Summary of ARBINET THEXCHANGE INC

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

Overview

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

Revenue

We generate revenues from both the trading that members conduct on our exchange, which we refer to as trading revenues, and the fees we charge members for the ability to trade on our exchange, which we refer to as fee revenues. Our trading revenue represents the aggregate dollar value of the calls that are routed through our switches at the price agreed to by the buyer and seller of the capacity. For example, if a 10-minute call is originated in France and routed through our facilities to a destination in India for $0.11 per minute, we record $1.10 of trading revenue for the call. Under our AssuredAxcess product, our members contract to buy minutes to specific markets at fixed rates. We may generate profit or incur losses associated with trading revenue on AssuredAxcess and other transactions executed on our exchange. Historically, such losses have not been material to our operating results. Our system automatically records all traffic terminated through our switches.

We record trading revenues because:

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

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

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

• a monthly minimum fee based on the amount of capacity that members have connected to our switches and overage fees for the number of minutes or megabytes that are routed through our switches in excess of amounts allowed under the monthly minimum, or collectively referred to as access fees, which comprised approximately 80% and 79% of fee revenues for the nine months ended September 30, 2007 and September 30, 2008, respectively;

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

• a membership fee to join our exchange; and

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

Cost and Operating Expenses

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

Indirect cost of trading and fee revenues consists of costs related to supporting the operation of our exchange, such as salaries, benefits, and related costs of engineering, technical support, product and software development, and system support personnel, as well as facilities and interconnect costs. It is impracticable to breakdown such expense between indirect cost of trading revenues and indirect cost of fee revenues.

Sales and marketing consists of salaries, benefits, commissions, and related costs of sales and marketing personnel, trade shows and other marketing activities.

General and administrative costs consist of salaries, benefits, and related costs of corporate, finance, and administrative personnel, facilities costs, bad debt expense and outside service costs, such as legal and accounting fees.

Digital Media

In August 2006, we established a new subsidiary, Arbinet Digital Media Corporation, to explore and develop products and services to address the market opportunity presented by the exchange of digital media. As part of our digital media strategy, in December 2006, the Company, through its wholly-owned subsidiary, Broad Street Digital Inc., acquired all of the outstanding common stock of Flowphonics Limited (renamed as Broad Street Digital Limited ("Broad Street Digital")), a license management platform for intellectual property rights and digital content distribution. The purchase price was approximately $2.1 million, including transaction costs.

To increase resources available for our core business, in the first quarter of 2008, we announced a decision to explore strategic alternatives for Broad Street Digital. As a result of this decision, we recognized an impairment charge of approximately $2.3 million, in the fourth quarter of 2007, to write down the intangible and long lived assets, including $0.4 million of goodwill, of Broad Street Digital to their estimated fair value.

During the second quarter of 2008, we made a decision to cease all activities related to the digital media market. As a result, the digital media segment has been presented as a discontinued operation in the accompanying financial statements for all periods presented.

On August 5, 2008, we entered into an agreement to sell substantially all of the assets of Broad Street Digital. In the second quarter of 2008, we recorded a charge of $250, to adjust the carrying value of the Broad Street Digital assets to the estimated net proceeds from the transaction, which was completed on August 19, 2008.

In connection with ceasing digital media activities, we entered into a separation and release agreement with the Chief Operating Officer of Arbinet Digital Media Corporation and severed the remaining employees in this segment. We recognized a severance charge of $0.5 million in the three months ended September 30, 2008 which is reflected in the loss from discontinued operations.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the amounts reported for assets, liabilities, revenues, expenses and the disclosure of contingent liabilities. Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Our critical accounting policies are those that we believe are both important to the portrayal of our financial condition and results of operations and often involve difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management evaluates these estimates, including those related to bad debts, income taxes, long-lived assets, restructuring, contingencies and litigation on an ongoing basis. The estimates are based on historical experience and on various assumptions about the ultimate outcome of future events. Our actual results may differ from these estimates because we did not estimate correctly.

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

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

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

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

• significant industry, economic or competitive trends.

