Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File Number 0-26739

ITXC CORP.

(Exact name of registrant as specified in its charter)

750 College Road East, Princeton, New Jersey 08540

(609) 750-3333

(Address and telephone number, including area code, of

registrant’s principal executive office)

Securities registered pursuant to Section 12(b) of the Act: none.

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

Common Stock, par value $.001 per share

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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

The aggregate market value of the voting common equity of the registrant held by non-affiliates (for this purpose, persons and entities other than executive officers, directors, and 5% or more shareholders) of the registrant, as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2002), was $164 million.

Number of shares of Common Stock outstanding as of January 31, 2003:  42,822,447

Documents incorporated by reference: Definitive proxy statement for the registrant’s 2003 annual meeting of shareholders (Part III).

Table of Contents

ITXC CORP.

TABLE OF CONTENTS

i

Table of Contents

PART I

Item 1.    Business of the Company

Introduction

ITXC Corp. was incorporated in Delaware in 1997. On October 1, 1999, we made our initial public offering, on March 15, 2000 we completed a follow-on offering of shares by ourselves and certain of our shareholders; and on October 12, 2000 we consummated the acquisition of eFusion, Inc. (“eFusion”). On October 11, 2001, we sold most of the tangible and intangible assets of our e-commerce business (other than patents) to eStara, Inc. (“eStara”), a privately held provider of web-voiced services, in exchange for an equity position in eStara. In May 2002, ITXC purchased the wholesale telephony assets of privately-held Nexcom Telecommunications, LLC. The assets include telephony equipment and operating facilities in 11 countries including Lithuania, Croatia, Bulgaria, and Slovakia. The purchase price paid was $9 million in cash and 533,701 shares of ITXC Common Stock. Our principal executive offices are located at 750 College Road East, Princeton, New Jersey 08540, and our telephone number is (609) 750-3333. As used in this Annual Report, the terms we, ITXC and the Company refer to ITXC Corp. and its subsidiaries.

ITXC, WWeXchange, BestValue Routing and webtalkNOW!, and many of our product/service names referred to herein, are trademarks, service marks or trade names of the Company or its subsidiaries. This Annual Report also includes references to trademarks and trade names of other companies.

Certain statements under the captions “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Business of the Company” and elsewhere in this Annual Report are forward-looking statements. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this Annual Report that are not historical facts. When used in this Annual Report, the words “could”, “expects”, “anticipates”, “objective”, “plans”, “may affect”, “may depend”, “believes”, “estimates”, “projects” and similar expressions are generally intended to identify forward-looking statements under the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. These factors consist primarily of the risks identified in Exhibit 99.1 to this Annual Report. We assume no responsibility to update these forward-looking statements after the filing of this Annual Report.

Our web site address is www.itxc.com. We make available, free of charge, on our web site, our annual report on From 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

Overview

We are a leading global provider of high quality wholesale voice and fax telecommunications services. We primarily use the Internet for transport of these calls. ITXC estimates that it now ranks in the top 10 carriers in the world based on minutes of international calling, and carries approximately 20% of all such calls transported on the Internet. Our services allow carriers and telephony resellers to benefit from the low capital and operating costs of using the Internet for transport. We believe that our scale, reputation for high quality and ability to rapidly implement new services for our carrier customers address the substantial opportunities that arise from the reach and economics of the Internet.

We have developed and deployed ITXC.net^®, an actively-managed network overlaid on the public Internet, to deliver high quality voice and fax communications while providing our customers with the cost savings and global reach of the Internet. We believe that the rapid growth of commercial traffic on ITXC.net demonstrates that we have successfully used our proprietary BestValue Routing to address the quality problems which early attempts at voice transport on the Internet encountered.

To date, we have concentrated our efforts on rapidly deploying ITXC.net worldwide. We have established ITXC-owned facilities in the U.S., England and Germany and several Eastern European countries and have arranged call termination and origination services with affiliates throughout the world. We have used our affiliate structure to achieve broad worldwide presence. As of January 31, 2003, we had affiliates in 175 countries. On a typical day, we carry traffic to and from well over 100 countries. By using the Internet for transport and our affiliates’ local infrastructure for terminating voice traffic, we have developed a reliable network, which we are continuing to expand, at substantially lower capital expense than traditional carrier networks.

1

Table of Contents

In April 1998, we introduced ITXC WWeXchange Service, the first application enabled by ITXC.net. This service provides international call completion to our customers and enables them to offer their own customers phone-to-phone global voice and fax service. We have achieved a high network usage growth rate since commencing ITXC WWeXchange Service. The following table sets forth the number of minutes of traffic carried over ITXC.net during the past twelve quarters:

In April 1999, we introduced a new ITXC-owned proprietary device called a SNARC, which facilitates the use of our network by our customers by enabling them to access our network directly from their own premises to originate calls. In addition, since December 1999 we have been installing similar devices on selected affiliates’ premises to connect them directly to the Internet for the purpose of terminating calls originated by ITXC.net affiliates. These devices avoid the costs of dedicated connections to network hubs and improve the economics of our services to our customers. We believe that SNARCs strengthen our customers’ and affiliates’ relationships with us and position us to deploy additional enhanced services over ITXC.net.

