurance thatthat informationinformation we are requiredrequired toto disclosedisclose inin reportsreports thatthat we filefil oror submitsubmit under thethe Exchange Act is recorded, processed, summarized and reported within thethe time periods specified in Securities and Exchange Commission rulesrules and forms, andand that suchsuch information isis accumulated andsnd communicatedcommunicated toto our management, includingincluding ourour chief executive officer andand chief financialfinancial officer, asas appropriate, toto allow timely decisions regardingregarding required disclosure.

(b) Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible forfor establishing and maintaining adequate internalinternal control over financialfinancial reporting as defined in Rule 13a-I 5(05(i) underunder the Exchange Act.

Our management has assessed thethe effectiveness ofour internalinternal control over financial reporfingreporting as of December 31, 2008.2008, IuIn making itsits assessmentassessinent of internalinternal control over financial reporting,reporting, management usedused thethe criteria setset forth byby thethe Committee of Sponsoring Organizations of the Treadway Commission ("COSO")("COSO") in Internal Control--IntegratedControl —Integrated Framework.I"ramework. Based on thisthis assessment, management concludedconcluded thatthat our internalinternal control over financialfinancial reporting was effective as of December 31, 2008 based on thethe criteriacriteria set forth by COSO inin lnternalInternal Control--IntegratedControl —Iaiegrated Framework.

Our independent registered public accounting firm, PrieewaterhouseCoopersPricewaterhouseCoopers LLP, thatihat audited the financial statementsstatements includedincluded in thisthis annual Report on From 10-Khas10-Khas issuedissued an attestation reportreport on our internal controlcontrol over financialfinancial reporting as of December 331,I, 2008,2008, which is includedincluded inin Itemitem 8 of this annualannual report on Form i10-K.0-K.

(¢)(e) ChangesinChauges in Internal Control

There were no changes inin our internal control over financialfinancial reporting,reporting, identifiedidentified inin connectionconnection with thethe evaluationevaluation of suchsuch internalinternal controlcontrol thatthat occurred duringduring the fourth fiscalfiscal quarter that have materially affected, oror are reasonably likely to materially affect,affect, ourour internalinternal control over financialiinanciai reporting.reporting.

ItemItem 9B. Other Information

Not applicable

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PART III111

Item 10. Directors, ExecutiveE.xeeutlve Officers and Corporate Governance " information required by thisthis item isis includedincluded under the captions "Management andand Corporate Governance Matters,"Matters, information required by " "Section 16(a)I 6(a) Beneficial OwnershipOvmership Reporting Compliance,"Compliance, and "Code of Conduct andand Ethics" inin thethe iBasis' Proxy Statement for the 2009 Annual Meeting of Stockholders and is incorporatedincorporated herein by reference.

Item 11. Executive ComperrsaiionCompensation " The information required by thisthis item isis included under thethe captions "13xeeutive"Executive Officer and Director Compensation,"Compensation "Compensation Discussion and Analysis,Analysis," ""Management"Management and Corporate governance Matters--CompansationMatters —Compensation Committee InterlocksInterlocks and Insider Participation,"Participation, ""Compensation"Compensation Committee Report" inin the iBasis'iBasis' Proxy Statement for the 2009 Annual Meeting of Stockholders and is incorporatedincorporated herein by reference.reference.

Item 12. SecuritySccuriry OwnershipOtvnershlp of Certain BeneficialBcneJicird OwnersOtvncrs and ManagementNauagcrncnr and RelatedStockholderIts(ared Stockholder MattersMalicrs

The information required by thisthis item isis included under thethe captions "Security Ownership of Certain BeneficialBenegcial Owners and Management" andand "Equity"Equity Compensation Plan Information" in the iBasis'iBasis' Proxy Statement for the 2009 Annual Meeting of Stockholders andand isis incorporated hereinherein by reference,

Item 13. CertainCcrlain Relationships and Related Transaei_ons,Transactions, and DireetorDirector lndependenceIndependence

The information requiredrequired by thisthis item isis includedincluded under the captionscaptions "Certain"Certain Relationships and Related Transactions" and "Management andand Corporate Governance Matters" inin thethe iBasis'iBasis' Proxy StatementStatement forfor the 2009 Annual Meeting of Stockholders andand is incorporatedincorporated herein by reference.

Item 14. PrincipalAccountlngFeesandServteesPrincipal rtccounang Fees and Services

The information requiredrequired by thisthis item isis includedincluded under the captioncaption "Independent Public Accountants" in the iBasis'iBasis' 2009 Proxy Statement forfor the 2009 Annual Meeting of Stockholders and isis incorporatedincorporated hereinherein by reference.

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PART IV

ItemItem 15. Exhibits, FinanclalStatementsandNchedulesFitdnncielSlntententsnndSe/tedules

(a) WeIWe have fitedfiled thethe following doenmentadocuments as part of this Annual Report on Form 10-K:

(1)(I) Financial Statements:

~PE 0

C0on__olldid_ate_d_dnd__t eiI a_Utt Reports of IndependentIndependent Registered Public Accounting Firms 64 _aJgrnents~Finan ial Suitements Consol_ide_te4._.sC ltd l*dSI Sh* as offDDecember0 3331 _008 andd20072p_Q_7 _6666 Con,_olidatedC lld dDStar me e!l__s~fD I forf J_3c._TAlreeh, d Y_eglBY EndedEddDDecerober0 3I,l, 2008.208~20_20Q6 dSII06 67 dD' 20ll7' d20tl6 60 CunsolidatcdStatementsofStockholders'Eo_ityfor.theThreeYearsEndedDec__e2AL2_008C, Ill d ~ fS hh, ld ~0927 lh Th Y E d ~M2 2008 2007and2006 668_ 60 C.o/nC solidItd ata_dd8«7C_tatements of CaslLF__b¢it f7 f Ih ThreeTh YearsY EDdedE d dDDecember.,__t,* I, l,2008,2008, 2007 and020tl62006 _69 ~N«C_C.9_0_aneial~li 0 ~il 0Statements 7970

(2) 1Indexndex to Financial Statements Schedules:SchedulesI 'AllAll financial statement schedules have been omitted because thethe required informationinformation isis included in our consolidatedconsolidated financial statements, or thethe related notes, or is not applicable.

(3) IndexIndex to Exhibits:

ExhibitEhhlbit Numbernaa2bSY DtscripaonD0800'i tiOD 2.-'-_2. 1 Share Purchase and SateSale Agreement between thethe Registrant and KPN B-V.B.V. (formerly KPN Telecom B.V.),B.V.),dateddated asas of June 21,200621, 2006 (incorporated(incorporated by referencereference from Exhibit 10.110.1 to the Registranl'sRegistrant's Quarterly RelmrtReport on FormFoun 10-Q filedfiled August 9, 2006 (file(file no.no. 000-27127)). 2.1.12.1.1 Amendment N_.No. _I t_to Share PurehasePurchase endand Sa_eSale AgreementAgraement betweanbetween the Reg_stmntRegistrant and KPN B.V-B.V. dated as _fof December 18, 20062006 (incorporated by reference from Exhibit 10.110.1 to the Registration's Current Report on Form 8-K filedfiled December 18, 2006 (file no. 000-27127)). 2.1.22.1.2 Amendment No. 2 toto Share Purchase and Sale Agreement between thethe Registrant and KPN B.V.B.V. dated as of April 27, 20072007 (incorporated by reference from Exhibit 10.110.1 to thethe Registration's CurrentCurreni Report on Form 8-K filed April 27, 20072007 (file no. 000-27127)). 2.1.32.1.3 Amendment N_.No. 3 t_to Shar_Share PurehasePurchase and Sa_eSale AgreementAgre_ment betweanbetween the Re_strantRegistrant and KPN B.V.B.V. dated as _fof August 1,I, 2007 (incorporated(incorporated by referencereference fromfrom Exhibit 10A10,1 to the Registratien'sRegistration's Current Report onon FormPorm 8-K filedfiled August 7, 2007 (file(file no. 000-27127)).000-271271). 3.13, 1 First Amended and Restated Certificate of lncorl:,orafionIncorporation of thethe Registrant (incorporated by reference fromfrom Exhibit 4.14.1 to thethe Reglstmnt'sRegistrant's Registration Statement on Form S-8 filedfiled onon December 21, 2007 (file no. 333- 148307)). 3.23.2 Second Amended and RestatadRestated By-Laws of the Registrant 0nenrporatad(incorporated by reference fromfrom Exhibit 3.013.01 to the Registrant's Current Report onon Form 8-K filedfiled on October 5, 2007 (file no. 000.27127)).000-27127)). 3.2.13.2.1 Amendment No. 1I toto the Second Amended andand Restated By-Laws of thethe Registrant (incorporated by reference from Exhibit 3.13.1 toto thethe Reglstrant'sRegistranfs Current Report on Form 8-K8-K filed on November 14, 2007 (file no. 000-27127)).000.27127)).