• Income taxes. We have net deferred tax assets, reflecting net operating loss (" NOL"), carryforwards and other deductible differences, which may reduce our taxable income in future years. These net deferred tax assets are offset by a valuation allowance resulting in no tax benefit being recognized related to these net deferred tax assets. We are required to periodically assess the realization of our deferred tax assets and changes in circumstances may require adjustments in future periods. The amount of net deferred tax assets actually realized could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities or changes in the amounts of future taxable income. If it becomes more likely than not that we will recognize a future tax benefit from the deferred tax assets, we may need to reverse some or all of our valuation allowance. When evaluating our ability to record a net deferred tax asset, SFAS No. 109, "Accounting for Income Taxes," requires us to consider all sources of taxable income as well as all available evidence to determine that it is more likely than not that we will be able to utilize this asset. At December 31, 2007, a full valuation allowance in the amount of $41.6 million has been recorded against net deferred tax assets since at that date the Company was unable to conclude that it was more likely than not that it would realize those assets. We will continue to refine and monitor all available evidence during future periods in order to more fully evaluate the recoverability of the Company's deferred tax assets.

On January 1, 2007 we adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109, Accounting for Income Taxes" ("FIN 48") to account for uncertain tax positions. FIN 48 requires that we recognize in our financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Included in our consolidated balance sheet at September 30, 2008 is approximately $39 of other long-term liabilities associated with uncertain tax positions in the various jurisdictions in which we conduct business.

The application of income tax law is inherently complex. Tax laws and regulations are voluminous and at times ambiguous, and interpretations of and guidance regarding income tax laws and regulations change over time. This requires us to make many subjective assumptions and judgments regarding our income tax exposures. Changes in our assumptions and judgments can materially affect our financial position, results of operations and cash flows.

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

• Goodwill and Other Intangible Assets. We follow the guidance of SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized but, instead, goodwill is subject to an annual assessment for impairment by applying a fair value approach. In assessing the recoverability of our goodwill and other intangibles, we must make assumptions regarding estimated future cash flows. If such assumptions change in the future, we may be required to record impairment charges for these assets.

• Litigation reserves. The establishment of litigation reserves requires judgments concerning the ultimate outcome of pending litigation against the Company and its subsidiaries. These reserves are based on the application of SFAS No. 5, "Accounting for Contingencies" ("SFAS No. 5"), which requires us to record a reserve if we believe an adverse outcome is probable and the amount of the probable loss is capable of reasonable estimation. In applying judgment, management utilizes among other things, opinions and estimates obtained from outside legal counsel to apply the standards of SFAS No. 5. Accordingly, estimated amounts relating to certain litigation have met the criteria for the recognition of a liability under SFAS No. 5. Litigation by its nature is uncertain and the determination of whether any particular case involves a probable loss or the amount thereof requires the exercise of considerable judgment, which is applied as of a certain date. The required reserves may change in the future due to new matters, developments in existing matters or if we determine to change our strategy with respect to any particular matter.

• Share-Based Compensation. Effective January 1, 2006, we adopted SFAS No. 123R, "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R requires all share-based payments to employees, including grants of stock options, to be expensed over the requisite service period based on the grant-date fair value of the awards and requires that the unvested portion of all outstanding awards upon adoption be recognized using the same fair value and attribution methodologies previously determined under SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated forfeitures for certain groups of options were revised in the third quarter of 2008, as a result of recent management changes and work force reductions. This resulted in a cumulative reduction of approximately $0.8 million for the three and nine months ended September 30, 2008, in non-cash stock-based compensation expense. The effect of this change in estimate, increased basic earnings per share by $0.04 and $0.03 for the three and nine months ended September 30, 2008, respectively. We use the Black-Scholes valuation method.

Results of Operations

Comparison of Nine Months Ended September 30, 2007 and 2008

Trading revenues, cost of trading revenues and indirect cost of trading and fee revenues

Trading revenues decreased 10.3% from $368.3 million for the nine months ended September 30, 2007 to $330.4 million for the nine months ended September 30, 2008. The decrease in trading revenues was due to a decrease in the volume of minutes traded by our members and a lower average trade rate for minutes bought and sold on our exchange. Specifically, the factors affecting trading revenues included:

