===============================================================================
                     SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C. 20549
                          -----------------------
                                 FORM 10-K
                          -----------------------


[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
        EXCHANGE ACT OF 1934
                FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
                      COMMISSION FILE NUMBER 000-28063

                            DELTATHREE.COM, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

                DELAWARE                                  13-4006766
    (State or other jurisdiction of                    (I.R.S. employer
     incorporation or organization)                   identification no.)

       430 PARK AVENUE, SUITE 500
           NEW YORK, NEW YORK                                10022
(Address of principal executive offices)                  (Zip code)

     REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 588-3670

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                           None.

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                                               NAME OF EACH EXCHANGE ON WHICH
           TITLE OF EACH CLASS                 THE SECURITIES ARE REGISTERED
-----------------------------------------   -----------------------------------
Class A Common Stock, par value $0.001             Nasdaq National Market
per share

        Indicate by a 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. | |

        The aggregate market value of the Registrant's Class A common stock
held by non-affiliates of the Registrant on March 22, 2000 was
approximately $293,608,219 million. On such date, the last sale price of
the Registrant's Class A common stock was $33.375 per share. Solely for
purposes of this calculation, shares beneficially owned by directors and
officers of the Registrant and persons owning 5% or more of the
Registrant's Class A common stock have been excluded, in that such persons
may be deemed to be affiliates of the Registrant. Such exclusion should not
be deemed a determination or admission by the Registrant that such
individuals or entities are, in fact, affiliates of the Registrant.

        The number of shares outstanding of the Registrant's capital stock,
as of March 22, 2000, is as follows:


                                                NUMBER OF SHARES OUTSTANDING
         TITLE OF EACH CLASS                         AT MARCH 22, 2000
-----------------------------------------   -----------------------------------
Class A Common Stock, $0.001 par value                   9,142,702
Class B Common Stock, $0.001 par value                   19,569,459


===============================================================================




                                     DELTATHREE.COM, INC.
                               1999 ANNUAL REPORT ON FORM 10-K

                                      TABLE OF CONTENTS
                                                                        PAGE
                                                                        ----
PART I

ITEM 1.  BUSINESS..........................................................3

ITEM 2.  PROPERTIES.......................................................21

ITEM 3.  LEGAL PROCEEDINGS................................................21

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..............21

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
        RELATED STOCKHOLDER MATTERS.......................................23

ITEM 6. SELECTED FINANCIAL DATA...........................................26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS...............................27

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......47

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................47

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
        ON ACCOUNTING AND FINANCIAL DISCLOSURE............................47

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............48

ITEM 11.  EXECUTIVE COMPENSATION..........................................51

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..58

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................61

PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
          FORM 8-K........................................................66

SIGNATURES................................................................68

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................F-1



                            DELTATHREE.COM, INC.
                      1999 ANNUAL REPORT ON FORM 10-K

                                   PART I

ITEM 1.  BUSINESS

GENERAL DESCRIPTION OF BUSINESS

        We are a global provider of Internet Protocol (IP) telephony
services, which include the transmission of voice and data traffic for
communications carriers and the provision of enhanced Web-based and other
communications services to individuals and businesses. IP telephony is the
real time transmission of voice communications in the form of digitized
"packets" of information over the public Internet or a private network,
similar to the way in which e-mail and other data is transmitted. We were
founded in 1996 to capitalize on the growth of the Internet as a
communications tool by commercially offering IP telephony services. We have
built a privately-managed, global network using IP technology, and we have
primarily been using this network to transmit traffic for communications
carriers, including RSL Communications, Ltd., our parent company. This
service is referred to as carrier transmission services.

        We are now using our expertise in IP telephony to provide our users
with a package of enhanced IP communications services. Our on-line
interactive communications portal, www.deltathree.com, enables users to
make calls and send e-mail, as well as retrieve and forward voice mail,
e-mail and faxes using one unified mailbox from anywhere in the world at
any time. Our package of enhanced IP communications services includes
PC-to- phone, D3 Box, Click IT, phone-to-phone, global roaming and
YourDay.com.

        We provide our services at a cost to users that is generally lower
than that charged by traditional carriers because we minimize our network
costs by using efficient packet-switched technology and we generally avoid
local access charges and by-pass international settlement charges by
routing international long distance calls over our privately managed
network.

        Carrier transmission services accounted for 71.7% of our total
revenues in 1998 and 59.8% of our total revenues in 1999. As we expand our
marketing and promotional efforts for our enhanced IP communications
services, we expect revenue from these services, over time, to represent a
majority of our total revenues.

        We market our enhanced IP communications services through our own
Web site. In addition, we market these services through "communications
centers" on the Web sites of other Internet companies. Communications
centers enable viewers of those Web sites to directly access our services
without leaving those Web sites. We have sought to establish marketing
relationships with Internet companies that have strong brand names and high
traffic volumes. To date, we have marketing relationships with CBS.com,
CNET, Sony.com, Xoom.com and Yahoo! and we are continuing to pursue
marketing relationships with other companies. We also have entered into
distribution and marketing arrangements with communications equipment and
software companies.

        In February 2000, we acquired YourDay.com, Inc., a leading on-line
calendar and scheduling system that seamlessly integrates Personal Digital
Assistants (PDAs), telephones and the Internet. As a result of this
acquisition, users will be able to access their calendars and schedules on
the Internet, over the phone or with their PDAs by using a synchronization
tool for fast response and easy transfer of data. YourDay.com will be
integrated into our existing service offerings.

        We were founded in 1996. In July 1997, RSL COM, a global
facilities-based telecommunications company, acquired a controlling 51%
interest in us. By April 1998, RSL COM had acquired the remaining 49%
interest in us from existing shareholders, and we became a wholly-owned
subsidiary of RSL COM. RSL COM currently owns shares of our Class B common
stock representing approximately 95.5% of the combined voting power of all
classes of our capital stock and approximately 68.1% of the economic
interest in our company. We provide carrier transmission services to RSL
COM. Such services accounted for 69.1% of our total revenues in 1998 and
67.2% of our total revenues in 1999.

        We registered 6,000,000 shares of our Class A common stock on a
Form S-1 registration statement, which became effective on November 22,
1999. We received net proceeds of approximately $96,255,000 from the sale
of the 6,900,000 shares at the initial public offering price of $15.00 per
share on November 29, 1999. The managing underwriters for this offering
were Lehman Brothers Inc., Merrill Lynch & Co., U.S. Bancorp Piper Jaffray,
Lazard Freres & Co. LLC and Fidelity Capital Markets.

INDUSTRY SEGMENTS

        We only report in one industry segment. See "Notes to Consolidated
Financial Statements - Note 14."

DESCRIPTION OF BUSINESS

        OUR OPPORTUNITY

GROWTH OF THE INTERNET AND E-COMMERCE

        The Internet has emerged as a significant global communications and
commercial medium, enabling millions of people worldwide to communicate and
providing businesses with an attractive means of marketing and selling
their products and services. International Data Corporation (IDC), a market
research firm, estimates that there were approximately 142 million Internet
users worldwide at the end of 1998, and that the number of users worldwide
will increase to approximately 500 million at the end of 2003. Internet
users are increasingly using the Web as a way to communicate. Jupiter
Communications, a market research firm, estimates that approximately 92.3%
of all Internet users regularly use e-mail and 20.6% of all Internet users
regularly participate in on-line "chat" rooms. Further, Jupiter estimates
that an additional approximate 5.2% of all Internet users occasionally use
e-mail and an additional 32.4% of all Internet users occasionally
participate in on-line "chat" rooms. In addition, a recent study by
E-Marketer, a market research firm, estimates that 9.4 billion e-mail
messages are delivered daily. Internet users are also increasingly using
the Web to purchase goods and services. IDC estimates that Internet users
worldwide purchased more than $50.0 billion of goods and services in 1998,
and that commerce over the Internet will grow to approximately $1.3
trillion of goods and services in 2003.

THE INCREASING SIGNIFICANCE OF IP COMMUNICATIONS

        Historically, the communications services industry has transmitted
voice and data over separate networks using different technologies.
Traditional carriers have typically built telephone networks based on
circuit switching technology, which establishes and maintains a dedicated
path for each telephone call until the call is terminated. Although a
circuit-switched system reliably transmits voice communications, circuit
switching does not efficiently use transmission capacity. When a telephone
call is placed, a circuit is established, and the circuit remains dedicated
for transmission of the call and unavailable to transmit any other call.

        Data networks have typically been built utilizing packet switching
technology, such as IP, which divides signals into packets that are
simultaneously routed over different channels to a final destination where
they are reassembled in the original order in which they were transmitted.
Packet switching provides for more efficient use of the capacity in the
network because the network does not establish dedicated circuits and does
not require a fixed amount of bandwidth to be reserved for each
transmission. As a result, substantially greater traffic can be transmitted
over a packet-switched network, such as the Internet, than a
circuit-switched network.

        Traditional telecommunications carriers have historically avoided
the use of packet switching for transmitting voice calls due to poor sound
quality attributable to delays and lost packets which prevent real-time
transmission. However, recent improvements in packet switching, compression
and broadband access technologies, improved hardware and the use of
privately-managed networks (such as our network) have significantly
improved the quality of packet-switched voice calls, allowing for real-time
transmission. Service providers that use privately managed networks are
able to reduce packet loss and latency, or delay, because they are able to
control the amount, timing and route of data transmitted.

        As a result, packet switching technology is now allowing service
providers to converge their traditional voice and data networks and more
efficiently utilize their networks by carrying voice, fax and data traffic
over the same network. These improved efficiencies of packet-switching
technology create network cost savings that can be passed on to the
consumer in the form of lower long distance rates. In addition,
international telephone calls carried over the Internet or private IP
networks are less expensive than similar calls carried over
circuit-switched networks primarily because they bypass the international
settlement process, which represents a significant portion of international
long distance tariffs.

        IDC estimates that in 1999, approximately 2.7 billion minutes will
be carried over IP networks, generating approximately $0.6 billion in
revenues. IDC also estimates that by 2004, IP minutes (retail and
wholesale) and revenues will grow to approximately 135.0 billion minutes
and approximately $20.7 billion, representing estimated compound annual
growth rates of 119% and 103%, respectively. Beyond cost savings, we
believe that advanced IP communications technologies will further the
potential for the Internet to become the preferred medium of communications
and commerce. For example, the integration of voice communications into the
Web could serve to enhance existing text-based modes of Internet
communications, such as e-mail and online chat, by adding a live, low-cost
means to communicate. In addition, the advanced functionality of IP
communications will provide e-commerce shoppers with the ability to speak
directly with customer service representatives of on-line retailers
providing the on-line retailer with the ability to offer responsive,
real-time customer support and service.

INCREASE IN MODES OF COMMUNICATION

        The global communications services industry, encompassing voice,
fax and data transmission, is experiencing significant growth. We believe
the growth in global communications services is being driven by:

        o  globalization of the world's economies and the worldwide trend
           toward communications deregulation and liberalization

        o  the growth of data and Internet traffic

        o  declining prices and a wider choice of products and services

        o  technological advances and greater investment in communications
           infrastructure

        In addition, technological advancements have allowed for multiple
modes of communication, such as cellular, voice-mail, e-mail and fax. We
expect rapid growth in demand for services that unify and simplify the
communications needs of users. For example, IDC expects that the market for
unified messaging services will be more than $3.0 billion in 2002 from
virtually nothing in 1997 and 1998.

LIMITATIONS OF EXISTING IP COMMUNICATIONS SOLUTIONS

        Although the growth of IP telephony historically has been limited
by poor sound quality attributable to delays and packet loss, recent
technological advancements have significantly improved the quality of
packet- switched telephone calls. As a result, several large long distance
carriers, including AT&T and Sprint, have announced IP telephony service
offerings.

        In addition, most smaller service providers have begun to offer
low-cost Internet telephony services from PCs to telephones and from
telephones to telephones. Many of these service providers, however, offer
their services only in certain geographic areas and provide limited
services. In addition, many of these service providers use the Internet for
transmission, rather than a privately-managed IP network. In using the
Internet, rather than a privately- managed IP network, for transmission,
these service providers have less control over the network management and
monitoring functions that are necessary to ensure quality of service. Most
of these service providers have not had the benefit of a well-capitalized
parent company to help finance a global, privately-managed network.

OUR INTERACTIVE COMMUNICATIONS PORTAL

Our interactive communications portal, www.deltathree.com, acts as a
single-source, on-line solution for our users and on-line marketing agents.
Through our interactive communications portal, our users can:

        o  view a description of all of our services, including pricing
           information

        o  sign up for any of our services, including PC-to-phone, unified
           messaging and phone-to-phone

        o  download our software

        o  recharge their account, either by entering their credit card
           information or authorizing automatic recharging

        o  send a PC-to-phone call

        o  retrieve and forward their voice mail, e-mail and faxes through
           their D3 Box

        o  check real-time billing and usage information

        o  communicate by e-mail with a deltathree.com customer service
           representative

        o  view answers to frequently-asked questions

        Through our interactive communications portal, our on-line
marketing agents can:

        o  view a description of our on-line agent program

        o  sign up to serve as an on-line agent

        o  receive marketing tools to put on their own Web sites

        o  monitor their daily results

        o  view trends

        o  view commissions by promotions

OUR SERVICES

        We provide a comprehensive package of enhanced IP communications
services. We provide some of our services on a prepaid or a per usage
basis, while we offer other services for free to attract and retain users.

CURRENT SERVICES

        We currently provide the following services:

        PC-to-phone. Our PC-to-phone service enables a user to conveniently
and inexpensively place a call to a standard telephone anywhere in the
world directly from a personal computer while remaining on-line. In order
to use this service, a user need only download our software for free from
our Web site and have access to the Internet. Once the software is
downloaded, the user is able to place a call from the user's PC and, while
browsing the Web, speak to a party who uses a standard telephone.

        We are able to provide our PC-to-phone service at rates generally
lower than those charged for traditional circuit switched calls. We are
able to charge lower rates because our service utilizes packet-switched
technology and because it routes calls directly from the Internet onto our
privately-managed IP network and to the called destination, thus avoiding
access and settlement rates associated with traditional international and
domestic long distance telecommunications services. Our PC-to-phone service
allows ease of use by enabling a user to make a call directly from a
personal computer.

        D3 Box. Our unified messaging service enables a user to
conveniently retrieve e-mail, voice mail and faxes, as well as send e-mail,
from a single source. We offer a user the flexibility of retrieving
messages by either logging on to www.deltathree.com or by placing a call
using a standard telephone. A user retrieving messages through a computer
can conveniently access and forward all e-mail, voice mail and faxes, while
a user retrieving messages through a standard telephone can hear voice mail
and have e-mail read by a computer-simulated voice.

        Click IT. Our Click IT service is a Web-based e-commerce service
enabling individuals and businesses to place a link on their Web sites
which, when clicked on by a user viewing the site, automatically initiates
a telephone call from the user's computer to a designated telephone number
specified by the owner of the Web site. In addition, a pop-up screen
appears which advertises the host's products and services. This service
allows e-commerce and business Web pages to support real-time voice calls
from on-line customers. Our Click IT service can also be used to enable a
user to place a call from his or her PC to any telephone number without
having to download PC-to- phone software. We call this service Click IT
phone booth.

        Phone-to-phone. Our phone-to-phone service enables a user to
inexpensively place a call or send a fax from a standard telephone or a fax
machine to anywhere in the world. Phone-to-phone calls originate and
terminate on the PSTN, but travel primarily over our privately-managed IP
network. Through our privately-managed IP network, we are able to carry
phone-to-phone voice communications traffic. Similar to our PC-to-phone
service, our phone-to-phone service is generally less expensive than
traditional carriers' services. Users can access this service by dialing a
local or toll-free access number and providing a pin number. Users are
charged for toll and long distance calls on a per-minute basis. We receive
payment for these calls by debiting pre-paid user accounts opened on-line
and through the sale of pre-paid calling cards.

        Global roaming. Our global roaming service enables businesses and
individuals to use a single account number to place phone-to-phone calls
over our network from locations throughout the world using
country-specific, toll-free access numbers, thereby bypassing local access
charges. We currently offer toll-free access numbers in Austria, Canada,
Finland, France, Germany, Hong Kong, Italy, Sweden, Switzerland, the United
Kingdom and the United States.

        Carrier transmission services. To maximize use of our available
network capacity, we offer carrier transmission services over our
privately-managed IP network to telecommunications carriers. RSL COM is
currently our largest carrier customer. RSL COM utilizes our network
primarily to resell our transmission services to other communications
carriers, as well as for the traffic RSL COM carries for its own retail
customers.

        YourDay.com. YourDay.com is an on-line calendar and scheduling
system that integrates personal assistant digital products, telephones and
the Internet to allow individuals to access their scheduling and business
data information from one centrally located Web site.

FUTURE SERVICES

        We intend to leverage our network to provide, and utilize our
technological expertise to develop, additional enhanced IP communications
services. These services will be accessible through our interactive
communications portal.

        We currently expect our future services will include the following:


ENHANCED SERVICE                      SUMMARY DESCRIPTION

IP-initiated conference calls.......  Enables a user to set up a conference
                                      call through our interactive
                                      communications portal either by
                                      sending a notice of the planned call
                                      to all of the participants and having
                                      each participant dial a toll-free
                                      number or by arranging for each of
                                      the participants to be called by the
                                      automated system at the designated
                                      call time. This service eliminates
                                      the need for a conference operator,
                                      thereby saving time and money.

Phone-to-PC.........................  Enables a user to receive phone calls
                                      directly through the user's PC while
                                      remaining on-line. For example, a
                                      user on the internet will receive a
                                      pop-up screen stating that someone is
                                      calling. The user can then choose to
                                      forward the call to voice mail or to
                                      answer the call from the computer
                                      without logging off the internet. We
                                      believe this service will be
                                      attractive to users with a single
                                      telephone line, who would otherwise
                                      miss incoming calls while on-line or
                                      would need to install additional
                                      phone lines.

D3 Fax..............................  Enables users to conveniently send
                                      faxes directly from their computer to
                                      a standard fax machine anywhere in
                                      the world over the Internet. To use
                                      this service, a user only need
                                      download our software, set up a
                                      deltathree.com account and be
                                      connected to the Web when they wish
                                      to send a fax.

Information services................  Enables a user to have easy access to
                                      communications information, such as
                                      phone and e-mail directory services,
                                      with a single click on our
                                      interactive communications portal. We
                                      believe this service will further the
                                      use of our interactive communications
                                      portal as a single source for users'
                                      communications needs.

White boarding......................  Enables multiple users to view and
                                      edit the same document on their
                                      computers while speaking with each
                                      other through their PCs. We believe
                                      this service will be an efficient and
                                      cost-effective tool for businesses.

PC-to-PC ...........................  A voice enabled IP phone and chat
                                      service that enables users to place
                                      calls directly from their PC to other
                                      PCs while remaining on-line. Like
                                      PC-to-phone, in order to use this
                                      product a user will need only to
                                      download our software for free from
                                      our Web site and have access to the
                                      Internet.

CUSTOMER CARE

        Our services are supported by our on-line interactive customer care
and billing center, which enables a user to set up a deltathree.com
account, receive an account number and a personal identification number,
pay by credit card for services, find answers to frequently asked questions
and contact our customer service representatives. Once a user has
established an account, the user can prepay for additional usage by credit
card as well as access real-time detailed information which includes call
logs and transaction records. Through our on-line billing system, a user
can personalize the billing information to select the data most relevant to
the user.

        Most user concerns can be addressed on-line. Users can find answers
to many of their questions by referring to the "frequently asked questions"
information section of our Web site. Other questions can be addressed by
our customer support department that responds to user inquiries primarily
through e-mails. We seek to respond to e-mail inquiries within 24 hours. We
strive to continually improve our customer care center on our interactive
communications portal to meet the evolving needs of our users. In addition
to our on-line customer care, we also provide 24 hour, seven days a week
telephone support.

OUR MARKETING, ADVERTISING AND PROMOTIONAL PROGRAMS

        We have developed and will continue to develop diversified
marketing, advertising and promotional programs to stimulate demand for our
services by increasing brand awareness. In the past, we have allocated
limited resources to marketing, advertising and promoting our services,
relying primarily on RSL COM to generate demand for our services. We intend
to increase our independent marketing efforts substantially in order to
increase our user base and to increase the frequency of use of our services
by our registered users and new users. We will also seek to form new
relationships with Internet businesses which we believe can promote our
services to a wide range of potential users and generate demand for our
services.

        Our marketing, advertising and promotional programs include:

        ON-LINE MARKETING RELATIONSHIPS. We encourage other companies to
link their Web sites to us either by creating "communications centers" on
their Web sites or by placing a deltathree.com banner on their Web sites
and directing their customers to us for their communications needs. We pay
fees for the placement of these banners and, in addition, we offer these
companies a percentage of the revenue generated by users that click-through
their Web site to use our services. To date, we have entered into marketing
relationships with six Internet companies, as described below, and we are
continuing to pursue marketing relationships with other companies.

        o SenseNet. In February 2000, we entered into a services agreement
with SenseNet Inc. Under this agreement, SenseNet has agreed to provide a
hyperlink from its Web site to our Web site. In addition, we will provide
our IP telephony services to SenseNet. The initial term of this agreement
is six months. SenseNet has agreed to pay us a minimum of $416,666.67 per
month during the term of the agreement, due on or prior to December 31,
2000.

        o Yahoo! In October 1999, we entered into a marketing and promotion
agreement with Yahoo! Under this agreement, Yahoo! has agreed to include
banners and other promotions on various Yahoo! domestic and international
Web sites that will link to areas of our Web site dedicated to our
PC-to-phone service and certain of our other enhanced IP communications
services. Yahoo! will also send e-mails to certain international and
domestic registered users of Yahoo! e-mail with exclusive offers for our
PC-to-phone service. In addition, Yahoo! will create and place on Yahoo!
Broadcast.com audio advertisements for our enhanced IP communications
services. The initial term of this contract is one year. We have committed
to pay Yahoo! $850,000 per quarter, in addition to a $600,000 initial
payment, for the services provided.

        o CNET. In October 1999, we entered into a marketing and promotion
agreement with CNET. Under this agreement, merchants on CNET's shopping
sites will be able to integrate our PC-to-phone software to enable users to
make a PC-to-phone call directly to such merchant from the CNET shopping
site using our Click IT service. In addition, CNET has agreed to display
banners and other promotions on its Web sites that will link to our Web
site. The initial term of the contract is two years. We have agreed to pay
CNET $1,062,500 per quarter for the services provided. We have committed to
pay an additional $1,250,000 in each year of the contract, a portion of
which was allocated to the third quarter of 1999.

        o CBS.com. In August 1999, we entered into a marketing agreement
with CBS.com. Under this agreement, we are the exclusive provider of
enhanced IP communications services, including PC-to-phone, phone-
to-phone, unified messaging and Click It services, on the CBS.com Web site.
CBS will provide links from its Web pages to our Web site and promote our
services through co-branded areas on its Web site, known as the
"DeltaThree/CBS Communication Center," and through a dedicated monthly
e-mail to e-mail addresses contained in its database. In addition, our
advertising banners will be placed on the CBSMarketWatch.com Web site. The
term of this agreement is two years. We have agreed to pay CBS $424,998 per
quarter for the services provided.

        o Sony.com. In August 1999, we entered into a marketing agreement
with Sony.com. Under this agreement, a co-branded area known as the
"Communication Center" will be established and will offer users links to
our enhanced IP communications services. Sony has agreed to include fixed
links to the Communication Center on the Sony.com Web site, which includes
sonymusic.com, sony.spe.com, station.sony.com and infobeat.com. The initial
term of this agreement is two years. We have agreed to pay Sony $30,000 per
quarter for the services provided.

        o Xoom.com. In June 1999, we entered into a co-marketing agreement
with Xoom.com, Inc. Xoom will provides links to our interactive
communications portal and promotes our services through co-branded areas on
its Web site and through periodic e-mails to its customers. Xoom has
established an IP "Communications Hub" on its home page. In addition, under
this agreement, Xoom will:

           o   integrate our services with the Xoom chat network of 250,000
               chat rooms

           o   offer our services with Xoom greeting cards

           o   integrate our services with Xoom's directory services (White
               Pages & Yellow Pages)

The initial term of this agreement is two years. We have agreed to pay Xoom
$240,000 per quarter for the services provided.

        We continue to seek to identify additional Internet businesses and
Web portals with strong brand names or high traffic volumes with which we
can establish marketing relationships similar to those described above. We
will expense costs under these agreements as they are incurred. As we have
only recently entered into the marketing relationships described above, to
date we have not generated material revenue from them.

        PRIVATE LABELING. We have entered into agreements with three
service providers to distribute our services under their own private
labels. Instead of sending customers to the deltathree.com interactive
communications portal, a service provider markets our services under its
own brand name, while contracting with us to provide the services under
their private label. In our agreements with these providers, we often
stipulate that the provider's Web site will say "powered by
deltathree.com." Our private label customers include both on-line and
off-line providers who market our services to their customer base. We
believe service providers are attracted to our private label services
because it allows them to capitalize on their name recognition in their
home market while providing our high-quality, low-cost services.

        Our agreement with MediaRing Pte Ltd was our first private labeling
agreement and served as our prototype for this promotional effort and
serves as a continuing source of revenues. Under this agreement, we
integrate our PC-to-phone service into MediaRing's PC-to-PC service,
thereby providing MediaRing's customers with a bundled package of
communications services. Our services are provided under MediaRing's brand
name; however, MediaRing's Web site states that it is "powered by
deltathree.com." In addition, we also provide the back- office and billing
support for MediaRing.

        ON-LINE AGENT COMMISSION PROGRAM. We have developed a Web-based
agent program that allows for rapid agent enrollment and agent account
maintenance. Through our on-line agent interactive center, any individual
with their own Web site can:

           o   take a tour of our on-line agent program

           o   complete an application to be an on-line agent

           o   be approved within 24-48 hours after completing the
               application

           o   if approved, execute our on-line agent agreement through a
               secured site

           o   receive an agent identification number and instructions on
               how to proceed as an agent

           o   download deltathree.com banners to post on their Web site

           o   track the number of people who have clicked through to
               www.deltathree.com and signed up for our services

           o   track the commissions that are due to them

        Agents may devise their own marketing programs, including
Web-links, direct mail campaigns or co- branding of our services in select
markets. Agents receive as commissions a percentage of revenue generated
from end users who sign up for our services through the agent's Web site.
We believe that providing our agents with easy, on-line access to these
marketing tools helps us to maximize the number of agents selling our
services while significantly reducing the resources needed to recruit
agents.

        OFF-LINE AGENT COMMISSION PROGRAM. Our off-line agent commission
program allows non-Web agents to design their own marketing programs to
solicit sales of our services. Off-line agents market and advertise through
traditional channels such as newspaper and magazine advertisements, direct
mail campaigns and telemarketing campaigns. Off-line agents receive a
percentage of revenue generated from users who sign up for our services
through the agent's programs. We currently have relationships with more
than 30 off-line agents that have generated revenue for us.

        RESELLER PROGRAM. We offer individuals and businesses the
opportunity to become resellers of our services through our reseller
program. Resellers are able to purchase bulk deltathree.com account numbers
at wholesale rates that they are then able to resell to private individuals
as either phone-to-phone calling cards or PC-to-phone accounts.

        DIRECT SALES. We have a direct sales force that is targeting
organizations that are currently not optimizing the marketing potential of
their Web sites. As with other on-line agents, we offer these on-line
agents the opportunity to market our services and products through their
Web pages to generate revenue from services we deliver as a result of links
from their Web sites.

        TRADITIONAL AND ON-LINE ADVERTISING. We intend to continue to
advertise in both traditional advertising mediums, such as direct mail,
newspapers and magazines, and through emerging on-line formats, such as
banners.

        INNOVATIVE MARKETING TOOLS. We intend to continue to develop
innovative marketing products and promotions to increase our user base. For
example, in December 1998, we introduced innovative voice-enabled
electronic greeting cards on a promotional basis. Sent over the Web,
V-Greetings enable the recipient to click on a link in the greeting card,
automatically downloading our PC-to-phone software allowing the recipient
to place a free PC-to-phone call to the card sender's standard telephone.
V-Greeting cards are available on-line and are designed to promote
different holidays, such as Christmas, Chanukah, Valentine's Day, Mother's
Day and Chinese New Year and other special occasions. To date, more than
1.1 million V-Greeting cards have been sent. Of those V-Greeting cards that
have been sent, approximately 360,000 of the recipients have downloaded our
PC-to-phone software and made a free PC-to-phone call. We believe that
V-Greeting cards is an effective marketing tool to introduce our services
to potential users.

