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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

OR

Commission file number 1-15475

INFONET SERVICES CORPORATION

(Exact name of registrant as specified in its charter)

2160 East Grand Avenue, El Segundo, California

(Address of principal executive offices)

90245

(Zip Code)

(310) 335-2600

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed under Sections 12, 13 or 15(d) of the Securities Exchange of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ¨    No  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of August 6, 2004, the registrant had the following number of shares outstanding:

Class A common stock: 161,403,358

Class B common stock: 304,080,922

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INFONET SERVICES CORPORATION

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PART I

FINANCIAL INFORMATION

Item 1.    Financial Statements

INFONET SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except per Share Amounts)

See accompanying notes to consolidated financial statements.

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In Thousands, Except per Share Amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

(Table continued on following page)

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(In Thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited consolidated financial statements of Infonet Services Corporation and subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X promulgated under the Securities Exchange Act of 1934. Correspondingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All normal, recurring adjustments considered necessary for a fair presentation have been included. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results may differ from these estimates. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 2, 2004 filed with the Securities and Exchange Commission on June 16, 2004. Certain items have been reclassified to conform to the current period presentation. The results of operations for the three months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending April 1, 2005.

The Company’s fiscal year is the 52- or 53-week period ending on the Friday nearest to March 31. For simplicity of presentation, the Company has described the 53-week period ended April 2, 2004 as the year ended March 31, 2004, and the 13-week periods ended June 27, 2003 and July 2, 2004 as the three months ended June 30, 2003 and 2004, respectively.

2.    NEW ACCOUNTING PRONOUNCEMENTS

In December 2003, the Financial Accounting Standards Board (“FASB”) issued a revision of Statement of Financial Accounting Standards (“SFAS”) No. 132 “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“Revised SFAS No. 132”). Revised SFAS No. 132 revises employers’ required disclosures about pension plans and other postretirement benefits. This statement does not change the measurement or recognition provisions of those plans required by existing pronouncements. Instead, Revised SFAS No. 132 requires disclosures in addition to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The interim disclosure requirements of Revised SFAS No. 132 became effective for the Company during the three months ended June 30, 2004. Additional disclosures of estimated future benefit payments will be required for the Company’s consolidated financial statements for the year ending April 1, 2005 and are not expected to have a material impact on the Company’s consolidated financial statements.

In July 2004, the Emerging Issues Task Force (“EITF”) published its consensus on Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF Issue No. 03-01 addresses the meaning of other-than-temporary impairment and its application to debt and equity securities within the scope of SFAS No. 115, certain debt and equity securities within the scope of SFAS No. 124, and equity securities that are not subject to the scope of SFAS No. 115 and not accounted for under the equity method of accounting. The guidance for evaluating whether an investment is other-than-temporarily impaired must be applied in other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. The Company is currently assessing the impact of the adoption of EITF Issue No. 03-01 on its consolidated financial position and results of operations.

3.    STOCK BASED COMPENSATION

The Company issues stock options and other stock-based awards to employees and directors. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. In accordance with SFAS No. 123, “Accounting for

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” the following pro forma net income and earnings per share information is presented as if the Company accounted for stock-based compensation awarded under the stock incentive plans using the fair value method. Under the fair value method, the estimated fair value of stock incentive awards is charged against income on a straight-line basis over the vesting period.

4.    PROPERTY, EQUIPMENT AND COMMUNICATION LINES

Property, equipment and communication lines, net consists of the following (in thousands):

Communication lines consist of purchased bandwidth. Under the purchased bandwidth arrangements, the Company’s rights to use the communication lines range from 3 to 25 years.

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5.    INTANGIBLE AND OTHER ASSETS

Intangible and other assets consist of the following (in thousands):

Intangible assets consist of the following (dollars in thousands):

Amortization expense for the three months ended June 30, 2003 and 2004 was approximately $330,000 and $689,000, respectively. At June 30, 2004, estimated future amortization expense is as follows: approximately $2,414,000 for the remaining nine months of fiscal year 2005 and approximately $1,776,000, $174,000, $173,000 and $145,000 for fiscal years 2006, 2007, 2008 and 2009, respectively.