In December 1999, we commenced our first service offering as a voice application service provider, providing a service called webtalkNOW! which allows Internet portals, Internet service providers and web sites to offer web-to-phone calling to their customers under their own brands.

In October 2000, we consummated our acquisition of eFusion, Inc., an Oregon-based provider of Internet voice services to online businesses and Internet service providers. After experiencing disappointing revenue growth in this field, in the second and third quarters of 2001 we wrote-down most of the value of those assets. On October 11, 2001, we sold most of the tangible and intangible assets of the e-commerce business (other than patents) to eStara, Inc., a privately held provider of web-voiced services, in exchange for a 19.9% equity position in eStara, which has subsequently been diluted. We also granted certain patent licenses to eStara for use in the e-commerce business. We initially valued this investment at $700,000. During the fourth quarter of 2002, we determined that there was an other-than temporary impairment in the value of the eStara investment, which resulted in a $700,000 charge. See Note 7 of the Notes to our Consolidated Financial Statements that we have presented elsewhere in this Annual Report.

Our current focus is on wholesale services primarily delivered over the Internet (known variously as “Voice on the Internet,” “Voice over Internet Protocol”, “VON” or “VoIP”). However, in the event market conditions change and enable our profitable entry into enhanced services, our use of the Internet as a foundation of our services would facilitate the introduction of more advanced communications applications such as:

Industry Overview

Convergence of Global Telecommunications and Data Services

        The global telecommunications industry has grown at a rapid rate over the last decade, driven by domestic and international deregulation, technological development, network deployment and the globalization of business. The number of communications service providers has also been increasing internationally as a result of competition fostered by domestic and international deregulation. These factors have contributed to a substantial decrease in the cost of telephony services delivered over the traditional telephone network. This trend of decrease in price, however, has been countered by an increase in demand that low

2

Table of Contents

prices have created. Based on country-by-country information and other data provided by the International Telecommunications Union, total telecommunications services revenue was approximately $700 billion in 1997. According to Insight Research Corporation, an industry research firm, this market is projected to grow to approximately $1.3 trillion by 2003. According to a report “World VoIP Markets” (2002) by research firm Frost & Sullivan, revenues from the VoIP marketplace will surpass $171 billion by the end of 2007. Also, according to TeleGeography, a market research firm, international telephone traffic on PSTN and VoIP networks grew 10% in 2001 as compared with 2000, to approximately 154 billion minutes (this number does not include PC-to-phone traffic, traffic routed over end-to-end IP networks, traffic routed on private networks, or domestic traffic in any country). According to the TeleGeography 2003 report, VoIP was expected to account for almost 10 billion minutes, or over 6% of the world’s international traffic in 2001—up from the 6.2 billion minutes that TeleGeography had projected for 2001 last year. TeleGeography further predicts that in 2002 VoIP will account for 18 billion minutes, or 10% of all international traffic. These figures only include PSTN and VoIP phone-to-phone calls placed through carriers; PC-to-phone, PC-to-PC calls and calls on private corporate networks are excluded. ITXC, carrying nearly 20% of the world’s international VoIP minutes, has the largest global market share of all VoIP players.

We believe that the combination of increasing demand for voice services and the proliferation of data networks, with their enhanced functionality and efficiency, is driving the convergence of voice traffic and data networks, including the Internet. We expect this transfer of traffic to accelerate as corporations and service providers are increasingly determining that the most cost effective and efficient way to build out and operate their communications infrastructure is with voice services supported across their data network. This is reflected in the growth of both acceptance and deployments of IP PBX (private branch exchange) and VoIP over VPN (virtual private network) within enterprise networks.

Network Infrastructure

The basic technology of traditional telecommunications was designed for slow mechanical switches. Communications over the traditional telephone network are routed through circuits which must dedicate resources to each call from its inception until the call ends, regardless of whether anyone is actually talking on the circuit. This circuit-switching technology incurs a significant cost per call and does not efficiently support the integration of voice with data services.

Data networks, however, were designed for electronic switching. They break the data stream into small, individually addressed packages of data (“packets”) which are routed independently of each other from the origin to the destination. Therefore, they do not require a fixed amount of bandwidth to be reserved between the origin and destination of each call and they do not waste bandwidth when it is not being used for actual transmission of information. This allows multiple voice or voice and data calls to be pooled, resulting in these networks being able to carry more calls with an equal amount of bandwidth. Moreover, they do not require the same complex switching methods required by traditional voice telephone networks, instead using a multiplicity of routers to direct each packet in the direction of its destination and they automatically route packets around blockages, congestion or outages.

Packet switching is a method of transmitting messages that can be used within a data network or across networks, including the public Internet. The Internet itself is not a single data network owned by any single entity, but rather a loose interconnection of networks belonging to many owners that communicate using the Internet Protocol (IP).

The Emergence of Voice on Data Networks

Voice on the Internet consists of transmitting both traditional and enhanced voice and fax services between ordinary phones and the addition of interactive voice capability to computers, web sites and email. Voice on the Internet serves the extensive markets of both phone users and computer users. We believe data networks provide lower cost than the traditional telephone network and are better suited to deliver future enhanced services to both phone users and computer users. Moreover, the Internet is the most cost-effective data network for transmitting any type of data worldwide, including voice. According to the International Telecommunications Union, the year 2000 was the first time Internet capacity exceeded international telephone circuit capacity.