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ExhibitKibibii Numbertenrnber Description,Deieri iten 10.'-'-'-T10.1 Lease, dated January 8, 1999, asas amended, betweenbetween thethe Registrant and Rodger P. Nordblom andand Peter C. Nordblom asas Trustees of Northwest Associates underunder Declaration of Trust dated December 9, 1971 with respect toto propertyproperty locatedlocated at 20 Second Avenue, Burlington, Massachusetts (incorporated by reference fromI'rom Exhibit 10.110.1 to thethe RegistrantsRegistrant's Registration Statement on Form S-l (file{fileno. 333-85545)). 10.210.2 Lease_Lease, dated as of August 7, 1998, between the Registrant endand l11111EighihEighth Avenue LLC, relatingrelating toto propertyproperty located atat I11111 Eighth Avenue, New York, New York (incorporated(incorporated by referencereference from Exhibit 10.310,3 to thethe Registrant's Registration Statement onon Form S-1S-I (file no. 333-85545)). 10.310.3 Lease, dated DecemberDeceinber 11, 1998 betweenbetween the Registrant and Downtown Properties L.L.C.,L.L.C., with respectrespect toto property locatedlocated at 611 Wilshire Boulevard, Los Angeles, California (incorporated by referencereference fromfrom Exhibit 10.410A toto thethe Registrant'aRegistrant's Registration Statement onon Form S-I (file(tile no. 333-85545)).333-85545)), 10.410,4 Lease, dated October 22, 1999, between thethe Registrant andRogerP.and Roger P.NordblomandPeterC.Nordblom and Peter C.Nordblom, asTrusteesas Trustees of N,N.W.W. Building 1I Associates under Declaration of Trust dated November I11,1, 19841984andand filedfiled with thethe Middlesex SouthSouth Registry District of thethe Land Court as Document Number 674807 with respectrespect toto property locatedlocated at I100 Second Avenue, Burlington, Massachuse_Massachusetts {incorporated by reference from Exhibit 10.2810.28 toto thethe Registrant'aRegistrant's Registration Statement onon Form S-tS-I (file no. 333-96535)). 10.510,5 iBasis,iBasis, the.Inc. 2007 Stock Plan (incorporated by reference from Exhibit 10.110.1 to the Registrant'aRegistrant's Current Report on FormForm 8-K filed on October 3, 2007 (file(file no.no. 000-27127)). 10.6"f10.6t 20082008 Executive Officer Bonus Plan (incorporated(incorporated by referencereference fromfrom Exhibit l10,0.11 to the Registrant's Current Report onon Form 8-I(8-K filedfiled on MarahMarch 3, 2008 (file(file no. 000-27127)),000-2/127)), 10.7"_"10 7n) 20092009 Executive Officer Bonus Plan. 10.8"_"Io.gef Company 409A Policy. 10.9t10.9$ Form of Stock Option Agreement under the iBasis,iBasis, Inc.Inc. 2007 Stock Plan (incorporated by reference from Exhibit 10.210.2 to thethe RegistrantsRegistrant's Current Report on Form 8-K filed on October 3, 2007 (file{fileno. 000-27127)). t0.10t10.10$ Employment Agreement between the Registrant and Ofer Gneezy, dated as of August 111,I, 1997 (incorporated{incorporated by referencereference fromfrom Exhibit 10.910.9toto the Regis_ant'aRegistrant's Registration Statement on Form S-1S-I (file no. 333-85545)). dated 1997. 10.11"_10.I It Emp__ymentEmployment Agre¢mentAgreement betweanbetween the Registrant and G_rd_nGordon J. VanderBrug_VanderBrug, dated as _fofAugust _11,___997. (incorporated(incorporated by referencereference fromfrom Exhibit 10.10,I100 to thethe Registrant's Registration Statement on FormFoun S- 1I (file(file no. 333- 85545)). 10.12_"10.127 Offer Letter and Employment Agreement, between thethe Registrant andand Mark S. Flynn, dated JanuaryJanuaty 30, 2007 (incorporated(incorporated by reference from Exhibit 10.7710.77 to thethe Registrant's Quarterly Report on Form 10-Q10-Q for the three months ended March 31, 2007 (file no. 000-27127)). 10.13"1"10.13$ Offer Letter between thethe Registrant andand Edwin vanvan larland,lerl and, dateddated September t11,1,20072007 (incorporated(incorporated byby reference from Exhibit 10.310 3 toto thethe RegistrantsRegistrant's Quarterly Report on Form 10-Q10 Q for thethe three months ended September 30, 20072007 (file no.no, 000-27127)). t10.0.14'["147 Offer Letter between the Registrant andand Richard Torment,Tennsnt, dated as of September 17, 2001 and Employment Agreement, dated as of September 20, 2001 (incorporated(Incorporated by referencereference fromfrom Exhibit I10.0.3030 to the Registrant's Annual Report on FormPorm 10-K for the year ended Dee,Decemberember 31, 2001 (file no. 000-27127)).

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Exhibitaxbibit Number DesedptlonDesert iieu 10.15--'--_10.15$ OfferOfferLetterbetweentheRegistrantandPaulLetter between the Registrant and Paul Flnyd,Floyd, dateddated as ofAprilof April 2, 20012001 and Proprietary lnformationInformation and Inventions Agreement dated April 12, 2001 (inenrporated(incorporated by referencereference from Exhibit t10,0.3131 toto the Registrant's Annual Report on Form l10-K0-K forfor thethe year endedended December 331,i, 20012001 (file(fi le no. 000-27127)). 10.1610.16 First Amended and Restated Registration Rights Agreement, dated as nfof July 12, 1999, amnngamong the Registrant and the holders of the capitalcapital stock nflheof the Registrant who become parties theretothereto (incorporated byby reference from"from Exhibit 10.1710,17toto the Registrant's Registration Statement onon Form S-1S-I (file no. 333- 85545)). between iBasis, Inc. and 10.[7I O. 17 Second Amended andand Restated Loan and Security Agreement dated October 2, 2007, between iBasis, Inc. and Silicon Valley Bank (incorporated(incorporated by reference from Exhibit I10.0.11 toto the Registrant's Cun'entCun ent Report on Form 8-K filed on October 9, 2007 (file(tile no. 000-27127)). 10.1810.18 First L_anLoan Modifieati_nModification Agreement da_eddated asas _fofApri_April 28_28, 2__82008 _etweanbetween Si_i__nSilicon Va___yValley Bank andand iBasis_iBasis, _n__tnc. (incorporated by reference from Exhibit 99.199.1 to the Regiatrant'sRegistrant's Current Report onon Form 8-K filed May 2, 2008 (file no. 000-27127)). 10A910.19 Second Loan Modification Agreement dated asas of September 30, 2008 between Silicon VatleyValley Bank and iBasis,iBasis, Inc.Inc. (incorporated by reference from Exhibit 99.99 lI to the Registrant's Current Report onon Form 8-K8 K filed October 6, 2008 (file no.no. 000-27127)).000-27127)). 10.20"10.20» Third Loan Modification Agreement dated as of December 30, 2008 betweenbet»seen Silicon Valley Bank andand iBasis,iBasis, the.Inc. and signed on JanuaryJanuary 26, 2009. 10.2110.21 Form of Common Stock Purchase Warrant issuedissued byby thethe Registrant pursuant toto the terms of thethe Securities Purchase Agreement, dated as of September 24, 2004, by and among the Registrant andand the Purchasers (as defined therein)therein) toto each of the Purchasers (incorporated(incorporated by referencereference from Exhibit 10.10.33 to thethe Registrant's Current Report on Form 8-K dated SeptemberSeptember 24, 2004 (file(tile no. 000-27127)). 10.2210.22 Common Stock Purchase Warrant issued byby the Registrant to Tejas Securities Group,Oroup, Inc.Inc. onon September 24, 2004.2004, (incorporated by referencereference from Exhibit 10.7010.70 to the Registrant's Form S-t,S-l, filedfiled OctnberOctober 18, 2004 (file no. 333- 119796). 10.2310.23 R_g_strati_nRegistration Rig_tsRights Agreement dated a_as _fof _et_berOctober _I, 2_7_2007, between iBssis_iBssis, _n_.Inc. and KPN B.V-B.V. (inc_rp_rated(incorporated by reference from Exhibit 4.014.01 to the Registrant's Current Report on Form 8-K, filed October 5, 2007 (file no. 333- 27127)). 21.t*21.1» StgntficantSignificant SubsidiartesSubsidiaries of thethe Registrant, 23.1"23,1» Consent of IndependentIndependent RegisterRegistereded Public Accounting Firm. 23.2*23.2» Consent of IndependentIndependent Registered Public Accounting Firm.Finn. 31.1'31.1» CertificateCerfifieate ofiBasis,of iBasis, Inc. Chief Executive OfficerOificer pursuant to SectinnSection 302 of thethe Sarbanes-Oxley Act of 2002. 31.2"31,2» CertifieateCertiTieate _fofiBasis_iBasis, _n_.Inc. Chief Finaneia_Financial ___erOfficer pursuant t_to Section 3_2302 _fof th_the Sarbane_-_x_eySarbanes-Oxley A_tAct nfof2__2_2002. 32:_322 Certificate ofiBasis,of iBasis, Inc Chief Executive Officer andand Chief Financial Officer porsuantpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Indicates management compensatory plan, ¢ontrantcontract oror arrangement.

FiledPiled herewith.

Furnished herewith.

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SIGNATURES

has Pursuant to the requirementsrequirements of Section 13 or 15 (d) of thethe Securities Exchange Act of 1934, thethe registrantregistrant has dulyduly caused this Report Ioto hebe signed on its behalf by thethe undersigned, thereunto duly authorized.authorized.

iBASIS,iBASIS, INC.INC.

March 13, 2009 By: /s/OFER/s/ DEER GNEEZY

III Ofer GnenzyGneezy President andnnd ChiefCh/efExecnn'veExecutive OfficerOgicer

Pursuant to the requirements of thethe Securities Exchange Act of 1934, this Report has heertbeen signed below byby the followingfollowing persons on behalf of the registrantregistrant and in thethe capacitiescapacities and on the dates indicated.indicated.

Nam_.._&enwns Tltl,_._e Oat.___enets

/s/OFER/s/ OFER GNEEZY President and Chief Executive Officer and Director (Principal Executive March 13, Officer) 2009 Ofer Gneezy

ts/GORDON/s/GORDONVANDERBRUGVANDERBRUG March 13, Executive Vice President and Director 2009 Gordon J.J.VanderBrug

/s/RICHARD/s/ RICHARD TENNANT Senior Vice President, Finance and Chief Financial Officer (Principal(Principal March 13,13, Financial andand Accounting Officer)Ofgcer) 2009 Richard G. TemlantTennant

Is/EELCO BLOK /s/ EELCO BLOK March 13, Director 2009 EeleoEelco Blok

IS/ROBERTIs/ ROBERT BRUMLEYBRVMLEY March 13, 1, Director 2009 Robert H. Brumley

/s/CHARLES COP.FIELD /s/ CHARLES CORFIELD March 13, Director 2009 Charles N. Corfield

/S/JOOST FARWERCK /s/ JOOST FARWERCK March 13, III Director 2009 Joost Farwerck

Is/W. FRANK KING /s/ W. FRANK KING March 13, IIIIm I Director 2009 W,W. Frank King

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EXHIBIT D

RSsumc[sResumes of Key Employees MANAGEMENTMANAGEMKNT RESUMES

Ofer Gncezy,Gneezy, Chief Executive Officer

Ofer Gneezy isis President and Chief Executive Officer ofiBasisof iBasis Retail, Inc. He is also the President, Chief Executive Officer and Chairman ofthethe Board ofofiBasis,iBasis, Inc. a leaderleader in international longlong distancedistance VolPVoIP services. Mr. Gneezy was a recipient of Pulver.com'sPulver. corn's Industry Pioneer Award and was named Best Business Leader forfor 2007 inin the annual Capacity Magazine awards. Mr. Gneezy built iBasis, Inc.Inc. asas the first provider of toll-qualitytoll-quality VolPVoIP service.

Prior to starting iBasis, Inc.,Inc., Mr. Gneezy was president of Acuity Imaging,Imaging, Inc.,Inc., a multinational leaderleader inin industrial automationautomation teelmology.technology. Mr. CmeezyGneezy led Acuity to achieve significant increases inin earnings,earnings, revenues and stockholderstockholder equityequity before successfully orchestratingomhestrating the company'scompany's acquisition byby RVSI, the second-largestsecond-largest company inin thethe industry.industry, The acquisition provided Acuity with strongstrong financial backing and access toto the semiennduetorsemiconductor industryindustry while delivering liquidity toto Acuity investors.investors. Previously, as president and CEO of Automatix, Inc.,Inc, , Mr. Gneezy led thethe turnaround of thethe company to growth andand sustained quarterly profitabilityprofitability and managed itsits merger with Itran, Inc.Inc. to formform Acuity. Mr. Gneezy is a graduate of the Advanced Management Program at Harvard University's Graduate School of Business Administration and has an M.S.M.S.in engineering from M.I.T.M.I.T.

Mark S.Flynn, Chief Legal Officer and Secretary

Mark S.S, Flynn isis Chief Legal Officer and Secretary for iBasisiBasis Retail, Inc. He also servesserves in these positions at iBasis,iBasis, Inc. Mr. Flynn manages thethe legal affairsaifairs of thethe company and provides counsel on a range of relatedrelated issuesissues includingincluding corporate governance and regulatory compliance.compliance.