OUR NETWORK

        In order to provide high-quality, low-cost service, we operate a
privately-managed, IP telephony network. By managing our network, we have
the ability to regulate traffic volumes for the communications traffic we
carry and directly control the quality of our services from our originating
POP to the termination point. In addition, our network allows us to avoid
the significant transmission delays associated with the highly congested
Internet, which may impede delivery of high-quality, reliable services to
our users. As of March 22, 2000, our network consisted of:

        o  46 POPs in 29 countries

        o  gateways, gatekeepers and routers at each POP

        o  hubs in New York, Los Angeles, London, Frankfurt and Hong Kong

        o  dedicated leased bandwidth

        o  interconnections with the RSL COM network

        o  peering arrangements with Internet backbone providers, enabling
           transmission efficiency

        o  a technologically-advanced network operations center

POPS

        We intend to further develop our network to increase our number of
POPs. We currently have 46 POPs in the following locations:

           Austria (Vienna)                         Hong Kong
           Bangladesh (Dhaka)                       Hungary (Budapest)
           Belgium (Brussels)                       Iceland (Reykjavik)
           Brazil (Rio de Janeiro)                  India (Bombay)
           Brazil (Sao Paulo)                       Israel (Jerusalem)
           Brazil (Jose de Compos)                  Israel (Rosh Ha'ayin)
           China (Beijing)                          Israel (Tel Aviv)
           China (Beijing 2)                        Korea (Seoul 1)
           China (Beijing 3)                        Korea (Seoul 2)
           China (Shanghai)                         Malaysia (Kuala Lumpur)
           Colombia (Bogota)                        Mexico (Mexico City)
           Colombia (Cali)                          Norway (Oslo)
           Czech Republic (Prague)                  Peru (Lima)
           Ecuador (Quayaquil)                      Russia (Moscow)
           Ecuador (Quito 1)                        Russia (Nijnei)
           Ecuador (Quito 2)                        Russia (Samara)
           Finland (Helsinki)                       Russia (St. Petersburg)
           France (Paris)                           Spain (Madrid)
           Germany (Frankfurt)                      Sweden (Stockholm)
           Greece (Athens)                          Turkey (Istanbul)
           Greece (Rhodes)                          United Kingdom (London)
           Greece (Saloniki)                        United States (Los Angeles)
           Holland (Rotterdam)                      United States (New York)

GATEWAYS, GATEKEEPERS AND ROUTERS

        The gateway acts as an entrance into and exit from our network for
communications traffic. At the origination POP, the gateway accepts the
communications traffic from the public switched telephone network (PSTN)
and compresses this traffic into IP packets for transmission over our
network. The gatekeeper determines the most cost-effective route for each
packet of communications traffic and the routers then direct the packets to
their destination. Upon termination, the gateway decompresses and
reconverts the packets into a circuit-switched signal, thereby enabling the
traffic to exit our network on to the PSTN. We use gateways and gatekeepers
developed by Ericsson and routers developed by Cisco.

HUBS

        Our network has five hubs located in New York, Los Angeles, London,
Frankfurt and Hong Kong which serve as backbone points for our network and
which allow our network to directly interconnect with the PSTN and the
Internet. In addition, at each of our five hubs, we co-locate our gateways
with the Ericsson international gateway switches on RSL COM's network. Our
multiple hub structure provides us with the ability to handle high volumes
of traffic transmitted over our network. By establishing multiple hubs, we
have greater flexibility to choose from multiple bandwidth suppliers,
allowing us to optimize quality and cost savings. In addition, our multiple
hub structure enables us to more efficiently direct the routing of traffic.
For example, communications traffic between Belgium and France does not
need to be routed to our New York hub but can be sent through our London
hub. This enables better use of allocated bandwidth and reduces delay
between originating and terminating sites.

LEASED BANDWIDTH

We connect our hubs and POPs through a network of dedicated leased
bandwidth. By leasing bandwidth, we can avoid using the Internet as our
primary means for the transmission of communications traffic. We can
therefore avoid the significant transmission delays associated with the
highly-congested Internet, which may impede delivery of high-quality,
reliable services to our users. Through our relationship with RSL COM,
which owns or leases substantial bandwidth for its own business, we have
access to bandwidth. We are able to take advantage of RSL COM's volume
discounts and achieve cost efficiencies that we could not achieve on our
own. In addition, we also lease bandwidth directly or indirectly from
several other telecommunications carriers.

INTERCONNECTIONS WITH RSL COM NETWORK

        RSL COM interconnects its network with our network in addition to
supplying us with low-cost bandwidth. The interconnections with RSL COM
provide us with access to major PSTNs throughout the world, the ability to
terminate communications traffic virtually anywhere in the world and the
ability to terminate traffic over RSL COM's network in the event of a
network failure.

PEERING

        Our network also connects with Internet exchange points to provide
access to and from the Internet. We have direct and indirect peering
arrangements with Internet backbone providers in order to support IP
services to and from the Internet. These arrangements allow us to access
the Internet directly, minimizing the amount of time our users'
communications traffic has to travel over the Internet.

NETWORK OPERATIONS CENTER

        To service our network effectively, we have established a network
operations center (NOC) which monitors and manages our network from a
central location, 7 days a week, 24 hours a day. The NOC monitors all
aspects of our network, including the routers, databases, switches, leased
lines, Internet connections, gatekeepers and gateways, to ensure that they
are functioning at optimal levels. In the event of a failure of any of
these network components, NOC personnel are provided with a real-time,
systems-generated notification via an instant messaging system consisting
of pagers, cellular phones, screen pop-ups and e-mail, which identifies the
malfunction so that proper measures can be taken to restore service in a
timely fashion. Our NOC utilizes a combination of proprietary and leading
industry technologies based upon Hewlett-Packard Open View software. By
utilizing technologically- advanced, real-time management and monitoring
systems, we seek to reduce system downtime and ensure that our users will
not experience any noticeable interruption in their service.

ADVANTAGES OF OUR NETWORK

        Our network is engineered to provide the following advantages:

        o  scalability. The software and hardware that we use in our
           network is scalable, allowing for new POPs to be easily
           integrated into our network with minimal incremental investment.

        o  flexibility. Our multiple hub structure and our interconnections
           with RSL COM and other carriers provide us with numerous routing
           options and greater flexibility to handle changing traffic
           patterns.

        o  rapid integration of services. We can introduce new services and
           duplicate existing services without having to deploy additional
           equipment at each POP on our network.

        o  manageability. Our privately-managed network allows us to
           directly control the quality of our services over our network
           from one central location.

        o  accessibility. Our privately-managed network allows users to
           gain access to our enhanced services from any country in which a
           POP has been established.

        o  global reach. By using our network, we are able to
           cost-effectively terminate communications traffic to over 200
           countries.

PROPRIETARY RIGHTS

        We rely or expect to be able to rely on patent, trademark and trade
secret laws, confidentiality agreements and other contractual arrangements
with our employees, strategic partners and others to protect our
proprietary rights.

        We have a registered trademark for "Delta Three(TM),"
"YourDay.com(TM)" and "Anytime, Anywhere(TM)" in the United States. We have
submitted trademark applications for the name "Delta Three(TM)" for the
following jurisdictions: Brazil, Colombia, Japan, Mexico, the Russian
Federation, Venezuela and the European Community under EC trademark
regulation. In addition, we have submitted trademark applications in the
United States for the names "V-Greetings(TM)," "Click IT(TM)," "D3
Fax(TM)," "deltathree.com(TM)," "D3 Box(TM)" and "deltathree.com the
Communications Portal(TM)." We do not currently own any registered
copyrights. In addition, we have filed one patent application in each of
the United States and Israel for a remote telephone configuration in
connection with our V-Greeting product. These applications may not result
in any patents or trademarks being issued and, if issued, these patents or
trademarks may not provide adequate protection against competitive
technology and may not be held valid and enforceable if challenged. In
addition, other parties may assert rights as inventors of the underlying
technologies, which could limit our ability to fully exploit the rights
conferred by any patents that we receive. Our competitors may be able to
design around any of the patents that we receive, and other parties may
obtain patents that we would need to license or circumvent in order to
exploit our patents.

        To further safeguard our intellectual property, we have a policy
that requires our employees to execute confidentiality and technology
ownership agreements when they begin their relationships with us. For a
discussion of recent litigation, see "Legal Proceedings."

REGULATORY ENVIRONMENT

    REGULATION OF IP TELEPHONY

        The use of the Internet and private IP networks to provide
telephone service is a recent market development. While we believe that the
provision of voice communications services over the Internet and private IP
networks is currently permitted under United States law, some foreign
countries have laws or regulations that may prohibit voice communications
over the Internet.

        United States. We believe that, under United States law, based on
specific regulatory classifications and recent regulatory decisions, the IP
communications services that we provide constitute information services (as
opposed to regulated telecommunications services). As such, our services
are not currently regulated by the Federal Communications Commission (FCC)
or any state agencies charged with regulating telecommunications carriers.
Nevertheless, aspects of our operations may be subject to state or federal
regulation, including regulation governing universal service funding,
disclosure of confidential communications, copyright and excise tax issues.
However, we cannot assure you that our services will not be regulated in
the future. Several efforts have been made in the United States to enact
federal legislation that would either regulate or exempt from regulation
communications 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 our business,
operating results, financial condition and future prospects.

        In addition, the FCC is currently considering whether to impose
surcharges or other common carrier regulations upon some providers of
Internet and IP telephony, primarily those which provide Internet and IP
telephony services to end users located within the United States. Although
the FCC decided that information service providers, including Internet and
IP telephony providers, are not telecommunications carriers, various
companies have challenged that decision. Congressional dissatisfaction with
the FCC's conclusions could result in requirements that the FCC impose
greater or lesser regulation, which in turn could materially adversely
affect our business, financial condition, operating results and future
prospects. On April 10, 1998, the FCC issued a report to Congress
discussing its implementation of universal service provisions contained in
the 1996 amendments to the Communications Act of 1934. In the report, the
FCC indicated that it would examine the question of whether certain forms
of phone-to-phone IP telephony are information services or
telecommunications services. The two are treated differently in several
respects, with certain information services being more lightly regulated
and not subject to universal service contribution obligations. The FCC
noted that it did not have, as of the date of the report, an adequate
record on which to make a definitive ruling, but that the record suggested
that certain forms of phone-to- phone IP telephony appear to have the same
functionality as non-IP telecommunications services and lack the
characteristics that would render them information services. In September
1998, two regional Bell operating companies advised Internet and IP
telephony providers that they would impose access charges on Internet and
IP telephony traffic. It is uncertain at this time whether these companies
will actually impose access charges or when such charges will become
effective. In addition, one of these regional Bell operating companies has
recently filed a petition with the FCC seeking the imposition of access
charges on phone-to-phone Internet and IP telephony services. On September
29, 1999, the FCC released a notice of inquiry seeking information on the
extent to which phone-to-phone IP telephony services might impact the
accessibility of telecommunications services to people with disabilities,
including opportunities for achieving greater accessibility for IP
telephony and the extent to which IP telephony is now, or soon will be, an
effective substitute for conventional circuit-switched telephony. On
October 22, 1999, the FCC released a notice of proposed rulemaking on
collecting information on the status of local telephone service competition
and the deployment of advanced telecommunications capability. The FCC
recognized that, while it does not regulate Internet services, IP telephony
may become an important substitute for circuit-switched telephony and
should be included in evaluating local competition. Also, the FCC asked
whether it should undertake a more specific determination of the extent to
which the Internet is being used to provide telephony services.

        If the FCC were to determine that certain services are subject to
FCC regulations as telecommunications services, the FCC may require
providers of Internet and IP telephony services to be subject to
traditional common carrier regulation, make universal service
contributions, and/or pay access charges. It is also possible that the FCC
may adopt a regulatory framework other than traditional common carrier
regulation which would apply to Internet and IP telephony providers. Any
such determinations could materially adversely affect our business,
financial condition, operating results and future prospects to the extent
that they negatively affect our cost of doing business or otherwise slow
the growth of our business.

        State regulatory authorities may also retain jurisdiction to
regulate the provision of intrastate Internet and IP telephony services.
Several state regulatory authorities have initiated proceedings to examine
the regulation of such services. Others could initiate proceedings to do
so. If such regulations are adopted, they could materially adversely affect
our business, financial condition, operating results and future prospects.
Based on information users provide to us when they sign up to use our
services, we estimate that approximately 55% of our IP communications
services are provided to carriers or users in the United States.

        International. The regulatory treatment of Internet and IP
telephony outside of the United States varies widely from country to
country. A number of countries that currently prohibit competition in the
provision of voice telephony may also prohibit Internet and IP telephony.
Other countries permit but regulate Internet and IP telephony. Some
countries will evaluate proposed Internet and IP 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 and IP telephony has not yet been addressed by
legislation or regulatory action. Increased regulation of the Internet
and/or Internet and IP telephony providers or the prohibition of Internet
and IP telephony in one or more countries, or more aggressive enforcement
of existing regulations in such countries, could materially adversely
affect our business, financial condition, operating results and future
prospects.

        For example, we believe that our services fall outside the
classification of regulated voice telephony services in the European Union.
The European Union regulatory regime distinguishes between voice telephony
services and other telecommunications services. In Services Directive
90/388/EEC, issued in 1990, the European Commission required Member States
to allow competition for all telecommunications services except voice
telephony and certain other services. The Services Directive was amended in
1996 by Commission Directive 96/19/EC, which required the liberalization of
all telecommunications services, including voice telephony, by January 1,
1998, except in certain member states that were granted extended compliance
periods. In addition, Directive 96/19/EC requires that services other than
voice telephony be subjected to no more than a general authorization or
declaration procedure. For purposes of these Directives, "voice telephony"
is defined as the commercial provision for the public of the direct
transport and switching of speech in real time between public switch
network termination points.

        On January 10, 1998, the Commission issued a Notice addressing
whether IP telephony was voice telephony and thus subject to regulation as
voice telephony by the Member States. As noted by the Commission, a
determination that IP telephony constitutes "voice telephony" may trigger
significant regulatory consequences with respect to, among other things,
licensing requirements and contributions to universal service funding.
Consistent with its earlier directives, the Commission stated that Internet
telephony could properly be considered voice telephony only if all elements
of its "voice telephony" definition were met. In this January 1998 Notice,
the Commission concluded that no form of IP telephony currently meets the
definition of "voice telephony" subject to Member States' regulation. The
Commission noted, however, that its conclusion that IP telephony cannot be
considered voice telephony may not apply to particular forms of service
provisions where, for example, an IP telephony service is marketed as an
alternative form of voice telephony service, users can dial out to any
telephone number, and the provider guarantees the quality of the IP voice
service by bandwidth reservation and claims that the quality of the IP
voice service is the same as traditional voice telephony service.
Accordingly, the Commission concluded that while voice over the Internet
services cannot "for the time being" be generally classified as "voice
telephony," the situation must be kept under review in light of
technological and market developments. The Commission intends to review its
Notice periodically.

        On November 10, 1999, the Commission released a communication
stating: "Assuming that over time the voice over the Internet service meets
the key criteria for classification as voice telephony under the regulatory
framework," this service would be regulated like other voice telephony
services and covered by general authorizations. The Commission has
announced that it is drafting a report on regulating the quality of voice
telephony services and related consumer protection issues and another
report discussing the new Internet telecommunications services and their
impact on the European Union's regulatory and policy framework. We cannot
predict what the content of such reports will be, or what impact, if any,
they may have on our business.

        Based on the Commission's current position, providers of IP
telephony should be subjected to no more than a general authorization or
declaration requirement by the European Union Member States. The Member
States of the European Union are: Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands,
Portugal, Spain, Sweden and the United Kingdom. However, we cannot assure
you that more stringent regulatory requirements will not be imposed by
individual Member States, since the Commission's Notice is not binding on
the Member States. The Member States therefore are not obligated to reach
the same conclusions as the Commission on this subject so long as they
adhere to the definition of "voice telephony" in the Services Directive. In
fact, France is currently conducting an investigation into how IP telephony
should be regulated. We cannot assure you that the services provided over
our network will not be deemed voice telephony subject to heightened
regulation by one or more EU Member States. Moreover, we cannot assure you
that our failure or the failure of any of our partners to obtain any
necessary authorizations will not have a material adverse effect on our
business, financial condition, operating results and future prospects.

        As we make our services available in foreign countries, and as we
facilitate sales by our partners to end users located in foreign countries,
such countries may claim that we are required to qualify to do business in
the particular foreign country. Such countries may also claim that we are
subject to regulation, including requirements to obtain authorization for
the provision of voice telephony or other telecommunications services, or
for the operation of telecommunications networks. It is also possible that
such countries may claim that we are prohibited in all cases from providing
our services or conducting our business as conducted in those countries.
Our failure to qualify as a foreign corporation in a jurisdiction in which
we are required to do so or to comply with foreign laws and regulations
could materially adversely affect our business, financial condition,
operating results and future prospects, including by subjecting us to taxes
and penalties and/or by precluding us from, or limiting us in, enforcing
contracts in such jurisdictions.

        Our partners may also currently be, or in the future may become,
subject to requirements to qualify to do business in a particular foreign
country, comply with regulations, including requirements to obtain
authorizations for the provision of voice telephony or other
telecommunications services or for the operation of telecommunications
networks, or to cease providing services or conducting their business as
conducted in that country. We cannot be certain that our partners either
are currently in compliance with any such requirements, will be able to
comply with any such requirements, and/or will continue in compliance with
any such requirements. The failure of our partners to comply with such
requirements could materially adversely affect our business, financial
condition, operating results and future prospects.

        One of our competitors recently disclosed that access to its
PC-to-phone service was blocked in certain countries in Asia and the Middle
East by government-controlled telecommunications companies, and that it
intended to negotiate agreements to continue to provide its services in
those countries but could not give assurances that such negotiations would
be successful. Another of our competitors recently disclosed that it has
received a letter from the Israel Minister of Communications requesting
that it cease and desist terminating calls over the Internet in Israel.
Although we have not received any similar notices from these regulators and
we do not know specifically how these competitors operate in such countries
or why they received such notices, there can be no assurance that such
regulators or any other regulator may not block our service or send us
similar cease and desist orders in the future.

    OTHER REGULATION AFFECTING THE INTERNET

        United States. Congress has recently adopted legislation that
regulates certain aspects of the Internet, including on-line content, user
privacy and taxation. For example, the Internet Tax Freedom Act prohibits
certain taxes on Internet uses through October 21, 2001. We cannot predict
whether substantial new taxes will be imposed on our services after that
date. In addition, Congress and other federal entities are considering
other legislative and regulatory proposals that would further regulate the
Internet. Congress is, for example, currently considering legislation on a
wide range of issues including Internet spamming, database privacy,
gambling, pornography and child protection, Internet fraud, privacy and
digital signatures. Various states have adopted and are considering
Internet-related legislation. Increased United States regulation of the
Internet may slow its growth, particularly if other governments follow
suit, which may negatively impact the cost of doing business over the
Internet and materially adversely affect our business, financial condition,
results of operations and future prospects.

        International. The European Union has also enacted several
directives relating to the Internet. The European Union has, for example,
adopted a directive on data protection that imposes restrictions on the
processing of personal data which are more restrictive than current United
States privacy standards. Under the directive, personal data may not be
collected, processed or transferred outside the European Union unless
certain specified conditions are met. In addition, persons whose personal
data is processed within the European Union are guaranteed a number of
rights, including the right to access and obtain information about their
data, the right to have inaccurate data rectified, the right to object to
the processing of their data for direct marketing purposes and in certain
other circumstances, and rights of legal recourse in the event of unlawful
processing. The Directive will affect all companies that process personal
data in, or receive personal data processed in, the European Union, and may
affect companies that collect or transmit information over the Internet
from individuals in the European Union Member States. In particular,
companies with establishments in the European Union may not be permitted to
transfer personal data to countries that do not maintain adequate levels of
data protection.

        In addition, the European Union has adopted a separate,
complementary directive which pertains to privacy and the processing of
personal data in the telecommunications sector. This directive establishes
certain requirements with respect to, among other things, the processing
and retention of subscriber traffic and billing data, subscriber rights to
non-itemized bills, and the presentation and restriction of calling and
connected line identification. In addition, a number of European countries
outside the European Union have adopted, or are in the process of adopting,
rules similar to those set forth in the European Union directives. Although
we do not engage in the collection of data for purposes other than routing
calls and billing for our services, the data protection directives are
quite broad and the European Union privacy standards are stringent.
Accordingly, the potential effect of these data protection rules on the
development of our business is uncertain.

COMPETITION

        We compete in both the market for enhanced IP communications
services and the market for carrier transmission services. Each of these
markets on a stand-alone basis is highly competitive and has numerous
service providers.

        According to International Data Corporation (IDC), a market
research firm, by mid-1999 there were an estimated 300 IP telephony service
providers worldwide. In an August 1999 report on IP telephony services, IDC
indicated that based on 1998 IP telephony minutes carried, we accounted for
9.8% of the market. According to this report, Net2Phone and Jens
Corporation are the only providers with greater market shares than ours,
representing approximately 39.4% and 16.4% of the market, respectively, in
1998. Jens Corporation's services are directed primarily to callers based
in Japan. IDC further indicated that while most IP telephony traffic is
carried by start-up service providers, traditional carriers such as
Singapore Telecom, Korea Telecom, Telia and Bell Atlantic are establishing
market presence.

    ENHANCED IP COMMUNICATIONS SERVICES

        The market for enhanced Internet and IP communications services is
new and rapidly evolving. We believe that the primary competitive factors
determining success in the Internet and IP communications market are:

        o  quality of service

        o  the ability to meet and anticipate customer needs through
           multiple service offerings

        o  responsive customer care services

        o  price

        Future competition could come from a variety of companies both in
the Internet and telecommunications industries. These industries include
major companies who have greater resources and larger subscriber bases than
we have, and have been in operation for many years. We also compete in the
growing market of discount telecommunications services including calling
cards, prepaid cards, call-back services, dial-around or 10-10 calling and
collect calling services. In addition, some Internet service providers have
begun to aggressively enhance their real time interactive communications,
focusing initially on instant messaging, although we expect them to begin
to provide PC-to-phone services.

        Internet and IP Telephony Providers. Many companies provide, or are
planning to provide, certain portions of the complete communications
solution we offer, including Net2Phone, Jens Corporation, JFAX.COM,
GlocalNet and Poptel.

        Traditional Telecommunications Carriers. Several traditional
telecommunications companies, including industry leaders such as AT&T,
Sprint, Deutsche Telekom, MCI WorldCom and Qwest Communications
International, have recently announced their intention to offer enhanced
Internet and IP communications services in both the United States and
internationally. All of these competitors are significantly larger than we
are and have:

        o  substantially greater financial, technical and marketing resources

        o  larger networks

        o  a broader portfolio of services

        o  stronger name recognition and customer loyalty

        o  well-established relationships with many of our target customers

        o  an existing user base to which they can cross-sell their services

        These and other competitors may be able to bundle services and
products that are not offered by us together with enhanced Internet and IP
communications services, which could place us at a significant competitive
disadvantage. Many of our competitors enjoy economies of scale that can
result in lower cost structure for transmission and related costs, which
could cause significant pricing pressures within the industry.

    CARRIER TRANSMISSION SERVICES

        We compete with telecommunications providers, long distance
carriers and other long distance resellers and providers of carrier
services for our carrier transmission services. Our primary competitors in
providing carrier transmission services include:

        o  long distance carriers, including AT&T, MCI WorldCom and Sprint
           Corporation

        o  foreign carriers, including British Telecom, Deutsche Telekom
           and Nippon Telegraph and Telephone Corporation

        o  global telecommunications alliances, including Global One and
           BT/AT&T

        o  emerging carriers providing transmission services over the
           Internet, including ITXC Corp., iBasis and AT&T Global
           Clearinghouse

        o  wholesale carrier providers, including STAR Telecommunications,
           Inc., GRIC Communications and Pacific Gateway Exchange

        Competition for carrier traffic is primarily based on price.
Decreasing telecommunications rates have resulted in intense price
competition and we expect that competition will continue to increase
significantly as telecommunications rates decrease. Increased competition
could force us to further reduce our prices and profit margins, and may
reduce our market share.

EMPLOYEES

        As of December 31, 1999, we employed 89 full-time and 16 part-time
employees, of which 87 are located in Israel and 18 are located in New
York. We consider our relationship with our employees to be good. None of
our employees is covered by collective bargaining agreements.

        Generally, all male adult citizens and permanent residents of
Israel under the age of 51 are, unless exempt, obligated to perform up to
31 days of military reserve duty annually. Additionally, all such residents
are subject to being called to active duty at any time under emergency
circumstances. Some of our officers and employees are currently obligated
to perform annual reserve duty. While we have operated effectively under
these requirements since we began operations, no assessment can be made as
to the full impact of such requirements on our workforce or business if
conditions should change, and no prediction can be made as to the effect on
us of any expansion of such obligations.

ITEM 2.  PROPERTIES

        We maintain our executive offices at 430 Park Avenue, New York, New
York, occupying approximately 3,000 square feet, which we sub-lease from
RSL COM. This sub-lease extends until June 29, 2001. We pay RSL COM annual
rent of $96,000 for this space.

        In December 1999, we entered into a lease for headquarters of our
United States operations with an annual rent of approximately $398,000,
increasing annually to $530,000 during the final year of the lease. The lease
term extends until December 2009, with an option to extend the lease for an
additional five years.

        We lease a 1,184 square meter office, which houses our research and
development facilities, at the Jerusalem Technology Park, Jerusalem,
Israel. The term of this lease extends until January 31, 2003, with an
option to extend the lease for an additional five year period. We pay
annual rent of approximately $240,000 plus Israeli value-added tax. In
addition, we have signed a lease for an additional 256 square meters in an
existing location in Israel. The term of this lease begins on April 1, 2000
and extends until January 31, 2003, with an option to extend the lease for
an additional five years. We will pay an annual rent of approximately
$52,000 plus Israeli value-added tax for this additional space. We sublease
a portion of our facility to third parties.

        Under a services agreement with RSL COM, we share space for
employees and equipment at eight locations with RSL COM. One of these
locations is 60 Hudson Street, New York, New York. This space houses our
international gateway and domestic switches. RSL COM provides these
facilities to us at no direct cost. The services agreement expires
September 3, 2004 with automatic extensions for additional one-year terms
unless terminated by one of the parties upon 30 days notice prior to the
end of the term.

ITEM 3.  LEGAL PROCEEDINGS

        On October 8, 1999, Aerotel, Ltd. and Aerotel U.S.A. commenced a
suit against us, RSL COM and an RSL COM subsidiary in the United States
District Court for the Southern District of New York. Aerotel alleges that
we are infringing on a patent issued to Aerotel in November 1987 by making,
using, selling and offering for sale prepaid telephone card products in the
United States. Aerotel seeks an injunction to stop us from using the
technology covered by this patent, monetary damages in an unspecified
amount and reimbursement of attorneys' fees. We have answered the
complaint, and the parties are currently engaged in pre-trial discovery. As
we continue to evaluate these claims, we believe that we have meritorious
defenses to the claims and we intend to defend the lawsuit vigorously.
However, the outcome of the litigation is inherently unpredictable and an
unfavorable result may have a material adverse effect on our business,
financial condition and results of operations. Regardless of the ultimate
outcome, the litigation could result in substantial expenses to us and
significant diversion of efforts by our managerial and other personnel.

        We are not a party to any other material litigation and are not
aware of any other pending or threatened litigation that could have a
material adverse effect on us or our business taken as a whole.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Effective as of November 17, 1999, the appointment of Robert R.
Grusky, Yadin Kaufmann and Oakleigh Thorne as directors of the Company was
unanimously approved by written consent of the Company's stockholders. Amos
Sela, Elie C. Wurtman, Itzhak Fisher, Nir Tarlovsky, Donald R. Shassian,
Jacob Z. Schuster and Avery S. Fischer continued to serve as directors of
the Company following such approval.

        Effective as of November 18, 1999, RSL COM, the holder of a
majority of the shares of the Company's common stock that were outstanding
as of that date, consented to the amendment of the Company's certificate of
incorporation to provide for a stock split by way of a reclassification of
the Company's Class A and Class B common stock.


                                  PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
           MATTERS

Market Information

        Our common stock has traded on the Nasdaq National Market under the
symbol "DDDC" since November 22, 1999. The following table sets forth the
per share range of high and low closing sales prices of our common stock
for the periods indicated:


                                                     HIGH          LOW
                                                      ($)          ($)
                                                  -----------  ------------
Year ended December 31, 1999
    Fourth quarter................................  29.375         25.00
Year ended December 31, 2000                        62.375        22.375
    First quarter (through March 22, 2000)........