Telephony based on Internet protocols emerged in 1995, with the invention of a personal computer program that allowed the transport of voice communications over the Internet via a microphone connected to a personal computer. Initial sound quality was poor and the service required that both parties to the conversation use personal computers instead of telephones. In 1996, the advent of the gateway for the first time offered anyone with access to a telephone the ability to complete calls on the Internet. A gateway is a device that transfers calls from the traditional telephone network to a network such as the Internet, and vice versa.

The Economics of Internet Telephony

Long distance telephone calls transported over the Internet are less expensive than similar calls carried over the traditional telephone network primarily because the cost of using the Internet is not determined by the distance those calls need to travel. Also, routing calls over the Internet is more cost-effective than routing calls over the traditional telephone network because the technology that enables Internet telephony is more efficient than traditional telephone network technology. The greater efficiency

3

Table of Contents

of the Internet creates cost savings that can be passed on to the consumer in the form of lower long distance rates or retained by the carrier as higher margins.

By using the public Internet, VoIP providers like ITXC are able to avoid direct payment for transport of communications, instead paying for large “pipes” into the public Internet, billed by bandwidth rather than usage, which transmits calls to a distant gateway. The Internet, which has its origins in programs devised by the Department of Defense to provide multiple routes and therefore redundancy which was largely immune from the failure of a single network element, provides great redundancy and can be “self healing” in the event of an outage in a particular network element or transmission path. Moreover, adding an additional entry or exit point (a Point of Presence or “PoP”) does not require any expensive or time consuming reconfiguration or reprogramming of existing network elements. The new element is simply installed with a specific IP address and it can send or receive information from any other IP address on the Internet.

Limitations of Existing Internet Telephony Solutions

The growth of voice on the Internet was limited in the past due to poor sound quality caused by technical issues such as delays in packet transmission and by bandwidth limitations related to Internet network capacity and local access constraints. However, the continuing addition of data network infrastructure, recent improvements in packet-switching and compression technology, new software algorithms and improved hardware have substantially reduced delays in packet transmissions and the effect of these delays. ITXC’s BestValue Routing enables the Company to provide its carrier customers with the consistent quality they require. In fact, ITXC’s carrier customers typically do not tell their customers that their phone-to-phone calls are being transmitted over the Internet since these callers are receiving the quality that they expect.

A number of large long distance carriers have announced Internet telephony service offerings. Smaller Internet telephony service providers have also begun to offer low-cost Internet telephony services from personal computers to telephones and from telephones to telephones. Traditional carriers have substantial investments in traditional telephone network technology, and therefore have been slow to embrace Internet technology.

We believe that the infrastructure required for a global network is too expensive for most companies to deploy on their own. This mandates that the network be a combination of gateways owned by different operators. For a network to achieve optimal functionality, however, the gateways need to be interoperable, or able to communicate with one another. Cisco appears to have emerged as a dominant supplier of such gateways. Other manufacturers are often seeking to make their equipment interoperable with Cisco.

The ITXC Solution

We believe that the rapid growth of commercial traffic on ITXC.net, particularly from Tier I carriers, demonstrates that we deliver high quality, low cost voice and fax communications over the Internet. The key advantages of our solution include:

Quality.    We believe that we deliver to our customers high quality voice communications over the Internet at competitive pricing. We maintain high quality primarily through our proprietary BestValue Routing technology and techniques which include ITXC-developed monitoring and analysis software and rapid human response from our 24-hours-a-day, 7-days-a-week network operations center. In addition, we blend the redundancy of the public Internet with our use of multiple termination affiliates to reach many locations to help assure the reliability and quality of our network. We use dedicated data networks and even the traditional telephone network to address peaks or when we cannot assure consistent quality on the Internet.

Lower Costs.    By using the public Internet, we are able to reach and rapidly deploy many affiliates throughout the world at a substantially lower capital expense than building the dedicated connections that a traditional telephony carrier would require. Also, as a result of our ability to use the public Internet, we believe that we have significantly lower marginal costs than the traditional telephone network or a private data network. In addition we avoid the significant costs of network reconfiguration which traditional networks experience whenever they must add, change or delete a PoP. Each PoP as well as any Network Operations Centers must be reconfigured whenever the routing from that PoP is changed. Because ITXC uses the Internet as the intermediary, we are able to add, change or delete a PoP with no reconfiguration required in any other PoP. We are also able to redeploy PoPs if they are no longer cost effective in their initial location.

Interoperability.    We have led an effort called iNOW! resulting in an industry standard for interoperability. The VocalTec and Cisco equipment installed on ITXC.net is already largely interoperable. Although we have transferred the iNOW! trademark and web site to an industry standards body, we intend to continue to provide leadership in interoperability of voice over the Internet services. In 2001 we announced that we were the first in the industry to achieve full interoperability between Cisco and VocalTec gateways and we intend to continue maximizing our opportunities for interoperability. Interoperability results in significant network efficiencies, increases the routing choices of ITXC’s customers, reduces latency (network delay) by reducing the need for protocol conversions, and increases the redundancy and therefore reliability of the ITXC network. We have been increasingly standardizing our network on Cisco gateways which we believe provide us the maximum flexibility to interoperate.