Mr. Flynn has substantialsubstantial experience in corporatecorporate legal affairs including corporate governance and Sarbanes-OxleySsrbanes-Oxley compliance,compliance, acquisitions and divestitures, and corporate finance.finance. Prior toto joiningjoining iBasis, Mark was Vice president, General Counsel and Secretary for ImagistiesImagistics InternationalInternational Inc.,Inc., a NYSE-tradedNYSE-uaded company engaged inin thethe marketing, sales and serviceservice of document imaging equipmentequipment with revenuesrevenues exceeding $600 million and 3,5003,500 employees in thethe U.S.,U.S., Canada, and the U.K.U,K. He has alsoalso served inin seniorsenior legal counsel positions atat public andand private companies inin the chemicals and health care industries,industries, including Senior Deputy General Counsel of Olin Corporation, a diversified ehemioalschemicals and materials company.company.

Richard Tennant, Chief Financial Officer

Richard Tennant oversees thethe financial management of the company. Mr. TennantTennsnt has more thanthan 20 years of experience inin corporate financefinance and administration. Prior to joining iBasis Retail, Inc.Inc. and iBasis,iBasis, Inc.,Inc., he was vice president, CFO and treasurer for ScoreBoard, a softwaresoftware start-up company targetingtargeting thethe wireless carrier market. Previously, Mr. Tennant servedserved as CFO of severalseveral private andand public companies, including LTX Corporation, a semiconductor testing solutions vendor with annual revenues of more than $200 million. Mr. Tennant also served as CFO for Netrix Corporation, a telecom equipment and softwaresofiware manufacturer. Ajay T. Joseph, Chief Technology Officer, [Basis,iBasis, Inc.

As Chief Technology Officer, Ajay Joseph is responsible for thethe technical strategy, innovation, and engineering of the iBasis InteractInternet Telephony infrastructure.in6'astructure. Since 1999, Mr. Joseph has led thethe networknenvork architecture, systems development and migration of thethe global iBasis network toto an all IP, switch-less architecture. Prior toto joiningjoining iBasis, Mr. Joseph was manager and arehitectarchitect of the IP Telecom division at GTE IntemetworkingInternetworking responsible for new VolP-basedVoIP-based serviees.services. He alsoalso held senior levellevel engineering and design positions at DeskNet Systems and NYNEX Seience&Science &Technology.

Paul H. Floyd, Senior Vice President, Research and Development, iBasis,iBasls, Inc.Inc.

Paul Floyd has more thanthan 20 years of experience in managing highly innovative and productive engineering organizations. Mr. Floyd was most recentlyrecently served as thethe senior vice president for thethe DSL business of AT&T spinout, Paradyne Networks where hehe was responsibleresponsible for engineering, product management, strategy, and planning. Mr. Floyd also held thethe position of vice president of Research andand Development at Paradyne, responsibleresponsible for leading all of thethe product and technologyteclmology development efforts within Paradyne. He also led the pioneering efforts around thethe development of ReaehDSLReachDSL technologytechnology and products, thethe industry's longestlongest looploop reach DSL technology.terhnology, Mr. Floyd spent the previous 13 years in various key senior-level engineeringengineering and design rolesroles in both AT&T's Paradyne division and AT&T Bell Labs.

Alan R. Bugos, Vice President, Advanced Technology & Engineering, [Basis,iBasis, Inc.Inc.

Alan Bugos has more than 17 years of hands-on experienceexperience inin telecommunications,telecommunications, optical networking, data networking, and eommunicationscommunications systems integration.integration. Formerly, he was a Department Manager at GTE Intemetworking's IP Telecom Group working on thethe development and deployment of VolPVoIP and IPIP Telephony servicesservires for GTE's (now Ganuity)Genuity) GNI IPIP backbone. Prior to GTE Intemetworking,Intereetworkin, Mr. Bugos was a Principal Member of Technical StaffatStaff at GTBGTE Laboratories, focusingfocusing on high-speed multi-gigabit optical network design, "real-time" IP multimedia networking, data networking techniques, and DSL and xDSL for lnternetInternet services, and advanced voice/video technologies.

Anthony S,S.Bloom, Vice President, Retail Services, iBasfs,iBasis, Inc.Inc.

Tony Bloom's 24-year career inin telecommunications has included executiveexecutive management andand strategic development experience with many publicly tradedtraded telecommunications conglomerates in thethe United States. Mr. Bloom is currently thethe Vice President forfor iBasisiBasis Retail prepaid products organization where he directs the sales,sales, marketing and prodnctionproduction businessbusiness units. Tony Bloom most recently served as the executiveexecutive director forfor Verizon's BusinessBusineSs Solution Group channel program where he was responsible for the MCI channel partnerpartner sales for the U.S.U.S. Mr. Bloom alsoalso held thethe position of director inin various key senior -level—level enterprise management roles inin both MCI's Commercial Accounts and MCI-Worldeom'sMCI-Worldcom's Major Accounts divisions. He also held various seniorsenior level positions at CTC Communications and Cable & Wireless. iBasis Retail, Inc.Ine.

EXHIBIT EK

Proposed Tariff TariffNo. I iBasisiBasis Retail, Inc.Inc. S,C.S,C, Tariff No. 1

OriginalOri 'nalPaPageelI

iBASIS RETAIL, INC.

REGULATIONS AND SCHEDULE OF CHARGES FOR FACILITIES BASED AND RESOLD LONG DISTANCE TELECOMMUNICATIONS SERVICES WITHIN THE STATE OF SOUTH CAROLINA

This tariffconminstariff contains thethe descriptions, regulations, and rates appheableapplicable• toto thethe fumishmgfurnishing' ' ofservof servicesi ees or facilities forfor telecommunicationstelecommunications services furnished by iBasis Retail, Inc.Inc, ("iBasis Retail" or thethe "Company"),"Company" ), with principal offices at 20 Second Avenue, Burlington, Massachusetts 01803. This tariff applies to thethe Company's services furnished within the State of South Carolina. This tariff is on file with the Public Service Commission of South Carolina, and copies may be inspected during normal business hours atat the Company's principal place of business.

IssuedIssued Date:Date; Effective Date: IssuedIssued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 Tariff iBasisRetail,Inc. S.C.S,C.TariffNo.N. 1

OriginalOri nalPaPagee22

CHECK SHEET

The sheetssheets of thisthis tariff are effective as of thethe date shown at the bottom of thethe respective sheet(s).sheet(s), Original andand revisedrevised sheets as named below comprise all changes fromI'rom thethe original tariff and are eurrantlycurrently in effect as of the date on the bottom right-hand side of this sheet.

SHEET REVISION SHEET REVISION

1 Original 28 Original 2 Original • 29 Original 3 Original 4 Original 5 Original 6 Original 7 Original 8 Original 9 Original 10 Original 11 Original 12 Original 13 Original 14 Original 15 Original 16 Original 17 Original 18 Original 19 Original 20 Original 21 Original 22 Original 23 Original 24 Original 25 Original 26 Original 27 Original

*~ - Indicates Revised Sheet

Issued Date:Date; Effective Date:Date; Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisiBasis Retail,Inc. S.C.S,C. TariffNo.Tariff No, 1

OriginalOri 'nalPaPagee33

TABLE OF CONTENTS

Title SheetSheet...... 1

Check SheetSheet...... 2

Table of ContentsContents, ...... 3

Symbols

TariffFormatTariff Format SheetsSheets,...... 5

Section 1 - Technical Terms andand AbbreviationsAbbreviations...... 6

Section 2 -—Rules and RegulationsRegulations...... 9 Use and Limitations of ServicesServices...... 10 Liabilities of thethe CompanyCompany...... 12 Responsibilities of the CustomerCustomer...... 16 Cancellation or Interruption ofServices ...... 19 Credit Allowance -—Interruption of Service, Deposit ...... , .....20 Payment and Billing ...... 21 Collection Costs, Taxes, Late Charge, Reconnection ChargeCharge...... 22

Section 3 - Description of ServiceService...... 23 Prepaid Calling Card ServicesServices...... 23 Description of Services ...... 23 Extra Features, Call Blocking, Customer ServiceService,...... , 25 Credits ...... 26 Refunds, Discontinuance of Prepaid Calling Card ServiceService,...... , ...... 27

Section 4 - Maximum Rates andand Charges ...... 28 Maximum Rates and Charges for Prepaid Calling Card ServicesServices...... 28 Payphone Surcharge, Return Check Charge, PromotionalPromononal Offerings ...... , 28 MarketingMarketing, ...... 29

Issued Date: Effective Date: IssuedIssued By: TonyBloomTony Bloom VicePresidentVice President 20 Second Avenue Burlington, MA0lS03MA 01803 iBasisRetail, Inc.Inc. S,C.S.C. TariffNo.Tariff No, 1

OriginalOri inalPaPagee44

.SYMBOLSSYMBOLS

The following are thethe only symbolssymbols used forfor thethe purposes mdmatedindicated belobelow;:

D Delete Or Discontinue

I Change ResultmgResulting In An IncreaseIncrease To A CustomerCustomer's Bill

M Moved To Or From Another Tariff Location

N New

R Change Resulting In A Reduction To A Customer's Bill

T Change InIn Text Or Regulation But No Change InIn Rate Or Charge

Issued Date: Effective Date: IssuedBy:Issued By: TonyBloomTony Bloom Vice President 20 SecondAvenueSecond Avenue Burlington, MA01803MA 01803 iBasisRetail,Inc. S,C.S.C. TariffNo.Tariff No. 1

Origin.alOri inalPaPagee 5

TARIFFFORMATSHEETSTARIFF FORMAT SHEETS

A,A. Sheet Numbering: Sheet numbers appear in the upper rightright comercorner of thethe page. Sheets areare numbered sequentially.sequentially. However, new sheets are occasionally added to the tariff. When a new sheet isis added between sheets already inin effect, a decimal is added. For example,example, a new sheet added between pages 11 andand 12 would become page 11.1.11.1.

B. Sheet Revision Numbers: Revision numbers alsoalso appear in the upper rightright comer of each sheet where applicable.applicable. These numbers areare used toto indicateindicate the most current page version on filefile with the Commission. For example, a 4th Revised Sheet 13 would cancel a 3rd Revised Sheet 13. Consult the Check Sheet forfor the sheetssheets currently inin effect.

C. Paragraph Numbering Sequence: There are nine (9) levels of paragraph coding. Each level of coding is subservient to itsits next higher level:level;

2., 2.2.11 2.2.1.11.1 2.2.1.1.A1.1.A 2.1.1.A.12.1.1.A. 1 2.2.t.l.A.l.(a)1.1.A.I.(a) 2.1.1.A.l.(a).I2,1.1.A.I.(a).I 2.2.1.1.A.l.(a).I.(i)1,1.A.I.(a).I,(i) 2.1.1,A,2.1.1.A, 1.(a).I.(i),(11.(a).I.(i).(1))

D,D. CheekCheck Sheets: When a tariff filing isis made with thethe Commission, an updated Check Sheet accompanies the tariff filing.filing. The CheekCheck Sheet listslists the sheets contained in the tariff,tariff with a cross referencereference toto thethe current Revision Number. When new sheets are added, thethe Check Sheet isis changed to reflect thethe revision. All revisions made inin aa given filing are designated by an asterisk (*), There will be no other symbols used on this sheet ifif these are the only changes made to itit (i.e,,(i.e., the format,format, etc. remains the same except forfor thethe revised revision levels on somesome sheets).sheets). The tarifftariff user should refer to thethe latest Check Sheet toto find out if a particular sheet isis thethe most current on filefile with the Commission.