6.    EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the periods presented. Diluted earnings (loss) per common share is computed based on the weighted average number of shares outstanding plus the dilutive effect, if any, of potential common stock.

At June 30, 2003 and 2004, the types of potential common stock were stock options and purchase rights and restricted stock. The inclusion of potential common stock had an antidilutive effect on the reported loss per share for the three months ended June 30, 2003 and 2004. Consequently, reported basic and diluted earnings per share are the same amount for the three months ended June 30, 2003 and 2004, respectively. Potential common shares of 25.1 million and 32.2 million were not included in the computation of diluted earnings per share for the three months ended June 30, 2003 and 2004, respectively, because to do so would have been antidilutive for the periods presented.

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7.    INCOME TAXES

The Company has established a valuation allowance against its entire net U.S. deferred income tax assets. The valuation allowance was recorded in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” due to the lack of evidence, within the meaning of SFAS No. 109, of the existence of sufficient future taxable income needed to realize the deferred income tax assets. Until appropriate levels of profitability are reached, the Company will not recognize income tax benefits related to its domestic results of operations. In the three months ended June 30, 2003 and 2004, the Company did not record income tax benefits resulting from its U.S. losses. The tax provision that was recorded is comprised of foreign subsidiary income taxes, foreign withholding taxes and state income taxes in jurisdictions that do not permit consolidated tax filings.

At June 30, 2004, the gross amount of the Company’s net deferred income tax assets was $207.0 million. The valuation reserve recorded against those net deferred income tax assets was $206.8 million. The $0.2 million residual is comprised of foreign net deferred income tax assets.

8.    SEGMENT INFORMATION

The Company conducts business in two operating segments: country representatives or Direct Sales Channels (“Direct”) and Alternate Sales Channels (“Alternate”). Both of these segments generate revenues by providing the Company’s clients with a complete global networking solution.

The Company has organized its operating segments around differences in distribution channels used to deliver its services to clients. These segments are managed and evaluated separately because each segment possesses different economic characteristics requiring different marketing strategies.

The accounting policies adopted for each segment are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K. The Company’s management evaluates performance based on operating contribution, where segment revenues are reduced by those costs that are allocable to the segments. Costs relating to operating the Company’s core network and non-allocable general, administrative, marketing and overhead costs, including income tax expense, are not charged to the segments. Accordingly, neither assets related to the core network nor their associated depreciation expense are allocated to the segments.

The Company accounts for intersegment transactions on the same terms and conditions as if the transactions were with third parties. Intersegment revenues are not material to any segment.

Summarized financial information concerning the Company’s reportable segments is as follows (in thousands):

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9.    RELATED PARTY TRANSACTIONS

Related parties consist of the Company’s Class A stockholders, non-consolidated country representative organizations in which the Company holds greater than a 20% but less than a 50% ownership interest, country representative organizations owned directly or indirectly by the Company’s Class A stockholders, and their respective affiliates.

Related party transactions for the periods presented comprise the following (in thousands):

Revenues

Operating Costs and Expenses

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Approximately $48.9 million of purchased bandwidth from related parties will be expensed in future periods in accordance with the Company’s accounting policies. Accumulated amortization related to such purchased bandwidth as of June 30, 2004 was approximately $26.6 million.

Related party balances as of June 30, 2004 comprise the following (in thousands):

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10.    STOCKHOLDERS’ EQUITY

Repurchase of Common Stock—The Company’s Board of Directors approved a plan for the use of up to $100 million to repurchase shares of Infonet Class B common stock over a two-year period, which ended in November 2003. These repurchases were made in the open market or privately negotiated transactions and in compliance with the Commission’s Rule 10b-18, subject to market conditions, legal requirements and other factors. During the three months ended June 30, 2003, the Company repurchased 1,960,868 shares under this plan at an aggregate cost of approximately $2.9 million. The Company did not repurchase any of its common stock during the three months ended June 30, 2004.