4

Table of Contents

As we move towards a single vendor solution, we are significantly increasing our efficiency, and by using interoperability are able to continue to be able to connect to carriers who deploy gateways from a variety of manufacturers as well as seamlessly connecting to carriers who use traditional circuit switched telephone switches.

Global Scale.    Our network is overlaid on the public Internet to provide a global communications medium to voice service providers. ITXC.net is scalable—by using the public Internet and our global network of affiliates, we are able to rapidly and easily add capacity when needed. In addition, we believe that we are able to connect new affiliates to ITXC.net in significantly less time than it would take for a traditional telephony carrier or dedicated data network to establish a dedicated connection. For example, we were able to rapidly deploy a network in Bolivia for COTAS that was able to transport a substantial market share of the traffic in the country within weeks of the date COTAS was able to carry traffic. Moreover, we have a business model of purchasing terminating minutes directly from affiliates and selling call completion to customers and affiliates. This model eliminates the need for complex settlement between carriers which had previously slowed the deployment of a global network.

Easy Access.    We offer our customers three ways to connect from their switches to ITXC.net: through normal dedicated switch-to-switch connections, through customer-owned gateways, and through SNARCs. SNARCs are specially configured devices, which we own and install on our carrier customers’ premises in order to eliminate the cost of dedicated connections from their switches to our network hubs. SNARCs allow our customers to benefit from the global termination capabilities of ITXC.net by bringing the advantages of voice over the Internet to the customer’s premises. In addition, our affiliates can terminate calls directly from ITXC.net using similar SNARC equipment that we install on their premises.

Attractive Platform for New Services.    Because of our leadership position in establishing interoperability standards and the breadth of our deployed network, developers of new services are bringing products to us for evaluation and possible deployment on ITXC.net. We believe that our operation as a voice application service provider opens our network to new categories of customers including major retailers who do not own telephone facilities themselves.

Our Strategy

Our goals are to achieve profitability and to grow our market share as a leading wholesale provider of voice and fax services as measured by revenue and network size. In order to achieve this goal we intend to:

Exploit Our Early Entrant Status and Worldwide Network

As of January 31, 2003, we had aggressively deployed ITXC.net in 175 countries. We believe that with the increasing use of this network, ITXC has developed a reputation in the communications industry for providing high quality voice and fax services over the Internet. In addition, we believe our experience as one of the first providers of Internet-based voice services has placed us at the forefront of developing the proprietary tools and techniques which enable us to offer our services. We intend to continue to enhance and capitalize upon our reputation and experience in the communications industry as we provide existing and new voice and fax services.

Rapidly Expand ITXC.net by Adding Additional Affiliates Worldwide

We have used our affiliate structure to quickly achieve a global reach for ITXC.net. We believe that this approach allows us to quickly expand and develop a broader network than our competitors. We intend to continue to rapidly add new affiliates worldwide in order to provide our customers with additional termination points.

Focus On Newly Deregulating Markets

We intend to focus substantial resources on newly deregulating markets to enable both incumbent carriers and new entrants to rapidly deploy worldwide capability with minimal capital expenditure. For example, ITXC entered into a relationship with COTAS, Bolivia’s second largest local exchange carrier, and Heilsberg, S.A., so that on November 28, 2001, the first day on which competition was legal in Bolivia, COTAS was immediately able to provide worldwide access through ITXC for its customers and achieved a substantial market share. In July 2002, India, one of the world’s largest potential markets, deregulated. Although India has a relatively low penetration of telephony, its population is so large that it represents a major market immediately, which will grow as penetration increases. In India we have interoperation agreements with many major carriers, including Videsh Sanchar Nigam Ltd. (VSNL) and Data Access (India) Ltd. Our introduction of service was sufficiently rapid and successful that on Sunday, September 22, 2002, we carried over one million minutes of traffic to India, even though deregulation was only effective for 2 months and implementation of the deregulation was impeded for some time by bureaucratic obstacles. Sunday is typically a peak day and future volumes to India may be higher or lower than September 22 for any number of reasons. The deregulation and competitive environment have resulted in a reduction in international rates to and from India by more than 50%. It is our intention to continue to take advantage of our experience in additional markets which are deregulating, such as Brazil.

5

Table of Contents

Capitalize on the Cost Advantages of the Internet

By overlaying ITXC.net on the public Internet, we believe that we are able to capture significant cost and capital savings. Instead of incurring the capital expense to deploy a global physical network, we are able to carry a substantial portion of our customer’s traffic using the existing Internet infrastructure together with our affiliate network. We believe that it would require significantly more capital for a carrier using traditional methods of network deployment to implement a network with the same capacity and global reach as ITXC.net. Additionally, the cost of transporting our traffic over the Internet is largely not distance sensitive, since we pay only for Internet access. We believe these factors enable us to benefit from significant cost savings that are not available to operators of the traditional telephone network or private data networks. In addition, we believe that we will gain economic and technological advantages by moving towards a switchless network. In the past switches were necessary at our major hubs, where we connected to traditional carriers through analog lines. We believe our new architecture will help reduce both capital and operating costs.