IssuedIssued Date: Effective Date: Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisRetail,iBasis Retail, Inc. S.C.S,C, TariffNo.Tariff No. 1 Section1 OriginalOri inal PagePa e66

SECTION 1 -—TECHNICAL T_RMST RMS AND ABBREVIATIONS

Access Line —An arrangement from&om a local exchange telephonetelephone company or other common carrier, using either dedicated or switched access, which connectsconnects a Customer's locationlocation toto the Company'sCompany*s locationlocation or switching center.

A__.__MANI -—ANI stands for Automatic Number Identification.Identification.

~Alicant -—An Applicant isis any entity or person who applies for Service under this tariff.tariff.

ApplicationA lication for Service -—The Application for Service is the Company's standard order form which includesincludes all pertinent, billing, technical, and other descriptive informationinformation which will enable the Company toto provide Telecommunications Services as required.

Authorization Code -—A numerical code, one or more of which may be assignedassigned toto a Customer, to enable the Company toto identifyidentify thethe origin of the Customer's call so thatthat it may rate andand bill the call.call, Automatic number identificationidentification (AN1)(ANI) is used as the Authorization Code wherever possible.

Authorized User-User —An Authorized User is a person, firm,firm, corporation, or other entity that either isis authorizedauthorized by the Customer toto receivereceive or send Telecommunications or isis placed in a position by the Customer, either throughthrough acts or omissions, toto send or receive Telecommunications.

CLECCLBC -—CLEC isis an acronym for CompetitiveCompefitive Local Exchange Carrier.

Commission -—Commission is used throughout this tariff to mean the Public Service Commission of South Carolina.

~Com an -—Company refersrefers to iBasisiBasis Retail, Inc.Inc,

Customer -—The person, firm,finn, corporation, or other legallegal entity that orders thethe Services of the Company or purchases a Company Prepaid Calling Card and/or originates prepaid callscalls using such Cards, and is responsibleresponsible forfor the payment of charges and for compliance with thethe Company's tarifftariff regulations,

Dedicated Access -—The Customer gains entry toto the Company's Services by a direct path from thethe Customer's location to the Company's Point-of-Presence.

DU_...__CDUC -—DUC is an acronym for Designated Underlying Carrier.

Issued Date: Effective Date: IssuedIssued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisP,iBasis Retail,etail,Ine.Inc. S.C.S.C.TariffNo.Tariff No.1I SectionSection1I OriginalOri 'nalPapage e7.7.

SECTIONSECTION 1I-—TECHNICALTECHNICAL TERMSTERMSANDANDABBREVIATIONSABBREVIATIONS - —(CONT'D.)CONT'D,

InterLATAInterLATA CallCall-—AnAnInterLATAInterLATA callcallisisanyany callcallthatthat originatesoriginates ininoneoneLATALATAandandterminatesterminates ininaa differentdifferent LATA.LATA.

IntraLATAIntraLATA CallCall -—AnAnIntraLATAIntraLATA callcall isis anyany callcall thatthat originatesoriginates ininoneone LATALATA andand terminatesterminates inin thethe samesame LATA.LATA.

IXCIXC-—IXCIXCstandsstands forfor InterexchangeInterexchange Carrier.Carrier.

L_TA~LTA -—LATALATA isis anan acronymacronym forfor LocalLocal AccessAccess TransportTransport Area,Area, whichwhich isisaageographicgeographic boundaryboundary withinwithin whichwhich aaLocalLocal ExchangeExchange CartierCarrier providesprovides communicationscommunications services.services.

LE__CCLEC-—LECLECisis anan acronymacronym forfor LocalLocal ExchangeExchange Carrier.Carrier.

NP_..AANPA -—NPANPA literallyliterally standsstands forfor NumberingNumbering PlanPlan AreaArea butbut isis moremore commonlycommonly referredreferred toto asas anan areaarea code.

_NXXNXX -NXX—NXX representsrepresents thethe first threethree digitsdigits ofof a Customer's telephonetelephone number.

PI._._G_CPIC -—PIC stands for primaryPrimary InterexehangeInterexchange Carrier.

PINP___ —- PIN stands for Personal Identification Number,

Platform —- Platform is thethe proprietary technology and associated computer equipment that is used in conjunctionconjunction with the Company's Prepaid CallingCafiing Cards.

Point.Point of Sale —- Point ofof Sale isis thethe locationlocation at which a Customer purchases the Prepaid Calling Card.Card.

POPPOP —- POPPOP isis anan acronymacronym forfor Point-of-Presence.Point-of-Presence. AA POP may bebe (a)(a) thethe central office of thethe UnderlyingUnd---erlying Carrier;Carrier; (b)(b) aa locationlocation wherewhere thethe LECLEC oror CLECCLEC handshands offoff traffictraffic of the Company's CustomerCustomer toto thethe UnderlyingUnderlying Carrier;Carrier; oror (c)(e) thethe locationlocation wherewhere thethe Customer'sCustomer's facilityfacility interconnectsinterconnects withwith thethe DUC.DUC.

IssuedIssued Date:Date: EffectiveEffective Date:Date: IssuedIssued By:By: TonyTony BloomBloom ViceVice PresidentPresident 2020 SecondSecond AvenueAvenue Burlington,Burlington, MAMA 0180301803 iBasisiBasisRetail,Retail, Inc.Inc. S.C.S,C,TariffNo.TaiiffNo. 1I SectionSection 1I OriginalOri 'nalPaPagee88

SECTIONSECTION 1I-—TECHNICALTECHNICAL TERMSTERMSANDAND ABBREVIATIONSABBREVIATIONS -—(CONT'D.)CONT'D,

A — U'tp h d d PrepaidpaidAccount t- AnAlinventorytm offT1Teleeom Units purchasedHiin advance byhyththe Customer,C t, and associatedassociated withwith oneone andand onlyonly oneone AuthorizationAuthorization CodeCode asas containedcontained inin aaspecificspecific PrepaidPrepaid CallingCalling Card.Card.

PrepaidPre aid CallingCallin CardCard oror CardCard -—AA cardcard issuedissued byby thethe Company,Company, containingcontaining anan AuthorizationAuthorization CodeCode whichwhich identifiesidentifies aa specificspecific PrepaidPrepaid AccountAccount ofofTelecomTelecom Units,Units, whichwhich enablesenables callscalls toto bebe processed,processed, accountaccount activityactivity totobebe logged,logged, andand balancesbalances totobebe maintained,maintained, onon aaprepaymentprepayment basis.basis. '* ~tm . 0 -—ResponsibleR p lhl OrganizationOg tl or entitytltyldidentifiedhf d byhy a toll-freet II-& servicele CustomerC t thatth t managesmanages andand administersadministers recordsrecords inin thethe tolltoll freefree numbernumber databasedatabase andand managementmanagement system.system.

Serviee(_l~Service s -—ServiceService consistsconsists ofof any TelecommunicationsTelecommunications ServiceService providedprovided byby thethe CompanyCompany pursuant toto thisthis tariff.tariff,

SwitchedSwitched AccessAccess -—The Customer gainsgains entry toto thethe Company'sCompany's Services by aa transmissionnansmission lineline thatthat isis switched throughthrough thethe Local Exchange CarrierCarrier toto reachreach thethe Company'sCompany's Point-of-Presence.Point-of-Presence.

Telecom Unit -—A measurement of Telecommunications Service equivalentequivalent toto oneone minute of usage between any twotwo points within thethe State of South Carolina.

TeleconununicationsTeleconununieations -—The transmission of voice communications or, subject toto the transmission capabilities of the services, the transmissiontransmission of data, facsimile, signaling, metering, or other similar communications.

' ' U~ddUnderlying CCarrie1: —- A TelTelecommunicationsmmehl tl carrier whoseh ee networkehy k ffacilitieslittd pprovideld the technical capability andand capacity necessarynecassary for the transmission and reception of Customer Telecommunications traffic.

IssuedIssued Date:Date: EffectiveEffective Date:Date: IssuedIssued By:By: TonyTony BloomBloom ViceVice PresidentPresident 2020 SecondSecond AvenueAvenue Burlington,Burlington, MAMA 0180301803 iBasisRetail,Inc.Inc, S.C.S.C. TariffNo.Tariff No. 1I Section 2 OriginalOri inal PagePa e 9

SECTION 2 -—RULES AND REGULATIONS

2.12.1 Undertaking ofof thethe Company

This tarifftariff contains the regulationsregulations and rates applicable to intrastateinhastate interexchange Telecommunications Services provided by thethe Company for Telecommunications between points within the State of South Carolina.Carolina, Services are furnishedfurnished subjectsubject toto thethe availability of facilities and subjectsubject toto thethe terms and conditions of this tariff inin compliance with limitations setset forth in the Commission's roles.rules. The Company'sCompany*s Services are provided on a statewide basis and are not intended toto be limitedlimited geographically.geographically, The Company offers Service toto all those who desire to purchase Service from the Company consistent with all of the provisions of thisthis tariff.tariff. The Company may act as thethe Customer's agent for ordering access connection facilities provided by other carriersearners or entitiesenhties when authorized by the Customer to allow connection of a Customer'sCustomer' s location to a Service provided by thethe Company. The Customer shallshall be responsible forfor all charges due for such Service arrangement.

2,1,12.1.1 The Services provided by thethe Company are not part of a joint undertaking with any other entity providing Telecommunications channelschannels or facilitiesfacilities but may involveinvolve the services of Underlying Carriers.

2.1.22.1.2 The rates and regulations contained in this tariff apply only to the Services furnishedfurnished by thethe Company and do not apply, unless otherwise specified, to the lines, facilities,facilities, or services provided by LECs or other common carriers for use in accessingthe Services of thethe Company.

2.1.32.1,3 The Company reservesreserves thethe right toto limitlimit the length of communications, discontinue furnishing Services, or limitlimit thethe use of Service necessitated by conditions beyond its control, including,including, without limitation:limitation: lacklack of satellite or other transmission medium capacity; the revision, alteration, or re-pricing of the Underlying Carrier's tariffed offerings; or when the use of Service becomes or is inin violation of thethe law or the provisions of this tariff.tariff.

Issued Date: Effective Date:Date' IssuedIssued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisiBasis Retail,Inc.Inc, S.C.S.C. TariffNo.Tariff No. 1 Section2 OriginalOri 'nalPaPagee1010

SECTION 22-- RULES AND ,REGULATIONSREGULATIONS (CONT'D.)CONT'D.