Restricted Stock Awards—During the three months ended June 30, 2004, certain key employees were granted a total of 1,760,500 shares of the Company’s Class B common stock as restricted stock awards under the Company’s 2003 Incentive Award Plan. Holders of these restricted shares are entitled to all the rights of a stockholder with respect to such shares, including the right to vote the shares and to receive any dividends or distributions paid or made with respect to the shares, subject to certain forfeiture and transfer restrictions. Shares of the restricted stock are subject to forfeiture upon the holder’s termination of employment. The forfeiture and transfer restrictions on the restricted stock lapse on the second anniversary of the grant date, or earlier in certain circumstances. The Company recorded deferred compensation of approximately $3.0 million in connection with the restricted stock awards, which will be charged to expense over the vesting period.

11.    COMMITMENTS AND CONTINGENCIES

Commitments—The Company is obligated to purchase certain customer premise equipment owned by non-consolidated country representatives should the customer cancel its contract prior to certain time limits agreed to between the Company and the country representative (generally 24 to 36 months) and the country representative is unable to redeploy the equipment within three months. The aggregate buy back value of the customer premise equipment at June 30, 2004 is approximately $20.5 million. Actual buybacks of customer premise equipment have historically averaged less than $10,000 per year.

Litigation—During the normal course of business, the Company may be subject to litigation involving various business matters. Management believes that an adverse outcome of any such known matters would not have a material adverse impact on the Company’s consolidated financial statements.

During December 2001 and through February 7, 2002, nine purported class action lawsuits were filed against the Company and various other parties alleging various violations of United States securities laws, and these have subsequently been consolidated into one lawsuit. The parties have entered into a settlement of this litigation, under which, all claims are dismissed, the defendants obtain releases of liability, and the litigation is terminated in exchange for a cash payment of $18.0 million by the defendants. The Company follows the provisions of SFAS No. 5, “Accounting for Contingencies,” which requires that an estimated loss from a loss contingency be accrued for by a charge to income if it is both probable that an asset has been impaired or that a liability has been incurred and that the amount of the loss can be reasonably estimated. The Company recorded a loss of $5.0 million during the year ended March 31, 2004, which reflects the Company’s contribution to the settlement, net of insurance. The Company paid $5.0 million into escrow for the settlement of this matter during April 2004. On July 26, 2004, following notice of the settlement to the members of the settlement class, the Court approved the settlement and entered final judgment and an order of dismissal with prejudice of the litigation.

Income Taxes—The Company is subject to income and other taxes in various jurisdictions, both domestically and internationally. As a result, the Company has identified various potential foreign tax exposures,

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the ultimate resolution of which may be material to the Company’s consolidated financial statements. The magnitude of potential loss that may result from the ultimate outcome of these contingencies, if any, in excess of recorded reserves is not presently estimable.

12.    EMPLOYEE BENEFIT PLANS

The Company has qualified and nonqualified retirement plans covering substantially all domestic employees. In addition, the Company maintains postretirement health care and life insurance benefit plans for certain qualified employees. The components of net periodic benefit cost for the Company’s pension plans and other postretirement benefit plans for the periods presented are as follows (in thousands):

The Company does not expect to make material contributions to either its pension plans or its other postretirement benefit plans for the year ending March 31, 2005.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was enacted on December 8, 2003. This Act introduced a prescription drug benefit under Medicare Part D as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit equivalent to Medicare Part D. The Company has not yet determined whether benefits provided by its other postretirement benefits plans are actuarially equivalent to Medicare Part D under the Act. Therefore the net periodic other postretirement benefit cost stated herein does not include the impact of this Act.

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INFONET SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13.    ACQUISITION

The Company has owned a 19% interest in Infonet Primalliance (“Primalliance”), which was accounted for by the cost method of accounting, since September 2000. During February 2004, the Company acquired the remaining 81% interest in Primalliance for $2,404,000 in cash consideration (net of cash received). During the three months ended June 30, 2004, the remaining purchase price contingencies provided for under the terms of the purchase agreement were resolved, resulting in the payment by the Company of an additional $3,000,000 of cash consideration. This additional consideration has been recorded as an increase to the purchase price and allocated to identifiable intangible assets as follows (in thousands):

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

The following discussion and analysis of our financial position and operating results for the first quarter of the fiscal year ending March 31, 2005 updates, and should be read in conjunction with, Management’s Discussion and Analysis of Financial Condition and Results of Operations presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2004. You should also read this discussion together with our unaudited consolidated financial statements and the related notes to those statements appearing elsewhere in this report.