Expand ITXC’s role in the Phone Call Value Chain

In Bolivia, as described above, we provide a complete outsourced domestic and international long distance service to our carrier customer. We also provide PC-to-phone services. In several trials we are providing authentication and other services to our wholesale customers. We believe that providing more of the value chain will position us to both earn a greater share of the consumer dollar and will strengthen our relationships with our wholesale customers.

Provide Services to the Prepaid Calling Card Industry

In the United States alone, the prepaid calling card industry is expected to reach just over $5 billion by 2005 and $6.3 billion by 2008, according to the Atlantic-ACM Market Dynamic and Forecast 2003-2008 report on prepaid calling cards. ITXC is well poised to provide services to calling card providers, which also provides ITXC with a steadier, more predictable stream of traffic as compared to sales to wholesalers. We experienced an increase in the percentage of our sales to prepaid calling card providers in 2002 and expect to build on this trend in 2003.

Establish ITXC.net as the Standard for Quality in Our Industry

By combining our BestValue Routing approach with our knowledge of gateway and Internet technology, we believe that we have demonstrated that the Internet can be an effective medium for two-way voice and fax communication. By continuing to provide reliable high quality voice and fax service with a global reach, our goal is to be the network of choice for new enhanced services that incorporate voice. We continue to undertake major efforts to improve our quality. A study by Atlantic-ACM of wholesale carriers worldwide (paid for by the wholesale carriers that were ranked, including ITXC) rated leading wholesale providers by a variety of criteria. Included in the survey were two carriers which primarily use the public Internet and other traditional carriers from around the world, including the three largest U.S. wholesale carriers. ITXC’s overall score was ranked above the industry average.

Provide our Customers and Affiliates with Direct Access to ITXC.net

We are committed to providing our customers with high quality, low cost voice service. SNARCs provide our customers with a voice communications solution that minimizes reliance on the traditional telephone network. By installing SNARCs on customer premises, we can provide our customers with direct access to all of the ITXC.net termination points worldwide without the need for a direct, dedicated connection to one of our network hubs. We also provide SNARCs to affiliates to terminate calls. In the future, an extension of our SNARC program will be able to connect our customers’ customers directly to the Internet, if market conditions and regulatory considerations warrant. We now provide many affiliates with direct access to voice traffic sent over ITXC.net for termination without the need for a direct, dedicated connection to one of our network hubs and thus are able to improve the economics of our services to them. Through year-end 2002 we had almost two billion minutes of use of ITXC.net from our SNARC program. We believe that SNARCs will strengthen our customers’ and affiliates’ relationships with us and position us to deploy additional Internet-based enhanced voice services over ITXC.net.

Deliver Additional Voice Services Over ITXC.net

We believe that Internet telephony represents only the beginning of the evolution of the Internet as a medium for voice and fax services and that our web-to-phone service represents only the early stage of this evolution. Through enhancements to ITXC.net, we can position ourselves to provide the network for wide commercial deployment of new voice and fax services as market conditions warrant. We believe that, in the future, the Internet will serve as a platform for existing and enhanced voice and fax services that may be accessed from traditional phones, personal computers and a variety of devices that span the range between telephones and personal computers, although the decline in Internet and telecommunications companies subsequent to 2001 has probably delayed the development of this market.

6

Table of Contents

ITXC.net

ITXC.net, a global communications network, allows us to deliver reliable, high quality voice and fax service through an actively-managed network overlaid on the public Internet.

We have implemented ITXC.net by using the public Internet to connect ITXC-owned network hubs in the U.S., England and Germany with our affiliates around the world. We use ITXC-developed software and skilled network management personnel to help assure the reliability and quality of voice transmission over the Internet. To further enhance the reliability of ITXC.net, we are also able to route and terminate voice traffic through alternate channels.

The key components of ITXC.net include:

The Public Internet

ITXC.net routes voice traffic over the public Internet; this allows traditional telephone users to benefit from Internet cost savings while calling phone-to-phone. By using the Internet, we are able to reach and rapidly deploy many affiliates throughout the world at what we believe to be significantly lower capital costs than that of building the dedicated connections that a traditional telephony carrier or dedicated data network would require.

Global Network of Affiliates

We have a global network of independent affiliates which own their own gateways and originate and/or terminate voice traffic over ITXC.net. We have used our affiliate structure to rapidly achieve what we believe to be the broadest global network in the Internet telephony marketplace. As of January 31, 2003, we had affiliates in 175 countries. Our affiliates range from small Internet service providers to traditional telephone companies.