2.22,2 Use andand Limitations of Services

2.2.12,2, 1 The Company'sCompany*s Services may be used for any lawful purpose consistent with the transmissiontransmission and switching parameters of thethe Telecommunications facilities utilized in the provisionpmvision of Services, subjectsubject to any limitationslimitations set forth inin this Section 2.2.2.2.

2.2.22.2.2 The use of the Company'sCompany*s Services without payment for Service or attempting to avoid payment forfor Service by fraudulent means or devices, schemes, false or invalid numbers, or falsefalse calling or credit cards is prohibited.prohibited,

2.2.32.2,3 The Company's Services are available forfor use twenty-four (24) hours per day, seven (7) days per week.

2.2.42.2.4 The Company's Services may be denied for nonpayment of charges or forfor other violations of this tariffsubjeettariff subject to Section 2.5.12,5.1 herein.

2.2.52.2.5 Customers shall not use the Service provided under this tariff for anyany unlawful or abusive purpose, including but not limited to:to:

A. Use of thethe Service toto transmittransmit a message or to locate a person or otherwise toto give or obtain informationinformation without payment of the applicable charge; or

S. Obtaining or attemptingattempting toto obtain or assisting another toto obtain or toto attempt to obtain Services by tampering, rearranging, or making connection with any Service components of the Company or tilethe DUC or by any trick or scheme or by any other fraudulent means or device whatsoever with intentintent toto avoid payment in whole or in part of thethe charges for such Services; or

C*C. Use of thethe Service of thethe Company toto send aa message or messages anonymously or otherwise inin a manner reasonably expected to frighten, abuse, torment, or harass another; or

D_D. Use of the Service inin such a manner as to interfereinterfere unreasonably with the use of Services by one or more other Customers.

Issued Date: Effective Date: IssuedIssued By: Tony Bloom ViceYice President 20 Second Avenue Burlington, MA 01803

, ",z ' _"7rl'_ , iBasisiBasis Retail,Inc.Inc. S.C.S.C. TafiffNo.Tariff No. 1I Section 2 OriginalOri inalPaPagee 11

SECTION 2 7—RULES AND REGULATIONS (CONT'D.)CONT'D.

2.22.2 Use and Limitations of Services (cont.)(cont.)

2.2.62,2.6 All Services are interstate and/or international offerings, but the Customer has the option toto use the Service toto place intrastate calls.calls, Intrastate Service isis only available ififthe Customer purchases the Company's interstateinterstate and/orandlor international Service offerings.

2.2.72.2.7 The Customer is responsible for notifying thethe Company immediately of any unauthorized use of Services.Services,

Issued Date: Effective Date: IssuedBy:Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisRetail,Inc.Inc, S.C.S.C. TariffNo,Tariff No. 1I Section2 OriginalOri inalPaPagee1212

SECTION 2 -—RULES AND REGULATIONSGULATIONS (CONT'D.)CONT'D.

2.32.3 Liabilities of thethe Company

2.2.3.13.1 The Company's liabilityliability will be limited to that expressly assumed inin Section 2.32.3 of thisthis tariff.

2.2.3.23.2 The Company shall not be liableliable for any claim, loss,loss, expense, damage, or for any interruption,interruption, delay, error, omission, or defect inin any Service, facility, or transmission provided under this tariff, if eansedcaused by an act of God, fire,fire, war, civil disturbance, act of government, or due to any other causes beyond thethe Company'sCompany*s control.

2,2.3.33.3 The Company shall not be liable for, andand shall be fully indemnifiedindemnified and held harmless by the Customer against any claim, loss, expense, or damage for defamation, libel,libel, slander, invasion, infringement of copyright or patent, unauthorized use of any trademark,trademark, trade name or serviceservice mark, proprietary or creative right, or any other injuryinjury toto any person, property, or entity arising out of thethe material, data, or informationinformation transmitted.transmitted.

2.3.42.3.4 No agent or employee of any other carrierearner or entity shall be deemed to be anan agent or employee of the Company.

2.3.52.3.5 The Company's liability, resulting inin whole or inin part from or arising in connection with thethe furnishingfurnishing of Service under thisthis tariff,tariff, including but not limited to mistakes, omissions, interruptions,interruptions, delays, errors, or other defects andand not causedcaused by tilethe gross negligence or willful misconduct of the Customer, shallshall not exceed auan amount equal toto thethe charges provided for under this tariff forfor thethe longlong distance call forfor the period during which the eaUcall was affected.

2.3.62.3.6 The Company shall not be liable for andand shall be indemnified and saved harmless by any Customer or by any other entity fromIrom any and all loss, claims,claims, demands, suits, or other action or anyany liabilityliability whatsoever, whether suffered,suffered, made, instituted, or asserted by any Customer or any other entity for any personal injury to, or death of, any person or persons, and forfor any loss,loss, damage, defacement, or destructiondeshuction of the premises of any Customer or any other entity or anyany other property whether owned or controlled by the Customer or others.

IssuedIssued Date: Effective Date;Date: Issued By:By; Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisRetail,Inc. S.C.S.C. TariffNo.Tariff No. 1I Section2 ' OriginalOri alPaPagee1313

SECTION 2 -—RULES ANANDD REGULATIONS (CONT'D.)CONT'D.

2.32.3 Liabilities of the Company (cont.(cont..))

2.3.72.3.7 The Company shall not be liable for anyany indirect,indirect, special, incidental, or consequential damages under this tarifftariff including,including, but not limited to,to, loss of revenuerevenue or profits, for any reason whatsoever, includingincluding thethe breakdown of facilities associated with the Service, or forfor any mistakes, omissions, delays, errors, or defects inin transmissiontransmission occurring during the course of furnishing Service.

2.3.82,3.8 Unless otherwise provided in the specific Service section, the Company will not be liableliable to thethe Customer for damages or be obligated toto make any adjustment, refund, or cancellation of charges unless the Customer has notified thethe Company in writing of any dispute concerning the charges, or thethe basis of any claims for damages, within sixtysixty (60) calendar days after an invoiceinvoice isis renderedrendered or a debit isis effected by the Company forfor thethe eallcall giving riserise to the dispute or claim.claim. Any such notice shallshall set forthforth sufficientsufucient facts to provide the Company with a reasonable basis upon which toto evaluate the Customer's claim or demand. If thethe Customer isis not satisfied with the Company'sCompany*s resolution of the billing issue,issue, the Customer may submitsubmit an application toto the Commission for reviewreview andand resolution.

2.3.92.3.9 The remedies set forth herein are exclusive and inin lieu of all other warranties and remedies,remedies, whether express or implied,implied, INCLUDINGINCLUDING WITHOUT LIMITATION IMPLIEDIMPLIED WARRANTIESWAIGIANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

Issued Date:Date; Effective Date:Date; IssuedIssued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisiBasis Retail,Ine.Inc. S.C.S.C, TariffNo.Tariff No. 1I Section2 ' OriginalPageOn alPa e 14

SECTION 2 -—RULES AND REGULATIONSREGULA IONS (CONT'D.)CONT'D.

2.32.3 Liabilities of the Company (cont,){cont.)

2.3.102.3,10 The Company isis not liable for failure of performance hereunder due toto causes beyond its control, including but not limitedlimited to:

A. Unavoidable interruptioninterruption in the working transmission faeilitiesfacilities includingincluding but not limited to fire, explosion, vandalism, cable cut, or other similar occurrence; or

B. Natural Disasters such as storms, fire, flood,flood, or other catastrophes; or

C, Any law, order, regulation,regulation, direction, action, or requestrequest of thethe United States government, or anyany other governmental entity having jurisdictionjurisdiction over the Company or of any department, agency, commission, bureau, corporation,corporation, or other instrumentality of any one or more of such governmental entity, or of any civil or military entity;entity; oror

D. National Emergencies, insurrections, riots,dots, wars, strikes, lockouts, work stoppages, or other labor difficulties, supplier failures shortages or thethe like; or

E,E. Notwithstanding anything in this tarifftotariff to thethe contrary, the unlawful acts of individuals,individuals, including acts of thethe Company's agentsagents aridand employees if committed beyond the scope of their employment.

Issued Date: Effective Date: IssuedIssued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisiBasis Retail, Inc. S.C.S.C. TariffNo.Tariff No. 1 Section 3 ' originalOri al PagePa e !155-

SECTION 2 -—RULES AND REGULATIONS (CONT'D:)CONT'D.

2.32.3 Liabilities of thethe Company (cont.)(cont.)

2.3.112,3,11 The Company is not liableliable for:

A,A. Damages caused by negligence or willful misconduct of the Customer; or

The use or abuse of any Service described herein by artyany party including,including, but not limited to, thethe Customer's employees or members of the public. "Use or Abuse" includes but is not limited to, any calls placed by means of PBX-re-origination or any other legal or illegalillegal equipment, service, or device.device, In the case of inbound Service, thisthis also applies to thirdthird parties who dial the Customer's tolltoll free inboundinbound number by mistake; or

C,C. Any action or omission of any other companycompany or companies furnishing a portion of the Services, facilities, or equipment associated with the Services; or

D,D. Any action, such as suspension of Service, blocking, or deactivating thethe provision of Service forfor all traffictraffic or traffic to or fromfrom certain NPA NXXs, certain countries, cities, or individual telephone stations for any Service offered under this tariff in order toto control fraud or non-payment.

IssuedIssued Date:Date; Effective Date: Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisiBasis Retail,Inc,Inc. S.C.S.C. TariffNo.Tariff No. 1I Section 3 OriginalOri 'nal PagePa e 16

SECTION 2 -—RULES AND REGULATIONS (CONT'D.)CONT'D.

2.42.4 Responsibilities of the Customer

2.4.12.4.1 The Customer isis responsibleresponsible for placing any necessary orders andand complyingcomplying with tariff regulations.regulations, The Customer is also responsibleresponsible forfor the payment of charges for Services provided under this tariff.

2.4.22.4.2 The Customer is responsible for anyany charges incurredincmred for special construction and/or special facilities which the Customer requests and which are ordered by the Company on thethe Customer's behalf.

2.4.32,4.3 If required forfor the provision of the Company's Services, thethe Customer must provide any equipment space, supporting structure, conduit, and electrical power without charge to the Company.

2.4.42.4 4 The Customer isis responsible for arranging access toto its premises at times mutually agreeable to the Company and the Customer when required for Company personnel to install, repair, maintain, program, inspect, or remove equipment associated with thethe provision of thethe Company's Services.

2.4.52,4.5 If any Company equipmemequipment isis installed inin a Customer location, thethe Customer shall cause the temperature and relative humidity in the equipment space provided by thethe Customer for thethe installation of the Company's equipment toto be maintained within the range normally provided for thethe operation of microcomputers.