All statements contained within the Management’s Discussion and Analysis of Financial Condition and Results of Operations that are not statements of historical fact constitute “Forward-Looking Statements” within the meaning of Section 21E of the Securities Exchange Act. These forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results or from any future results expressed or implied by these forward-looking statements. Statements that include the terms “will”, “believe”, “belief”, “expects”, “plans”, “anticipates”, “intends” or the like should be considered uncertain and forward-looking. Forward-looking statements also include projections of financial performance, statements regarding management’s plans and objectives and statements concerning any assumptions relating to the foregoing. Certain important factors regarding our business, operations and competitive environment, which may cause actual results to vary materially from these forward-looking statements, are discussed under the caption “Risk Factors” in our Form 10-K for the fiscal year ended March 31, 2004.

Certain reclassifications have been made to the prior year amounts to conform to the current period presentation.

Overview

We provide cross-border managed voice and data communications services to multinational entities worldwide. We offer our services to our clients directly through country representatives and indirectly through alternate sales channels consisting of major international telecommunications carriers and value-added resellers. We deploy a broad array of fully managed data communications services over our reliable, secure, and high quality global network, which we refer to as The World Network. The World Network is an extensive and versatile network that can be accessed by our clients from over 180 countries and territories.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America. Our preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Income Taxes

During the year ended March 31, 2001, we filed a request for determination from the Internal Revenue Service, or IRS, regarding the propriety of establishing an intangible asset, for tax purposes only, arising in connection with a September 1999 transaction with three stockholders in which we obtained access to certain

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customers served by AUCS Communication Services N.V. and cash of $40.0 million in exchange for the issuance to the three stockholders of 47.84 million shares of our Class B common stock. In November 2001, we received a favorable determination from the IRS that an intangible asset relating to the access to these customers was created by the transaction. The intangible asset, which may be amortized in our tax returns over a period of fifteen years, was determined to have a value of $445.0 million. Accordingly, in the fiscal year ended March 31, 2002, we recorded a deferred income tax asset of approximately $171.0 million, representing the deferred income tax benefit assuming an estimated 38.5% tax rate. United States Securities and Exchange Commission Staff Accounting Bulletin 48, “Transfer of Nonmonetary Assets by Promoters or Shareholders,” requires that transfers of nonmonetary assets to a company by stockholders in exchange for stock prior to or at the time of a company’s initial public offering be recorded at the transferor’s historical cost basis. Accordingly, for financial statement purposes, the access to these customers was valued at the stockholders’ basis of $0. Correspondingly, the $171.0 million credit resulting from the recognition of the deferred income tax asset was reflected as an increase in stockholders’ equity, net of directly related costs.

At June 30, 2004, the unadjusted net book value of our deferred income tax assets totaled approximately $207.0 million, which was principally comprised of the remaining carrying value of the intangible asset discussed above of approximately $117.3 million and the benefit associated with domestic income tax losses of approximately $63.2 million. The provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” require a valuation allowance when, based upon currently available information and other factors, it is more likely than not that all or a portion of the deferred income tax asset will not be realized. SFAS No. 109 provides that an important factor in determining whether a deferred income tax asset will be realized is whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred income tax asset. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years. The existence of cumulative losses in recent years is an item of negative evidence that is particularly difficult to overcome. Based on our estimates of fiscal year 2005 operating performance, we have determined that it is likely that we will incur a cumulative loss for the three-year period that includes fiscal years 2003, 2004 and 2005. We believe this determination represents negative evidence such that SFAS No. 109 requires that we record a valuation allowance related to our intangible deferred income tax asset. Accordingly, we have recorded a valuation allowance of approximately $206.8 million against our entire net domestic deferred income tax assets as of June 30, 2004. Our valuation allowance increased $4.9 million during the three months ended June 30, 2004. We intend to maintain a valuation allowance until sufficient evidence exists to support its reversal. Also, until an appropriate level of profitability is reached, we do not expect to recognize any domestic income tax benefits in future results of operations.