        On March 22, 2000, the last reported sale price for our common
stock on the Nasdaq National Market was $33.375 per share. The market price
for our stock is highly volatile and fluctuates in response to a wide
variety of factors.


Holders

        As of March 22, 2000, we had approximately 64 holders of record of
our common stock. This does not reflect persons or entities who hold their
stock in nominee or "street" name through various brokerage firms.

Dividend Policy

        We have never declared or paid any cash dividends on our capital
stock. We do not anticipate paying any cash dividends on our capital stock
in the foreseeable future. We currently intend to retain future earnings,
if any, to finance our operations and to expand our business. In addition,
indentures governing outstanding indebtedness of RSL COM restrict our
ability to declare or pay cash dividends, and, for the foreseeable future,
effectively prohibit such payments or declarations. Any future
determination to pay cash dividends will be at the discretion of our board
of directors and will be dependent upon our financial condition, operating
results, capital requirements and other factors that our board of directors
considers appropriate.

Recent Sales of Unregistered Securities

        A predecessor company to us, Delta Three, Inc., was formed in June
1996 ("Old Delta Three"). During 1996, Old Delta Three issued a total of
7,535,277 (post-split) shares of its common stock to private investors to
generate initial start-up capital in transactions exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act") pursuant to Section 4(2) of the Securities Act. Shares
for a total consideration of $164,755 were issued to 22 investors over a
five-month period in privately negotiated transactions with no general
solicitations being made. The purchasers delivered representations as to
their investment intents and all securities issued were legended to
indicate the restricted nature of the securities. These shares were issued
as follows:


DATE                  NO. OF INVESTORS     NO. OF SHARES    TOTAL CONSIDERATION

July 2, 1996.........         1(1)              62,121              $25,000
July 15, 1996........         2(2)              31,060              $12,500
July 16, 1996........         6(3)              95,666              $38,500
August 1, 1996.......         6(4)             6,243,160            $16,265
August 15, 1996......         3(5)              126,726             $51,000
October 15, 1996.....         1(6)              24,848              $10,000
November 5, 1996.....         3(7)              951,693             $11,490
                                                                    -------
     Total...........                                              $164,755
                                                                   ========


-----------------------------

(1) Elliot Schwartz
(2) Arlene & Elliot Schwartz and Schwartz Family Trust Fund B
(3) Michael Ettinger, Schwartz Family Trust C, Ida & Michael Ettinger,
    Walter Wolak, Rosalyn Schneller & Elliot Schwartz and Elliot Schwartz,
    as custodian for Alex Weller
(4) Jacob Davidson, Pioneer Management Corporation, Inc., Fred Sager, Noam
    Bardin, Lee Kaplan and Michna Avni
(5) Modern Technology Corp., Charlotte Horowitz and Shelly Weller & Elliot
    Schwartz
(6) Kerry Kassovar
(7) Joseph H. Popolow, Stephen J. Perone and Jane F. Moysak

        In the first half of 1997, Old Delta Three issued 124,242 shares of
its common stock to each of Israel Securities Center Corp. and Michael
Selesny in exchange for investment banking services related to identifying
private investors in Old Delta Three transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof. These 24,848 shares were purchased for $0.004 per share.

        On December 23, 1996, Old Delta Three conducted a $300,000 private
placement of units consisting of convertible notes and warrants to
individual accredited investor subscribers in transactions exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof. There were twelve investors in the December placement, Eva D.
Glass, Bert Amador, Albert Resnick, John M. Walsh, Andrew S. Edson &
Marilyn Edson, Larry Alpert, H. Manes, Mark Katzman, Neil Katzman, Edmond
O'Donnell, Dr. Debabrata Chakrabarty and Smithfield Corp., each investing
$25,000 for which each investor received one unit consisting of a $25,000
convertible note (at a conversion price of $0.80 per share) and a warrant
permitting the purchase of up to 31,060 shares at an exercise price of $0.8
per share. In addition, one investor, Thomas Mann, made a short term loan
to Old Delta Three for $5,000 for which it received a warrant to purchase
up to 12,424 shares at an exercise price of $0.8 per share. An additional
investor, Northeast Securities, Inc., was paid a 10% commission and a 3%
expense allowance, in the form of convertible notes and warrants, for
acting as a placement agent which such services were valued at $50,000. No
general solicitations were made in connection with this transaction. Old
Delta Three obtained representations from the investors as to their
accredited investor status and the securities were legended to indicate the
restricted nature of them.

        Old Delta Three conducted a similar private placement of units in
April 1997 consisting of convertible notes and warrants for an aggregate of
$520,000 in transactions exempt from the registration requirements of the
Securities Act in reliance on Rule 505 thereof. A total of 16 units were
issued to the following investors: Surety Bank & Trust Co. Ltd., Bert
Amador, Harvey R. Manes, M.D., Steven A. Portnoy, Kantibhai S. Patel IRA,
The Gross Investment Company, L.P., M.A.S. Hallaba IRA and Northeast
Securities, Inc. The price of each unit was $32,500 and consisted of a
$32,500 convertible note (at a conversion price of $1.30 per share) and a
warrant permitting the purchase of up to 24,848 shares at an exercise price
of $1.30 per share. No general solicitations were made in connection with
this transaction. Old Delta Three obtained representations from the
investors as to their accredited investor status and the securities were
legended to indicate the restricted nature of them.

        In June 1997, under a restricted stock agreement for employees and
directors of Old Delta Three, Old Delta Three granted shares to certain
employees of Old Delta Three totaling 491,999 shares of common stock of Old
Delta Three, pursuant to transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof and
Rule 701 thereunder. These grants were to have vested over a two year
period. Upon the merger described below, these grants were converted to
restricted units with an exercise price of $0.004 per share granted by RSL
COM under RSL COM's 1997 Stock Incentive Plan, pursuant to RSL COM's
registration statement on Form S-8 related to such plan.

        Pursuant to a stock purchase agreement among RSL COM, Old Delta
Three and shareholders of Old Delta Three representing a controlling
interest in Old Delta Three, dated July 23, 1997, Old Delta Three issued to
RSL COM 8,101,467 shares of its common stock. An additional 2,339,168
shares of common stock were issued into escrow. These shared were issued in
a transaction exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof. The escrowed shares were released
from escrow to RSL COM prior to completion of the merger described below.
The total consideration for all the shares issued, including the escrowed
shares, was $5 million. At or about the same time as the July 23, 1997
transaction, RSL COM purchased shares from most of the then existing
shareholders of Old Delta Three as well as the units sold in December 1996
and April 1997 from the then existing shareholders.

        Pursuant to an Agreement and Plan of Merger dated March 31, 1998,
Old Delta Three was merged into RSL Acquisition Corp., a wholly-owned
subsidiary of RSL COM, the name of which new entity was changed to Delta
Three, Inc. Old Delta Three ceased to exist upon consummation of the
merger. Shareholders of Old Delta Three, other than RSL COM, received cash
and shares of RSL COM in exchange for their shares of Old Delta Three. As
of the consummation of the merger, RSL COM was the only shareholder of
Delta Three, Inc. and was issued 18,061,156 shares of common stock.
Subsequent to the merger, RSL COM exercised all the warrants and
convertible notes held by it in transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.

        Pursuant to a stock and warrant purchase agreement, on October 18,
1999, we issued to Yahoo! Inc. 125,275 shares of common stock and a warrant
to purchase 125,275 shares of common stock with an exercise price of $7.98
per share for $1,000,000, in a transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.

        Pursuant to a stock and warrant purchase agreement, on October 20,
1999, we issued to CNET Investments, Inc. 1,085,943 shares of common stock
and warrants to purchase 466,028 (post-split) shares of common stock at an
exercise price of $19.31 per share from $10,999,994.76 in a transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof.

        In connection with our initial public offering consummated on
November 29, 1999, shares of common stock outstanding prior to the offering
were converted into shares of Class B common stock. This conversion was
effected without registration under the Securities Act in reliance on
Section 3(a)(9) of the Securities Act on a one- for-one basis.

        Pursuant to an Agreement and Plan of Merger dated as of February 3,
2000, YourDay Acquisition Corp., our wholly-owned subsidiary, was merged
with and into YourDay.com, Inc. Pursuant to the merger, we issued 229,443
shares of common stock to stockholders of YourDay.com, Inc., in a
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.

Use of Proceeds

        On November 22, 1999, we offered 6,000,000 shares of our common
stock in an initial public offering. These shares were registered with the
Securities and Exchange Commission on a registration statement on Form S-1
(file no. 333-86503), which became effective on November 22, 1999. We
received net proceeds of approximately $96,255,000 from the sale of
6,900,000 shares at the initial public offering price of $15.00 per share
after deducting underwriting commissions and discounts and expenses of
approximately $6,300,000. The managing underwriters for our initial public
offering were Lehman Brothers Inc., Merrill Lynch & Co., U.S. Bancorp Piper
Jaffray, Lazard Freres & Co. LLC and Fidelity Capital Markets.

        As of the date of this report, we have not made any specific
allocations with respect to the net proceeds from our initial public
offering. We expect that we will use the net proceeds to be allocated as
follows:

        o  approximately $20 million to fund marketing and promotional
           activities

        o  approximately $10 million for capital expenditures

        o  the balance for general corporate purposes

        The preceding allocations are only an estimate and the amounts that
we actually expend will depend upon several factors, including our
available cash, the success of our marketing and promotion activities and
the availability of new business opportunities. Pending use of the net
proceeds, we intend to invest the net proceeds in interest-bearing,
investment-grade instruments, certificates of deposit, or direct or
guaranteed obligations of the United States.

ITEM 6.    SELECTED FINANCIAL DATA

        We derived the selected consolidated financial data presented below
from our consolidated financial statements and related notes included in
this prospectus. You should read the selected consolidated financial data
together with our consolidated financial statements and related notes and
the section of this annual report entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Brightman
Almagor & Co., a member firm of Deloitte Touche Tohmatsu, independent
certified public accountants, audited our historical financial statements
for the period June 1996 (inception) through December 31, 1996 and as of
and for the years ended December 31, 1997, 1998 and 1999. Their report
appears elsewhere in this annual report. The selected balance sheet data as
of December 31, 1996 is derived from an audited financial statement not
included in this annual report.

<TABLE>
<CAPTION>
                                                  PERIOD FROM
                                                   JUNE 1996
                                                 (INCEPTION)TO
                                                  DECEMBER 31,     YEAR ENDED DECEMBER 31,
                                                  ------------ -------------------------------
                                                      1996       1997       1998       1999
                                                  ------------ ---------  ---------  ---------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
<S>                                               <C>         <C>        <C>        <C>
   Affiliates...................................  $            $ --  468  $   3,896  $   7,431
   Non-affiliates ..............................             1       778      1,742      3,621
                                                  ------------ ---------  ---------  ---------
      Total revenues............................             1     1,246      5,638     11,052
Costs and operating expenses:
   Cost of revenues.............................            --      (892)    (4,459)    (9,723)
   Research and development expenses............            --      (294)      (650)    (1,233)
   Selling and marketing expenses...............            --      (632)    (2,431)    (7,403)
   General and administrative expenses (exclusive
      of non-cash compensation expense).........          (179)   (1,388)    (1,842)    (2,754)
   Non-cash compensation expense................            --        --       (743)   (19,116)
   Depreciation and amortization of goodwill....            --      (370)    (2,671)    (3,721)
                                                  ------------ ---------  ---------  ---------
      Total costs and operating expenses........          (179)   (3,576)   (12,796)   (43,950)
                                                  ------------ ---------  ---------  ---------
Loss from operations............................          (178)   (2,330)    (7,158)   (32,898)
Interest expense, net...........................            --       (37)      (186)      (873)
Minority interest...............................            --        --        223         --
                                                  ------------ ---------  ---------  ---------
Net loss........................................  $       (178)$  (2,367) $  (7,121) $ (33,771)
                                                  ============ =========  =========  =========
Net loss per share--basic and diluted............ $      (0.03)$          $          $
                                                  ============ =========  =========  =========
Weighted average shares outstanding--basic
  and diluted....................................        6,420    12,390     19,254     20,418

                                                               AS OF DECEMBER 31,
                                                  --------------------------------------------
                                                          1996      1997       1998       1999
                                                  ------------ ---------  ---------  ---------
                                                                 (IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents                         $        130 $   3,196  $   1,357  $  89,957
Working capital (deficiency)                                70     2,763     (3,232)    82,941
Total assets                                               396     8,403     25,676    126,832
Long-term debt due to affiliates                           344        --      5,107         --
Total stockholder's equity (deficiency)                    (30)    6,272     12,370    102,580
</TABLE>



ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATIONS

        The following discussion of our financial condition and results of
operations should be read together with our consolidated financial
statements and the related notes thereto included in another part of this
annual report.

OVERVIEW

        We are a global provider of IP telephony services, which include
our carrier transmission services and enhanced Web-based and other
communications services. We were founded in 1996 to capitalize on the
growth of the Internet as a communications tool by commercially offering IP
telephony services. In July 1997, RSL COM acquired a majority interest in
our company, and in April 1998, we became a wholly-owned subsidiary of RSL
COM after RSL COM acquired the remaining outstanding shares of our capital
stock from third parties.

        Since our inception, our primary activities have included:
        o      developing our business model

        o      hiring management and other key personnel

        o      building our IP network

        o      offering PC-to-phone, phone-to-phone and carrier
               transmission services

        o      entering into marketing relationships to promote our
               enhanced IP communication services

        o      developing new services

        o      developing our interactive communications portal and
               customer care center

        Since RSL COM's investment in our company in July 1997 until our
initial public offering, we have relied on RSL COM almost exclusively for
our financing needs. With the proceeds of our initial public offering, we
are less dependent upon RSL COM for our funding needs.

        In addition, since RSL COM's investment in our company, we have
provided RSL COM with a majority of our network capacity which has enabled
us to maximize the use of our available network capacity. We currently
generate revenues primarily from carrier transmission services for RSL COM
and other telecommunications carriers. As we continue to expand our
marketing and promotional efforts for our enhanced IP communications
services, we expect revenue from these services, over time, to represent a
majority of our total revenues. This shift in revenue mix would minimize
our reliance upon carrier transmission services for our revenues. In order
to increase the number of users of these services we believe we will have
to significantly increase our marketing and advertising expenditures. For
these reasons our historical operating results may not necessarily be
indicative of our future operating performance.

    Revenues

           Revenues are derived from affiliates and non-affiliates.
Revenues from affiliates consist of revenues received from RSL COM for
carrier transmission services we provide to RSL COM. The majority of the
services we provide to RSL COM are resold by RSL COM to other
communications companies, and the remainder are used directly by RSL COM's
customers. Revenues from non-affiliates consist of revenues from carriers
other than RSL COM for carrier transmission services and revenues from
users of our enhanced IP communications services, including PC-to- phone
and phone-to-phone. All revenues are recognized as the service is
performed. Revenues are currently derived from usage charges on a per
minute basis. We expect our minutes of use to increase over time. However,
prices have been decreasing due to significant competition. This pricing
pressure has begun to negatively impact our gross margins, particularly
with respect to our carrier transmission services.

        Carrier transmission services to RSL COM accounted for 46.7% of our
total revenues in 1999 and 69.1% of our total revenues in 1998. Carrier
transmission services to non-affiliates accounted for 12.7% of our total
revenues in 1999 and 5.6% of our total revenues in 1998. The provision of
enhanced IP communications services accounted for 18.4% of our total
revenues in 1999 and 20.5% in 1998.

    Costs and Operating Expenses

        Costs and operating expenses consist of cost of revenues, research
and development expenses, selling and marketing expenses, general and
administrative expense, depreciation and amortization of goodwill and
non-cash stock compensation.

        o  Cost of revenues consist primarily of access, termination and
           transmission costs paid to carriers that we incur when providing
           services and fixed costs associated with leased transmission
           lines. The term of our contracts for leased transmission lines
           is generally one year and either party can terminate with prior
           notice. We incurred extraordinary costs of approximately $1.6
           million in 1998 and $1.4 million in 1999 in integrating the
           hardware and software purchased from Ericsson into our network.
           To compensate us for our costs, Ericsson agreed to offset our
           payable to them for network telecommunications equipment that we
           previously purchased from them with a fair market value of $3
           million, representing Ericsson's reimbursement of costs incurred
           by us. As a result we classified this payable as deferred
           revenues and costs which we recognize as an offset to cost of
           revenues and research and development expenses as they are
           incurred.

        o  Research and development expenses consist primarily of costs
           associated with establishing our network and the initial testing
           of our services and compensation expenses of software developers
           involved in new product development and software maintenance. In
           the future, these expenses may fluctuate as a percentage of
           revenue depending on the project undertaken during the reporting
           period. Since our inception, we have expensed all research and
           development costs in each of the periods in which they were
           incurred.

        o  Selling and marketing expenses consist primarily of advertising
           and promotional expenses incurred to attract potential users and
           network partners. We expect to substantially increase our
           selling and marketing expenses as we increase our marketing
           efforts in order to grow our user base and increase the
           frequency of use by our registered users and new users of our
           services. We anticipate that as we add new paid users we will be
           able to spread these costs over a larger revenue base and
           accordingly improve our operating margins.

        o  General and administrative expenses consist primarily of
           compensation and benefits for management, finance and
           administrative personnel, occupancy costs and legal and
           accounting fees. We expect to hire additional personnel and to
           incur expenses associated with being a public company, including
           costs of directors' and officers' insurance and increased legal
           and accounting fees.

        o  Amortization of goodwill consists of amortization of the
           goodwill related to the purchase by RSL COM of all of the
           outstanding shares of our capital stock. In July 1997, we issued
           shares representing 51% of outstanding share capital to RSL COM
           for $5 million. No goodwill was recorded as a result of this
           issuance. However, as a result of acquiring a controlling
           interest in us, RSL COM recorded goodwill in the amount of
           $450,000, representing our net liabilities. RSL COM then
           proceeded to offer to purchase from our stockholders all of our
           outstanding shares it did not already own. By April 1998, RSL
           COM had paid approximately $14.7 million in cash and securities
           for the remaining 49% of our shares that it did not own and RSL
           COM recorded goodwill in the amount of $14.7 million. As a
           result of these transactions, RSL COM "pushed down" a total of
           approximately $15.2 million of goodwill to our financial
           statements, accounted for in our financial statements as an
           increase in both goodwill and additional paid-in capital of
           approximately $15.2 million in the aggregate. The goodwill is
           being amortized by us over a five-year period. The amortization
           of this goodwill has been reflected as a charge to operations
           beginning in 1997. We have recorded amortization expense of
           approximately $5.5 million through December 31, 1999. The
           future amortization of the unamortized goodwill balance will
           result in charges of approximately $3.0 million in 2000, $3.0
           million in 2001, $3.0 million in 2002 and $500,000 in 2003.

        We have not recorded any income tax benefit for net losses and
credits incurred for any period from inception to December 31, 1999. The
utilization of these losses and credits depends on our ability to generate
taxable income in the future. Because of the uncertainty of our generating
taxable income, we have recorded a full valuation allowance with respect to
these deferred assets.

    Deferred Compensation Charge

        We have recognized approximately $24.3 million of deferred
compensation charges in 1999 related to non-cash compensation expense due
to the issuance of 2,198,025 shares of our common stock to our employees
granted with exercise prices below the fair market value in periods prior
to December 31, 1999. We recorded an additional approximately $4.4 million
of deferred compensation charges in connection with our sale of stock and
warrant to both Yahoo! and CNET. The deferred compensation charge
represents the difference between each of the purchase price of the common
stock and the exercise price of the warrant as compared to the fair value
of the common stock at the date of sale. We began amortizing this deferred
compensation charge during the fourth quarter of 1999.

        We will amortize the deferred compensation charge over a
twelve-month period for Yahoo! and a twenty-four month period for CNET. We
recognized $19.1 million in non-cash compensation expense in 1999, and we
will recognize an additional $10.7 million during the period January 1,
2000 through May 31, 2002.


RESULTS OF OPERATIONS

The following table sets forth the statement of operations data presented
as a percentage of revenues for the periods indicated:


                                    YEAR ENDED DECEMBER 31,
                               ---------------------------------
                                  1997         1998         1999
                               -------    ---------     --------
Revenues:
   Affiliates................     37.6%        69.1%        67.2%

   Non-affiliates ...........     62.4         30.9         32.8
                               -------    ---------     --------
      Total revenues.........    100.0        100.0        100.0

Costs and operating expenses:

   Cost of revenues..........     71.6         79.1         88.0
   Research and development
     expenses................     23.6         11.5         11.2

   Selling and marketing
     expenses................     50.7         43.1         67.0

   General and administrative
     expenses (exclusive of
     non-cash compensation
     expense)................    111.4         32.7         24.9

   Non-cash compensation
     expense.................       --         13.2        173.0

   Depreciation and
     amortization of goodwill.    29.7         47.4         33.7
                               -------    ---------     --------
      Total costs and
        operating expenses...    287.1        227.0        397.6
                               -------    ---------     --------
Loss from operations.........   (187.1)      (127.0)      (297.6)

Interest expense, net........     (3.0)        (3.3)        (7.9)

Minority interests...........       --          4.0           --
                               -------    ---------     --------
                                (190.1)%     (126.3)%     (305.5)%
                               =======    =========     ========

COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998

Revenues

        Affiliates. Revenues from affiliates were $7.4 million for the year
ended December 31, 1999 compared to $3.9 million for the year ended
December 31, 1998, an increase of $3.5 million or 89.7%. The increase in
revenues from affiliates was due to an increase in sales of our services by
RSL COM to its customers. The increase in sales by RSL COM was due to the
growth in our network resulting in our ability to provide additional
capacity and to the quality of services that we provide.

        Non-affiliates. Revenues from non-affiliates were $3.6 million for
the year ended December 31, 1999 compared to $1.7 million for the year
ended December 31, 1998, an increase of $1.9 or 111.8%. Revenues from
carrier transmission services for telecommunications carriers other then
RSL COM were $1.4 million for the year ended December 31, 1999 compared to
$164,902 for the year ended December 31, 1998, an increase of $1,254,190.
The increase was due primarily to an increased demand from a larger
customer base. Revenues from IP communications services were $2.0 million
for the year ended December 31, 1999 compared to $1.2 million for the year
ended December 31, 1998, an increase of $0.8 million or 66.7%. The increase
in revenues from IP communications services was due to a greater number of
PC-to-phone and phone-to-phone calls being placed by an increasing user
base.

        Revenues from carrier transmission services to RSL COM and other
telecommunications carriers accounted for 71.7% and 59.8% of revenues for
the years ended December 31, 1998 and December 31, 1999, respectively.
Other than RSL COM, no other customer accounted for greater then 5% of our
revenues during these periods. We expect the revenues from carrier
transmission services to RSL COM and other carriers will continue to
account for a majority of our revenues through at least the end of 2000.

    Costs and Operating Expenses

        Cost of revenues. Cost of revenues were $9.7 million for the year
ended December 31, 1999 compared to $4.5 million for the year ended
December 31, 1998. During the year ended December 31, 1999, we recognized
$299,136 compared to $694,250 for the year ended December 31, 1998 as the
reimbursement of certain costs from Ericsson, our primary equipment vendor.
Such reimbursement reduced our cost of revenues during both periods.
Excluding this reimbursement, cost of revenues would have been $10.0
million for the year ended December 31, 1999 compared to $5.2 million for
the year ended December 31, 1998, an increase of $4.8 million or 92.3%. The
increase in cost of revenues (excluding the reimbursement) was due
primarily to increased costs associated with the significant increase in
carrier transmission services. During 1998, due to difficulties in
integrating the hardware and software purchased from Ericsson into our
network, we incurred significant costs and anticipate that we will incur
additional costs through the end of 1999. To compensate us for our costs,
Ericsson agreed to provide us at no cost with network telecommunications
equipment with a fair market value of $3 million, representing Ericsson's
participation in such research and development costs, which we recognize as
an offset to cost of revenues and research and development expenses.

        Research and development expenses. Research and development
expenses were $1.2 million for the year ended December 31, 1999 compared to
$650,140 for the year ended December 31, 1998. During the year ended
December 31, 1999, we recognized reimbursement from Ericsson for expenses
we incurred in research and development of $1.1 million compared to
$901,385 for the year ended December 31, 1998. Excluding this
reimbursement, research and development costs would have been $2.3 million
for the year ended December 31, 1999 compared to $1.6 million for the year
ended December 31, 1998, an increase of $0.7 million or 43.8%. The increase
in research and development expenses (excluding the reimbursement) was due
to greater costs incurred in hiring personnel to develop several new
services and enhancements to our existing services.

        Selling and marketing expenses. Selling and marketing expenses were
$7.4 million for the year ended December 31, 1999 compared to $2.4 million
for the year ended December 31, 1998, an increase of $5.0 million or
208.3%. The increase in selling and marketing expenses was due to the
expansion of our marketing and promotional activities. Selling and
marketing expenses for the year ended December 31, 1998 included expenses
related to a promotional campaign we conducted during this period.

        General and administrative expenses. General and administrative
expenses were $2.8 million for the year ended December 31, 1999 compared to
$1.8 million for the year ended December 31, 1998, an increase of $1.0
million or 55.6%. The increase in general and administrative expenses was
primarily due to additional personnel and increased occupancy costs.

        Non-cash compensation expenses. Non-cash compensation expenses were
$19.1 million for the year ended December 31, 1999 compared to $743,000 for
the year ended December 31, 1998, an increase of $18.4 million. The
increase in non-cash compensation expenses was due to the recognition of
compensation expense for grants of employee stock options and RSL COM
restricted units held by our employees that were converted into shares of
our common stock or options to purchase our common stock and the issuance
of shares and warrants to both CNET and Yahoo!.

        Depreciation and amortization of goodwill. Depreciation and
amortization of goodwill was $3.0 million for year ended December 31, 1999
compared to $2.5 million for the year ended December 31, 1998, an increase
of $0.5 million or 20.0%. The increase in amortization of goodwill was due
to an increase in goodwill which grew significantly during 1998 as a result
of RSL COM acquiring the remaining outstanding shares of our company.

    Loss from Operations

        Loss from operations was $32.9 million for the year ended December
31, 1999 compared to approximately $7.2 million for the year ended December
31, 1998, an increase of $25.7 million or 356.9%. The increase in loss from
operations was due to the increase in costs and operating expenses and to a
decrease in prices we charged for carrier transmission services. We expect
to continue to incur losses for the foreseeable future.

    Interest Expense, Net

        Interest expense, net was $873,601 for the year ended December 31,
1999 compared to $186,295 for the year ended December 31, 1998, an increase
of $687,306 or 368.9%. The increase in interest expense was due to greater
borrowings from RSL COM to finance our working capital and capital
expenditure requirements.

    Net Loss

        Net loss was approximately $33.8 million for the year ended
December 31, 1999 compared to $7.1 million for the year ended December 31,
1998, an increase of $26.7 million or 376%. The increase in net loss was
due to the foregoing factors.


COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997

        Revenues

        Affiliates. Revenues from affiliates were $3.9 million for the year
ended December 31, 1998 compared to $467,842 for the year ended December
31, 1997, an increase of $3.4 million, or 732.8%. The increase in revenues
from affiliates was due to an increase in sales of our services to RSL COM.
The increase in sales to RSL COM was attributable to the growth in our
network resulting in our ability to provide additional capacity to RSL COM
and an increase in demand for our services from RSL COM.

        Non-affiliates. Revenues from non-affiliates were $1.7 million for
the year ended December 31, 1998 compared to $777,799 for the year ended
December 31, 1997, an increase of $964,142, or 124.0%. Revenues from
carrier transmission services for telecommunications carriers other than
RSL COM were $317,503 for the year ended December 31, 1998 compared to
$56,882 for the year ended December 31, 1997, an increase of $260,621, or
458.2%. Revenues from enhanced IP communications services were $1.2 million
for the year ended December 31, 1998 compared to $202,643 for the year
ended December 31, 1997, an increase of $951,151, or 469.4%. The increase
in revenues from carrier transmission and enhanced IP communications
services was due to an increase in the destinations we could terminate
traffic to as a result of the expansion of our network and an increasing
user base. Revenues from equipment sales were $270,644 for the year ended
December 31, 1998 compared to $498,504 for the year ended December 31,
1997, a decrease of $227,860, or 45.7%. The decrease was due primarily to
our decision to focus on enhanced IP communications services rather than
equipment sales. Equipment sales are not expected to constitute a material
portion of revenues in the future.