A total of 10.15 billion minutes were bought and sold on our exchange in the nine months ended September 30, 2008, a decrease of 5.0% from the 10.72 billion minutes for the nine months ended September 30, 2007. This decline was due to a 2.0% decrease in the number of completed calls from 1.39 billion calls in the nine months ended September 30, 2007 to 1.36 billion calls in the nine months ended September 30, 2008. Also contributing to the decline in minutes bought and sold on our exchange was a decrease in the average call duration (ACD) from 3.9 minutes per call on for the nine months ended September 30, 2007 to 3.7 minutes per call for the nine months ended September 30, 2008. Average call duration, a recognized measure of call quality within the telecommunications industry, is influenced by various factors including changes in geographic markets, the mix of fixed versus mobile calls and the quality of the underlying termination. During the three months ended June 30, 2008, the ACD for completed calls on our exchange was 3.53 minutes, its lowest level since the inception of the Company. In an effort to increase the ACD of calls completed on our exchange, during the quarter ended September 30, 2008, we began to implement corrective measures, including the elimination of certain routes offered on our exchange. We believe these actions significantly contributed to the decline in minutes bought and sold on our exchange during the three months ended September 30, 2008, and will continue to impact volumes during the fourth quarter. In addition, we expect volatility in the mix of fixed versus mobile calls and the mix of geographic markets traded on our exchange to continue in the future.

As a result of the decrease in trading revenues, cost of trading revenues decreased 10.3% from $368.6 million for the nine months ended September 30, 2007 to $330.7 million for the nine months ended September 30, 2008.

Indirect cost of trading and fee revenues increased 1.3% from $15.1 million for the nine months ended September 30, 2007 to $15.3 million for the nine months ended September 30, 2008. This increase was primarily due to higher interconnection costs of $0.7 million and $0.5 million of moving costs relating to the relocation of our London switch to a co-location facility. These amounts were partially offset by a decrease in utilities of $0.2 million mainly attributable to the London and 611 West 6th Street premises that were exited. In addition, compensation related expenses decreased $0.7 million and certain hardware and software maintenance expenses decreased $0.1 million.

Fee revenues

Fee revenues increased 0.9% from $37.7 million for the nine months ended September 30, 2007 to $38.0 million for the nine months ended September 30, 2008. On a per minute basis, fee revenues increased from $0.0035 in the nine months ended September 30, 2007 to $0.0037 in the nine months ended September 30, 2008. Average fee revenue per minute increased primarily as a result of changes in the mix of both geographic markets and members trading activity on our exchange. In addition, we experienced increased sales of certain premium service offerings including increased fees for providing accelerated payments to members. In the future, we may provide additional incentives to improve liquidity in our exchange and that, along with members continuing to achieve higher volume levels, may lead to a decline in average fee revenue per minute.

Sales and marketing

Sales and marketing expenses increased 13.2% from $7.2 million for the nine months ended September 30, 2007 to $8.2 million for the nine months ended September 30, 2008. This increase principally reflects $1.0 million of increased compensation related expenses.

General and administrative

General and administrative expenses decreased 19.3% from $10.3 million for the nine months ended September 30, 2007 to $8.3 million for the nine months ended September 30, 2008. This decrease was primarily related to a reduction in professional fees of $1.7 million, and decreased compensation related expenses of $0.3 million. The 2007 professional fees reflected $1.1 million in costs related to the Company's formal review of strategic alternatives to enhance shareholder value and $0.7 million related to litigation matters settled in 2007.

Depreciation and amortization

Depreciation and amortization decreased 2.5% from $5.8 million for the nine months ended September 30, 2007 to $5.6 million for the nine months ended September 30, 2008. This decrease is primarily attributable to certain assets that are fully depreciated.

Severance charges

During the third quarter of 2008, we recorded a severance charge of $1.3 million related to a departure and transition services agreement entered into with our former Chief Executive Officer, and a workforce reduction of certain employees in our core Voice and Data business, including the termination without cause of our Chief Operating Officer and Chief Marketing Officer.

During the nine months ended September 30, 2007, we recognized a charge of approximately $1.0 million, representing severance charges related to a resignation agreement entered into with our former Chief Executive Officer and to a workforce reduction of certain employees.

Restructuring

During 2001 and 2002, we exited two leased facilities and established a reserve for the future lease obligations, net of estimated sub-lease income. In August 2007, we decommissioned certain fixed assets at 611 West 6th Street in Los Angeles and relocated its Los Angeles switch operations to one of the sites that had been exited in December 2002. As a result, we recognized a gain of $1.0 million representing the reversal of the remaining liability related to abandoned space placed back into service. In addition, we recognized a charge of $0.3 million representing the present value of future lease obligations remaining on the West 6th Street location. A gain of $0.7 million, representing the net impact of these two transactions, is reflected as a restructuring benefit in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2007.