Multiple Access Points and Network Hubs

As of January 31, 2003, we had three network hubs, one in New Jersey, one in California and one in London, each consisting of a switch and multiple gateways. In February 2003, ITXC added a fourth hub, located in Germany. Our customers access ITXC.net through dedicated connections from their switches to these network hubs or by using SNARCs located on their premises. SNARCs connect our carrier customers’ switches to the Internet and ITXC.net and thereby avoid costly, distance-based dedicated line charges associated with connecting customer switches to our network hubs. As of January 31, 2003, we had installed over 229 SNARCs at 89 carrier customer sites and 379 SNARCS at 110 affiliate locations. Some affiliates also connect directly to the Internet to originate or terminate calls using gateways they have purchased directly from equipment suppliers and which they manage. ITXC is in the process of converting to a switchless architecture, under which we will be able to eliminate switches previously located at the network hubs. All of the functionality formerly contained in the switches will be provided by other equipment and the existing switches will not be replaced. We anticipate that this will result in lower future depreciation expense as well as reduced operating expense and increased reliability resulting from network simplification. The German hub is switchless using this new architecture.

BestValue Routing

Our BestValue Routing approach employs ITXC-developed software and techniques to efficiently and cost-effectively route voice traffic over ITXC.net. We believe that our ability to develop and deploy intelligent routing methods represents a significant competitive advantage. We have received patents in this area and have other patent applications on file or in preparation. We believe that our Best Value Routing approach enables us to provide consistent, reliable quality since we are able to avoid the majority of Internet congestion points and minimize packet loss and delay.

We implement our BestValue Routing approach from our 24-hours-a-day, 7-days-a-week network operations center where we poll our affiliates’ gateways periodically to assure their stability, test the quality of Internet connections to the gateways and collect call detail records in near real-time to monitor the quality of calls placed over our network. We use network analysis software to compare monitoring data to predetermined parameters from our database of call detail records. This software generates reports on a per route basis when the measured parameters fail to meet predetermined standards. Frequent analysis of this information allows us to rapidly correct network problems such as congestion or inoperative gateways and to automatically generate improved routing.

Our monitoring and analysis software helps our staff to manage a routing scheme across multiple switches and gateways around the world. Our routing software establishes predetermined percentages of traffic to be sent to each provider, based both on price and quality. If a particular Internet route or termination provider is not meeting our standards, our automatic routing switches to a better quality or different priced provider as appropriate. For example, if transport through the public Internet proves to be unreliable on a particular route, we can reroute the traffic through dedicated data networks or the traditional telephone network to terminate the call in a traditional manner. The use of multiple termination affiliates in many cities in which

7

Table of Contents

we operate provides us with numerous termination possibilities to help ensure completed calls with consistent quality and low cost.

We have also made considerable progress towards achieving interoperability between gateways of different manufacturers. At present we have the ability to exchange traffic between Cisco and VocalTec gateways and are working to increase the number of vendors’ equipment which is interoperable. Interoperability gives ITXC customers the ability to choose the vendor that best suits their needs; allows customers to access more routes; gives terminating affiliates traffic from more carriers; lowers ITXC’s capital and operational costs by simplifying routing and network architecture; increases redundancy and therefore reliability on ITXC.net; and enables ITXC to exchange calls with other VoIP networks without the added latency of converting and reconverting between formats.

Our Strategic Carrier and Technology Partners

We believe that our strategic relationships with carrier affiliates are important because they allow us to extend the geographic reach of ITXC.net. We believe that these relationships will lead to a broader origination/termination presence in key areas and allow us to provide service over our own network for more of our customers. We also expect that these relationships will assist us in focusing our development of new Internet-based voice services. In February 2003, we announced our selection of Cisco’s AS5000 Universal Gateway and PGW 2200 Softswitch Voice Over IP (VoIP) offerings, along with Cisco’s Voice Infrastructure and Applications Solution (Cisco VIA), and were recognized by Cisco as a Cisco Powered Network.

Our Services

ITXC WWeXchange Service

In April 1998, we introduced ITXC WWeXchange service, the first application enabled by ITXC.net. This service provides international call completion to our customers and enables them to offer their own customers phone-to-phone global voice and fax service. ITXC WWeXchange service relies upon Internet telephony technology. Such technology permits calls originated by a telephone to be transmitted over the Internet.

ITXC WWeXchange service provides our customers with high quality, low cost global long distance service without their having to understand or deploy Internet telephony technology themselves. We believe that the high quality of calls completed using ITXC WWeXchange service allows our customers to use ITXC.net as an alternative to traditional voice traffic networks.

We believe that our affiliates benefit from ITXC WWeXchange service because they:

SNARCs

SNARCs consist of vendor-supplied gateways and other related equipment including ITXC-developed software that we place on selected customer premises in order to eliminate the cost of backhaul from customer switches to our switches. Until we launched our SNARC program in April 1999, customers had to bear the expense of running dedicated circuits from their facilities to their suppliers. This is known as backhaul. Our customers also typically ran circuits from their facilities to our network hubs, then in New York or Los Angeles. However, the introduction of our SNARC program reduces the expense of backhaul by transporting traffic directly to the Internet and ITXC.net in whatever city the customer is located. We believe that this use of Internet capability to eliminate the expense of backhaul makes us more attractive to customers located away from major telephony hubs. In addition, since December 1999 we have been installing similar equipment on selected affiliates’ premises to connect them directly to the Internet for the purpose of their terminating calls originated over ITXC.net. As of January 31, 2003, we had installed over 229 SNARCs at 89 carrier customer sites and 379 SNARCS at 110 affiliate locations.