2,4,62.4.6 If a Customer interfacesinterfaces with Company equipment, the Customer shall ensureensure that thethe equipment and/or system is properly interfaced with thethe Company's facilitiesfacilities or Services, that the signals emitted into thethe Company's network are of the proper mode, bandwidth, power, and signal level for the intended use of the subscriber and inin compliance with criteria set forth in this tariff,tariff, and that the signalssignals do not damage equipment, injureinjure personnel, or degrade Service to other Customers. If the Federal Communications Commission or somesome other appropriate certifying body certifies terminalterminal equipment as being teclmicallytechnically acceptableacceptable for direct electrical connection with thethe telephonetelephone network, thethe Company will permit such equipment to be connected with its channels without thethe use of protective interface devices. If the Customer fails to maintain thethe equipment and/or thethe system properly, with resulting imminentimminent harm toto the Company's equipment, personnel, or the quality of Service to other Customers, the Company may, upon written notice, require thethe use of protective equipment at thethe Customer's expense. If thisthis failsfails toto produce satisfactory quality and safety, the Company may, upon written notice, terminate the Customer's Service.

Issued Date:Date; Effective Date:Date, Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisiBasis Retail,hue.Inc. S.C.S.C. TariffNo.Tariff No. 1 Section3 OriginalOri 'nalPaPagee1717

SECTION 2 -—RULES AND REGULATIONS (CONT'D.)CONT'D.

2.42.4 Responsibilities of the Customer (conPd.)(cont'd, )

2.4.72,4.7 The Customer must pay the Company forfor replacementreplacement or repair of damage to any equipment or facilities of thethe Company caused by negligence or willful acts of tilethe Customer or others, by improperimproper use of thethe Services, or by use of equipment provided by the Customer or others.others,

2.4.82,4.8 The Customer must pay for the loss or thefttheft of any Company equipment installedinstalled at the Customer's premises.

2.4.92.4.9 If the Company installsinstalls equipment at thethe Customer's premises, thethe Customer shall be responsible forfor thethe payment of any applicable installationinstallation charge.

2.4,102.4, 10 The Customer must use thethe Services offered in this tarifftariff inin a manner consistent with thethe termsterms of this tarifftariff and the policies and regulations of all state, federal, and local authorities having jurisdiction over the Services.

2.4.112.4.11 The Customer is responsible for all lost and stolen travel cards, calling cards, and associated PINs.

2.4.122.4.12 InIn the event that parties other than the Customer (e.g.,(e.g, , the Customer's customer) will have use of the Services directly or indirectly through thethe Customer, then thethe Customer agreesagrees toto forever indemnify and hold thethe Company and any affiliated or unaffiliated third party provider or operator of facilities employed in thethe provision of the Services harmless from andand against any and all claims,claims, demands, suits, actions, losses,losses, damages, assessments, or payments which may be asserted by said parties.

2.4.132.4.13 Upon receiptreceipt of thethe Company's Prepaid Calling Cards, thethe Customer will assume all risks of lossloss or misuse of such Prepaid Calling Cards.Cards,

2.4.142.4.14 The Customer will not use the Company'sCompany*s name or any service mark or trademark of the Company or referrefer to thethe Company inin connection with any product, equipment, promotion or promotional material, publication, contracts, or bill of the Customer without the expressexpress prior written consent of the Company.

IssuedIssued Date: Effective Date: Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisiBasis Retail,Inc. S.C.S.C. Tariff No. 1 Section3 OriginalOri inalpaPagee 18

SECTION 2 -—RULES AND REGULATIONS (CONT'D.)CONT'D.

2.42.4 Responsibilities of thethe Customer (eont'd.)(cont'd. )

2.4.152.4, 15 The Customer isis responsible for thethe payment of all chargescharges forfor Services provided under this tariff and for thethe payment of all assessments, fees, surcharges, taxes,taxes, or similarsimilar liabilitiesliabilities whether charged toto or against thethe Company or the Customer. This includesincludes but is not limited to amounts the Company is required by government or other entities to collect and/or pay toto designated entities, The Company may adjust its ratesrates and charges, or impose additional rates and charges, inin order to recoverrecover these amounts. Unless otherwise specified herein, if anyany entity imposesimposes charges on thethe Company in connection with thethe Customer's Service, that entity's charges may be passed throughthrough to the Customer. The Customer isis responsibleresponsible for the payment of all suchsuch charges.

2.4.162.4.16 The cancellation of Services by the Customer pursuant toto Section 2.5.42.5.4 of thisthis tariff or discontinuance or suspension of Services by the Company pursuant to Section 2.52.5 of this tariff does not relieve the Customer of any obligations toto pay thethe Company for charges due andand owing for Services furnished up toto the timetime of discontinuance. The remediesremedies set forthforth herein will not be exclusive and the Company will at all times be entitled toto all rightsrights available toto it under either lawlaw or equity.

Issued Date: Effective Date: Issued By: TonyBloomTony Bloom Vice President 20 Second Avenue Buflington,Burlington, MA01803MA 01803 [ i iBasis Retail, Inc.Inc. S.C.S,C. TariffTariffNo.No. 1 Section 3 OriginalOri inalPaPagee1919

SECTION 2 -—RULES AND REGULATIONS (CONT'D.)CONT'D.

2.52.5 Cancellation or Interruption of Services

2.5.12.5.1 Without incurring liability,liability, upon five (5) working days' (defined as any day on which the Company's business office is open and the U.S.U.S, Mail is delivered) written notice to thethe Customer, thethe Company may immediately discontinue Services toto a Customer or may withhold the provision of ordered or contracted Services:

A,A. For nonpayment of any sum due toto thethe Company for more than thirty (30) days afteraiter issuanceissuance of thethe bill for thethe amount due; or

B. For violation of anyany of the provisions of thisthis tariff;tariff; or

C,C. For violation of any law, rule, regulation, or policy of any governing authority having jurisdiction over thethe Company'sCompany*s Services; or

D, By reasonreason of any order or decision of a court, public service commission, federal regulatory body, or other governing authorityauthority prohibiting the Company fromfrom furnishing itsits Services.

The above notice is not required inin those instancesinstances where the Company does not have contact information for the Customer.Customer,

2.5.22,5,2 Without incurring liability, thethe Company may interrupt the provision of Services at any time inin order to perform tests and inspections toto assure compliance with tarifftariff regulations and the proper installationinstallation and operation of thethe Customer's and thethe Company's equipmentequipment and facilities and may continue suchsuch interruption until any itemsitems of noncompliance or improperimproper equipment operation so identified are rectified.rectified.

2.5.32.5.3 Service may be discontinued by the Company without notice toto thethe Customer, by blocking traffictraffic toto certain counties, cities, or NXX exchanges, or by blocking calls using certain Customer Authorization Codes, when the Company deems itit necessary to take such action to prevent unlawful use of itsits Service.Service, The Company will restore Service as soon as it can be provided without undue risk,risk, and will, upon request by thethe Customer affected, assign a new Authorization Code toto replace thethe one that has been deactivated, or otherwise make the Customer whole.

IssuedIssued Date: Effective Date: IssuedIssued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisRetail,iBasis Retail, Inc. S.C.S.C. TariffNo.Tariff No. 1I Section3 OriginalOri 'nalPaPagee2020

SECTION 2 -—RULES AND REGULATIONS (CONT'D.)CONT'D.

2.52.5 CancellationCanceHation or Interruption of Services (eont'd.)(cont'd. )

2.5.42.5.4 The Customer may terminate Service upon verbal or written notice for thethe Company's standard month-to-month contract. The Customer will be liableliable for all usage on any of the Company's Service offerings until thethe Customer actuallyaetuaUy leavesleaves thethe Service. Customers will continue to have thethe Company's Service and be responsible for payment until the Customer or itsits agent notifies itsits LEC and changes itsits long distance carrier.

The Company'sCompany*s discontinuance policies concerning Prepaid Calling Card Services is found in Section 3.3.11

2.62.6 Credit Allowance - Interruption of Service

2.6.12.6.1 Credit maymaybebe given for disputed calls, on a per call basis.

2.6.22.6.2 Credit shall not be issuedissued for the unavailability of long distance Services.

2.6.32,6.3 The Company's credit allowance policies concerning Prepaid Calling Card Services is foundfound in Section 3.1.6.3.1.6.

2.72.7 Deposit

The Company may require deposits for certain Services ifif specifically provided for in thethe applicable Service description of this tariff.

IssuedIssued Date: Effective Date:Date; IssuedIssued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 Tariff iBasisRetail,Inc. S.C.S,C. TariffNo.N. 1 Section3 OriginalOri 'nalPaPagee2121

SECTION 2 -—RULES AND REGULATIONS (CONT'D.)CONT'D.

2.82.8 Payment and Billing

2.8.12.8.1 For anyany Service thatthat is not prepaid, Service is provided and billed on a billing cycle basis, beginning on thethe date that Service becomes effective. Billing is payable upon receipt.

2.8.22,8.2 The Customer is responsible forfor payment of all charges for Services furnished to the Customer, as well as toto allall persons using the Customer's codes,codes, exchange lines, facilities, or equipment, with or without the knowledge or consent of thethe Customer. The security of thethe Customer's Authorization Codes, subscribed exchange lines, and direct connect facilities isis thethe responsibility of thethe Customer. All calls placed using direct connect facilities, subscribed exchange lines, or Authorization Codes will be billed to andand must be paid by the Customer. For any Services that are not prepaid and thatthat have charges based on actual usage during a month, any accrued interest will be billed monthly in arrears.

IssuedIssued Date:Date; Effective Date: Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisRetail,Inc.Inc. S.C.S,C. TariffNo.Tariff No. 1I Section3 OriginalOri 'nalpaPagee2222

SECTION 2 -—RULES AND REGULATIONS (CONT'D_)CONT'D.

2.92,9 Collection Costs

In the event thethe Company isis required toto initiateinitiate legallegal proceedings to collect any amounts due toto the Company for regulated Services, or for the enforcementenforcement of any other provision of thisthis tariff or applicable law, Customer shall, inin addition to all amounts due, be liableliable to the Company for all reasonable costs incurredincmred by the Company in such proceedings and enforcement actions, including reasonable attorneys' fees,fees, collection agency fees or payments, and court costs. In any such proceeding, the amount of collection costs, including attorneys'attorney' fees,fees, due toto the Company will be determined by the court.

2.102.10 Taxes

When a Customer receivesreceives a bill from the Company for Services, all federal,federal, state, and local taxes,taxes, assessments, surcharges,surcharges, or fees, including sales taxes, use taxes,taxes, and municipal utilities taxes, will be billed as separate line itemsitems and are not included inin thethe ratesrates quoted herein. Any applicable sales taxtax or exemption must be certified in writing and supported by appropriate documentation.

2.112,11 Late Charge

For all Services that are not prepaid, ifif payment isis not received by the Customer by thethe due date, a latelate fee of the lesser of(a)of (a) one and one-half (1(I½)Ya) percent per month or (b) thethe maximum percentage permitted by law, shall be assessed against thethe Customer'sCustomer' s delinquent balmaeebalance of undisputed usage not paid by thethe due date. A Customer thatthat isis past due with a payment isis liable for all reasonable attorneys' fees andand other properly documented costs of collection incurred by thethe billing Customer, if any.

2.12?.12 ReeonnectionReconnection Charge

A reconneetionreconnection fee per occurrence inin thethe amountamount of $25.$25.0000 will be charged when Service is reestablished forfor Customers which has been disconnected due toto non-payment. Payment of the reconnection fee and any other outstanding amounts will be due in full prior to reeonneetionreconnection of Service.