    Costs and Operating Expenses

        Cost of revenues. Cost of revenues were $4.5 million for the year
ended December 31, 1998 compared to $0.9 million for the year ended
December 31, 1997. For the year ended December 31, 1998, we recognized a
reduction in cost of revenues of $694,250 as a result of the reimbursement
for certain costs from Ericsson. Excluding this reimbursement, cost of
revenues would have totaled $5.2 million, an increase of $4.3 million, or
477.8%. The increase in cost of revenues (excluding the reimbursement) was
due primarily to the increased costs associated with the significant
increase in carrier transmission services.

        Research and development expenses. Research and development
expenses were $650,140 for the year ended December 31, 1998 compared to
$294,150 for the year ended December 31, 1997. For the year ended December
31, 1998, we recognized reimbursement from Ericsson for expenses we
incurred in research and development of $901,385. Excluding this
reimbursement, research and development expenses would have been $1.6
million, an increase of $1.3 million, or 427.5%. The increase in research
and development expenses (excluding the reimbursement) was due to greater
costs incurred in hiring personnel to develop new services and enhancements
to our existing services.

        Selling and marketing expenses. Selling and marketing expenses were
$2.4 million for the year ended December 31, 1998 compared to $631,970 for
the year ended December 31, 1997, an increase of $1.8 million, or 284.7%.
The increase in selling and marketing expenses was due to the expansion of
our marketing and promotional activities.

        General and administrative expenses. General and administrative
(exclusive of non-cash compensation expense) expenses for the year ended
December 31, 1998 were $1.8 million compared to $1.4 million for the year
ended December 31, 1997, an increase of $454,764, or 32.8%. The increase in
general and administrative expenses was primarily due to additional
personnel and increased occupancy costs.

        Non-cash compensation expense. Non-cash compensation expenses were
$742,780 for the year ended December 31, 1998 compared to zero for the year
ended December 31, 1997. The increase in non-cash compensation expense was
due to the recognition of compensation expense for grants of employee stock
units.

        Depreciation and amortization of goodwill. Depreciation and
amortization of goodwill was $2.7 million for the year ended December 31,
1998 compared to $370,249 for the year ended December 31, 1997, an increase
of $2.3 million, or 621.2%. The increase in amortization of goodwill is due
to an increase in goodwill which grew significantly during 1998 as a result
of RSL COM acquiring the remaining outstanding shares of our company.

    Loss from Operations

        Loss from operations was $7.2 million for the year ended December
31, 1998 compared to $2.3 million for the year ended December 31, 1997, an
increase of $4.9 million, or 207.2%. The increase in loss from operations
was due primarily to the increase in costs and operating expenses and to a
decrease in prices we charged for carrier transmission services.

    Interest Expense, Net

        Interest expense, net was $186,295 for the year ended December 31,
1998 compared to $37,232 for the year ended December 31, 1997, an increase
of $149,063, or 400.4%. The increase in interest expense was due to
increased borrowings from RSL COM to support our working capital and
capital expenditure requirements.

    Net Loss

        Net loss was $7.1 million for the year ended December 31, 1998
compared to $2.4 million for the year ended December 31, 1997, an increase
of $4.7 million, or 200.8%. The increase in net loss was due to the
foregoing factors.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception in June 1996, we have incurred significant operating
and net losses due in large part to the start- up and development of our
operations. As of December 31, 1999, we had an accumulated deficit of
approximately $43.4 million. We anticipate that we will continue to incur
operating and net losses as we implement our growth strategy.

        From our inception, we funded losses and capital expenditures from
cash provided from financing activities, primarily the net proceeds of the
private placement of:

        o  capital stock sold to RSL COM for an aggregate amount of
           approximately $5.0 million in July 1997

        o  capital stock and units of convertible notes and warrants to
           purchase our capital stock sold to unrelated third parties for
           an aggregate amount of approximately $0.6 million from July 1997
           to April 1998

        o  capital stock sold to CNET for an aggregate amount of
           approximately $11.0 million in October 1999

        In July 1997, RSL COM acquired a 51% interest in our company for
approximately $5.0 million. Between July 1997 and April 1998, RSL COM
acquired all of the remaining shares of our outstanding capital stock from
our shareholders for approximately $14.7 million. In April 1998, our
company was merged into a wholly-owned subsidiary of RSL COM. Since RSL
COM's acquisition of a controlling interest in us in July 1997, RSL COM has
funded our cash requirements, which we have accounted for as inter-company
loans bearing interest at the rate of 14% per annum, due on demand after
June 30, 2000. Upon completion of an initial public offering by us, the
maturity dates will be extended to the first anniversary of the completion
of such offering. As of December 31, 1999, we owed approximately $14.8
million (principal and accrued interest) to RSL COM.

        Prior to the closing of our initial public offering, RSL COM made
available to us a $10 million line of credit (exclusive of the existing
$14.8 million owed to RSL COM as of December 31, 1999), due on demand after
November 1, 2000 and bearing interest at the rate of 14% per annum, which
will be available to fund our operating expenses. To date, we have not
drawn on the RSL COM line of credit. We are not subject to any negative or
financial covenants under either the RSL COM inter-company loans or line of
credit. Although we are neither the debtor nor the guarantor under any of
the indentures that govern a substantial amount of RSL COM's debt, we are
subject to financial restrictions by reason of our status as a restricted
subsidiary of RSL COM under such indentures. Such restrictions
significantly limit and could prohibit the ability of RSL COM and its
restricted subsidiaries, including our company, to incur additional
indebtedness or to create liens on their assets. The limitations on
indebtedness under the indentures generally are based on the application of
tests derived from RSL COM's consolidated financial statements.
Effectively, our ability to incur indebtedness is limited by the amount of
indebtedness that RSL COM and its restricted subsidiaries, including our
company, are permitted to incur under the indentures. The limitations under
RSL COM's restrictive indenture covenants currently prohibit us from
incurring any significant amount of additional debt. We have further agreed
with RSL COM that we will not incur any debt other than inter-company debt
without its written consent so long as we are a restricted subsidiary.

        In 1998 and 1999, we incurred approximately $6.0 million and $2.8
million, respectively, in capital expenditures, including purchases of
network components, the expansion of our network and computer hardware and
software costs. We expect to incur approximately $10.0 million in
additional capital expenditures through the end of 2000.

        As of December 31, 1999, we had approximately $90.0 million in cash
and cash equivalents. Principal uses of cash have been to fund operating
losses, working capital requirements and capital expenditures. We have had
significant negative cash flows from operating activities for each annual
and quarterly period to date.

        Net cash used in operating activities was $1.6 million for the year
ended December 31, 1997, $3.8 million for the year ended December 31, 1998
and $9.8 million for the year ended December 31, 1999. Net cash used in
operating activities in these periods consisted mostly of net operating
losses partially offset by increases in trade payables and deferred
revenues.

        Net cash used in investing activities was $949,137 for the year
ended December 31, 1997, $3.1 million for the year ended December 31, 1998
and $3.5 million for the year ended December 31, 1999. Net cash used in
investing activities in these periods consisted mostly of capital
expenditures for the purchase of computer software and network equipment.

        Net cash provided by financing activities was $5.6 million for the
year ended December 31, 1997, $5.0 million for the year ended December 31,
1998 and $101.9 million for the year ended December 31, 1999. Cash provided
by financing activities from June 1996 to December 31, 1997 consisted
primarily of proceeds from sales of capital stock and the issuance of
convertible notes and warrants to purchase capital stock, which was
partially offset by repayment of shareholder loans, short-term bank loans
and loans from RSL COM. For the year ended December 31, 1998 and the eleven
months ended November 30, 1999, cash provided by financing activities
consisted of borrowings from RSL COM. We received net proceeds of
approximately $96,255,000 upon the completion of our initial public
offering on November 29, 1999.

        We believe that our available cash and cash equivalents, will be
sufficient to meet our working capital requirements, including operating
losses, and capital expenditure requirements for at least the next 18
months, assuming our business plan is implemented successfully. Thereafter,
we will be required to raise additional funds. Additional financing may not
be available when needed or, if available, such financing may not be on
terms favorable to us. If additional funds are raised through the issuance
of equity securities, our existing stockholders may experience significant
dilution. In addition, the indentures governing outstanding indebtedness of
RSL COM restrict our ability to incur indebtedness. We also have agreed
with RSL COM not to incur any debt (other than inter-company debt) without
its written consent so long as we are a restricted subsidiary of RSL COM.
Those limitations may require us to resort to other sources of funding,
such as the issuance of equity, we may need to rely upon RSL COM to provide
any additional capital to meet our working capital and capital expenditure
requirements, and we cannot assure you that RSL COM or any other third
party will be willing or able to provide additional capital on favorable
terms or at all.

YEAR 2000 SOFTWARE COMPLIANCE

        We have not experienced any significant problems associated with
year 2000 issues to date. Similarly, to our knowledge, our distributors,
suppliers and other third parties with whom we conduct business have not
experienced material year 2000 problems to date.

RISK FACTORS

        In addition to the other information in this report, the following
factors should be carefully considered in evaluating our business and
prospects.

RISKS RELATED TO OUR COMPANY

WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE OUR LOSSES WILL CONTINUE

        We have incurred significant losses since inception, and we expect
to continue to incur significant losses for the foreseeable future. We
reported a net loss of approximately $33.8 million in 1999, and a net loss
of approximately $7.1 million in 1998. As of December 31, 1999, our
accumulated deficit was approximately $43.4 million. As a percentage of
revenues, our net loss was 305.6% in 1999 and 126.3% in 1998. Our revenues
may not continue to grow or even continue at their current level. In
addition, we expect our operating expenses to increase significantly as we
develop and expand our business. For example, we intend to spend
approximately $20 million on marketing and promotional programs in 2000
compared to $7.4 million in 1999 and $2.4 million in 1998. As a result, we
will need to increase our revenues significantly to become profitable. In
order to increase our revenues, we need to attract users to increase the
fees we collect for our services. If our revenues do not increase as much
as we expect or if our expenses increase at a greater pace than revenues,
we may never be profitable or, if we become profitable, we may not be able
to sustain or increase profitability on a quarterly or annual basis.

WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE US

        We have only a limited operating history upon which you can
evaluate our business and prospects. We commenced operations in June 1996.
You should consider our prospects in light of the risks, expenses and
difficulties we may encounter as an early stage company in the new and
rapidly evolving market for IP communications services. These risks include
our ability:

        o  to increase awareness of our brand, increase the number of users
           of our IP telephony services and build user loyalty

        o  to increase revenues to cover the increased marketing
           expenditures we have planned

        o  to compete effectively

        o  to develop new products and keep pace with developing technology

        In addition, because we expect an increasing percentage of our
revenues to be derived from our enhanced IP communications services, our
past operating results may not be indicative of our future results.

WE MAY NOT BE ABLE TO EXPAND OUR REVENUE AND ACHIEVE PROFITABILITY

        Our business strategy is to expand our revenue sources to enhanced
IP communications services and advertising on the Internet. We can neither
assure you that we will be able to do this or that this strategy will be
profitable. Currently our revenues are primarily generated from carrier
transmission services for RSL COM and other communications carriers.
Carrier transmission services generated 59.8% of our total revenues in 1999
and 74.7% in 1998. Enhanced IP communications services generated 18.0% of
our total revenues in 1999 and 20.5% in 1998. The provision of carrier
transmission services and enhanced IP communications services have not been
profitable to date.

        In the future, we intend to generate increased revenues from
multiple sources, many of which are unproven, including the commercial sale
of enhanced IP communications services and advertising on the Internet. To
date, we have recorded no revenue from advertising. We expect that our
revenues for the foreseeable future will be dependent on, among other
factors:

       o   sale of enhanced IP communications services

       o   acceptance and use of Internet communications

       o   continued rapid growth of the Internet consumer market

       o   expansion of service offerings

       o   user traffic levels

       o   the effect of competition, regulatory environment, international
           long distance rates and access and
           transmission costs on our prices

       o   sale of carrier transmission services

       o   continued improvement of our global network quality

       o   sale of Internet advertising

We may not be able to sustain our current revenues or successfully generate
additional revenues from the sale of carrier transmission services,
enhanced IP communications services and advertising on the Internet in the
future.

WE CANNOT ASSURE YOU THAT A MARKET FOR OUR SERVICES WILL DEVELOP

        We are uncertain whether a market will develop for our enhanced IP
communications services. Our market is new and rapidly evolving. Our
ability to sell our services to end users may be inhibited by, among other
factors, the reluctance of some end users to switch from traditional
communications carriers to IP communications carriers and by concerns with
the quality of Internet and IP telephony and adequacy of security in the
exchange of information over the Internet. End users in markets serviced by
recently deregulated telecommunications providers are not familiar with
obtaining services from competitors of these providers and may be reluctant
to use new providers, such as our company. Our ability to increase revenues
from enhanced IP communications services depends on the migration of
traditional telephone network traffic to our IP network. We will need to
devote substantial resources to educate end users about the benefits of IP
communications solutions in general and our services in particular, and as
a result, we intend to spend approximately $20 million in 2000 for
marketing and promotional activities. If end users do not accept our
enhanced IP communications services as a means of sending and receiving
communications we will not be able to increase our number of paid users or
successfully generate revenues in the future.

OUR FUTURE SUCCESS DEPENDS ON THE GROWTH IN THE USE OF THE INTERNET AS A MEANS
OF COMMUNICATIONS

        If the market for IP communications, in general, and our services
in particular, does not grow at the rate we anticipate, we will not be able
to increase our number of users or generate revenues from our enhanced IP
communications services or from advertising on the Internet at the rate we
anticipate. We currently rely on revenues generated primarily from the sale
of carrier transmission services but expect in the future to increasingly
rely on revenues generated from enhanced IP communications services and
from advertising on the Internet. To be successful, IP communications
requires validation as an effective, quality means of communication and as
a viable alternative to traditional telephone service. As is typical in the
case of a new and rapidly evolving industry, demand and market acceptance
for recently introduced services are subject to a high level of
uncertainty. The Internet may not prove to be a viable alternative to
traditional telephone service for reasons including:

       o   inconsistent quality or speed of service

       o   traffic congestion on the Internet

       o   potentially inadequate development of the necessary infrastructure

       o   lack of acceptable security technologies

       o   lack of timely development and commercialization of performance
           improvements

       o   unavailability of cost-effective, high-speed access to the
           Internet

        If Internet usage grows, the Internet infrastructure may not be
able to support the demands placed on it by such growth, or its performance
or reliability may decline. In addition, Web sites may from time to time
experience interruptions in their service as a result of outages and other
delays occurring throughout the Internet network infrastructure. If these
outages or delays frequently occur in the future, Internet usage, as well
as usage of our communications portal and our services, could be adversely
affected.

IF WE DO NOT DEVELOP THE DELTATHREE.COM BRAND, WE MAY NOT BE ABLE TO MAINTAIN
A LEADING POSITION IN OUR INDUSTRY

        We may not be able to become the leader in our industry. To become
the leader, we must strengthen the brand awareness of the deltathree.com
brand. If we fail to create and maintain brand awareness, it could
adversely affect our ability to attract sufficient Web traffic and reduce
our attractiveness to advertisers. Brand recognition may become more
important in the future with the growing number of Internet sites and IP
communications providers.

IF WE FAIL TO ESTABLISH MARKETING RELATIONSHIPS THAT PROVIDE US VISIBILITY,
WE MAY NOT BE ABLE TO SUFFICIENTLY INCREASE OUR SALES

        We believe that our success depends, in part, on our ability to
develop and maintain marketing and promotional relationships with Internet
companies and communications equipment and software companies that
themselves have strong brand names or high traffic volumes. If we are
unable to establish and maintain these relationships, we may not be able to
increase sales of our services, and we may lose users.

WE WILL NEED ADDITIONAL CAPITAL TO FINANCE OUR OPERATIONS IN THE FUTURE AND
MAY HAVE TO REQUEST IT FROM RSL COM WHO HAS NO OBLIGATION TO PROVIDE IT

        We intend to continue to enhance and expand our network in order to
maintain our competitive position and meet the increasing demands for
service quality, capacity and competitive pricing. Also, the introduction
of our new enhanced IP communications services will require significant
marketing and promotional expenses that we often incur before we begin to
receive the related revenue. If our cash flow from operations is not
sufficient to meet our capital expenditure and working capital
requirements, we will need to raise additional capital from other sources.
Although we are neither the debtor nor the guarantor under any of the
indentures that govern a substantial amount of RSL COM's debt, we are a
"restricted subsidiary" under these indentures and will continue to be one
after the completion of the offering. The limitations under RSL COM's
restrictive indenture covenants prohibit RSL COM and its restricted
subsidiaries, including us, from incurring any significant amount of
additional debt. We have agreed with RSL COM not to take any action which
would cause RSL COM to default under its indentures and not to incur any
debt, other than inter-company debt, without its written consent so long as
we are a restricted subsidiary of RSL COM. These limitations may require us
to resort to other sources of funding, such as the issuance of equity. If
we issue additional equity, investors could experience dilution. If we are
unable to raise additional capital through the issuance of equity, we may
need to rely upon RSL COM to provide any additional capital to meet our
working capital and capital expenditure requirements and we cannot assure
you that RSL COM or any other third party will be willing or able to
provide additional capital on favorable terms. If we are unable to obtain
additional capital, we may be required to reduce the scope of our business
or our anticipated growth, which would reduce our revenues.

WE MAY BE UNABLE TO MANAGE OUR EXPANSION AND ANTICIPATED GROWTH EFFECTIVELY

We have grown and expect to continue to grow rapidly. This growth has
placed, and is likely to continue to place, a significant strain on our
managerial, operational and financial resources. To manage our growth, we
must continue to implement and improve our operational and financial
systems, as well as our managerial controls and procedures. We cannot
assure you that we have made adequate allowances for the costs and risks
associated with this expansion, that our systems, procedures or controls
will be adequate to support our operations or that our management will be
able to successfully offer and expand our services. If we are unable to
effectively manage our expanding operations, our revenues may not increase,
our cost of operations may rise and we may not be profitable.

POTENTIAL FLUCTUATIONS IN OUR QUARTERLY FINANCIAL RESULTS MAKE IT DIFFICULT
FOR INVESTORS TO PREDICT OUR FUTURE PERFORMANCE

Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside our control.
The factors generally within our control include:

       o   the rate at which we are able to attract users to purchase our
           enhanced IP communications services

       o   the amount and timing of expenses to enhance marketing and
           promotion efforts and to expand our infrastructure

       o   the timing of announcements or introductions of new or enhanced
           services by us

        The factors outside our control include:

       o   the timing of announcements or introductions of new or enhanced
           services by our competitors

       o   technical difficulties or network interruptions in the Internet
           or our privately managed network

       o   general economic and competitive conditions specific to our
           industry

        The foregoing factors also may create other risks affecting our
long-term success, as discussed in the other risk factors.

        We believe that quarter-to-quarter comparisons of our historical
operating results may not be a good indication of our future performance,
nor would our operating results for any particular quarter be indicative of
our future operating results.

OUR NETWORK MAY NOT BE ABLE TO ACCOMMODATE OUR CAPACITY NEEDS

        We expect the volume of traffic we carry over our network to
increase significantly as we expand our operations and service offerings.
Our network may not be able to accommodate this additional volume. In order
to ensure that we are able to handle additional traffic, we may have to
enter into long-term agreements for leased capacity. To the extent that we
overestimate our capacity needs, we may be obligated to pay for more
transmission capacity than we actually use, resulting in costs without
corresponding revenues. Conversely, if we underestimate our capacity needs,
we may be required to obtain additional transmission capacity from more
expensive sources. If we are unable to maintain sufficient capacity to meet
the needs of our users, our reputation could be damaged and we could lose
users.

WE FACE A RISK OF FAILURE OF COMPUTER AND COMMUNICATIONS SYSTEMS USED IN
OUR BUSINESS

        Our business depends on the efficient and uninterrupted operation
of our computer and communications systems as well as those that connect to
our network. We maintain communications systems in five facilities in New
York, Los Angeles, London, Frankfurt and Jerusalem. Our systems and those
that connect to our network are subject to disruption from natural
disasters or other sources of power loss, communications failure, hardware
or software malfunction, network failures and other events both within and
beyond our control. In December 1998, we experienced a system disruption
while we were installing a new billing system and users were unable to
access our Web site for six hours. In July 1999, we experienced a system
disruption with respect to our unified messaging service, D3 Box, while the
product was being market tested. For a period of three days the system was
down and users were unable to send or retrieve new messages. Any system
interruptions that cause our services to be unavailable, including
significant or lengthy telephone network failures or difficulties for users
in communicating through our network or portal, could damage our reputation
and result in a loss of users.

OUR COMPUTER SYSTEMS AND OPERATIONS MAY BE VULNERABLE TO SECURITY BREACHES

        Our computer infrastructure is potentially vulnerable to physical
or electronic computer viruses, break-ins and similar disruptive problems
and security breaches which could cause interruptions, delays or loss of
services to our users. We believe that the secure transmission of
confidential information over the Internet, such as credit card numbers, is
essential in maintaining user confidence in our services. We rely on
licensed encryption and authentication technology to effect secure
transmission of confidential information, including credit card numbers. It
is possible that advances in computer capabilities, new technologies or
other developments could result in a compromise or breach of the technology
we use to protect user transaction data. A party that is able to circumvent
our security systems could misappropriate proprietary information or cause
interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible
liability. Although we have experienced no security breaches to date of
which we are aware, we cannot guarantee you that our security measures will
prevent security breaches.

THIRD PARTIES MIGHT INFRINGE UPON OUR PROPRIETARY TECHNOLOGY

        We cannot assure you that the steps we have taken to protect our
intellectual property rights will prevent misappropriation of our
proprietary technology. To protect our rights to our intellectual property,
we rely on a combination of trademark and patent law, trade secret
protection, confidentiality agreements and other contractual arrangements
with our employees, affiliates, strategic partners and others. Although we
do not currently own any issued patents, we have pending applications for
patents in the United States and Israel. We may be unable to detect the
unauthorized use of, or take appropriate steps to enforce, our intellectual
property rights. Effective copyright and trade secret protection may not be
available in every country in which we offer or intend to offer our
services. Failure to adequately protect our intellectual property could
harm our brand, devalue our proprietary content and affect our ability to
compete effectively. Further, defending our intellectual property rights
could result in the expenditure of significant financial and managerial
resources.

OUR SERVICES MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS

        Third parties may assert claims that we have violated a patent or
infringed a copyright, trademark or other proprietary right belonging to
them. We incorporate licensed third-party technology in some of our
services. In these license agreements, the licensors have agreed to
indemnify us with respect to any claim by a third party that the licensed
software infringes any patent or other proprietary right so long as we have
not made changes to the licensed software. We cannot assure you that these
provisions will be adequate to protect us from infringement claims. Any
infringement claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.

        On October 8, 1999, we were named as a defendant in a lawsuit
alleging that we are infringing on a patent by making, using, selling and
offering for sale prepaid telephone card products in the United States. The
plaintiffs are seeking an injunction to stop us from using the technology
covered by this patent, monetary damages in an unspecified amount and
reimbursement of attorneys' fees. We have answered the complaint, and the
parties are currently engaged in pre-trial discovery. As we continue to
evaluate these claims, we believe that we have meritorious defenses to the
claim and we intend to defend the lawsuit vigorously. However, the outcome
of the litigation is inherently unpredictable and an unfavorable result may
have a material adverse effect on our business, financial condition and
results of operations. Regardless of the ultimate outcome, the litigation
could result in substantial expenses to us and significant diversion of
efforts by our managerial and other personnel.

OPERATING INTERNATIONALLY EXPOSES US TO ADDITIONAL AND UNPREDICTABLE RISKS

        We intend to continue to enter additional markets in Eastern
Europe, Africa and Asia and to expand our existing operations outside the
United States. International operations are subject to inherent risks,
including:

       o   potentially weaker protection of intellectual property rights

       o   political instability

       o   unexpected changes in regulations and tariffs

       o   fluctuations in exchange rates

       o   varying tax consequences

       o   uncertain market acceptance and difficulties in marketing
           efforts due to language and cultural differences

WE HAVE EXPERIENCED LOSSES AS A RESULT OF FRAUD

        We have experienced losses due to fraud. In 1999, we experienced
losses from fraud of approximately $25,000. Callers have obtained our
services without rendering payment by unlawfully using our access numbers
and personal identification numbers. Although we have implemented
anti-fraud measures in order to control losses relating to these practices,
these measures may not be sufficient to effectively limit all of our
exposure in the future from fraud and we continue to experience losses from
fraud. While we have established reserves for bad debts in accordance with
historical levels of uncollectible receivables resulting primarily from
these fraudulent practices, our losses may exceed our reserves and could
rise significantly above anticipated levels.

INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE

        Competition in the market for each of enhanced IP communications
services and carrier transmission services is becoming increasingly intense
and is expected to increase significantly in the future. The market for
enhanced internet and IP communications is new and rapidly evolving. We
expect that competition from companies both in the Internet and
telecommunications industries will increase in the future. Our competitors
include both start-up IP telephony service providers and established
traditional communications providers. Many of our existing competitors and
potential competitors have broader portfolios of services, greater
financial, management and operational resources, greater brand-name
recognition, larger subscriber bases and more experience than we have. In
addition, many of our IP telephony competitors use the Internet instead of
a private network to transmit traffic. Operating and capital costs of these
providers may be less than ours, potentially giving them a competitive
advantage over us in terms of pricing.

        We also compete in the growing market of discount
telecommunications services including calling cards, prepaid cards,
call-back services, dial-around or 10-10 calling and collect calling
services. In addition, some Internet service providers have begun to
aggressively enhance their real time interactive communications, focusing
initially on instant messaging, although we expect them to begin to provide
PC-to-phone services. For the carrier transmission services business, we
compete with telecommunications providers, long distance carriers and other
long distance resellers and providers of carrier services. Competition for
carrier traffic is primarily based on price. Decreasing telecommunications
rates have resulted in intense price competition and we expect that
competition will continue to increase significantly as telecommunications
rates decrease. Increased competition could force us to further reduce our
prices and profit margins, and may reduce our market share.

        If we are unable to provide competitive service offerings, we may
lose existing users and be unable to attract additional users. In addition,
many of our competitors, especially traditional carriers, enjoy economies
of scale that result in a lower cost structure for transmission and related
costs, which cause significant pricing pressures within the industry.
Although the minutes of use we sell are increasing, revenues are not
increasing at the same rate due primarily to a decrease in revenue per
minute for our carrier transmission services. In order to remain
competitive we intend to increase our efforts to promote our services, and
we cannot be sure that we will be successful in doing this.

        In addition to these competitive factors, recent and pending
deregulation in some of our markets may encourage new entrants. We cannot
assure you that additional competitors will not enter markets that we plan
to serve or that we will be able to compete effectively.

DECREASING TELECOMMUNICATIONS RATES MAY DIMINISH OR ELIMINATE OUR COMPETITIVE
PRICING ADVANTAGE

        Decreasing telecommunications rates may diminish or eliminate the
competitive pricing advantage of our enhanced IP communications services
and carrier transmission services. International and domestic
telecommunications rates have decreased significantly over the last few
years in most of the markets in which we operate, and we anticipate that
rates will continue to be reduced in all of the markets in which we do
business or expect to do business. Users who select our enhanced IP
communications services to take advantage of the current pricing
differential between traditional telecommunications rates and our rates may
switch to traditional telecommunications carriers as such pricing
differentials diminish or disappear, and we will be unable to use such
pricing differentials to attract new customers in the future. In addition,
our ability to market our carrier transmission services to
telecommunications carriers depends upon the existence of spreads between
the rates offered by us and the rates offered by traditional
telecommunications carriers, as well as a spread between the retail and
wholesale rates charged by the carriers from which we obtain wholesale
service. Continued rate decreases will require us to lower our rates to
remain competitive and will reduce or possibly eliminate our gross profit
from our carrier transmission services. If telecommunications rates
continue to decline, we may lose users for our enhanced IP communications
services and carrier transmission services.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO IP TELEPHONY COULD
HARM OUR BUSINESS

        Traditionally, voice communications services have been provided by
regulated telecommunications common carriers. We offer voice communications
to the public for international and domestic calls using IP telephony, and
we do not operate as a licensed telecommunications common carrier in any
jurisdiction. Based on specific regulatory classifications and recent
regulatory decisions, we believe we qualify for certain exemptions from
telecommunications common carrier regulation in many of our markets.
However, the growth of IP telephony has led to close examination of its
regulatory treatment in many jurisdictions making the legal status of our
services uncertain and subject to change as a result of future regulatory
action, judicial decisions or legislation in any of the jurisdictions in
which we operate. Established regulated telecommunications carriers have
sought and may continue to seek regulatory actions to restrict the ability
of companies such as ours to provide services or to increase the cost of
providing such services. In addition, our services may be subject to
regulation if regulators distinguish phone-to- phone telephony service
using IP technologies over privately-managed networks such as our services
from integrated PC-to-PC and PC-originated voice services over the
Internet. Some regulators may decide to treat the former as regulated
common carrier services and the latter as unregulated enhanced or
information services.