ITXC PC to Phone Wholesale Service

We believe that ITXC.net has the same advantages of consistent quality, global coverage and competitive prices for web-to-phone calls as it does for phone-to-phone calls. Our ITXC PC to Phone Wholesale service provides an outsourced solution to Internet portals, Internet service providers and web sites allowing them to offer self-branded web-to-phone service to their users. We can provide our customers with high quality, global call completion over ITXC.net for their end-users’ web-to-phone calling and the dialing software necessary for their users to actually place calls over ITXC.net from their PCs. The market for this service has developed slowly, and the failure of many Internet ventures has further diminished the potential market. If the market

8

Table of Contents

opportunity revives, we believe that our ITXC PC to Phone Wholesale service will assist our customers in building their own brands and in retaining their end-users.

Future Enhanced Voice Services

We believe that, in the future, the Internet will serve as a platform for existing and enhanced voice and fax services that may be accessed from traditional phones, personal computers and a variety of devices that span the range between telephones and personal computers, although the decline in Internet and telecommunications companies subsequent to 2001 has probably delayed the development of this market. If and when market conditions warrant, we intend to make investments to develop and market additional services for use over ITXC.net. We believe that as a result of the convergence of the data and communications networks and the capabilities and size of ITXC.net, we will be able to offer next-generation, enhanced voice services to both new and existing customers when the need arises. In addition, we believe that ITXC.net’s open architecture, combined with the strength and size of our customers, affiliates and strategic relationships, will attract developers of voice services to our network.

Sales, Marketing and Distribution

Our sales and marketing goals are to:

We are now well known in the telecommunications industry, and use industry relationships and a variety of marketing activities to attract affiliates to ITXC.net. We often meet potential affiliates at Internet and telephony trade shows and seminars and through trade contacts. We also often meet potential customers through directed sales calls by our sales personnel.

We have a dedicated sales force selling services which is supplemented by members of our executive management team. This sales force also recruits the affiliates that terminate calls for us around the world. Our salespeople are based regionally within the U.S. and worldwide, as well as in our corporate office. We also have sales agents located in various countries. Our senior management focuses on maintaining and cultivating relationships with our customers. We assign our sales representatives specific accounts based on their level of experience, location and the quality of the relationship between the representative and the customer. We compensate our sales staff based in large part on incentive-based goals and measurements. Our sales compensation plan is based primarily on margin, rather than revenue. In addition to our marketing and sales staff, we rely on our executive and operations personnel, including the staff of our 24-hours-a-day, 7-days-a-week network operations center, to identify sales opportunities within existing customer accounts and to provide quality customer service.

We also maintain an Internet web site which, among other things, provides information to prospective customers and affiliates concerning the technical and other requirements for becoming a part of ITXC.net.

Our primary marketing and sales support is centralized and directed from our headquarters office in Princeton, New Jersey. We have a full-time staff dedicated to our marketing efforts. The marketing and sales support staff are charged with implementing our marketing strategies, prospecting and producing sales presentation materials and proposals.

New Services Development and Implementation

Our product management organization is charged with understanding the market and developing new service concepts and managing them through implementation. They work closely with our development team, which is also dedicated to the improvement and enhancement of the monitoring and analysis software tools and Internet management systems we use to achieve BestValue Routing, the enhancement of our management systems, including our billing and customer care software, and the

9

Table of Contents

development and implementation of new Internet-based voice services. Our future success will depend, in part, on our ability to improve existing technology and develop and/or implement new voice services that incorporate leading technology.

Competition

The long distance telephony market and the Internet telephony market are highly competitive. There are several large and numerous small competitors, and we expect to face continuing competition for ITXC.net based on price and service offerings from existing competitors and new market entrants in the future. The principal competitive factors in our market include price, quality of service, breadth of geographic presence, customer service, reliability, network size and capacity, and the availability of enhanced communications services. Our competitors include major and emerging telecommunications carriers in the U.S. and foreign telecommunications carriers. The financial difficulties of many telecommunications providers are rapidly altering the number, identity and competitiveness of the marketplace, and we are unable to determine with certainty the eventual result of this shakeout.

Internet Protocol and Internet Telephony Service Providers

During the past several years, a number of companies have introduced services that make Internet telephony or voice services over the Internet available to businesses and consumers. All major telecommunications companies, including entities like AT&T, Sprint and WorldCom, as well as iBasis, Net2Phone and deltathree.com either presently or potentially route traffic to destinations worldwide and compete or can compete directly with us. While not fully facility based, Arbinet and Band-X provide clearing house functions for Internet telephony services and compete with us as well. Other Internet telephony service providers focus on a retail customer base and may in the future compete with us. These companies may offer the kinds of voice services we intend to offer in the future. In addition, companies currently in related markets have begun to provide voice over the Internet services or adapt their products to enable voice over the Internet services. These related companies may potentially migrate into the Internet telephony market as direct competitors.

Telecommunications Companies and Long Distance Providers

A large number of telecommunications companies, including AT&T, Deutsche Telekom, Cable & Wireless, WorldCom, Sprint and BT, currently provide wholesale voice telecommunications service which competes with our business. These companies, which tend to be large entities with substantial resources, generally have large budgets available for research and development, and therefore may further enhance the quality and acceptance of the transmission of voice over the Internet.