IssuedIssued Date: Effective Date: IssuedIssued By:By.' Tony Bloom Vice President 20 Second Avenue Burlin_on,Burlington, MA01803MA 01803 iBasisRetail,Inc. S,C,S.C. TariffNo.Tariff No. 1 Section3 OriginalOri 'nalPaPagee2323

SECTION 3 -- DESCRIPTION OF,,.SERVICEF SERVICE

3.13.1 Prepaid Calling Card Services

3.1.13.1.1 General

The Company may produce and arrange for thethe distribution and sale of Prepaid Calling Cards. The Prepaid Calling Cards will be brand marked iBasis, Inc.Inc. or iBasisiBasis Retail, Inc.

All Prepaid Calling Card Services are interstate andand international offerings with the Customer having the ability toto use the Prepaid Calling Card toto place calls within thethe state. All applicable fees, directions&hrections for use, and customer serviceservice informationinformation areare includedincluded on thethe back of thethe Cards or on the packaging. Prepaid Calling Cards have no cash redemption value. The Company is not responsible for lost or stolenstolen Cards or PINs, or unauthorized use.

3.3.1.1,11.1.1 Customers may purchase the Company's Prepaid Calling Cards at a variety of retail outlets or through other distribution channels.

3.1.1.23.1.1.2 Prepaid Calling Card Services will be available with designated Card face values suebsuch as five dollars ($5.00),($5,00), ten dollars ($10.00),($10.00), twenty dollars ($20.00),($20.00), or alternatively,altemahvely, other values in one-cent ($.01)($.01) U.S.U.S. increments.increments.

3.1.23,1.2 DescriptionDeseription of Service

The Company's Prepaid Calling Card Service is a prepaid long distance Service that ailowsallows Customers to obtain a predetermined amount of access to the Company's long distance Services by purchasing the Company's Prepaid Calling Cards. The Cards are a cash-value-based Service with fixed faceface values on thethe Cards thatthat arcare availableavailable to thethe Customer thatthat purchases thethe Cards. Some Cards may includeinclude a rechargerecharge option as set forth in Section 3,1.3.3.1.3,

Issued Date: Effective Date: Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisRetail,hlc,Inc. S.C.S,C. TadffNo.Tariff No, 1 Section3 OriginalOri 'nalPaPagee2424

SECTION 3 - DESCRIPTION OF SERVICESERVI E (CONT'D.)CONT'D.

3.13.1 Prepaid Calling Card Services (¢ont'd.)(cont'd. )

3,3.1.21.2 Description of Service (cont'd.)(cont'd. )

3.1.2.13.1.2.1 Prepaid Calling Card Usage

A_A. Prepaid Calling Card Service is offered via access numbers printed on thethe back of the Cards. The Customer dials thethe access number on the Card and is then prompted by an automated voice responseresponse system toto enter thethe Authorization Code (or PIN), which isis either includedincluded on thethe back of thethe Card or otherwise provided to thethe Customer upon purchase. The Customer then enters the called telephone number.number, A PIN is not required if the Card provides for AN/registrationANI registration andand the Customer registersregisters its ANI with the Company.

B. The Calling Card Platform validates the PIN or ANI, determines thethe timetime remainingremaining on the Card, which is prompted to the caller, andand completes the call.

C. Billing forfor a call begins when thethe Platform receives a signal thatthat thethe called- toto number isis answered.answered. Billing ends when thethe Platform receives a signal that the calling or called party has terminated thethe call. Upon call termination,termination, the totaltotal consumed cost for each call is deducted from the remaining balance on the Card.

D. Calls are billed in increments ranging fromIrom one (1) toto five (5) minutes depending on the specificspecific calling Card and thethe destination called.called,

E. All calls must be charged against a Card thatthat has a sufficientsufficient balance. All callers will receive a warning tone one (1) minute before thethe balance is reducedreduced to zero (0).(0). The call will be interruptedinterrupted when the balance is reduced to zero (0).

F. Calling CaidsCards are only valid if activated by an authorizedauthorized distributor or reseller and used prior toto theirtheir expiration dates.dates, The Company will not refund unused balances after Cards have expired.

IssuedIssued Date: Effective Date;Date: Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisRetail,Inc. S.C.S.C. TariffNo.Tariff No. 1 Section3 ' OriginalOri al PagePa e 25

SECTION 3 - DESCRIPTION OF SERVICE (CONT'D.)CONT'D.

3,13.1 Prepaid Calling Card Services (cont'd,)(cont'd, )

3.1.33.1.3 Extra Features

The followingfollowing extraexha features maymaybebe available on some of thethe Company's Cards:

' A. ANIA~hi RRegistrationt tio -—CardsCtod thatth t haveh o toan ANiANI registrationgist otto optionptio williii beh disclosed as such. For these Cards, a Customer has the option of registering its ANI with the Company so that itit is not necessary toto inputinput the PIN number forfor the call to be validated.

B_ — B. R~hdRecharge Option - CardsC d thatththoothohave the rechargeh g optionpti willitthbe discloseddi i d as such. For these Cards, Customers may selectselect an amountamount of access to the Company'sCompany*s Service fi'omfrom a choice of pre-designated amounts. A Customer may rechargerecharge the Cards by selecting one of thethe pre-designated amounts.

3.1.43,1,4 Call Blocking

The Company will block calls made to the followingfollowing typestypes of numbers: "500,""500," "700,""700,""855,""855,""900,""900,""976,""976,""411,""411,""555,""555,""885,""885,""886,""886,"and "8727'"872." These typestypes of calls, therefore,therefore, cannot be completed.completed,

3.1.53,1o5 Customer Service

Customers may dial the customercustomer service number on the back of the Card twenty- four (24) hours per day, seven (7) days per week toto reportreport any problems with thethe Card or Service. A live operator isis available to taketake calls from 10:00 a.m.a.m. toto 12:00 a.m.a.m. ET. When a livelive operator is not available,available, Customers may leave messages regarding their questions or concernsconcerns and thethe Company will return messages within one (1)(I) business day fromIrom thethe date messages are received.received,

Issued Date: Effective Date: Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisRetail,Inc. S.C.S.C. TariffNo.Tariff No. 1I Section 3 OriginalOri inalPaPagee2626

SECTION 3 -- DESCRIPTION OF SERVICE (CONT'D;]CONT'D.

3.13.1 Prepaid Calling Card Services (eont'd.)(cont'd, )

3.1.63,1.6 Credits

3.1.6.13.1.6.1 To receive credit, the Customer must promptly notify thethe Company at the designated tolltoll freeIree number on the back of thethe Card and furnish thethe PIN, thethe called number, the troubletrouble experienced, and thethe approximate timetime the call was placed.

3.1.6.23,1.6.2 With the provision of the above information, the Customer will receive a credit equivalent of up to one (1) minute under thethe following circumstances:

A. When a call charged to a Prepaid Calling Card isis interrupted due to a cut-off or one-wayone-way transmission.nansmission,

B. Credit for failure of Service shall also be allowed for failure of power, equipment, or systems, which are provided for andand are the responsibilityresponsibility of the Company if such faihtresfailures occur while a completed call is in progress.

3,3.1.6.31.6.3 Credit allowances will not be given forfor interruptionsinterruptions thatthat are due to thethe failure of power, equipment,equipment, or systems not provided by thethe Company.

3.3.1.6.41.6.4 Credit allowances will not exceed the amount of usage deducted fromIrom thethe card balance.

3.3.1.6.51.6.5 No credits will be provided in the event of any forceforce majeure events.

Issued Date: Effective Date: IssuedIssued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisiBasis Retail,Inc. S.C.S.C. TariffNo.Tariff No. 1I Section3 OriginalOri 'nalPaPagee2727

SECTION 3 - DESCRIPTION OF SERVICE,SERVICE (CONT'D.)CONT'D.

3.13.1 Prepaid CallingCapdng Card Services (eont'd.)(cont'd. )

3.1.73.1.7 Refunds

If a Prepaid Calling Card is unusable for reasons beyond the Customer's control, thethe Card has not exceeded thethe expiration period, and thethe retailretail outlet has not provided a replacement card, a Customer may submit a refund request by calling customer service and providing all relevantrelevant information. Upon verification thatthat a refund is due, the Customer will be provided with either a replacement card equal to the value remaining inin thethe account, or ifif possible, the equivalent value on thethe Customer's card. Card replacements will be accomplished either via the retail outlet where the card was purchased or sent to the Customer's address, at the option of the Customer. No monetary refundsrefunds will be provided.provided,

The refund will be provided toto the Customer within sixty (60) days of notification by thethe Customer of the problem.

3.23.2 Discontinuance of Prepaid Calling Card Service

If thethe Company wishes to discontinue Service, it will ensure either through itsits contracts with itsits network providers, distributors, or marketing agents,agents, or other means, that purchased Cards remainremain usable throughthrough their expiration dates or, if thethe Card does not have an expiration date, forfor one (1)(I) year fromI'rom thethe date of firstfirst use, or thatthat Customers are otherwise made whole.

Issued Date: Effective Date:Date; Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 S.C.TariffNo. 1 iBasisiBasisRetail,Retail, Inc.Inc. S.C, Tariff No, 1 SectionSection44 ' OriginalOri alPaPagee2828

SECTIONSECTION 44--MAXIMUMMAXIMUM RATESRATESANDAND CHARGESCHARGES

4.14.1 MaximumMaximum RatesRates andand ChargesCharges forfor PrepaidPrepaid CallingCalling ServicesServices

AAbasebase perper minuteminute raterate ofof$.99$.99perper minute.minute.

AAweeklyweekly feefeeofof$0.99$0,99assessedassessed withinwithin twenty-fourtwenty-four (24)(24)hourshours aftera&erthethe firstfirst callcall andand eacheach weekweek thereafter.theres&or.

AA$1.10$1.10hang-uphang-up feefee appliedapplied toto callscalls thatthat dodo notnot useuse upup thethe entireentire cardcard balance.balance.

4.24.2 PayphonePayphone SurchargeSurcharge

PursuantPursuant toto thethe FCC'sFCC's OrderOrder inin CCCC DocketDocket 96-128,96-128,thisthis surchargesurcharge appliesapplies onlyonly toto dial-dial- aroundaround calls,calls, i.e.,i.e., eailscalls originating usingusing aa carrier'scarrier's accessaccess code,code, aa Customer'sCustomer's 800800 andand other toll-freetoll-&ee numbers, callingcalling cards,cards, andand prepaidprepaid phonephone cardcard calls,calls, fromfrom payphonepayphone instruments.instruments.

The Customer shall pay thethe Company a per callcall surcharge of up toto $1.10$1.10perper callcall forfor allafi such traffic.

4.4.33 Return Check Charge

A fee in the amount of $25.$25.0000 will be charged whenever a check or draftdra& presented for payment for Service is not accepted by thethe institutioninstitution on which it is written.

Return check charges may be applied in an amount not to exceed that allowed under SouthSouth Carolina statutes, S,S.C.C. Code Section 34-11-70,34-11-70.