We believe that our determination to record a valuation allowance to reduce our deferred income tax assets is a critical accounting estimate because it is based on an estimate of future taxable income in the United States, which is susceptible to change and dependent upon events that are remote in time and may or may not occur, and because the impact that recording a valuation allowance has on the assets reported in our consolidated balance sheets and on our results of operations is material.

We operate, and are subject to income taxes, in many foreign jurisdictions and in many taxable jurisdictions around the world. As a result, our reported income tax provisions are based, in part, on our judgments as to the amount of income that may be subject to tax in certain foreign jurisdictions.

Purchased Bandwidth

We monitor and evaluate the viability of the network service providers from which we have purchased bandwidth. The term “purchased bandwidth” refers to transmission capacity contractually acquired under long-term prepaid leases, capitalized leases and indefeasible rights of use. From time to time our network service providers may experience adverse economic circumstances. In the past, at least one of our network service providers has entered into voluntary bankruptcy proceedings. If a service provider enters into bankruptcy

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proceedings or experiences other adverse events such that it may be unable to provide bandwidth to us, we consider whether such bankruptcy proceedings or other adverse events will affect our purchased bandwidth and whether to recognize an impairment of the purchased bandwidth. If we determine that we will experience a permanent disruption in services as a result of such proceedings or other adverse events, we may record an impairment charge or write-off the bandwidth purchased from the service provider.

Included in our property, equipment and communication lines is purchased bandwidth with a net book value of $206.0 million as of June 30, 2004. There is no purchased bandwidth that is considered to be at risk as of June 30, 2004.

We believe that our determination not to recognize any impairment of purchased bandwidth is a critical accounting policy because it is susceptible to change and dependent upon events that are remote in time and that may or may not occur, and because the impact that recognizing an impairment would have on the assets reported in our consolidated balance sheets and on our results of operations could be material.

Long-Lived Assets

We monitor and evaluate the recoverability of our long-lived assets. If the carrying amount of a long-lived asset exceeds the expected future cash flows (undiscounted and without interest charges) from the use of the asset, we recognize an impairment loss in the amount of the difference between the carrying amount and the fair value of the asset. Our most significant long-lived asset subject to impairment is our owned network, which had a net book value of $328.0 million as of June 30, 2004. We currently estimate that undiscounted future cash flows will be sufficient to recover the value of our long-lived assets. However, our estimates of future cash flows are subject to change. Should our estimates of future undiscounted cash flows indicate that the carrying value of our long-lived assets may not be recoverable, we would be required to determine the fair value of those assets and record a loss for the difference, if any, between the carrying value and the fair value of those assets.

Our determination relating to the value of the long-lived assets is subject to change because it is based on our estimates of future cash flows. We believe that the undiscounted future cash flows are sufficient to recover the carrying value of our long-lived assets.

We believe that our determination not to recognize an impairment loss on our long-lived assets is a critical accounting estimate because it is susceptible to change and dependent upon events that are remote in time and may or may not occur, and because the impact that recognizing an impairment loss would have on the assets reported in our consolidated balance sheets and on our results of operations could be material. If our estimated future undiscounted cash flows were to decrease by a hypothetical ten-percent, the long-lived assets would continue to be recoverable, and we would not be required to recognize an impairment of our long-lived assets.

Valuation Allowance for Revenue Credits and Accounts Receivable

We make estimates of future credits expected to be issued to clients related to services provided during the periods presented through the analysis of historical trends and known events. Management’s estimates and assumptions must be made and used in connection with establishing the revenue reserves associated with discounts earned on special client agreements and billing reserves for pricing changes and client disputes. Material differences may result in the amount and timing of our revenue adjustments if management’s estimates differ from actual results. Similarly, our management must make estimates regarding the collectibility of our accounts receivable. We specifically analyze accounts receivable including historical bad debts, client concentrations, client credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts.

The valuation allowance for revenue credits and accounts receivable was $21.0 million as of June 30, 2004 and $19.3 million as of March 31, 2004. If management over or under estimated the reserves by a hypothetical

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ten-percent, the valuation allowance for revenue credits and accounts receivable as of June 30, 2004 would decrease or increase by $2.1 million.