General

Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we have. As a result, certain of these competitors may be able to adopt more aggressive pricing policies which could hinder our ability to market our voice services. We believe that our key competitive advantages are our ability to deliver reliable, high quality voice service over the Internet in a cost-effective manner, our technology and the patents that protect it, and the size and rapid growth of our network, as well as our relative financial strength. We cannot provide assurances, however, that these advantages will enable us to succeed against comparable service offerings from our competitors.

Government Regulation

Regulation of Internet Telephony

The use of the Internet to provide telephone service is a fairly recent market development. At present, ITXC is not aware of any domestic, and is only aware of a few foreign, laws or regulations that prohibit voice communications over the Internet.

United States.    ITXC believes that, under U.S. law, the Internet-related services that ITXC provides constitute information services as opposed to regulated telecommunications services, and, as such, are not currently actively regulated by the FCC or any state agencies charged with regulating telecommunications carriers. Nevertheless, aspects of ITXC’s operations may be subject to state or federal regulation, including regulation governing universal service funding, disclosure of confidential communications and excise tax issues. ITXC cannot provide assurances that Internet-related services will not be actively regulated in the future. Several efforts have been made in the U.S. to enact federal legislation that would either regulate or exempt from regulation services provided over the Internet. Increased regulation of the Internet may slow its growth, particularly if other countries also impose regulations. Such regulation may negatively impact the cost of doing business over the Internet and materially adversely affect ITXC’s business, operating results, financial condition and future prospects.

The FCC has considered whether to impose surcharges or other common carrier regulations upon certain providers of Internet telephony, primarily those which, unlike ITXC, provide Internet telephony services directly to end users. While the FCC has presently refrained from such regulation, the regulatory classification of Internet telephony remains unresolved.

10

Table of Contents

Specifically, the FCC has expressed an intention to further examine the question of whether certain forms of phone-to-phone Internet telephony are information services or telecommunications services. The two are treated differently in several respects, with certain information services being regulated to a lesser degree. The FCC has noted that certain forms of phone-to-phone Internet telephony bear many of the same characteristics as more traditional voice telecommunications services and lack the characteristics that would render them information services. The FCC has opened a proceeding in response to a petition by AT&T which seeks a declaration that regulatory forbearance is appropriate for voice over Internet services and to preclude certain activities by local exchange carriers which allegedly adversely affect AT&T’s voice over Internet services. A decision in this proceeding may well determine the regulatory status of voice over the Internet. In addition, the FCC has opened a docket to reconsider the mechanisms for contributing to the Universal Service Fund, and may reconsider the status of Internet telephony in that context.

If the FCC were to determine that certain Internet-related services including Internet telephony services are subject to FCC regulations as telecommunications services, the FCC could subject providers of such services to traditional common carrier regulation, including requirements to make universal service contributions, and pay access charges to local telephone companies. It is also possible that the FCC may adopt a regulatory framework other than traditional common carrier regulation that would apply to Internet telephony providers. Any such determinations could materially adversely affect ITXC’s business, financial condition, operating results and future prospects to the extent that any such determinations negatively affect the cost of doing business over the Internet or otherwise slow the growth of the Internet. Congressional dissatisfaction with FCC conclusions could result in requirements that the FCC impose greater or lesser regulation, which in turn could materially adversely affect ITXC’s business, financial condition, operating results and future prospects.

State regulatory authorities may also retain jurisdiction to regulate certain aspects of the provision of intrastate Internet telephony services. Several state regulatory authorities have initiated proceedings to examine the regulation of such services. Others could initiate proceedings to do so.

One of ITXC’s subsidiaries is subject to regulation by the FCC and the New York Public Service Commission as a result of having been granted authorizations to provide telecommunications services by these entities.

International.    The regulatory treatment of Internet telephony outside of the U.S. varies widely from country to country. A number of countries that currently prohibit competition in the provision of voice telephony also prohibit Internet telephony. Other countries permit but regulate Internet telephony. Some countries will evaluate proposed Internet telephony service on a case-by-case basis and determine whether it should be regulated as a voice service or as another telecommunications service. Finally, in many countries, Internet telephony has not yet been addressed by legislation or regulation. Increased regulation of the Internet and/or Internet telephony providers or the prohibition of Internet telephony in one or more countries could materially adversely affect our business, financial condition, operating results and future prospects. The European Commission regulatory regime, for example, distinguishes between voice telephony services and other telecommunications services.

In January 1998, the European Commission issued a communication addressing whether Internet telephony was voice telephony and thus subject to regulation by the member states of the European Union. Consistent with its earlier directives, the Commission concluded that no form of Internet telephony currently meets the definition of voice telephony subject to regulation by the member states of the European Union. The European Commission stated that only phone-to-phone communications reasonably could be considered voice telephony and that, at that time, even phone-to-phone Internet telephony did not meet all elements of its voice telephony definition. Therefore, the European Commission concluded that, at that time, voice over Internet services cannot be classified as voice telephony. More recently, in September 2000, after requesting comments from interested parties, the European Commission issued a subsequent communication in which