        Application of new regulatory restrictions or requirements to us
could increase our costs of doing business and prevent us from delivering
our services by our current arrangements. In such event, we would consider
a variety of alternative arrangements for providing our services, including
obtaining appropriate regulatory authorizations for our local network
partners or ourselves, changing our service arrangements with RSL COM for a
particular country or limiting our service offerings. Such regulations
could limit our service offerings, raise our costs and restrict our pricing
flexibility, and potentially limit our ability to compete effectively.
Further, regulations and laws which affect the growth of the Internet could
hinder our ability to provide our services over the Internet. For a more
detailed discussion of the regulation of IP telephony, see
"Business--Regulation of IP Telephony."

WE MAY NOT BE ABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE
COMMUNICATIONS INDUSTRY

        Our industry is subject to rapid technological change. We cannot
predict the effect of technological changes on our business. In addition,
widely accepted standards have not yet developed for the technologies we
use. We expect that new services and technologies will emerge in the market
in which we compete. These new services and technologies may be superior to
the services and technologies that we use, or these new services may render
our services and technologies obsolete.

        To be successful, we must adapt to our rapidly changing market by
continually improving and expanding the scope of services we offer and by
developing new services and technologies to meet customer needs. Our
success will depend, in part, on our ability to license leading
technologies and respond to technological advances and emerging industry
standards on a cost-effective and timely basis. We will need to spend
significant amounts of capital to enhance and expand our services to keep
pace with changing technologies.

RISKS RELATED TO OUR RELATIONSHIP WITH RSL COM

WE DEPEND ON SALES TO RSL COM

        We currently depend on sales to RSL COM, our controlling
stockholder, for a substantial majority of our revenues. RSL COM accounted
for 37.6%, 69.1% and 67.2% of our revenues for the years ended December 31,
1997, December 31, 1998 and December 31, 1999, respectively. RSL COM is not
contractually required to purchase services from us, other than a minimum
of 50 million minutes per year pursuant to the services agreement for two
years through November 29, 2001. We cannot assure you that RSL COM will
fulfill its obligations under this agreement or that the contract will be
renewed upon its expiration. RSL COM resells a significant portion of the
carrier transmission services it purchases from us to third parties.
Although we could market our services directly to these third parties if
RSL COM ceased purchasing services from us, we cannot assure you that we
would succeed in attracting these customers or that these customers would
purchase our services in the same volume or on the same terms as from RSL
COM.

WE DEPEND ON THE SERVICES RSL COM PROVIDES TO US

        We are currently dependent upon RSL COM for leased line capacity,
data communications facilities, traffic termination services and physical
space for our equipment. Through our relationship with RSL COM, which owns
or leases substantial bandwidth for its own business, we have access to
bandwidth. We are able to take advantage of RSL COM's volume discounts and
achieve cost efficiencies that we could not achieve on our own. Although we
have entered into a services agreement with RSL COM for it to provide these
services through 2004, if RSL COM becomes unwilling or unable to provide
its current level of services to us during the term of such agreement or
thereafter, we may not be able to find replacement service providers on a
timely basis. If we are required to change providers, we would likely
experience delays, operational difficulties and increased expenses, and our
ability to provide services to our users or expand our operations may be
impaired.

        The inter-company agreements with RSL COM were made in the context
of a parent-subsidiary relationship and were not negotiated on an arms'
length basis. As a result, the terms of such agreement may be better or
worse than the terms that would have been negotiated by unaffiliated third
parties for similar arrangements.

RSL COM WILL CONTROL ALL MATTERS SUBMITTED TO A STOCKHOLDER VOTE

        After completion of our initial public offering, RSL COM owns all
of our Class B common stock and will therefore own approximately 95.5% of
the voting power of our company.

        As long as RSL COM continues to beneficially own shares of capital
stock representing more than 50% of the voting power of our outstanding
capital stock, RSL COM will be able to exercise a controlling influence
over decisions affecting our company, including:

        o  composition of our board of directors and, through it, the
           direction and policies of our company, including the appointment
           and removal of officers

        o  mergers or other business combinations involving our company

        o  acquisitions or dispositions of assets by our company

        o  future issuances of capital stock or other securities by our
           company

        o  incurrence of debt by our company

        o  amendments, waivers and modifications to any agreements between
           us and RSL COM

        o  payment of dividends on our capital stock

        o  approval of our business plans and general business development

In addition, five of our ten directors are officers and/or directors of RSL
COM, or otherwise affiliated with RSL COM. As a result, the ability of any
of our other stockholders to influence the management of our company is
limited, which could have an adverse effect on the market price of our
stock.

WE ARE SUBJECT TO THE COVENANTS OF RSL COM'S INDENTURES WHICH RESTRICT OUR
ABILITY TO CONDUCT OUR BUSINESS

        Although we are neither the debtor nor the guarantor under any of
the indentures that govern a substantial amount of RSL COM's debt, we are
subject to covenants by reason of our status as a restricted subsidiary of
RSL COM under such indentures. As of March 1, 2000, RSL COM had
approximately $1.4 billion of debt outstanding under these indentures. This
debt is unsecured. These restrictions significantly limit the ability of
RSL COM and its restricted subsidiaries, including our company, to incur
additional indebtedness or create liens on their assets. The limitations on
indebtedness under the indentures generally are based on the application of
tests derived from RSL COM's consolidated financial statements.
Effectively, our ability to incur indebtedness is limited by the amount of
indebtedness that RSL COM and its restricted subsidiaries, including our
company, are permitted to incur under the indentures. The limitations under
RSL COM's restrictive indenture covenants currently prohibit us from
incurring any significant amount of additional debt. We have also agreed
with RSL COM not to take any action which would cause RSL COM to default
under its indentures and not to incur any debt, other than inter-company
debt, without its written consent so long as we are a restricted subsidiary
of RSL COM. In addition, currently the restrictions under the RSL COM
indentures effectively prohibit us from paying dividends and limit our
ability to make other distributions in respect of our capital stock, sell
assets, engage in mergers or acquisitions or make some types of
investments. Such restrictions also limit the ability of a third party to
acquire a controlling interest in our company. These restrictions may
prohibit transactions that would otherwise be beneficial to our company.

THE INTERESTS OF RSL COM MAY CONFLICT WITH OUR INTERESTS

        The interests of RSL COM, our controlling stockholder and principal
customer, may conflict with our interests.

        Services. We have entered into a services agreement with RSL COM
for the provision of traffic termination services, colocation rights and
other network support services. We provide carrier transmission services to
RSL COM. Because of these transactions and RSL COM's controlling position
in our company, conflicts of interest could arise relating to the nature,
quality and pricing of services or products provided by us to RSL COM or by
RSL COM to us.

        Financial Support. Historically, RSL COM has funded our working
capital and operating losses. As a result, we owe RSL COM $14.8 million, as
of December 31, 1999. Also, to the extent that we require additional
working capital we may need to turn to RSL COM. Because of RSL COM's
control over us, conflicts of interest could arise relating to the
prepayment of borrowings, the provision of additional funding and the terms
of such funding and general issues relating to the uses and sources of our
funds.

        Board Conflicts. Five of our ten directors are officers and/or
directors of RSL COM, or otherwise affiliated with RSL COM. Our directors
who are also directors or officers of RSL COM will have fiduciary duties,
including duties of loyalty, to both companies and may have conflicts of
interest with respect to matters potentially involving or affecting us,
such as acquisitions, financings or other corporate opportunities that may
be suitable for both us and RSL COM. Some of these individuals and a number
of our executive officers own substantial amounts of RSL COM capital stock
and/or options for shares of RSL COM capital stock. Although we believe
that these directors and officers will be able to fulfill their fiduciary
duties to our stockholders despite their positions with RSL COM and their
ownership of RSL COM capital stock and options, there could be potential
conflicts of interest when these directors and officers are faced with
decisions that could have different implications for our company and RSL
COM. There are no specific policies in place with respect to any conflicts
that may arise. We expect conflicts to be resolved on a case-by- case
basis, and in a manner consistent with applicable law. For example, if a
business opportunity were presented to both us and RSL COM for
consideration, directors affiliated with RSL COM would not participate in
our consideration of that opportunity. However, conflicts could be resolved
in a manner adverse to us which could harm our business.

RSL COM MAY COMPETE WITH OUR COMPANY

        RSL COM is in the communications business and may compete with us
under some circumstances. Under the services agreement between us and RSL
COM, RSL COM is prohibited from competing with us in providing Internet
telephony services as described in the services agreement, provided that we
provide RSL COM with any requested Internet telephony services promptly and
with quality assurance. However, this non-competition provision terminates
on September 3, 2001 and the scope of such provision is subject to the
following limitations:

        o  RSL COM and its subsidiaries may acquire up to 20% in an entity
           providing Internet telephony services

        o  RSL COM and its subsidiaries may be stockholders in entities
           providing Internet telephony services,

        o  the non-competition provision does not apply to RSL COM's
           subsidiaries that become publicly traded companies

        o  Internet telephony services under the non-competition provision
           are limited to (1) phone to phone services marketed as IP to the
           general public, including both individuals and businesses and
           (2) the following Web-based enhanced communication services:
           PC-to-phone, D3 box, Click IT, Global Roaming, IP-initiated
           conference calls, Phone-to-PC, D3 Fax, information services and
           white boarding

RSL COM'S CLASS B COMMON STOCK MAY BE TRANSFERRED TO A THIRD PARTY THAT WOULD
EFFECTIVELY CONTROL US

        Although our Class B common stock generally converts to common
stock automatically upon transfer, RSL COM may transfer our Class B common
stock to permitted transferees, including entities controlled by RSL COM or
its principal stockholder, Ronald S. Lauder, and successors in interest of
RSL COM. As a result, a third party could acquire our Class B common stock
and may become party to our intercompany agreements. We cannot assume that
a third party would maintain good relations with us or maintain or renew
our agreements with RSL COM.

RISKS RELATED TO OUR STOCK

A THIRD PARTY MAY BE DETERRED FROM ACQUIRING OUR COMPANY

        The disproportionate voting rights of our Class B common stock
relative to our common stock could delay, deter or prevent a third party
from attempting to acquire control of us. This provision may have the
effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain control of our company, even though such a
change in ownership would be economically beneficial to our company and our
stockholders.

VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR STOCKHOLDERS

        Since trading commenced in November 1999, the market price of our
common stock has been highly volatile and may continue to be volatile and
could be subject to wide fluctuations in response to factors such as:

        o  variations in our actual or anticipated quarterly operating
           results or those of our competitors

        o  announcements by us or our competitors of technological
           innovations

        o  introduction of new products or services by us or our
           competitors

        o  changes in financial estimates by securities analysts

        o  conditions or trends in the Internet industry

        o  changes in the market valuations of other Internet companies

        o  announcements by us or our competitors of significant
           acquisitions

        o  our entry into strategic partnerships or joint ventures

        o  sales of our capital stock by RSL COM

All of these factors are, in whole or part, beyond our control and may
materially adversely affect the market price of our common stock regardless
of our performance.

        Investors may not be able to resell their shares of our common
stock following periods of volatility because of the market's adverse
reaction to such volatility. In addition, the stock market in general, and
the market for Internet-related and technology companies in particular, has
been highly volatile. The trading prices of many Internet-related and
technology companies' stocks have reached historical highs within the last
52 weeks and have reflected relative valuations substantially above
historical levels. During the same period, such companies' stocks have also
been highly volatile and have recorded lows well below such historical
highs. We cannot assure you that our stock will trade at the same levels of
other Internet stocks or that Internet stocks in general will sustain their
current market prices.

WE DO NOT INTEND TO PAY DIVIDENDS

        We have never declared or paid any cash dividends on our common
stock. We intend to retain any future earnings to finance our operations
and to expand our business and, therefore, do not expect to pay any cash
dividends in the foreseeable future. In addition, indentures governing
outstanding indebtedness of RSL COM restrict our ability to declare or pay
cash dividends, and, for the foreseeable future, effectively prohibit such
payments or declarations.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

        The Securities and Exchange Commission's rule related to market
risk disclosure requires that we describe and quantify our potential losses
from market risk sensitive instruments attributable to reasonably possible
market changes. Market risk sensitive instruments include all financial or
commodity instruments and other financial instruments (such as investments
and debt) that are sensitive to future changes in interest rates, currency
exchange rates, commodity prices or other market factors. We believe our
exposure to market risk is immaterial. We currently do not invest in, or
otherwise hold, for trading or other purposes, any financial instruments
subject to market risk.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The Company's Consolidated Financial Statements required by this
item are included in Item 14 of this report.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

        None.


                                  PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

        The following table sets forth certain information concerning our
directors, executive officers and key employees.


NAME                                    AGE   POSITION

Elie C. Wurtman                          30   CO-FOUNDER, CO-CHAIRMAN OF THE
                                                 COMPANY AND CHAIRMAN OF THE
                                                 BOARD OF DIRECTORS

JACOB A. DAVIDSON                        30   CO-FOUNDER AND CO-CHAIRMAN OF
                                                 THE COMPANY

MARK J. HIRSCHHORN                       35   VICE PRESIDENT AND CHIEF
                                                 FINANCIAL OFFICER

NOAM BARDIN                              28   CO-FOUNDER, INTERIM CHIEF
                                                 EXECUTIVE OFFICER, PRESIDENT,
                                                 VICE PRESIDENT OF TECHNOLOGY
                                                 AND CHIEF TECHNOLOGY OFFICER*

SHIMMY ZIMELS                            34   VICE PRESIDENT OF OPERATIONS

DR. BARUCH D. STERMAN                    38   VICE PRESIDENT OF RESEARCH AND
                                                 DEVELOPMENT AND PRODUCT
                                                 INTEGRATION

MARC M. TOBIN                            33   GENERAL COUNSEL

AVERY S. FISCHER                         32   DIRECTOR

ITZHAK FISHER                            43   DIRECTOR

ROBERT R. GRUSKY                         42   DIRECTOR

YADIN KAUFMANN                           40   DIRECTOR

JACOB Z. SCHUSTER                        50   DIRECTOR

DONALD R. SHASSIAN                       44   DIRECTOR

NIR TARLOVSKY                            33   DIRECTOR

OAKLEIGH THORNE                          42   DIRECTOR

--------------------------------------------

*PRIOR TO APRIL 1, 2000, AMOS SELA SERVED AS CHIEF EXECUTIVE OFFICER AND
PRESIDENT.

        ELIE C. WURTMAN co-founded our company and has been a co-chairman
of our company since October 1999 and the chairman of our board of
directors since April 1999. Mr. Wurtman was president and chief executive
officer of our company from November 1996 until March 1999 and acting vice
president of sales and marketing for our company from August 1998 to March
1999. Mr. Wurtman has served as vice president of emerging technologies for
RSL COM from April 1998 to May 1999. In November 1995, Mr. Wurtman
co-founded Ambient Corporation, Inc., a company which develops smartcard
technology, and was a director of Ambient until September 1999. Mr. Wurtman
co-founded Pioneer Management Corporation, a holding company involved in
several high- tech ventures, and was a director from January 1992 to June
1996.

        JACOB A. DAVIDSON co-founded our company and has been a co-chairman
of our company since October 1999. Mr. Davidson is not a director of our
company. From April 1999 to October 1999, Mr. Davidson acted as our
president. From May 1996 to March 1999, Mr. Davidson served as chairman of
the board of our company. Mr. Davidson co-founded Ambient Corporation and
served as its chief executive officer and its chairman from June 1996 until
September 1999. Mr. Davidson co-founded Pioneer Management Corporation and
was the managing director from January 1992 to June 1996.

        MARK J. HIRSCHHORN has been our vice president and chief financial
officer since April 1999. Prior to joining our company, Mr. Hirschhorn
served in various positions at RSL COM, including vice president-finance
from August 1997 to May 1999, global controller from January 1996 to May
1999 and assistant secretary from September 1996 to May 1999. From October
1987 to December 1995, Mr. Hirschhorn was employed at Deloitte & Touche
LLP, most recently as senior manager.

        NOAM BARDIN co-founded our company and has been vice president of
technology and chief technology officer since June 1997. Effective April 1,
2000, Mr. Bardin will serve as president and interim chief executive
officer of our company. Prior to serving as vice president, Mr. Bardin
served as our global network director from November 1996 to May 1997. From
November 1995 to October 1996, Mr. Bardin served as director of operations
for Ambient Corporation. From January 1995 to October 1995, Mr. Bardin
worked for several Israeli high-tech companies in helping to secure
government grants and assistance. Prior to 1995, Mr. Bardin attended Hebrew
University.

        SHIMMY ZIMELS has been our vice president of operations since July
1997. Prior to joining our company, Mr. Zimels was the controller and vice
president of finance of Net Media Ltd., a leading Israeli-based Internet
service provider, from June 1995 to June 1997. From April 1991 to May 1995,
Mr. Zimels was a senior tax auditor for the Income Tax Bureau of the State
of Israel.

        DR. BARUCH D. STERMAN has been our vice president of research and
development and product integration since May 1998. Prior to joining our
company, Dr. Sterman worked as a consultant for Israeli businesses in
database design, billing systems, and automated data flow from August 1996
to May 1998. After receiving a doctorate in Physics in June 1993, Dr.
Sterman founded a start-up company, Gal-Or Lasers, that developed a compact
laser (of his own design) for industrial and medical use.

        MARC M. TOBIN has been our general counsel since August 1998 and
our corporate secretary since September 1999. Prior to joining our company,
Mr. Tobin served as corporate counsel to Slim Fast Foods Company from
October 1991 to July 1998 and assistant corporate secretary from March 1995
to July 1998.

        AVERY S. FISCHER has been a director of our company since September
1999 and was the secretary of our company from July 1997 until September
1999. Mr. Fischer has served as vice president of legal affairs and general
counsel of RSL COM since January 1999 and legal counsel of RSL COM since
January 1997. From 1994 to 1997, he was an associate with the law firm of
Rosenman & Colin LLP, New York, New York with a practice concentrating in
mergers and acquisitions, securities and general corporate counseling. From
1993 to 1994, Mr. Fischer was an associate with the law firm of Shea &
Gould, New York, New York, with a practice concentrating in commercial and
securities litigation.

        ITZHAK FISHER has been a director of our company since July 1997.
Mr. Fisher was a co-founder of RSL COM and has been a director, president
and chief executive officer of RSL COM since its inception in 1994. From
1992 to 1994, Mr. Fisher served as general manager of Clalcom Inc., a
telecommunications company. From 1990 to 1992, Mr. Fisher served as the
special consultant to the president of BEZEQ, the Israel Telecommunication
Corp., Israel's national telecommunications company. Mr. Fisher co-founded,
and was a director, president and chief executive officer of Medic Media,
Inc., a company engaged in the business of renting telephone and television
systems in hospitals throughout Israel.

        ROBERT R. GRUSKY has been a director of our company since the
closing of our initial public offering. Mr. Grusky has been President of
RSL Investments Corporation since April 1998. Mr. Grusky has been a senior
managing member of Hope Capital Partners, L.P., a public equities
investment partnership, and a co-founder and principal of New Mountain
Capital LLC, a private equity fund, since January 2000. From April 1997 to
January 2000, Mr. Grusky was Senior Advisor to Ronald S. Lauder. From 1985
to 1997, Mr. Grusky was at Goldman, Sachs & Co. as a member of its mergers
and acquisitions department and later in its principal investment area. In
1990, Mr. Grusky took a one-year leave of absence during which he was
appointed a White House Fellow by President Bush and served as Assistant to
the then Secretary of Defense Dick Cheney. He is a director of Central
European Media Enterprises, Ltd., ITI Holdings, S.A. and an advisory
director of Tinicum Capital Partners, L.P. He is also a member of the Board
of Trustees of the Hackley School and The Multiple Myeloma Foundation.

        YADIN KAUFMANN has been a director of our company since the closing
of our initial public offering. Mr. Kaufmann is a co-founder of MainXchange
Ltd. and has served as its chairman from February 1997 until the present
and as its chief executive officer from February 1997 until January 1999.
In 1990, Mr. Kaufmann co- founded Veritas Venture Capital Management Ltd.,
a venture fund that invests primarily in early-stage technology companies
in Israel, and has since 1990 been its co-managing director. From 1987
until 1995, he was involved in the management of Athena Venture Partners,
and from 1986 until 1987 he was an associate at the law firm Herzog, Fox &
Ne'eman. Mr. Kaufmann currently serves on the Board of Directors of Carmel
Biosensors Ltd.

        JACOB Z. SCHUSTER has been a director of our company since May
1999. He has been a director, executive vice president and assistant
secretary of RSL COM since 1994. Mr. Schuster served as treasurer of RSL
COM from 1994 through 1998, and was chief financial officer from February
1997 until December 1998. Mr. Schuster has been president and treasurer of
RSL Management Corporation since November 1995 and executive vice president
of RSL Investments Corporation since March 1994. From 1986 to 1992, Mr.
Schuster was a general partner and treasurer of Goldman Sachs.

        DONALD R. SHASSIAN has been a director of our company since May
1999. Mr. Shassian has served as chief operating officer of RSL COM since
August 1999, and he has served as executive vice president, chief financial
officer and treasurer of RSL COM since January 1999. From 1993 through
1998, Mr. Shassian served as senior vice president and chief financial
officer of Southern New England Telecommunications. From 1988 through 1993,
Mr. Shassian served as a partner of Arthur Andersen LLP, providing audit
and business advisory services to companies in the telecommunications
industry. In 1992, Mr. Shassian was named the partner-in-charge of Arthur
Andersen's telecommunications industry practice group for North America.

        NIR TARLOVSKY has been a director of our company since July 1997.
Mr. Tarlovsky has served as the vice president of business development of
RSL COM since April 1995, and was a director of RSL COM from April 1995
until March 1997. Mr. Tarlovsky is also vice president of RSL COM North
America, Inc., a subsidiary of RSL COM. From 1992 to March 1995, Mr.
Tarlovsky served as senior economist of Clalcom. While at Clalcom, he was
responsible for the development of new international telecommunications
ventures. Mr. Tarlovsky is also a director of Telegate, a German operator
services company.

        OAKLEIGH THORNE has been a director of our company since the
closing of our initial public offering. Since October 1996, Mr. Thorne has
served as the chairman and chief executive officer of TBG Information
Investors, LLC, a private equity partnership, and as the co-president of
Blumenstein/Thorne Information Partners I, L.P., a private equity
partnership. He was president and chief executive officer of Commerce
Clearing House, a provider of tax and business law information, software
and services from April 1995 to August 1996, and the executive vice
president of Commerce Clearing House from January 1991 to April 1995. Since
March 1998, Mr. Thorne has been a director of Medscape, a web-based
healthcare company. He also serves as the chairman of the board of SCP
Communications.

BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

        Our certificate of incorporation, as amended and restated, provides
that the number of members of our board of directors shall be not less than
three and not more than thirteen. Our number of directors is currently ten.
At each annual meeting of stockholders, directors will be elected to hold
office for a term of one year and until their respective successors are
elected and qualified. All of the officers identified above serve at the
discretion of our board of directors.

        We have established an executive committee, a compensation
committee and an audit committee to devote attention to specific subjects
and to assist the Board in the discharge of its responsibilities. The
functions of these committees and their current members are set forth
below.

        The Executive Committee is empowered to act on any matter except
those matters specifically reserved to the full Board of Directors by
applicable law. Itzhak Fisher, Donald R. Shassian, Nir Tarlovsky and Elie
C. Wurtman are the current members of the Executive Committee.

        The Compensation Committee is responsible for evaluating our
compensation policies, determining our executive compensation policies and
guidelines and administering our stock option and compensation plans. Yadin
Kaufmann, Jacob Z. Schuster and Oakleigh Thorne are the current members of
the Compensation Committee.

        The Audit Committee recommends to the Board the appointment of the
firm selected to serve as our independent auditors and our subsidiaries and
monitors the performance of such firm; reviews and approves the scope of
the annual audit and evaluates with the independent auditors our annual
audit and annual financial statements; reviews with management the status
of internal accounting controls; evaluates issues having a potential
financial impact on us which may be brought to the Audit Committee's
attention by management, the independent auditors or the Board; and
evaluates our public financial reporting documents. Jacob Z. Schuster,
Donald R. Shassian and Robert R. Grusky are the current members of the
Audit Committee.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

        Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than
10% of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission initial reports of ownership and
reports of changes in beneficial ownership of common stock and other equity
securities of the Company. Directors, officers and greater than 10%
stockholders are required by SEC regulations to furnish the Company with
all Section 16(a) forms they file.

        To the Company's knowledge, based solely upon review of the copies
of such reports furnished to the Company, all of the Company's directors,
officers and greater than 10% stockholders have complied with the
applicable Section 16(a) reporting requirements, except for the Statements
of Beneficial Ownership on Form 3 relating to the beneficial ownership of
shares of common stock by Shimmy Zimels, Jacob A. Davidson, Marc Tobin,
Baruch D. Sterman, Elie C. Wurtman, Noam Bardin, Amos Sela, Mark J.
Hirschhorn, Yadin Kaufmann, Oakleigh Thorne, Avery S. Fischer, Itzhak
Fisher, Robert R. Grusky, Jacob Z. Schuster, Donald R. Shassian, Nir
Tarlovsky, RSL Communications Ltd. and CNET Investment Inc., which were not
filed on a timely basis.

ITEM 11.  EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

        The following table sets forth certain summary information
concerning the compensation paid or awarded to the chief executive officer
of the Company and the four other most highly compensated executive
officers of the Company in 1999 whose total salary and bonus exceeded
$100,000.

<TABLE>
<CAPTION>

                                                             1999 ANNUAL
                                                           COMPENSATION ($)      LONG-TERM      ALL OTHER
                                                         ---------------------
                                                         SALARY ($)   BONUS ($) COMPENSATION  COMPENSATION ($)
                                                         ----------  ---------- ------------  ----------------
<S>                                                        <C>         <C>         <C>           <C>
Amos Sela, president and chief executive officer.......    230,000     115,000       --             --

Mark J.  Hirschhorn, chief financial officer...........    200,000     160,000       --             --

Noam Bardin, chief technology officer..................    170,000     136,000       --             --

Shimmy Zimels, vice president of operatons.............    170,000     136,000       --             --

Elie Wurtman, co-chairman of the company...............    180,000      90,000       --             --
</TABLE>


OPTION GRANTS DURING FISCAL 1999

     The following table sets forth information regarding stock options
granted to the named executive officers during 1999.



<TABLE>
<CAPTION>

                                    INDIVIDUAL GRANTS
                   ---------------------------------------------------
                    SHARES OF   % OF TOTAL  EXERCISE                         POTENTIAL REALIZABLE VALUE AT
                   COMMON STOCK   OPTIONS    PRICE   FAIR MARKET             ASSUMED RATES OF STOCK PRICE
                    UNDERLYING  GRANTED TO    PER     VALUE ON               APPRECIATION FOR OPTION TERM
                     OPTIONS    EMPLOYEES IN SHARE   GRANT DATE EXPIRATION   -----------------------------
NAME               GRANTED (#)  FISCAL YEAR ($/SH)      ($/SH)     DATE         0%         5%        10%
-----              ------------ ----------- -------   --------- --------    ---------  ---------  ---------
<S>                  <C>           <C>       <C>        <C>      <C>      <C>         <C>        <C>
Amos Sela .........  273,332       21.4      5.11       15.00    4/1/06     2,703,253  4,372,357  6,592,975

Mark J.  Hirschhorn  173,938       13.6      5.11       15.00    4/1/06     1,720,246  2,782,401  4,195,517

Noam Bardin .......  173,938       13.6      5.11       15.00    4/1/06     1,720,246  2,782,401  4,195,517

Shimmy Zimels......  173,938       13.6      5.11       15.00    4/1/06     1,720,246  2,782,401  4,195,517

Elie Wurtman.......  165,656       13.0      5.11       15.00    4/1/06     1,638,338  2,649,918  3,995,749
</TABLE>

---------------

* Excludes options issued in exchange for RSL COM restricted units.

OPTION EXERCISES IN FISCAL 1999 AND YEAR-END OPTION VALUES

     The following table sets forth information for the named executive
offices with respect to options held as of December 31, 1999.