4.4.44 PromotionalPromotional OfferingsOfferings

TheThe CompanyCompany maymay &omfrom timetime toto timetime makemake promotional offeringsofferings availableavailable inin which thethe ratesrates andand chargescharges differ &omfrom thethe tariffedtariffed ratesrates inin Section 4.4.1.1. TheseThese offeringsofferings will bebe limitedlimited toto certaincertain CardsCards andand datesdates andand thethe CommissionCommission willwill be notifiednotified asas requiredrequired ofof thesethese promotions.promotions.

IssuedIssuedlSaieiDate: EffectiveEffective Date:Date: IssuedIssued ByBy:' TonyTony BloomBloom ViceVice PresidentPresident 2020 SecondSecond AvenueAvenue Burlington,Burlington, MAMA 0180301803 iBasisRetail,Inc.Inc, S.C.S,C, TariffNo.Tariff No. 1I Section4 ' OriginalOri alPaPagee2929

SECTIONSE TION 4 - MAXIMUM RATES AND CHARGES,CHARGES (CONT'D.)CONT'D.

4.54.5 Marketing

As a telephone utility under thethe regulation of the Commission, thethe Company hereby asserts andand affirms that as a resellerreseller of intrastate telecommunicationstelecommunications service the Company will not indulge or participate inin deceptive or misleading telecommunicationstelecommunications marketing practices to the detriment of consumers in South Carolina, and thethe Company will comply with those marketing procedures, if any, set forth by thethe Commission. Additionally, the Company will be responsible for the marketing practices of its contracted telemarketerstelemarketers for compliance with thisthis provision.provision, The Company understands that violation of thisthis provision could result in a rulerule to Show Cause as toto the withdrawal of its certification toto complete intrastate telecommunicationstelecommunications traffic within thethe state of South Carolina.

Issued Date: Effective Date: Issued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 iBasisRetail,Inc. S.C,S.C.TariffNo.Tariff No. 1 OriginalOri inalPaPagee 1

PRICEPRICK LIST

1,11,1 Prepaid Calling Cards

Base rate of $0.50$0.50 per minute.

Weekly feefee of $0.89.$0.89.

Hang-up fee of $0,99,$0,99,

Payphone fee of $0.99.$0.99.

IssuedIssued Date: Effective Date: IssuedIssued By: Tony Bloom Vice President 20 Second Avenue Burlington, MA 01803 [BasisiBssis Retail,RetaB, Inc.

EXHIBITKXBIBITF

Indemnity Bond

4264521_3426452lv. 3 'L

INDEMNITY BOND TO THE PEOPLE OF THE STATE OF SOUTH CAROLINA

Bond No: 08BSBFJ7020

We, iBasisRetailiBasis Retail, Inc,,Inc principalprincipalandproviderofand provider of prepaidr aidcallincalling cardscardsthrouthrough distributors within thethe State of South Carolina and Hartford Fire Insurance Company,Com an, as an admitted surety insurer, bind ourselves unto the Regulatory Commission of the State of South Carolina,Ctmh 9 an Obligee,Ohhd, int theth 0penalMstmsum off29000.$5.000.00.00.

The totaltotal aggregateaggregate liability under this bond is limited to 5_00.005 000.00 (Five've Thousand D~ol ars .

The conditions of thisthis obligation are suchsuch thatthat the principal shall in all respectsrespects fully and faithfully comply with altall applicable provisions of South Carolina law.law. This obligation shallshall be used toto refundrefund prepayments to individualsindividuals who have purchased prepaid telecommunicationstelecommunications services of thethe principal ififthe principal isis unable toto provide such service of returnreturn thethe prepayments to its customers.customers, Within twanty-fourtwenty-four (24)(24) hours of such event, principal shallshall provide toto insurerinsurer a list of prepaid-calling service account codes it believes to be outstanding in the State of South Carolina togethertogether with the remainingremaining balances. Bond insurer agrees to act as administrator of the funds and toto distribute remaining account balances to individuals who request fundsfunds in writing.writing,

This bond shallshall taketake effect as of thethe date hereon and shall remainremain in full force andand effect until the surety is released fromtrom liability by thethe written order of the South Carolina Regulatory Commission, provided thatthat the surety may cancel thisthis bond and be relived of further liabilityliability hereunder by delivering thirty (30) days written notice to thethe South Carolina Regulatory Commission.Commission, Such cancellation shallshall not affect any liabilityliability incurred or accrued hereunder prior to the terminationtermination of saidsaid thirty (3) day period. The principal will promptly reissue a bond before thethe end of the thirtythirty (30) day period for an amount equal to or greater than the Valuevalue of this instrumentinstrument unless the parties agreeagree otherwise.

DDatet thistt' 2"2 _a day0 yofA~itof April, 2009

iBasis Retail

Hartford Fire Insurance CompanyCom an C 'ce Jf_ice V. Clifford,_ttomey-in-FaetClifford, ttorney-in-Fact DirectDirect Inqulrles/Cla;msInquiries/Claims to;fot THE HARTFORD POWER OF ATTORNEY ",,EBONO,,.,,,,'Fo,O,o,,°.,..Tot POWER OF ATTORNEY P.O,P.O. 80XBOX 2103, 690 ASYLUM AVENUE HARTFORD, CONNECTICUT 06106t 15t8 cell:cs/lr 888-266-3488888-2664488 orcrfax:fao. 860.787..5835}860-76743835) KNOW ALL PERSONS BY THESETHEBE PRESENTSPRESENTS THAT: ,r A_eno_"A enc Code:Code:0808 084700 ~X Hartford Fire Insurance Company, a corporationduly o_ganizeAorganized underthethe lawsluvm o£thcof the Stat_State otConnextJcatof Connecticut ~ Hartford Casualty Insurance Company, as corporationcorporuuon duly _Santzedorganized und_under thefim lawslaws of thetho Statestate of Indim=indians ~ HartfordHarlford Accident and IndemnityIndemnity Company, aaccrporotloncorporationduly organizedorfisnizod underunder thetho lawsbwz of the StateSlate of ConnecticutCounociicut ~ Hartford Underwriters InsuranceInsurance Company, aa corporationcorporation duly organiz=dorganized underunder the lawslaws of thethe Stateof Connccticctconnecticut ~ Twin City Fire InsInsuranceura nee CamCompany,pany, a corporat_,Oncorporation dulyduly organ/_cdorganized u_¢runder tt',_the lawso£of the StateSuite of IndianaIndiana ~ Hartford Insurance Company of Illinois,Sllnois, au corpoun_oncoqmmtioe dutyduly ersan[zedorgouizod underthet=wslaws ofot_ethe Stateat"ofl]ttno_sillinois ~ Hartford InsuranceInsurance Company of the Midwest, az corporation dulyorganlz_iorgontzod underthehwslaws of theStateof thdtanatndlonu Hartford InsuranceInsurance Company of the Southeast, az ¢on=oo_tiuncorporation dutyduly orE_tz_dorgonlexl uederunder thethe lawsofofthethe Stat_State ofHoridaFlorida • ~ • I i having their having their homehome office inin Hadfccd,Hartford, Coasec_cutConnecficut ,(hereinafter(hereinaRer collecUvelycofiemively referredreferred toto as theIhe "Compantss')'Companies") do hereby make, constituteconsfitute andand appoint, upuP to thethe amountamOunt of UNLIMITEDUNLIM ITED BETSEY TAN, TTNATINA HI_CKLEY,HINCKLEY, JIMGIN SMITH, JANICEoTANICE V.U. CLiFfORDCLIFFORD OP BOSTON, MASSACRUSETTSMASSACHUSETTS

Iheir true and lawful theirhue end/awful Attomey(s)-In-Fact,Attorney(s)-ln-Fact, each iraIn their separate cupedtycapadty ifIf meremore than one Isls named above, toto sign itsits namename asas surely(las)surety(les) only as delineated above by delineated above by 1_,E(, andand toto execute, sealseat andend ackno'_edgeacknowledge any andand aftafi bonds,bands, undedaidngs,undertakingm contracts andand other wdttonwrRtsn IsstmmentsInsbumanta In theths nature thereof, nature thereof, onon behalf of theths Companies )nIn theirtheir businessbusiness of guaranteeingguaranteeing theths ftdefftyRdslity of persona,persons, guaranteeing thethe performance of contracts andsnd executing or executing or guaranteeing bonds andend undertakings requtradrequired or permitted inIn anyanY acttonsactions oror proceedings allowed by law,law. In Witness Whereof, endand as authoredauthorized by a ResolutionResolufion of theths Board ofof Dh'ectersDirectors of the Companies on January 22,22, 2004,2004, the Companiescompanies have caused these presents to signed its have caused these presents to bebe signed by its Assistant Vice President and ItsIts corporate sealsseals to be hereto a_xed,affixed, duly attested by itsits Assistant Secretary, Further, pursuant Resolutkln Seexetae/, Further, pursuant to Resolution of theIhe Board of Directors of the Compan)es,Companies, thethe Companies hereby unambiguously affirmaNrm that theythey arears and wfil be bound and will be bound byby anyany rnechanlssilymechanlcafiy appliedappfied signatures app)ledeppfisd toto thisthis Power of Attorney.Attorney,

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sudowoky, Aooioiaot Scottscca Sadowsky,Assistant Secretarysmxetory M.hk RossFisheFisher,f, AssistantV_ceVioo President STATE OF CONNECIlCUT STATE OF CONSECTICLIT-_i 2" S._ss. Hartford COUN'P/OFCOUNTY OF ttARTFORBHARTFORD .11g On this 3 of March, 2008, before me On this 3rddayday of March, 2008, before me personallypersonafiy came M. Ross Fisher, to me known,known, who being bymems dulyswam,sworn, did deposeandand say:ssy: thatthat he resides in the County of Hartford, he resides In theCountyof Hartford,StateStats of ConnectleshConnecficut; that he isis the AssistantViceVke Pras_entPresident of thethe Compaaias,companies, thethe corporationsceqoorattons describeddesaibed Inin andend which executed the above Instrument; that he knows executed the above }nSbUmsnt;that he knowsthethe sealsseals of ti'_ethe said coqxx_ns;ccrpcmficno; thatthat theths seals affixedeffixed totc the saidsold (estrementinstrument are suchcorporateseals; that they were oo aifixed authcdty the they were so affixed byautho_tyof the BoardsofcfDirectorsofsaldof said cerpcmtionsccrpcmtlcna and thatIhst he signedhishis name theretostereto by likelike authority,authority.

$colt5cou E.6P_Pmobo N_uyNobuXPublicPa'_t_ CERfutcata CER'flFC_TE MyCo_sloncommim lou F.xpsoph'_lrm C_o_crOoiobor 331,l, 20122c 3 2 the I,i. the undersigned,unde mtgnsd, Assistant Vice Presidentof thethe Companies.Companies, DO HEREByHEREBY CERTIFY that thethe above and foregoingforegoing isIs a truetrue and correctcopyof the Power of and copy cf the P0v_r of Attorneyexecutedbyby said Companies,companies, whlchvrtkh Is atiltstlil inIn full fecesforce effectiveelfecfive as of AptAprilil 2, 220090 0 9 Signedandsnd ssslndsealed attheat the _tyCity of Hartford.

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GaqGary W.VV. 8lumper,8lump or, AsslstantAssistant VicePrealdentPresident

POA2_8POA2008