Reserve for Litigation

During the nine months ended September 30, 2007, we recognized a charge of $1.9 million representing management's estimate of potential loss exposure in certain litigation matters.

Interest and other income/expense

Interest income decreased 61.3% from $2.1 million for the nine months ended September 30, 2007 to $0.8 million for the nine months ended September 30, 2008. This decrease was primarily due to lower average invested amounts of cash, cash equivalents and marketable securities in 2008 versus 2007, coupled with lower interest rates. Interest expense decreased 43.1% from $0.8 million for the nine months ended September 30, 2007 to $0.4 million for the nine months ended September 30, 2008. This decrease principally reflects lower fees paid by the Company under its third party credit arrangement, mainly attributable to decreases in the volume of minutes traded on our exchange and reduced utilization of credit by our members. Other income (expense), net decreased $0.2 million for the nine months ended September 30, 2008 compared to September 30, 2007, reflecting a decrease of late fees charged to our members.

Foreign currency exchanges gains (losses)

The foreign currency exchange gain for the nine months September 2007 was $0.4 million compared to a foreign currency exchange loss of $2.4 million for the nine months ended September 30, 2008. The foreign currency translation gains (losses) represent the impact of currency fluctuations on U.S. denominated obligations of our U.K. subsidiary.

Provision for income taxes

We recorded an income tax provision of approximately $225 and $511, for the nine months ended September 30, 2007 and 2008, respectively. The income tax provision in 2007 represented the statutory requirements for state taxes. The income tax provision in 2008 is based upon the Company's 2008 estimated effective annual tax rate of approximately 13.8%.

On January 1, 2007, we adopted the provisions of FIN 48, which requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit based on the technical merits of the position. A nominal amount of interest relating to uncertain tax positions has been included in the income tax provision for the nine months ended September 30, 2008.

Discontinued operations

Bell Fax, Inc.

In October 1999, the Company ceased the operations of Bell Fax, Inc. ("Bellfax"), a wholly-owned subsidiary. Bellfax was engaged in the sale and rental of telecommunication equipment and operating international routes. In the first quarter of 2008, management determined that the remaining liabilities of Bellfax were no longer required. Accordingly, $226, net of income tax of $11, has been recorded as income from discontinued operations for the nine months ended September 30, 2008.

Digital Media

In August 2006, we established a new subsidiary, Arbinet Digital Media Corporation, to explore and develop products and services to address the market opportunity presented by the exchange of digital media. As part of our digital media strategy, in December 2006, the Company, through its wholly-owned subsidiary, Broad Street Digital Inc., acquired all of the outstanding common stock of Flowphonics Limited (renamed Broad Street Digital Limited ("Broad Street Digital")), a license management platform for intellectual property rights and digital content distribution. The purchase price was approximately $2.1 million, including transaction costs.

To increase resources available for our core businesses, in the first quarter of 2008, we announced a decision to explore strategic alternatives for Broad Street Digital. As a result of this decision, we recognized an impairment charge of approximately $2.3 million in the fourth quarter of 2007, to write down the intangible and long lived assets, including $0.4 million of goodwill, of Broad Street Digital to their estimated fair value.

On August 5, 2008, the Company entered into an agreement to sell substantially all of the assets of Broad Street Digital. In the second quarter of 2008,we recorded a charge of $250, to adjust the carrying value of the Broad Street Digital assets to the estimated net proceeds from the transaction, which was completed on August 19, 2008. In connection with ceasing digital media activities, we entered into a separation and release agreement with the Chief Operating Officer of Arbinet Digital Media Corporation and severed the remaining employees in this segment. We recognized a severance charge of $0.5 million in the three months ended September 30, 2008, which is reflected in the loss from discontinued operations.

Comparison of Three Months Ended September 30, 2007 and 2008

Trading revenues and cost of trading revenues

Trading revenues decreased 18.6% from $116.7 million for the three months ended September 30, 2007 to $95.0 million for the three months ended September 30, 2008. The decrease in trading revenues was due to both a decrease in the volume of minutes and a lower average trade rate per minute, traded on our exchange.

A total of 3.11 billion minutes were bought and sold on our exchange in the . . .