<TABLE>
<CAPTION>

                                                                 NUMBER OF
                                                                 SECURITIES         VALUE OF
                                                                 UNDERLYING       UNEXERCISED
                                                                 UNEXERCISED      IN-THE-MONEY
                                                                 OPTIONS AT        OPTIONS AT
                                SHARES                           YEAR END (#)        YEAR-END
                               ACQUIRED            VALUE        EXERCISABLE ($)    EXERCISABLE
NAME                          ON EXERCISE(#)    REALIZABLE      /UNEXERCISABLE    /UNEXERCISABLE
-----                         --------------   -------------    ---------------   --------------
<S>                                      <C>              <C>      <C>             <C>
Amos Sela....................            0                0        0/273,332       0/5,641,572

Mark J.  Hirschhorn..........            0                0        0/173,938       0/3,590,080

Noam Bardin..................      248,483        6,397,443        0/173,938       0/3,590,080

Shimmy Zimels................       86,969        2,239,104        0/173,938       0/3,590,080

Elie Wurtman.................            0                0        0/165,656       0/3,419,140
</TABLE>

COMPENSATION OF DIRECTORS

     We do not pay our directors cash compensation. Directors are
reimbursed for the expenses they incur in attending meetings of the board
or board committees. Each director who was not our employee received
options to purchase 24,848 shares of common stock upon completion of our
initial public offering, with an exercise price equal to the initial public
offering price. Under our 1999 Directors' Plan, each non-employee director
will be eligible to receive on an annual basis options to purchase 10,000
shares of common stock with an exercise price equal to the fair market
value on the date of grant. See "1999 Directors' Plan."

EMPLOYMENT AGREEMENTS

     We have entered into employment agreements with Messrs. Sela,
Hirschhorn, Wurtman, Davidson, Bardin and Zimels, each with the following
principal terms:

     o  The agreement is effective as of April 1, 1999 and will end on
        March 31, 2002.

     o  The employee is entitled to receive a base salary as stated below,
        increased on each January 1, commencing January 1, 2001, by an
        amount equal to his base salary then in effect, multiplied by the
        applicable cost of living index during the prior year. The
        employee's base salary, as adjusted for cost of living increases,
        may be further increased at the option and in the discretion of the
        board of directors.

     o  The employee shall be granted options to purchase shares of our
        common stock as set forth below, under our proposed 1999 Stock
        Incentive Plan, at an exercise price of $5.11 per share. The
        employee's options are exercisable in installments, as long as the
        employee is employed by us on the applicable vesting date, and
        after an option is exercisable, that option remains exercisable
        until the expiration of seven years from the date of the agreement.
        If the employee is terminated for any reason prior to September 30,
        2000, following such date, any unvested options will expire. If the
        employee is terminated for cause, following such date, all options
        will expire. In the case of Messrs. Sela, Hirschhorn, Bardin and
        Zimels, the options are exercisable in three equal installments on
        each of April 1, 2000, 2001 and 2002. In the case of Messrs.
        Wurtman and Davidson, 50% of the options are exercisable on April
        1, 2000 and the remaining options are exercisable in two equal
        installments on each of April 1, 2001 and April 1, 2002.

     o  The employee's options are immediately exercisable in full upon a
        change of control. The employee's options, following any
        termination of the employee's employment, other than for cause,
        remain exercisable for the lesser of two years and the remaining
        term of his options.

     o  If the employee's employment is terminated by us without cause or
        by the employee for good reason, the employee is entitled to
        receive previously earned but unpaid salary, vested benefits and a
        payment equal to his base salary as in effect immediately prior to
        the termination date.

     o  If the employee dies or is unable to perform his duties, he or his
        representative or estate or beneficiary will be paid, in addition
        to any previously earned but unpaid salary and vested benefits, 12
        months' total base salary reduced, in the case of disability, by
        any disability benefits he receives.

     The following table sets forth the position, base salary and number of
shares of common stock represented by the options granted for each of
Messrs. Wurtman, Sela, Davidson, Hirschhorn, Bardin and Zimels, pursuant to
their respective employment agreements:

<TABLE>
<CAPTION>

                                                                                          OPTIONS TO
                                                                                           PURCHASE
                                                                                           SHARES OF
                                            POSITION                      BASE SALARY     COMMON STOCK

<S>                              <C>                                    <C>               <C>
Elie C.  Wurtman ...............  Co-Chairman of the Company and
                                  Chairman of the Board of Directors     $   180,000(1)       165,656

Amos Sela(2) ...................  Chief Executive Officer and President  $   230,000          273,332

Jacob A.  Davidson .............  Co-Chairman of the Company             $   180,000(1)       115,959

Mark J.  Hirschhorn ............  Vice.President and Chief Financial     $   200,000          173,938
                                  Officer

Noam Bardin ....................  Vice President of Technology and       $   170,000          173,938
                                  Chief Technology Officer

Shimmy Zimels ..................  Vice President of Operations           $   170,000          173,938

(1) Messrs. Wurtman and Davidson will devote 50% of their time to us
    beginning on April 1, 2000 and their base salaries will at that time be
    reduced to $90,000 each.

(2) Effective April 1, 2000, we and Mr. Sela have mutually agreed to
    terminate his employment agreement.
</TABLE>

        Following RSL COM's purchase of Mr. Davidson's and Mr. Wurtman's
interests in us in July 1997, they entered into employment agreements with
RSL COM dated July 1997. These agreements terminated at the end of March
1999. They entered into new employment agreements with us as of April 1,
1999.

1999 STOCK INCENTIVE PLAN

        We have a stock incentive plan. The purpose of the plan is to
foster and promote the long-term financial success of our company and
materially increase shareholder value by (a) motivating superior
performance by means of performance-related incentives, (b) encouraging and
providing for the acquisition of an ownership interest in our company by
executive officers, other employees and consultants and (c) enabling us to
attract and retain the services of an outstanding management team upon
whose judgment, interest and effort the successful conduct of our
operations is largely dependent.

        GENERAL. The plan provides for the grant of (i) incentive stock
options and non-incentive stock options to purchase our common stock; (ii)
stock appreciation rights, which may be granted in tandem with or
independently of stock options; (iii) restricted stock and restricted
units; (iv) incentive stock and incentive units; (v) deferred stock units;
and (vi) stock in lieu of cash. We have reserved 4,000,000 shares of our
common stock for issuance upon exercise of awards to be granted under the
plan.

        ADMINISTRATION. The plan will be administered by our compensation
committee or such other committee as designated by our board of directors.
This committee will be made up of at least two directors who are not our
employees and whose membership on the committee (i) does not adversely
impact our ability to deduct compensation payments made under the plan and
(ii) will permit recipients of awards to avail themselves of exemptions
under federal securities laws.

        ELIGIBILITY AND EXTENT OF PARTICIPATION. The plan provides for
discretionary grants of awards to officers of the company within the
meaning of Rule 16a-1(f) of the Exchange Act and to other employees and
consultants of the company. Directors who are non-employees are prohibited
from participating in the plan. The maximum number of shares for which
options or stock appreciation rights may be granted to any one participant
in a calendar year is 600,000 of the shares of common stock available under
the plan.

        STOCK OPTIONS. Under the plan, the committee may grant both
incentive and non-incentive stock options for common stock of the company.
The options generally will have a term of seven years and will become
exercisable in three equal installments commencing on the first anniversary
of the date of grant. The purchase price per share payable upon exercise of
an option will be established by the committee; provided, however, that
such option exercise price may be no less than the fair market value of a
share of our common stock on the date of grant (or 110% of the fair market
value, in the case of incentive stock option grants to persons holding more
than 10% of voting power of all classes of our capital stock). The option
exercise price is payable by one of the following methods or a combination
of methods to the extent permitted by the committee: (i) in cash or its
equivalent, or (ii) subject to the approval of the committee, in shares of
common stock owned by the participant for at least six months prior to the
date of exercise. The committee may provide that a participant who delivers
shares of common stock to exercise an option when the market value of the
common stock exceeds the exercise price of the option will be automatically
granted reload options for the number of shares delivered to exercise the
option. Reload options will be subject to the same terms and conditions as
the related option except that the exercise price will be the fair market
value on the date the reload option is granted and such reload option will
not be exercisable for six months.

        STOCK APPRECIATION RIGHTS. The committee may grant stock
appreciation rights in tandem with or independently of a stock option.
Stock appreciation rights entitle the participant to receive the excess of
the fair market value of a stated number of shares of common stock on the
date of exercise over the base price of the stock appreciation right. The
base price may not be less than 100% of the fair market value of the common
stock on the date the stock appreciation right is granted. The committee
will determine when a stock appreciation right is exercisable, the method
of exercise, and whether settlement of the stock appreciation right is to
be made in cash, shares of common stock or a combination of cash and
shares.

        RESTRICTED STOCK AND RESTRICTED UNITS. The committee may grant
awards in the form of restricted stock and restricted units. For purposes
of the plan, restricted stock is an award of common stock and a restricted
unit is a contractual right to receive common stock (or cash based on the
fair market value of common stock). Such awards are subject to such terms
and conditions, if any, as the committee deems appropriate. Unless
otherwise determined by the committee, participants are entitled to receive
either currently or at a future date, dividends or other distributions paid
with respect to restricted stock and, if and to the extent determined by
the committee, either to be credited with or receive currently an amount
equal to dividends paid with respect to the corresponding number of shares
covered by restricted units. Restricted stock and restricted units become
vested and nonforfeitable and the restricted period shall lapse upon the
third anniversary of the date of grant unless the committee determines
otherwise.

        INCENTIVE STOCK AND INCENTIVE UNITS. The plan allows for the grant
of awards in the form of incentive stock and incentive units. For purposes
of the plan, incentive stock is an award of common stock and an incentive
unit is a contractual right to receive common stock. Such awards will be
contingent upon the attainment, in whole or in part, of certain performance
objectives over a period to be determined by the committee. With regard to
a particular performance period, the committee has the discretion, subject
to the plan's terms, to determine the terms and conditions of such awards,
including the performance objectives to be achieved during such period and
the determination of whether and to what degree such objectives have been
attained. Unless otherwise determined by the committee, participants are
entitled to receive, either currently or at a future date, all dividends
and other distributions paid with respect to the incentive stock and, if
and to the extent determined by the committee, either to be credited with
or receive currently an amount equal to dividends paid with respect to the
corresponding number of shares covered by the incentive units.

        ELECTIVE UNITS. On such date or dates established by the committee
and subject to such terms and conditions as the committee will determine, a
participant may be permitted to defer receipt of all or a portion of his
annual compensation and/or annual incentive bonus ("deferred annual
amount") and receive the equivalent amount in elective stock units based on
the fair market value of the common stock on the date of grant. To the
extent determined by the committee, a participant may also receive
supplemental stock units for a percentage of the deferred annual amount. On
the date of a participant's termination of employment, the participant will
receive a number of shares of common stock equal to the number of elective
units and supplemental units held on that date. Elective units carry no
voting rights until the shares have been issued. The committee will
determine whether any dividend equivalents attributable to elective units
are paid currently or credited to the participant's account and deemed
reinvested in common stock. Elective units and dividend equivalents with
respect to the elective units are fully vested at all times. Unless the
committee provides otherwise, supplemental units and dividend equivalents
with respect to the supplemental units will become fully vested on the
third anniversary of the date the corresponding deferred amount would have
been paid.

        STOCK IN LIEU OF CASH. The plan authorizes the committee to grant
awards of common stock to executive officers in lieu of all or a portion of
an award otherwise payable in cash pursuant to any bonus or incentive
compensation plan of the company, based on the fair market value of the
common stock.

        AMENDMENT AND TERMINATION. No awards may be granted under the plan
after the expiration of ten years from the date of the plan's adoption. The
board of directors or the committee may amend, suspend or terminate the
plan or any portion of it at any time. However, no amendment may be made to
the plan without shareholder approval if such amendment would (1) increase
the number of shares of common stock subject to the plan, (2) change the
price at which options may be granted, or (3) remove the administration of
the plan from the committee.

1999 PERFORMANCE INCENTIVE PLAN

        We have a performance incentive plan. The purpose of the plan is to
assist the company and its subsidiaries to attract, retain, motivate and
reward the best qualified executive officers and key employees by providing
them with the opportunity to earn competitive compensation directly linked
to our performance.

        GENERAL. Under the plan, bonuses are payable if we meet any one or
more of several performance criteria, which are to be set annually by the
committee, after receipt of the proposed annual budget for the coming year
from management. It is expected that proposed performance criteria for the
coming year will be presented by management in the fourth quarter of the
current year and approved not later than March 31 of the next year. It is
expected that the period over which performance is to be measured will be
one year.

        The committee shall determine whether bonuses payable under the
plan will be paid in cash, shares of common stock or in any combination
thereof, provided that not less than 50% of any bonus shall be in cash. No
more than 400,000 shares common stock may be issued under the plan.

        ADMINISTRATION. The plan will be administered by our compensation
committee or such other committee as designated by our board of directors.
This committee will be made up of directors who are not our employees and
whose membership on the committee (i) does not adversely impact our ability
to deduct compensation payments made under the plan and (ii) will permit
recipients of awards to avail themselves of exemptions under federal
securities laws. The committee will establish the performance targets and
certify whether such performance targets have been achieved.

        BONUS. Bonus amounts are determined as follows: if 100% of the
pre-established targets are achieved, participants will generally be
eligible to receive a bonus equal to their base salary for such year. If
120% of such targets are achieved, the bonus potentially payable to
participants will generally equal twice their base salary for such year
and, if 80% of such targets are achieved, the bonus potentially payable to
participants will generally equal 25% of their base salary for such year.
To the extent our results exceed 80% of the targets but is less than 120%
of the targets, the amount of the bonus payable to participants will be
adjusted proportionately based on where such results fall within the ranges
set forth above.

        Once eligibility has been determined, a bonus, if applicable, will
consist of two components. Fifty percent of the amount determined pursuant
to the formula described above will be payable if the targets are achieved.
Up to an additional 50% of such amount will be payable in the discretion of
the committee. In addition, the plan permits the committee to grant
discretionary bonuses to participants, notwithstanding that a bonus would
not otherwise be payable under the plan, to recognize extraordinary
individual performance.

        ELIGIBILITY. Each executive officer of the company and each key
employee who is recommended by the chief executive officer and selected by
the committee and approved by the board of directors is eligible to receive
a bonus under the plan.

        OTHER TERMS. No plan participant may receive a bonus with respect
to any plan year in excess of $1,000,000. The committee may impose
conditions with respect to an award of common stock, including conditioning
the vesting of shares on the performance of additional service. The
committee may permit a participant to receive all or a portion of his bonus
payable in common stock. If a participant's employment terminates prior to
the completion of performance period, the committee shall determine whether
a prorated bonus may be paid to such a participant. In addition, the plan
permits a participant to elect to defer payment of his or her bonus on
terms and conditions established by the committee.

        AMENDMENT AND TERMINATION. Either the board of directors or the
committee may amend, suspend, discontinue or terminate the plan, provided
that, unless the board determines otherwise, any amendment or termination
of the plan that requires stockholder approval will not be effective until
stockholder approval is obtained.

1999 EMPLOYEE STOCK PURCHASE PLAN

        We have an employee stock purchase plan. The purpose of the
employee stock purchase plan is to align employee and shareholder long-term
interests by facilitating the purchase of common stock by employees and to
enable employees to develop and maintain significant ownership of common
stock.

        GENERAL. The employee stock purchase plan is intended to comply
with the requirements of Section 423 of the Internal Revenue Code, and to
assure the participants of the tax advantages provided thereby. The number
of shares of our common stock available for issuance under the employee
stock purchase plan is limited to 1,350,000 shares of common stock.

        ADMINISTRATION. The employee stock purchase plan will be
administered by a committee established by the board of directors. The
committee may make such rules and regulations and establish such procedures
for the administration of the employee stock purchase plan as it deems
appropriate.

        ELIGIBILITY. All employees of the company and its designated
subsidiaries who have at least one year of service and work more than 20
hours per week and five months in a calendar year will be eligible to
participate in the employee stock purchase plan, except that employees who
are "highly compensated" within the meaning of Section 414(q) of the Code
and employees who are five percent or more stockholders of the company or
any parent or subsidiary of the company will not be eligible to
participate.

        GRANTS. Pursuant to the employee stock purchase plan, each eligible
employee will be permitted to purchase shares of common stock up to two
times per calendar year through regular payroll deductions in an aggregate
amount equal to 1% to 10% of the employee's base pay, as elected by the
employee, for each payroll period. Under the employee stock purchase plan,
a participant's right to purchase shares of common stock may not accrue at
a rate that exceeds $25,000 of fair market value of common stock during any
calendar year.

        OFFERING PERIOD; PURCHASE PERIOD. The initial offering period will
commence on the first trading day on or after the effective date of the
employee stock purchase plan and end on the last trading day on or prior to
the second anniversary of the commencement date. Each subsequent offering
period will have a duration of approximately one year, commencing on the
first trading day and ending on the last trading day of each calendar year
(commencing with calendar year 2001). Each "purchase period" will have a
duration of approximately six months.

        EXERCISE PRICE. As of the last day of each "purchase period" ending
within an "offering period," participating employees will be able to
purchase shares of common stock with payroll deductions for a purchase
price equal to the lesser of:

       o   85% of the fair market value of common stock on the date the
           offering period begins and

       o   85% of the fair market value of common stock on the last day of
           the purchase period.

        A right to purchase shares which is granted to a participant under
the employee stock purchase plan is not transferable otherwise than by will
or the laws of descent and distribution.

1999 DIRECTORS' PLAN

        We have a directors' stock compensation plan. The purposes of the
directors' plan are to enable us to attract, maintain and motivate
qualified directors and to enhance a long-term mutuality of interest
between our directors and shareholders of our common stock by granting our
directors options to purchase our shares.

        Under the directors' plan, on the first business day following each
annual meeting of our shareholders during the term of the directors' plan,
each director who is not an employee of our company will be granted options
to acquire 10,000 shares of our common stock with an exercise price per
share equal to the fair market value of a share of our common stock on the
date of grant. These options will have a seven-year term and will become
exercisable on the first anniversary of the date of grant. In addition,
each director who is not an employee of our company on the date of the
completion of this offering will be granted options to acquire 24,848
shares of our common stock with an exercise price per share equal to the
initial public offering price. Each individual who becomes a director and
is not an employee of our company following completion of this offering
will be granted options to acquire 24,848 shares of common stock with an
exercise price per share equal to the fair market value on the date of
grant. These options will have a seven-year term and will be immediately
exercisable, but if exercised, subject to the 180-day lock-up to be imposed
on our officers and directors. The maximum number of shares that may be
issued under the directors' plan is 600,000. The plan will terminate
December 31, 2009, unless sooner terminated by our stockholders.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

        Executive compensation decisions in 1999 were made by RSL COM's
compensation committee, in the case of Mr. Wurtman and Mr. Davidson, and by
Mr. Wurtman and Mr. Davidson, with our board's approval, in the case of Mr.
Bardin. Following the closing of our initial public offering, our
compensation committee will make all compensation decisions regarding our
executive officers. In 1999 no interlocking relationship existed between
our board of directors and the board of directors or compensation committee
of any other company, except that Messrs. Wurtman and Davidson were
directors of Ambient, the board of which makes all compensation decisions
for Ambient. Mr. Davidson was also Ambient's chief executive officer. See
"Related Party Transactions--Ambient."

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth information with respect to the
beneficial ownership of shares of our Class B common stock and common stock
as of March 1, 2000 and the beneficial ownership of shares of the capital
stock of RSL COM as of March 1, 2000 by:

       o       each person who we know owns beneficially more than 5% of
               our common stock

       o       each of our directors individually

       o       each of our named executive officers individually

       o       all of our executive officers and directors as a group

       o       each stockholder who is selling stock in this offering

        Unless otherwise indicated, to our knowledge, all persons listed
below have sole voting and investment power with respect to their shares of
common stock. Each person listed below disclaims beneficial ownership of
their shares, except to the extent of their pecuniary interests therein.
Shares of common stock that an individual or group has the right to acquire
within 60 days of March 1, 2000 pursuant to the exercise of options are
deemed to be outstanding for the purpose of computing the percentage
ownership of such person or group, but are not deemed outstanding for the
purpose of calculating the percentage owned by an other person listed.

<TABLE>
<CAPTION>

                                    SHARES OF DELTATHREE.CO         SHARES OF RSL COM
                                      CAPITAL STOCK                  CAPITAL STOCK
                                    BENEFICIALLY OWNED             BENEFICIALLY OWNED
                                    -----------------------      --------------------------
                                                 PERCENT-
                                     NUMBER       AGE(1)         NUMBER       PERCENTAGE(2)
                                    --------     -------         ---------    -------------
PRINCIPAL STOCKHOLDERS:

RSL Communications, Ltd.
   767 Fifth Avenue
   Suite 4300,
<S>                                   <C>           <C>         <C>                <C>
   New York, New York 10153..........  19,569,459    68.1%               --              --%

Ronald S.  Lauder(3)
   c/o RSL Communications, Ltd.......  19,574,459    68.1        15,947,636 (16)       29.1

CNET Investments, Inc.
   150 Chestnut Street
   San Francisco, California 94111...  1,551,971(4)   5.4                --              --

DIRECTORS AND EXECUTIVE OFFICERS:

Itzhak Fisher(5)(6)..................     25,848       *          3,310,481(17)         6.0

Nir Tarlovsky(5)(6)..................     34,848       *            863,199(18)         1.6

Donald R. Shassian(5)(6).............     29,848       *            101,333(19)           *

Jacob Z. Schuster(5)(7)..............     34,848       *          1,689,404(20)         3.1

Yadin Kaufmann(6)(8).................     24,848       *              1,000(21)           *

Robert R. Grusky(6)(9)...............     26,848       *              3,500(22)           *

Avery S. Fischer(5)(6)...............     31,848       *             14,375(23)           *

Oakleigh Thorne(6)(10)...............     25,298       *                 --              --

Elie C. Wurtman(11)(12)..............    165,656       *                 --              --

Shimmy Zimels(11)(13)................    263,407       *                 --              --

Noam Bardin(11)(13)..................    427,421      1.5                --              --

Mark J. Hirschhorn(11)(13)...........    183,938       *                 --              --

Amos Sela(11)(14)....................    278,332       *                 --              --

All Directors and Executive
Officers as a group (sixteen
persons)(15).........................  1,725,143      5.8         5,995,772            10.9
</TABLE>

-------------------
* Less than 1%.
(1)   Percentage of beneficial ownership is based on (a) 19,569,459 shares
      of Class B common stock issued to RSL COM and (b) 9,147,575 shares of
      common stock (excluding a warrant issued to CNET to purchase 466,028
      shares of common stock) outstanding as of March 1, 2000.
(2)   Percentage of beneficial ownership is based on RSL COM's outstanding
      share capital of 24,267,283 shares of Class B common stock and
      30,591,975 shares of Class A common stock as of March 1, 2000. Shares
      of Class B common stock of RSL COM are convertible at any time into
      shares of Class A common stock of RSL COM for no additional
      consideration on a share-for-share basis. Shares of Class A common
      stock of RSL COM are entitled to one vote for each share and shares
      of Class B common stock of RSL COM are entitled to 10 votes for each
      share.
(3)   Ronald S. Lauder, together with a number of entities, including
      entities formed for the benefit of charities and members of his
      family, own shares of RSL COM's capital stock that enable him to vote
      more than 50% of RSL COM's capital stock. As a result, he may be
      deemed to be the beneficial owner of our capital stock owned by RSL
      COM. Mr. Lauder disclaims beneficial ownership of these shares.
(4)   Includes a warrant to purchase 466,028 shares of common stock.
(5)   The address for the director listed is c/o RSL Communications, Ltd.
(6)   Includes options to purchase 24,848 shares of common stock.
(7)   Consists of (a) 10,000 shares of common stock owned by Schuster
      Family Partners, of which Mr. Schuster is the sole general partner
      and the limited partners are some of his children and (b) options to
      purchase 24,848 shares of common stock. Mr. Schuster disclaims
      beneficial ownership of the shares owned by Schuster Family Partners.
(8)   The address for Mr. Kaufmann is 91 Medinat Hayehudim St., Herzlia
      Pituach 46120, Israel.
(9)   The address for Mr. Grusky is c/o New Mountain Capital LLC, 712 Fifth
      Avenue, 23rd Floor, New York, NY 10019.
(10)  The address for Mr. Thorne is P.O. Box 871, Lake Forest, IL 60045.
(11)  The address for director or executive officer listed is c/o us.
(12)  Includes options to purchase 165,656 shares of common stock.
(13)  Includes options to purchase 173,938 shares of common stock.
(14)  Includes options to purchase 273,332 shares of common stock.
(15)  Includes options to purchase 1,279,545 shares of common stock.
(16)  Consists of (a) 2,336 shares of Class A common stock of RSL COM, (b)
      15,481,527 shares of Class B common stock, (c) 3,873 shares of Class
      A common stock issuable upon exercise of an equal number of currently
      exercisable options granted to Mr. Lauder under RSL COM's 1997
      Directors' Compensation Plan and (d) 459,900 shares issuable upon
      exercise of a warrant issued to Mr. Lauder. The shares of Class B
      common stock consist of: (a) 9,496,295 shares owned by RSL
      Investments Corporation, a corporation wholly owned by Mr. Lauder,
      (b) 1,814,579 shares owned by EL/RSLG Media, of which The 1995 Estee
      Lauder RSL Trust, of which Mr. Lauder is a trustee and the
      beneficiary is a 50% shareholder, (c) 907,290 shares owned by RAJ
      Family Partners, of which Mr. Lauder is a limited partner and a
      shareholder of the general partner, and (d) 3,263,363 shares owned
      directly by Mr. Lauder.
(17)  Consists of (a) 177,839 shares of Class A common stock of RSL COM and
      (b) 3,132,642 shares of Class B common stock of RSL COM owned by
      Fisher Investment Partners, L.P., of which Mr. Fisher is the sole
      general partner and the Fisher 1997 Family Trust is the sole limited
      partner. Mr. Fisher disclaims beneficial ownership of these shares.
(18)  Consists of (a) 718,915 shares of Class A common stock of RSL COM
      owned by Tarlovsky Investment Partners, of which Mr. Tarlovsky is the
      sole general partner and the Tarlovsky 1997 Family Trust is the sole
      limited partner and (b) 144,284 shares of Class A common stock
      issuable upon exercise of an equal number of currently exercisable
      options granted to Mr. Tarlovsky under RSL COM's 1997 Stock Incentive
      Plan.
(19)  Consists of (a) 18,000 shares of Class A common stock of RSL COM and
      (b) options to purchase 83,333 shares of Class A common stock of RSL
      COM.
(20)  Consists of (a) 1,189 shares of Class A common stock owned directly
      by Mr. Schuster, (b) 41,656 shares of Class A common stock owned by
      Schuster Family Partners, of which Mr. Schuster is the sole general
      partner and the limited partners are some of his children, and (c)
      1,646,559 shares of Class B common stock owned by Schuster Family
      Partners. Mr. Schuster disclaims beneficial ownership of the shares
      owned by Schuster Family Partners.
(21)  Represents 1,000 shares of Class A common stock of RSL COM.
(22)  Represents 4,500 shares of Class A common stock of RSL COM.
(23)  Consists of (a) 5,980 shares of Class A common stock of RSL COM and
      (b) options to purchase 8,395 shares of Class A common stock of RSL
      COM.



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    We believe that all of the transactions set forth below were made on an
arms-length basis. All future transactions between us and our officers,
directors, principal stockholders and affiliates will be approved by a
majority of the board of directors, including a majority of the outside
directors, and will continue to be on terms no less favorable to us than
could be obtained from unaffiliated third parties.

AMBIENT

    In January 1998, we entered into a cooperation agreement with Ambient
Corporation, a public company founded by Elie Wurtman, a co-chairman of our
company and chairman of the board and Jacob Davidson, a co-chairman of our
company. Mr. Wurtman was a director of Ambient until September 1999. Mr.
Davidson was chief executive officer and chairman of Ambient from June 1996
until September 1999. Mr. Davidson owns a 7% interest in Ambient. Under the
cooperation agreement, we provided them with office services for
approximately $1,000 per month. We also rented approximately 150 square
meters of our facility in Jerusalem, Israel to Ambient. In addition,
Ambient rented approximately 675 square feet of office space to us before
we moved into our new facilities in Jerusalem for a total of approximately
$13,500. The cooperation agreement and the sub-lease to Ambient were
terminated as of September 1, 1999.