Our determination relating to the valuation allowance is subject to change because it is based on management’s current estimates of required reserves and potential adjustments.

We believe that our valuation allowance for revenue credits and accounts receivable is a critical accounting estimate because it is susceptible to change and dependent upon events that are remote in time and may or may not occur, and because the impact that recognizing an impairment loss would have on the assets reported in our consolidated balance sheets and on our results of operations could be material.

Loss Contingencies

We follow the provisions of SFAS No. 5, “Accounting for Contingencies.” SFAS No. 5 requires that an estimated loss from a loss contingency be accrued by a charge to income if it is both probable that an asset has been impaired or that a liability has been incurred and that the amount of the loss can be reasonably estimated. In addition, financial statement disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Because contingent liabilities are often resolved over long time periods, there are considerable uncertainties related to the incurrence, amount and range of loss, and the ultimate outcome of loss contingencies. Estimating probable losses requires analysis of multiple variables that often depend on judgments about potential actions by third parties. In making its determinations of likely outcomes of loss contingencies, management periodically evaluates the potential for changes in loss estimates and consults regularly with its advisors.

Our determination relating to provisions for loss contingencies is subject to change because it is based on management’s current estimates of future probable losses.

In the third quarter of fiscal year 2004, a $5.0 million litigation settlement expense was recorded as a contingency for the class action lawsuit described in Part II, Item 1. On July 26, 2004, the United States District Court, Central District of California approved the settlement and entered final judgment and an order of dismissal with prejudice of the litigation.

We are subject to income and other taxes in various jurisdictions, both domestically and internationally. As a result, we have identified various potential foreign tax exposures, the ultimate resolution of which may be material to our consolidated financial statements. The magnitude of potential loss that may result from the ultimate outcome of these contingencies, if any, in excess of recorded reserves is not presently estimable.

We believe that our determination to record provisions for loss contingencies is a critical accounting estimate because it is based on an estimate of future probable losses, which is susceptible to change and dependent upon events that are remote in time and may or may not occur, and because the impact that recording a provision for loss contingencies has on the assets reported in our consolidated balance sheets and on our results of operations may be material.

Our management has discussed our critical accounting estimates and judgments with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our related disclosures.

Price Erosion

As the telecommunications market continues to experience transitional changes, we face several factors that may negatively impact our pricing:

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As a result of increasing competition in the markets we serve, we offer our clients different and more cost effective solutions when they renew their contracts. Consequently, we may provide comparable services to our clients at the same or reduced prices under the renewed contracts. We refer to this as price erosion. Using data obtained during the three months ended June 30, 2004, we estimate our price erosion of multi-year contracts up for renewal to be, on average, approximately 19% on an annualized basis.

In order to counter the effects of price erosion, we launched a targeted program aimed at retention and growth of existing clients. This program establishes the metrics to calibrate performance and provides the sales organization with tools designed to retain and grow existing clients in the face of severe pricing pressures at the time of contract renewal. Additionally, we are implementing several key initiatives aimed at further expanding our reach within certain countries and metropolitan areas and reducing local access costs.

Revenue Recognition

We record revenues for Network Services; Consulting, Integration and Provisioning Services; Applications Services; and Other Communications Services when the services are provided. Such services are provided under client contracts, which generally have a term of 1 to 3 years. Consistent with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent,” we recognize revenues from contracts entered into by non-consolidated country representatives at end-user prices. The amount of end-user revenues to which a non-consolidated country representative is entitled for sales and support services is reflected as country representative compensation, which is included in Communication services costs and Integration and provisioning costs in our results of operations. Installation fee revenues are amortized over the average client life. Amounts for services billed in advance of the service period and cash received in advance of revenues earned are recorded as advance billings and recognized as revenues when earned. An allowance for client credits is accrued concurrently with the recognition of revenues.

Results of Operations

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

The following tables summarize our revenues by service, by distribution channel and by region and are provided in support of the accompanying Management’s Discussion and Analysis for the three months ended June 30, 2003 and 2004. Dollar amounts presented below are in thousands.

Revenues by Service

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Revenues by Distribution Channel