RSL COM

    On July 23, 1997, RSL COM acquired 51% of our outstanding share
capital. From that date through March 31, 1998, RSL COM continued to
purchase additional shares from our other stockholders. On March 31, 1998,
we entered into a merger agreement with RSL COM and our remaining minority
stockholders. Pursuant to the agreement, we merged with and into a newly
formed wholly-owned subsidiary of RSL COM. Since RSL COM's acquisition of a
controlling interest in us, RSL COM has funded our cash requirements
through inter-company loans bearing interest at the rate of 14% per annum.
As of December 31, 1999, we owed approximately $14.8 million (principal and
accrued interest) to RSL COM. The inter-company loans are due on demand
after October 1, 2000. Prior to the closing of our initial public offering,
RSL COM made available to us a $10 million line of credit (in addition to
the existing $12.3 million), bearing interest at the rate of 14% per annum,
due on demand after November 1, 2000. To date, we have not drawn on the RSL
COM line of credit. We have agreed with RSL COM that we will not incur any
debt other than inter-company debt without its written consent so long as
we are a restricted subsidiary.

    Since our initial public offering, RSL COM has been our controlling
stockholder and owns 100% of the outstanding Class B common stock, which
represents approximately 95.5% of the combined voting power of all of our
outstanding capital stock and approximately 68.1% of the economic interest
in our company.

    For so long as RSL COM continues to beneficially own shares of capital
stock representing more than 50% of the combined voting power of our
outstanding capital stock, it will be able to approve any matter submitted
to a vote of our stockholders, including, among other things, the election
of all members of the board of directors. In addition, our non- competition
provision in the services agreement with RSL COM terminates on September 3,
2001. See "--Services Agreement." Therefore, various conflicts of interest
could arise between ourselves and RSL COM.

    RSL COM has no contractual obligation to retain its shares of our Class
B common stock, except RSL COM has agreed, subject to specified exceptions,
not to sell or otherwise dispose of any shares of our Class B common stock
for a period of 180 days from the date of the consummation of our initial
public offering without the prior written consent of Lehman Brothers Inc.
This lock-up agreement does not restrict RSL COM from selling shares of
Class B common stock to a purchaser or purchasers of the shares who agree
to be bound by the same restrictions that bind RSL COM. As a result, there
can be no assurance concerning the period of time during which RSL COM will
retain its ownership of our Class B common stock owned by it following the
offering. See "--Registration Rights Agreement."

INTERCOMPANY COMPLIANCE AGREEMENT

    We have entered into an agreement with RSL COM under which we have
agreed not to take any action which would cause RSL COM to default under
its indentures. In order to help RSL COM comply with its indentures, we
have also agreed to obtain RSL COM's written consent before incurring any
debt and to provide RSL COM with information that it requires for its
reporting obligation under its indentures and under the securities laws.

SERVICES AGREEMENT

    We entered into a services agreement with RSL COM on July 23, 1997,
which was subsequently amended and restated as of September 3, 1999. As
amended and restated, the agreement extends to September 2, 2004, and is
automatically extended for additional one-year terms unless terminated by
RSL COM or us. The services agreement may be terminated by us or RSL COM
for cause, by the non-bankrupt party in the event of bankruptcy of the
other party or by RSL COM should RSL COM and/or its affiliates hold less
than 50% of the voting control of our outstanding common stock.

Services and Facilities

    Under the agreement, if we require equipment space or limited office
space at any location where RSL COM maintains an office or equipment, RSL
COM is required to use its reasonable best efforts to provide us such
space. However, RSL COM is not obligated to provide us with office space
for more than that required by two full-time employees, and RSL COM is
entitled to vacate space without it being deemed a breach of the agreement.
We are required to pay RSL COM our proportionate share of all lease
payments associated with such office or equipment space. In addition, RSL
COM is required to make reasonable efforts to assist us in obtaining
Internet, frame relay and dedicated lines from third parties in countries
where RSL COM has communication switches colocated with our network servers
at the same price that RSL COM pays such third parties. As of December 31,
1999, we colocated offices in five locations and equipment in five
locations. RSL COM is also required to use its reasonable efforts to
purchase dedicated bandwidth connectivity on our behalf from third party
bandwidth suppliers at the same price as RSL COM pays such third party
suppliers. As a result, we realize certain bulk pricing benefits received
by RSL COM.

    Under the services agreement, RSL COM is also required to provide us
with the following services:

        o  domestic inbound traffic termination--RSL COM is required to
           terminate our domestic inbound traffic through RSL COM's
           switches in countries where our servers and RSL COM's switches
           are co-located. This termination service is provided to us at
           the then prevailing fair market rates for such service.

        o  international outbound termination--RSL COM is required to
           terminate our international outbound telephone traffic in each
           country where our servers and RSL COM's switches are co-located
           and RSL COM has contracted to receive such services in the
           ordinary course. This termination service is provided to us at
           the then prevailing fair market rates for such service.

        o  traffic origination--RSL COM is required to use its best efforts
           to assist us in obtaining services, including toll-free
           services, from local third parties which will provide our users
           with the ability to access our network at the same rates offered
           by such third parties to RSL COM in countries where our servers
           and RSL COM's switches are colocated.

        o  use of RSL COM switches--RSL COM is required to provide us with
           use of RSL's switches to connect our carrier customers in each
           location where our servers and RSL COM's switches are colocated.
           The termination rate is $0.01 per minute. We are charged for a
           minimum usage of 100,000 minutes per month per switch per
           connection, whether or not such minutes are used. In addition,
           RSL COM provides our carrier customers billing and other similar
           customer-related services at a charge of $0.01 per minute of
           carrier traffic usage. Based on switches currently used, RSL COM
           charges us a minimum of $7,000 per month.

        o  use of prepaid calling platform--RSL COM is required to provide
           us with access to, and use of, RSL COM's prepaid calling
           platform in each location where our servers and RSL COM's
           switches are co- located. If we elect to use RSL COM's prepaid
           calling platform, we will be charged for a minimum of 100,000
           minutes per month. The fee for using RSL COM's prepaid calling
           platform is $0.01 per minute of traffic usage. In addition, RSL
           COM is required to provide us with additional customer-related
           services for our prepaid calling services at a rate of $0.015
           per minute of traffic usage. To date, we have not elected to
           purchase such services.

In the event any of RSL COM's current or future strategic partner objects
to RSL COM providing us with any of the foregoing services, RSL COM can
cease providing the service to us. A strategic partner is a minority
shareholder in RSL COM or any RSL COM subsidiary owning more than 10% of
the common stock of such entity. However, RSL COM is required to use
reasonable efforts to encourage its strategic partners not to object. To
date, no strategic partner has objected to RSL COM providing us with these
services.

        Under the services agreement, we are required to provide Internet
telephony services and facilities to RSL COM necessary to route RSL COM's
international telecommunications traffic between all originations and
destinations we service. The agreement provides that we are required to
use, at RSL COM's request, up to 50% of our network capacity to route RSL
COM's international telecommunications traffic between our origination and
termination points. For a period two years from the date of the closing of
our initial public offering, RSL COM has committed to purchase a minimum of
50 million minutes per annum of voice and fax transmission services from
us. If RSL COM fails in this commitment RSL COM will be required to pay us
a shortfall charge of 10% of the average daily weighted coverage price per
minute charged by us to RSL COM in the last three months of each annual
period. If we are no longer a subsidiary of RSL COM, RSL COM's minimum
purchase obligation will cease. These services are provided to RSL COM at
the then prevailing fair market rates. However, the services agreement does
not specify procedures for establishing such rates.

Marketing

        Under the services agreement, we and RSL COM will engage in joint
marketing. Each of us is required to place, in a prominent location, a link
on its home page Web site to the other's home page Web site. We will also
cross- sell each other's products and services, including through
promotional materials and customer service representatives and other
additional promotional efforts. However, neither we nor RSL COM are
required to market or promote a product or service of the other if such
product or service competes with the other party's product or service.

Non-Competition

        Under the services agreement between us and RSL COM, RSL COM is
prohibited from competing with us in providing Internet telephony services
as described in the services agreement, provided that we provide RSL COM
with any requested Internet telephony services promptly and with quality
assurance. However, this non-competition provision terminates on September
3, 2001 and the scope of such provision is subject to the following
limitations:

        o  RSL COM and its subsidiaries may acquire up to 20% in an entity
           providing Internet telephony services;

        o  RSL COM and its subsidiaries may be stockholders in entities
           providing Internet telephony services, provided that Internet
           telephony services are ancillary to the business of that entity;

        o  the non-competition provision does not apply to RSL COM's
           subsidiaries that become publicly traded companies; and

        o  Internet telephony services under the non-competition provision
           are limited to (1) phone to phone services marketed as IP to the
           general public, including both individuals and businesses and
           (2) the following Web- based enhanced communication services:
           PC-to-phone, D3 box, Click IT, Global Roaming, IP-initiated
           conference calls, Phone-to-PC, D3 Fax, information services and
           white boarding.

CARRIER TRANSMISSION SERVICES

        RSL COM purchases carrier transmission services from us. RSL COM
accounted for 37.6%, 69.1% and 67.2% of our revenues in the years 1997,
1998 and 1999, respectively. Rates are established based on market rates.
The balance of our revenues in these periods were derived from services
provided to non-affiliates.

REGISTRATION RIGHTS AGREEMENT

        We have entered into an agreement with RSL COM under which we have
given RSL COM the right to require us on three occasions to register for
sale the shares of common stock they hold. RSL COM will not be allowed to
exercise these registration rights during the 180-day lock-up period. RSL
COM also has an unlimited number of "piggyback" registration rights. This
means that any time we register our common stock for sale, RSL COM will
have the right to include their common stock in that offering and sale.

        We have agreed to pay all expenses that result from registration of
RSL COM's common stock under the registration rights agreement (other than
underwriting commissions for the common stock it sells and RSL COM's
taxes). We have also agreed to indemnify RSL COM against liabilities that
may result from their sale of common stock they hold, including Securities
Act liabilities.

MANAGEMENT AGREEMENT

        We have entered into an agreement with RSL COM pursuant to which
RSL COM has agreed from the time we completed our initial public offering
until such time as we are no longer a subsidiary of RSL COM, RSL COM will
provide to us the following services:

        o  international legal services

        o  financial services, including assistance in accounting,
           financial reporting, budgeting, business controls, tax and
           treasury related matters

        o  corporate finance and mergers and acquisition advisory services

        o  assistance with network planning

        o  product development

        o  assistance with strategic planning

        o  availability of RSL COM management

        We have agreed to pay to RSL COM $20,000 per month for these
services, subject to adjustments for inflation.

RELEASE AND INDEMNIFICATION AGREEMENT

        We entered into an agreement with RSL COM, pursuant to which we
have agreed to release each other from any claims existing or arising from
acts or events occurring or failing to occur prior to the date of the
agreement, other than those arising from this agreement, the services
agreement, the registration rights agreement, the management agreement, the
intercompany credit agreement, the compliance agreement and other
commercial transactions between us and RSL COM. Further, we have agreed to
indemnify each other for breaches of the existing agreements described
above.

RELATIONSHIPS WITH OTHER INVESTORS

YAHOO! INC.

        In October 1999, we entered into a marketing and promotion
agreement with Yahoo! Under this agreement, Yahoo! has agreed to include
banners and other promotions on various Yahoo! domestic and international
Web sites that will link to areas of our Web site dedicated to our
PC-to-phone service and certain of our other enhanced IP communications
services. Yahoo! will also send e-mails to certain international and
domestic registered users of Yahoo! e-mail with exclusive offers for our
PC-to-phone service. In addition, Yahoo! will create and place on Yahoo!
Broadcast.com audio advertisements for our enhanced IP communications
services. The initial term of this contract is one year. We have committed
to pay Yahoo! $850,000 per quarter, in addition to a $600,000 initial
payment, for the services provided.

        On October 18, 1999, in exchange for an offset of an account
payable to Yahoo! of $1 million, we issued to Yahoo! 125,275 shares of our
common stock. In addition, on November 23, 1999, Yahoo! exercised a warrant
to purchase 58,626 shares of our common stock. The shares issued to Yahoo!
are subject to restrictions on resale. However, Yahoo! will be entitled to
request that we register their shares under the Securities Act beginning
180 days after the completion of our initial public offering and to include
their shares in our future registered equity offerings.

CNET INVESTMENTS, INC.

        In October 1999, we entered into a marketing and promotion
agreement with CNET. Under this agreement, merchants on CNET's shopping
sites will be able to integrate our PC-to-phone software to enable users to
make a PC-to- phone call directly to such merchant from the CNET shopping
site using our Click IT service. In addition, CNET has agreed to display
banners and other promotions on its Web sites that will link to our Web
site. The initial term of the contract is two years. We have agreed to pay
CNET $1,062,500 per quarter for the services provided. We have committed to
pay an additional $1,250,000 in each year of the contract, a portion of
which was allocated to the third quarter of 1999.

        On October 20, 1999, we issued to CNET for approximately $11
million 1,085,943 shares of our common stock and warrants to purchase
466,028 shares of our common stock at an exercise price of $19.31 per share
exercisable for the term of our promotion agreement with CNET. CNET will be
entitled to request that we register their shares under the Securities Act
beginning 180 days after the completion of our initial public offering and
to include their shares in our future registered equity offerings.


                                  PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

               (a)(1) Financial Statements.

               The Consolidated Financial Statements filed as part of this
Annual Report on Form 10-K are identified in the Index to Consolidated
Financial Statements on page F-1 hereto.

               (a)(2) Financial Statement Schedules.

               Financial Statement Schedules have been omitted because the
information required to be set forth therein is not applicable or is shown
on the financial statements or notes thereto.

               (a)(2) Exhibits.

               The following exhibits are filed herewith or are
incorporated by reference to exhibits previously filed with the Securities
and Exchange Commission.

EXHIBIT
NUMBER        DESCRIPTION
-------       -----------
  3.1**       Form of Amended and Restated Certificate of Incorporation of
              deltathree.com, Inc.
  3.2**       Form of Amended and Restated By-laws of deltathree.com, Inc.
  4.1**       Specimen Certificate of Common Stock.
  4.2**       Specimen Certificate of Class B Common Stock.
  4.3**       Registration Rights Agreement dated September 1, 1999,
              between RSL Communications, Ltd. and deltathree.com, Inc.
 10.1**       Amended and Restated Services Agreement by and between RSL
              Communications, Ltd. and deltathree.com, Inc., dated
              September 3, 1999.
 10.2**       Credit Facility dated September 1, 1999, between RSL
              Communications, Ltd. and deltathree.com, Inc.
 10.3**       Form of deltathree.com, Inc. 1999 Stock Incentive Plan.
 10.4**       Form of deltathree.com, Inc. 1999 Employee Stock Purchase
              Plan.
 10.5**       Form of deltathree.com, Inc. 1999 Performance Incentive Plan.
 10.6**       Form of deltathree.com, Inc. 1999 Directors' Plan.
 10.7**       Employment Agreement effective as of April 1, 1999, between
              Amos Sela and deltathree.com, Inc.
 10.8**       Employment Agreement effective as of April 1, 1999, between
              Mark J. Hirschhorn and deltathree.com, Inc.
 10.9**       Employment Agreement effective as of April 1, 1999, between
              Noam Bardin and deltathree.com, Inc.
 10.10**      Employment Agreement effective as of April 1, 1999, between
              Shimmy Zimels and deltathree.com, Inc.
 10.11**      Employment Agreement effective as of April 1, 1999, between
              Elie C. Wurtman and deltathree.com, Inc.
 10.12**      Employment Agreement effective as of April 1, 1999, between
              Jacob A. Davidson and deltathree.com, Inc.
 10.13**      Investor Rights Agreement dated as of September 29, 1999
              between Yahoo! Inc. and deltathree.com, Inc.
 10.14**      Form of warrant issued to Yahoo! Inc on October 18, 1999.
 10.15**      Management Agreement dated as of November 1, 1999 between
              deltathree.com, Inc. and RSL Communications, Ltd.
 10.16**      Amendment to Services Agreement by and between RSL
              Communications, Ltd. and deltathree.com, Inc., dated November
              1, 1999.
 10.17**      Investor Rights Agreement dated as of October 20, 1999
              between CNET Investments, Inc. and deltathree.com, Inc.
 10.18**      Form of warrant issued to CNET Investments, Inc. on October
              20, 1999.
 10.19**      Intercompany Compliance Agreement dated as of November 1,
              1999, between RSL Communications, Ltd., RSL Communications
              PLC and deltathree.com, Inc.
 10.20**      Development and Promotion Agreement effective as of September
              22, 1999 between CNET, Inc. and deltathree.com, Inc.
 10.21**      Form of Proposed Release and Indemnification Agreement
              between RSL Communications, Ltd. and deltathree.com, Inc.
 10.22        Agreement and Plan of Merger dated as of February 3, 2000
              between deltathree.com, Inc., YourDay Acquisition Corp.,
              YourDay.com, Inc. and SenseNet Inc.
 21.1         Subsidiaries of Registrant.
 23.1         Consent of Brightman Almagor & Co.
 24.1         Power of Attorney (included on the signature page to this
              Annual Report).

-----------------------------

**   Incorporated by reference to our registration statement on Form S-1
     (Registration No. 333-86503).


              (b)        Reports on Form 8-K.

              During fiscal 1999, we did not file any reports on Form 8-K.




                                 SIGNATURES


Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to
be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of New York, New York on the 27th day of March, 2000.



                                              DELTATHREE.COM, INC.



                                              By: /s/ Mark J. Hirschhorn
                                                  -----------------------
                                                  Mark J. Hirschhorn
                                                  Chief Financial Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Amos Sela AND Mark J. Hirschhorn his true
and lawful attorney-in-fact, each acting alone, with full power of
substitution and resubstitution for him and in his name, place and stead,
in any and all capacities to sign this Annual Report, and to file the same,
with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact or his substitutes, each acting
alone, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed by the following persons in the capacities
and on the dates indicated:

<TABLE>
<CAPTION>
              SIGNATURE                                TITLE                            DATE
              ---------                                -----                            ----
<S>                                <C>                                           <C>
/s/ Amos Sela
-------------------------------     Chief Executive Officer, President             March 27, 2000
Amos Sela                           and Director (Principal Executive Officer)

/s/ Mark J. Hirschhorn
-------------------------------     Chief Financial Officer (Principal             March 27, 2000
Mark J.  Hirschhorn                 Accounting and Financial Officer)

/s/ Elie C. Wurtman
-------------------------------     Co-Chairman of the Company                     March 27, 2000
Elie C.  Wurtman                    and Chairman of the Board of Directors

/s/ Jacob A. Davidson
------------------------------      Co-Chairman of the Company                     March 27, 2000
Jacob A.  Davidson

/s/ Itzhak Fisher
------------------------------      Director                                       March 27, 2000
Itzhak Fisher

/s/ Nir Tarlovsky
------------------------------      Director                                       March 27, 2000
Nir Tarlovsky

/s/ Donald R. Shassian
-----------------------------       Director                                       March 27, 2000
Donald R.  Shassian

/s/ Jacob Z. Schuster
----------------------------        Director                                       March 27, 2000
Jacob Z.  Schuster

/s/ Avery S. Fischer
----------------------------        Director                                       March 27, 2000
Avery S.  Fischer

/s/ Robert R. Grusky
----------------------------        Director                                       March 27, 2000
Robert R.  Grusky

/s/ Yadin Kaufmann
----------------------------        Director                                       March 27, 2000
Yadin Kaufmann

/s/ Oakleigh Thorne
----------------------------        Director                                       March 27, 2000
Oakleigh Thorne
</TABLE>



<TABLE>
<CAPTION>
                          INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                     DELTATHREE.COM, INC.

                                                                                          PAGE
                                                                                          ----
<S>                                                                                      <C>
Independent Auditors' Report...............................................................F-2

Consolidated Balance Sheets as of December 31, 1998 and 1999...............................F-3

Consolidated Statements of Operations for the Years Ended December 31, 1997,
  1998 and 1999............................................................................F-4

Statements of Changes in Stockholder's Equity (Deficiency) for
  the Years Ended December 31, 1997, 1998 and 1999.........................................F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1998 and 1999..............................................................................F-6

Notes to Consolidated Financial Statements.................................................F-7
</TABLE>

     All Financial Statement Schedules have been omitted because (i) the
required information is not present in amounts sufficient to require
submission of the schedule, (ii) the information required is included in
the Financial Statements or the Notes thereto or (iii) the information
required in the schedules is not applicable to the Company.




                        INDEPENDENT AUDITORS' REPORT


TO THE STOCKHOLDERS OF
DELTATHREE.COM, INC.


     We have audited the accompanying consolidated balance sheets of
deltathree.com, Inc. ("the Company") as of December 31, 1998 and 1999 and
the related consolidated statements of operations, changes in stockholders'
equity (deficiency) and cash flows each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provides a reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly,
in all material respects, the consolidated financial position of the
Company as of December 31, 1998 and 1999, and the consolidated results of
its operations and cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.


BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL)
A MEMBER OF DELOITTE TOUCHE TOHMATSU

Tel Aviv, Israel
January 26, 2000



<TABLE>
<CAPTION>
                       DELTATHREE.COM, INC. CONSOLIDATED BALANCE SHEETS

                                                                        DECEMBER 31,
                                                                 ---------------------------
                                                                    1998            1999
                                                                 -----------     -----------
                                                                      ($ IN THOUSANDS)
                            ASSETS
Current assets:
<S>                                                              <C>             <C>
     CASH AND CASH EQUIVALENTS................................    $    1,357      $   89,957
     SHORT-TERM INVESTMENTS...................................            --          11,276
     ACCOUNTS RECEIVABLE--NET..................................          543             903
     DUE FROM AFFILIATES......................................         2,192           1,760
     PREPAID EXPENSES AND OTHER CURRENT ASSETS................           621           3,090
                                                                 -----------     -----------
TOTAL CURRENT ASSETS..........................................         4,713         106,986
                                                                 -----------     -----------
INVESTMENTS...................................................            90              90
                                                                 -----------     -----------
PROPERTY AND EQUIPMENT:
     TELECOMMUNICATIONS EQUIPMENT.............................         7,910           9,844
     FURNITURE, FIXTURES AND OTHER............................           736             721
                                                                 -----------     -----------
                                                                       8,646          10,565
     LESS ACCUMULATED DEPRECIATION............................          (376)         (1,066)
                                                                 -----------     -----------
     PROPERTY AND EQUIPMENT--NET...............................        8,270           9,499
                                                                 -----------     -----------
GOODWILL--NET..................................................       12,488           9,457
                                                                 -----------     -----------
DEPOSITS......................................................           115             800
                                                                 -----------     -----------
TOTAL ASSETS..................................................   $    25,676        $126,832
                                                                 ===========     ===========
             LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
     SHORT-TERM DEBT DUE TO AFFILIATES........................   $        --     $    14,752
     ACCOUNTS PAYABLE.........................................         4,302           2,580
     DUE TO AFFILIATES........................................         1,403             626
     DEFERRED REVENUES AND COSTS..............................         1,610             538
     OTHER CURRENT LIABILITIES................................           629           5,548
                                                                 -----------     -----------
TOTAL CURRENT LIABILITIES.....................................         7,944          24,044
                                                                 -----------     -----------
LONG-TERM LIABILITIES:
     LONG-TERM DEBT DUE TO AFFILIATES.........................         5,107              --
     SEVERANCE PAY OBLIGATIONS................................           233             208
                                                                 -----------     -----------
TOTAL LONG-TERM LIABILITIES...................................         5,340             208
                                                                 -----------     -----------
MINORITY INTEREST.............................................            21              --
                                                                 -----------     -----------
TOTAL LIABILITIES.............................................        13,305          24,252
                                                                 -----------     -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
     CLASS A COMMON STOCK, AUTHORIZED AT DECEMBER 31,
         1999--PAR VALUE $0.001; 200,000,000 SHARES;
         ISSUED AND OUTSTANDING 0 AT DECEMBER 31, 1998;
         8,918,132 AT DECEMBER 31, 1999.......................            --               9

     CLASS B COMMON STOCK--PAR VALUE $0.001; 200,000,000
         AND 200,000,000 AT DECEMBER 31, 1998 AND 1999,
         RESPECTIVELY; 19,569,459 AND 19,569,459
         ISSUED AND OUTSTANDING AT DECEMBER 31, 1998
         AND 1999, RESPECTIVELY...............................            20              20

     PREFERRED STOCK, PAR VALUE $0.001; 25,000,000 SHARES
         AUTHORIZED AS OF DECEMBER 31, 1999; NO SHARES
         ISSUED AND OUTSTANDING AT DECEMBER 31, 1998
         AND 1999.............................................          31,O              --

     ADDITIONAL PAID-IN CAPITAL...............................        23,084         157,891

     RECEIVABLE FOR CAPITAL STOCK.............................            --          (1,232)

     DEFERRED COMPENSATION....................................        (1,066)        (10,670)

     ACCUMULATED DEFICIT......................................        (9,667)        (43,438)
                                                                  -----------     -----------
TOTAL STOCKHOLDER'S EQUITY....................................        12,371         102,580
                                                                  -----------     -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY....................   $    25,676     $   126,832
                                                                 ===========     ============
</TABLE>

                        SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



<TABLE>
<CAPTION>
                                     DELTATHREE.COM, INC.
                             CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                YEAR ENDED DECEMBER 31,
                                                          ------------------------------------
                                                              1997        1998        1999
                                                              ----        ----        ----
                                                                    ($ IN THOUSANDS,
                                                                   EXCEPT SHARE DATA)
REVENUES:
<S>                                                       <C>         <C>         <C>
     AFFILIATES.........................................  $      468  $     3,896 $    7,431

     NON-AFFILIATES.....................................         778        1,742      3,621
                                                          ----------  ----------- ----------
TOTAL REVENUES..........................................       1,246        5,638     11,052
                                                          ----------  ----------- ----------
COSTS AND OPERATING EXPENSES:
     COST OF REVENUES...................................         892        4,459      9,723

     RESEARCH AND DEVELOPMENT EXPENSES..................         294          650      1,233

     SELLING AND MARKETING EXPENSES.....................         632        2,431      7,403

     GENERAL AND ADMINISTRATIVE EXPENSES (EXCLUSIVE OF NON-CASH
         COMPENSATION EXPENSE SHOWN BELOW)..............       1,388        1,842      2,754

     NON-CASH COMPENSATION EXPENSE......................          --          743     19,116

     DEPRECIATION AND AMORTIZATION......................         370        2,671      3,721
                                                          ----------  ----------- ----------
TOTAL COSTS AND OPERATING EXPENSES......................       3,576       12,796     43,950
                                                          ----------  ----------- ----------
LOSS FROM OPERATIONS....................................      (2,330)      (7,158)   (32,898)

INTEREST EXPENSE, NET...................................         (37)        (186)      (873)

MINORITY INTEREST.......................................          --          223         --
                                                          ----------  ----------- ----------
NET LOSS................................................  $   (2,367) $    (7,121)$  (33,771)
                                                          ==========  =========== ==========
NET LOSS PER SHARE--BASIC AND DILUTED.................... $    (0.19) $     (0.37)$    (1.65)
                                                          ==========  =========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING--BASIC AND DILUTED... 12,390,043   19,253,855 20,418,457
                                                          ==========  =========== ==========
</TABLE>


                        SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



<TABLE>
<CAPTION>
                                     DELTATHREE.COM, INC.
                 STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY)
                              ($ IN THOUSANDS, EXCEPT SHARE DATA)



                                                                             RECEIVABLE                               TOTAL
                             CLASS A              CLASS B       ADDITIONAL      FOR                               STOCKHOLDERS'
                           COMMON STOCK        COMMON STOCK      PAID-IN      CAPITAL    ACCUMULATED   DEFERRED      EQUITY
                          --------------     ----------------
                          SHARES  AMOUNT     SHARES     AMOUNT   CAPITAL       STOCK        DEFAULT  COMPENSATION  (DEFICIENCY)
                          ------  -------    ------     ------  ----------  ----------   ----------- ------------  -------------
BALANCE
<S>                      <C>      <C>        <C>        <C>      <C>        <C>          <C>          <C>          <C>
   at January 1, 1997.....    --  $    --    7,659,507  $    8   $    141   $      --    $     (179)  $       --    $     (30)
Issuance of capital stock                   11,278,742      11      5,320                                               5,331
Recognition of pushdown
   of goodwill............                                          3,338                                               3,338
Net loss..................                                                                   (2,367)                   (2,367)
                          ------  -------  ----------     ------  ----------  ----------   ----------- ------------  -------------
BALANCE
   At DecembeR 31, 1997...    --       --  18,938,249       19      8,799          --        (2,546)          --        6,272
Conversion of debt and
   warrants to equity                         631,210        1        657                                                 658
Deferred compensation
   expense................                                          1,809                    (1,809)          --
Amortization of deferred
   compensation expense...                                                                                    743         743
recognition of pushdown
   of goodwilL............                                         11,819                                              11,819
Net loss..................                                                                   (7,121)                   (7,121)
                          ------  -------  ----------     ------  ----------  ----------   ----------- ------------  -------------
BALANCE
   At December 31, 1998       --       --  19,569,459       20     23,084          --        (9,667)       (1,066)     12,371
Issuance of common stock
   in initial public offering,
   net of expenses (includ-
   ing over-allotment of
   shares)............... 6,900,000    7                           93,855                                              93,862
Issue of shares to
   employees.............   748,288    1                              232        (232)                                      1
Issue of shares to
   YAHOO!................   183,901    *                            1,000      (1,000)                                      *
Issue of shares to CNET.. 1,085,943                                11,000                                              11,001
Deferred compensation
   expense to Yahoo! and
   CNET..........                                                   4,397                                  (4,397)         --
Deferred compensation
   expense to employees                                            24,323                                 (24,323)         --
Amortization of deferred
   compensation expense                                                                                    19,116      19,116
Net loss.................                                                                   (33,771)                  (33,771)
                          ------  -------  ----------     ----- -----------   ----------  ------------ ------------ --------------
BALANCE
   At december 31, 1999. 8,918,132 $   9   19,569,459       20  $ 157,891     $(1,232)    $ (43,438)    $ (10,670   $ 102,580
                         ========= ======  ==========     ===== ============  ==========  ============  =========== ==============

*  Less than $1,000
</TABLE>


                        SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



<TABLE>
<CAPTION>
                                     DELTATHREE.COM, INC.
                             CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                YEAR ENDED DECEMBER 31,
                                                          ------------------------------------
                                                              1997        1998        1999
                                                              ----        ----        ----
                                                                    ($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                       <C>         <C>         <C>
Net loss................................................. $    (2,367)$    (7,121)$  (33,771)
     Adjustments to reconcile net loss to net cash used
         in operating activities:
         Depreciation and amortization...................         370       2,671      3,721
         Amortization of deferred compensation..........           --         743     19,116
         Write-down of investment........................          --          25         --
         Minority interest...............................          --        (224)       (21)
         Increase (decrease) in liability for severance pay        27         148        (25)
         Provision for losses on accounts receivable.....         100         227       (275)
     Changes in assets and liabilities:
         Decrease (increase) in accounts receivable.....         (925)         78        (85)
         Increase in other current assets and due from affiliates(198)     (2,270)     (2037)
         Increase (decrease) in accounts payable........          926       1,734       (793)
         Decrease in deferred revenues...................          --      (1,595)    (1,072)
         Increase in current liabilities and due to affiliates    446       1,827      5,467
                                                          ----------- ----------- ----------
                                                                  746       3,364     23,996
                                                          ----------- ----------- ----------
Net cash used in operating activities....................      (1,621)     (3,757)    (9,775)
                                                          ----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of property and equipment..................        (889)     (3,003)    (2,848)
     Increase in deposits................................          --         (61)      (685)
     Equity investments..................................         (60)        (25)        --
     Other...............................................          --          15         --
                                                          ----------- ----------- ----------
Net cash used in investing activities....................        (949)     (3,074)    (3,533)
                                                          ----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Increase in short-term investments                            --          --    (11,276)
     Proceeds from issuance of capital stock.............       5,331          --    104,864
     Proceeds from issuance of convertible notes.........         520          --         --
     Retirement of convertible notes.....................        (208)         --         --
     Proceeds from short-term debt from affiliates.......          --          --      8,320
     Proceeds from long-term debt from affiliates........         (30)      5,000         --
     Proceeds from short-term borrowings.................          25          --         --
     Payment of other long-term debt.....................          --          (8)        --
                                                          ----------- ----------- ----------
Net cash provided by financing activities................       5,638       4,992    101,908
                                                          ----------- ----------- ----------
Increase (decrease) in cash and cash equivalents.........       3,068      (1,839)    88,600
Cash and cash equivalents at beginning of year...........         128       3,196      1,357
                                                          ----------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. $     3,196 $     1,357 $   89,957
                                                          =========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid for:
         Interest........................................ $        -- $        -- $       --
                                                          =========== =========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
     FINANCING ACTIVITIES:
     Conversion of convertible notes and warrants into
       captal stock                                       $        -- $       657 $       --
                                                          =========== =========== ==========
     Assets acquired with vendor credits................. $        -- $     3,000 $       --
                                                          =========== =========== ==========
     Recognition of pushdown of goodwill................. $     3,338 $    11,819 $       --
                                                          =========== =========== ==========

                        SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>



                               DELTATHREE.COM, INC.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 -- BUSINESS DESCRIPTION

         a. Description of business--deltathree.com, Inc. (the "Company"),
         a Delaware corporation, is a global provider of Internet Protocol
         ("IP") telephony services, which include the transmission of voice
         and data traffic for communications carriers and the provision of
         enhanced Web-based and other communications services to
         individuals and businesses.

         The Company was founded in 1996 to capitalize on the growth of the
         Internet as a communications tool. The Company commercially
         provides IP telephony services over a privately-managed IP
         network. The Company operates a privately-managed IP network with
         46 points of presence (POPs) in 29 countries as of December 31,
         1999.

         The Company's research and development activities are conducted in
         Israel by its wholly owned subsidiary, Delta Three Israel Ltd.
         ("Delta Ltd.").

         b. Acquisition of the Company by RSL COM--The Company is a
         subsidiary of RSL COM, a publicly-traded multinational
         telecommunications company. RSL COM and its subsidiaries and
         affiliates (excluding the Company) are collectively referred to
         herein as "RSL COM" or "affiliates." Approximately 69% and 67% of
         the Company's revenues for the year ended December 31, 1998 and
         1999, respectively, were derived from transactions with RSL COM.

         In July 1997, the Company issued 8,150,895 shares of capital stock
         to RSL COM pursuant to a stock purchase agreement with RSL COM
         (representing 51% of the Company's outstanding capital stock at
         that time) for aggregate gross consideration of $5,000,000. In
         addition, at the time of the closing under the stock purchase
         agreement, the Company issued 2,353,440 shares of capital stock
         into escrow, which were released to RSL COM in 1997 for no
         additional consideration under the anti-dilution provisions of the
         stock purchase agreement relating to the July 1997 issuance.
         During the remainder of 1997, RSL COM acquired additional shares
         of capital stock from the Company's existing stockholders for
         aggregate consideration of $2,857,000. As of December 31, 1997,
         RSL COM held approximately 75% of the Company's outstanding
         capital stock.

         By April 1998, RSL COM acquired the remaining outstanding capital
         stock of the Company held by the Company's remaining stockholders
         for total consideration of $11,819,000 and merged the Company with
         a newly formed, wholly-owned subsidiary of RSL COM, with the
         Company remaining as the surviving corporation.

         The acquisition of the Company by RSL COM has been "pushed-down"
         into the Company's financial statements as of July 1997, with an
         increase to both goodwill and additional paid-in capital in the
         amount of $15,158,000. The goodwill is being amortized by the
         Company over a five-year period.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         a. Principles of consolidation and basis of presentation--The
         consolidated financial statements include the accounts of
         deltathree.com, Inc. and its subsidiaries. The results of
         subsidiaries acquired or disposed of during the year are included
         from the date of acquisition to the date of disposal, if
         applicable. All significant intercompany accounts and transactions
         have been eliminated in consolidation.

         b. Use of estimates--The preparation of the financial statements
         in conformity with generally accepted accounting principles
         requires management to make estimates and assumptions, primarily
         for allowances for doubtful accounts receivable and the useful
         lives of fixed assets and intangible assets, that affect the
         reported amounts of assets and liabilities and 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. Actual results could differ from
         those estimates.

         c. Cash and cash equivalents--The Company considers all highly
         liquid investments purchased with an original maturity of three
         months or less to be cash equivalents.

         d. Allowance for doubtful accounts--The Company estimates the
         allowance for doubtful accounts by reviewing the status of
         significant past due receivables and analyzing historical bad debt
         trends and the Company then reduces accounts receivables by such
         allowance for doubtful accounts to expected net realizable value.

         e. Investments--Investments in less than 20% of the share capital
         of other companies are presented at cost. In the event that
         management identifies a decline of an other than temporary nature
         in the estimated fair value of an investment to an amount below
         cost, such investment is written down to fair market value.

         f. Property and equipment and related depreciation--Property and
         equipment are stated at cost. Depreciation is calculated using the
         straight-line method over the estimated useful lives of the
         depreciable assets, which range from two to ten years.
         Improvements are capitalized over their estimated life or the life
         of the lease, whichever is shorter, while repair and maintenance
         costs are charged to operations as incurred. The useful life of
         telecommunications network equipment purchased from Ericsson (see
         Note 10b) is 10 years. During 1998, $3 million of the Company's
         equipment purchases from Ericsson was initially recorded in the
         Company's consolidated balance sheets as a debit to property and
         equipment and an offsetting credit to accounts payable. After the
         Company reached agreement with Ericsson relating to difficulties
         encountered by the Company in integrating hardware and software
         purchased from Ericsson (see Note 10b), the Company reclassified
         the $3 million accounts payable to deferred revenues and costs.

         g. Goodwill and related amortization--Goodwill represents the
         excess of cost over the fair value of the Company's net assets,
         pushed down as a result of RSL COM's acquisition of the Company,
         and is being amortized using the straight-line method over five
         years.

         h. Impairment of long-lived assets and goodwill--The Company's
         long-lived assets and goodwill are reviewed for impairment on a
         quarterly basis and whenever events or changes in circumstances
         occur indicating that the net carrying amount may not be
         recoverable. The Company reviews for impairment by comparing the
         carrying value of the long-lived asset or goodwill to the
         estimated undiscounted future cash flows expected to result from
         the use of the long-lived assets (and their eventual disposition)
         or the goodwill. If the sum of the expected undiscounted future
         cash flows is less than the carrying amount of assets, the Company
         would recognize an impairment loss. The impairment loss, if
         determined to be necessary, would be measured as the amount by
         which the carrying amount of the long-lived asset or goodwill
         exceeds the fair value of the long-lived asset or goodwill based
         on estimated future discounted cash flows. The Company determined
         that, as of December 31, 1999, there had been no impairment in the
         carrying value of long-lived assets or goodwill.

         i. Revenue recognition and deferred revenue--The Company records
         revenue based on minutes (or fractions thereof) of customer usage.
         The Company records payments received in advance for prepaid
         services and services to be supplied under contractual agreements
         as deferred revenue until such related services are provided.

         j. Cost of revenues--Cost of revenues is comprised primarily of
         access, transmission and termination costs based on actual minutes
         in addition to monthly circuit lease costs and is net of
         reimbursements from vendors.

         k. Research and development expenses--Research and development
         expenses, net of reimbursements from vendors, are expensed as
         incurred.

         l. Advertising expenses--Advertising expenses are expensed as
         incurred. For the years ended December 31, 1997, 1998 and 1999,
         advertising expenses were approximately $24,000, $124,000 and
         $87,000, respectively.

         m. Income taxes--The Company accounts for income taxes under the
         provisions of Statement of Financial Accounting Standards ("SFAS")
         No. 109, "Accounting for Income Taxes". SFAS No. 109 establishes
         financial accounting and reporting standards for the effect of
         income taxes that result from activities during the current and
         preceding years. SFAS No. 109 requires an asset and liability
         approach for financial reporting for income taxes. The Company's
         foreign subsidiaries file separate income tax returns in the
         jurisdiction of their operations.

         n. Net loss per share--In accordance with the Company's adoption
         of SFAS No. 128, "Earnings Per Share", the net loss per share is
         calculated by dividing the net loss attributable to capital stock
         by the weighted average number of shares outstanding. Outstanding
         common stock options are not included in the net loss per share
         calculation as their effect is anti-dilutive. The adoption of SFAS
         No. 128 did not materially affect the Company's presentation of
         net loss per share.

         o. Concentration of credit risk--The Company is subject to
         concentrations of credit risk which consist principally of trade
         accounts receivable and cash and cash equivalents.

         The Company maintains its cash with various financial
         institutions. The Company performs periodic evaluations of the
         relative credit standing of these institutions.

         The majority of the Company's non-carrier customers prepay for
         their services. The Company establishes an allowance for doubtful
         accounts based upon factors surrounding the credit risk of
         customers, historical trends and other information.

         p. Fair value of financial instruments--The carrying amounts of
         cash and cash equivalents, short-term investments, accounts
         receivable and payable approximate fair value due to the
         short-term maturity of these instruments. The carrying amounts of
         outstanding borrowings approximate fair value due to their
         short-term interest rate.

         q. Effects of recently issued accounting standards--In June 1998,
         the FASB issued SFAS No. 133, "Accounting for Derivative
         Instruments and Hedging Activities," which establishes accounting
         and reporting standards for derivative instruments and hedging
         activities. Generally, it requires that an entity recognize all
         derivatives as either an asset or liability and measure those
         instruments at fair value, as well as identify the conditions for
         which a derivative may be specifically designed as a hedge. SFAS
         No. 133 is effective for fiscal years beginning after June 15,
         2000. The Company does not currently engage or plan to engage in
         any derivative or hedging activities. The adoption of SFAS No. 133
         is not expected to have a material impact on the Company.

         During 1998, the Accounting Standards Executive Committee of the
         American Institute of Certified Public Accountants issued
         Statement of Position No. 98-1, "Accounting for the Costs of
         Computer Software Developed or Obtained for Internal Use" ("SOP
         No. 98-1"). The Company amortizes these costs over the anticipated
         life of the systems. The adoption of SOP No. 98-1 did not have a
         material impact on the Company's financial statements.

         r. Stock-based compensation--The Company has adopted the
         disclosure provisions of SFAS No. 123 "Accounting for Stock-Based
         Compensation," and elected to continue the accounting set forth in
         Accounting Principles Board ("APB") Opinion No. 25, "Accounting
         for Stock Issued to Employees." The Company has provided the
         necessary pro forma disclosures as if the fair value method had
         been applied (See Note 11g).

         s. Reclassifications--Certain previously reported amounts have
         been reclassified to conform with the 1999 presentation.

NOTE 3 -- ACCOUNTS RECEIVABLE, NET

         Accounts receivable are stated net of an allowance for doubtful
         accounts of $ 326,000 and $52,000 at December 31, 1998 and 1999,
         respectively.

NOTE 4 -- DUE FROM/TO AFFILIATES

         The balances due from and due to affiliates are for services
         rendered and are non-interest bearing.

NOTE 5 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS

         Prepaid expenses and other current assets consist of the
         following:

                                                            DECEMBER 31,
                                                      -------------------------
                                                          1998         1999
                                                      ------------ ------------
                                                          ($ IN THOUSANDS)
                                                                   ------------
Prepaid commissions.................................. $        145 $         --
Deposits with credit card companies..................          199          150
Government of Israel (VAT refund and other)..........           60           55
Deposits with suppliers..............................           87           --
Prepaid expenses.....................................           28        1,333
Loan to employee.....................................           32          977
Other................................................           70          575
                                                      ------------ ------------
Total prepaid expenses and other current assets...... $        621 $      3,090
                                                      ============ ============

NOTE 6 -- GOODWILL, NET
         Goodwill consists of the following:


                                                            DECEMBER 31,
                                                      -------------------------
                                                          1998         1999
                                                      ------------ ------------
                                                          ($ IN THOUSANDS)
                                                                   -----------
Goodwill from acquisition of the Company by RSL COM
     (see Note 1).................................... $     15,158 $    15,158
Less--accumulated amortization........................      (2,670)     (5,701)
                                                      ------------ ------------
     Total goodwill, net............................. $     12,488 $     9,457
                                                      ============ ============


NOTE 7 -- SHORT-TERM DEBT DUE TO AFFILIATES

     The short-term debt issued in 1998 to RSL COM bears interest at a
     fixed annual rate of 14% and is due on October 1, 2000.

NOTE 8 -- OTHER CURRENT LIABILITIES

         Other current liabilities consist of the following:


                                                            DECEMBER 31,
                                                      -------------------------
                                                          1998         1999
                                                      ------------ ------------
                                                          ($ IN THOUSANDS)
Accrued expenses..................................... $        361 $      2,971
Employees and related expenses.......................          144        2,451
Deposits from customers..............................          119           15
Other................................................            5          111
                                                      ------------ ------------
     Total other current liabilities................. $        629 $      5,548
                                                      ============ ============

NOTE 9 -- SEVERANCE PAY OBLIGATIONS

         Delta Ltd., the Company's Israeli subsidiary, is subject to
         certain Israeli law and labor agreements that determine the
         obligations of Delta Ltd. to make severance payments to dismissed
         employees and to employees leaving employment under certain other
         circumstances. The obligation for severance pay benefits, as
         determined by Israeli law, is based upon length of service and the
         employee's most recent salary. This obligation is partially funded
         through regular deposits made by Delta Ltd. into unaffiliated
         severance pay funds and by the purchase from unaffiliated
         insurance companies of managers' insurance policies. Amounts
         funded are controlled by the fund trustees and insurance companies
         and are not under the control and management of Delta Ltd.

NOTE 10 -- COMMITMENTS AND CONTINGENCIES

         a. Services agreement with RSL COM--In July 1997, the Company
         entered into a three-year services agreement with RSL COM.
         Pursuant to the services agreement with RSL COM, RSL COM is
         required to use its reasonable best efforts to provide the Company
         with certain office and equipment space and to assist the Company
         in obtaining Internet, frame-relay and dedicated lines from third
         parties. In addition, RSL COM is required under the agreement to
         provide the Company with various communications services at rates
         set forth in the agreement. The agreement also provides that the
         Company is required, at RSL COM's request, to use up to 50% of its
         network capacity to route RSL COM's international
         telecommunications traffic at rates set forth in the agreement.

         Based on a cost analysis performed by the Company, management
         believes that the amounts reflected in the financial statements
         pursuant to the above services agreement do not materially differ
         from amounts which the Company would have recognized or incurred
         in providing or obtaining equivalent services on an arms- length
         basis. In September 1999, this agreement was amended. Consistent
         with the original services agreement, the amendment also supports
         the continued provision of services at fair market value.

         b. Technology and marketing agreement with Ericsson--In October
         1997, the Company entered into a technology and marketing alliance
         with Ericsson for the development and deployment of advanced IP
         telephony gateways and communications software. Under the alliance
         agreement, the Company is entitled to purchase hardware and
         software on preferential terms.

         During 1998 and 1999, due to difficulties in integrating the
         hardware and software purchased from Ericsson into the Company's
         network, the Company incurred significant costs. To compensate the
         Company for its costs, Ericsson agreed to offset amounts owed by
         the Company to Ericsson for network telecommunications equipment
         previously purchased from Ericsson with a fair value of $3
         million. This offset represents Ericsson's reimbursement of the
         costs previously incurred and expected to be incurred by the
         Company. For the years ended December 31, 1998 and 1999, the
         Company recognized $901,000 and $1,105,000, respectively, as an
         offset to research and development expenses, and $694,000 and
         $299,000, respectively, as an offset to cost of revenues incurred
         in respect of the network telecommunications equipment.

         c. Other marketing and cooperation agreements--The Company has
         entered into marketing and cooperation agreements with various
         other companies that maintain sites on the Web. Pursuant to
         certain of these agreements, the Company is obligated to pay
         commissions based on revenues derived from such Web links.

         d. Indentures governing debt of RSL COM--The Company is subject to
         covenants by reason of its status as a restricted subsidiary of
         RSL COM under the indentures governing a substantial amount of RSL
         COM's debt. These restrictions significantly limit the ability of
         the Company to incur additional indebtedness or create liens on
         its assets. The Company's ability to incur indebtedness is limited
         by the amount of indebtedness that RSL COM and the Company are
         permitted to incur under the indentures. Such restrictions also
         limit the Company's ability to pay dividends or make other
         distributions in respect of the Company's capital stock, sell
         assets, engage in mergers or acquisitions or make some types of
         investments. These restrictions also limit the ability of a third
         party to acquire a controlling interest in the Company. These
         restrictions may prohibit transactions that would otherwise be
         beneficial to the Company.

         e. Lease commitments--In December 1999, the Company entered into a
         lease for headquarters of its United States operations with an
         initial cost of approximately $398,000, increasing to $530,000
         during the final year of the lease. The lease term extends until
         December 2009 with an option to extend the lease for an additional
         five years.

         The Company leases office space from RSL COM in New York at an
         annual cost of $96,000. The lease term extends until June 2001.

         The Company leases offices in Israel at an annual cost of
         $240,000. The lease term extends until February 2003, with an
         option to extend the lease for an additional five years. In
         addition, the Company entered into a lease for additional space in
         its existing location in Israel at an annual cost of approximately
         $52,000. The term of the lease begins April 1, 2000 and extends
         until January 31, 2003, with an option to extend the lease for an
         additional five years.

         f. Legal proceedings--On October 8, 1999, Aerotel, Ltd. and
         Aerotel U.S.A. commenced a suit against the Company, RSL COM and
         an RSL COM subsidiary in the United States District Court for the
         Southern District of New York. Aerotel alleges that we are
         infringing on a patent issued to Aerotel in November 1987 by
         making, using, selling and offering for sale prepaid telephone
         card products in the United States. Aerotel seeks an injunction to
         stop us from using the technology covered by this patent, monetary
         damages in an unspecified amount and reimbursement of attorneys'
         fees. The Company has answered the complaint, and the parties are
         currently engaged in pre-trial discovery. As the Company continues
         to evaluate these claims, the Company believes that it has
         meritorious defenses to the claim and it intends to defend the
         lawsuit vigorously. However, the outcome of the litigation is
         inherently unpredictable and an unfavorable result may have a
         material adverse effect on the Company's business, financial
         condition and results of operations. Regardless of the ultimate
         outcome, the litigation could result in substantial expenses to
         the Company and significant diversion of efforts by the Company's
         managerial and other personnel.

NOTE 11 -- STOCKHOLDER'S EQUITY

         a. Share capital--Following the Company's initial public offering,
         effective November 1999, the Company's shares are listed on the
         NASDAQ National Market System.

         b. Stock split--All references to per share amounts and the number
         of shares in these financial statements have been restated to
         reflect the stock split of 2.48-for-one, effected in November
         1999.

         c. Description of capital stock--As of December 31, 1998, the
         Company's authorized share capital was 200,000,000 shares of Class
         B common stock, par value $0.001, of which 19,569,459 shares were
         issued and outstanding.

         In September 1999, the Company authorized two additional classes
         of capital stock, the Class A common stock, par value $0.001, and
         preferred stock, par value $0.001. As of December 31, 1999, the
         Company's authorized share capital was 200,000,000 shares of Class
         A common stock, of which 8,918,132 were issued and outstanding,
         200,000,000 shares of Class B common stock, of which 19,569,459
         shares were issued and outstanding, and 25,000,000 shares of
         preferred stock, of which none were issued and outstanding.

         Effective upon the authorization of the Class A common stock, each
         share of Class B common stock is convertible into one share of
         Class A common stock at any time. The holders of the Class B
         common stock are entitled to ten votes per share. The holders of
         the Class A common stock are entitled to one vote per share.

         d. Yahoo! Inc. transaction--On October 18, 1999, the Company
         issued to Yahoo! Inc. 125,275 shares of Class A common stock and a
         warrant to purchase 125,275 shares of Class A common stock at an
         exercise price of $7.98 per share. The Company recorded the $1
         million purchase price of the 125,275 Class A common stock as a
         receivable. The Company has elected to offset the Yahoo!
         receivable against the first $1 million due under a separate
         advertising and promotional agreement, as described below. In
         December 1999, Yahoo! exercised the warrant utilizing a cashless
         exercise, and the Company issued to Yahoo! 58,626 shares of Class
         A common stock. The Company recorded $1,007,000 of deferred
         compensation expense related to the issuance of the shares
         representing the difference between each of the purchase price of
         the Class A common stock as compared to the fair value of the
         Class A common stock and the fair value of the warrant. The fair
         value of warrant has been measured by utilizing the Black-Scholes
         option pricing model. Amortization of the deferred compensation
         for the year ended December 31, 1999 amounted to $168,000.

         In addition, on October 18, 1999, the Company entered into a
         binding advertising and promotion agreement whereby Yahoo! Inc.
         will provide 226,038,600 page views to the Company over a one-year
         period commencing in December 1999. In consideration for such, the
         Company will compensate Yahoo! Inc. $5,000,000. Under the terms of
         the advertising and promotion agreement, the Company made a cash
         payment of $600,000 on the effective date of the agreement and an
         additional twelve cash payments of $283,333 over the twelve months
         following the effective date. The $5,000,000 is charged to expense
         using the straight-line basis over the one-year life of the
         contract.

         e. CNET transaction--On October 20, 1999, the Company issued to
         CNET Investments, Inc. 1,085,943 shares of common stock and a
         warrant to purchase 466,028 shares of Class A common stock at an
         exercise price of $19.31 per share, or approximately $11.0 million
         in the aggregate which was received in cash by the Company upon
         the issuance of the shares. The Company recorded approximately
         $2.7 million of deferred compensation expense related to the
         issuance of the shares representing the difference between each of
         the purchase price of the Class A common stock as compared to the
         fair value of the Class A common stock and the issuance of the
         warrant (using the Black-Scholes option pricing model for
         determining the fair value of the warrant). Amortization of the
         deferred compensation for the year ended December 31, 1999
         amounted to $225,000.

         In addition, the Company entered into a binding development and
         promotion agreement with CNET, Inc., effective as of September 22,
         1999, whereby CNET, Inc. will provide various promotions to the
         Company to assist the Company in promoting its PC-to-Phone product
         and related services. In consideration for this promotion, the
         Company will compensate CNET, Inc. a total of $11,000,000 over a
         two-year period. In the first year, the Company will pay CNET a
         one-time payment of $330,000, payments aggregating $920,000 for
         special promotions and $354,000 per month. In the second year, the
         Company will pay CNET an aggregate amount of $1,250,000 for
         special promotions and $354,000 per month.

         f. Restricted units--Through April 1999, a total of 1,121,324
         restricted units had been granted to employees of the Company
         under the 1997 RSL COM Stock Incentive Plan. The restricted units
         were convertible to shares of RSL COM Class A common stock or cash
         (at RSL's discretion) based on the value of the Company on
         December 31 of each year, as determined with reference to the
         value of RSL COM. Of these restricted units, 836,147 had an
         exercise price of $0.004 and were granted in 1997 and 1998 and
         189,262 had an exercise price of $2.08 and were granted in 1998.
         In April 1999, an additional 95,915 restricted units were granted
         to employees of the Company with an exercise price of $5.11. The
         majority of the restricted units vest over a three-year period
         from the date of grant and were exercisable for a period of seven
         years from the date of grant. Upon completion of the Company's
         initial public offering, the Company issued shares of the
         Company's Class A common stock in exchange for vested restricted
         units on a one-for-one basis upon payment of the related exercise
         price and issued options to purchase shares of the Company's Class
         A common stock in exchange for unvested restricted units on a
         one-for-one basis, with the same exercise prices and vesting
         schedules as the corresponding restricted units.

         Pursuant to generally accepted accounting principles, the
         restricted units were considered variable grants. Consequently,
         the changes in the fair value of the underlying shares at each
         balance sheet date affected the aggregate amount of deferred
         compensation recorded by the Company. The Company recorded
         deferred compensation in connection with the restricted unit
         grants of $1,800,000 through December 31, 1998 and an additional
         $14,393,000 during the year ended December 31, 1999. The
         additional amount for 1999 resulting from the difference between
         the fair value of the restricted units and the initial offering
         price of $15 is included as a reduction of stockholder's equity
         and is being amortized by charges to operations over the vesting
         period.

         g. Stock Options--In April 1999, the Company agreed to grant
         options to purchase an aggregate of 1,076,761 shares of the
         Company's Class A common stock at an exercise price of $5.11 to
         executive officers of the Company, subject to completion of the
         Company's contemplated initial public offering. Such options vest
         over a three-year period from the date of grant and are
         exercisable for a period of seven years from the date of grant.

         The Company recorded deferred compensation related to the stock
         options of approximately $9,930,000 as of December 31, 1999,
         representing the difference between the exercise price and the
         initial public offering price of $15. Such amount is included as a
         reduction of stockholders' equity and is being amortized by
         charges to operations over the three-year vesting period.

         In addition in November 1999, the Company adopted the 1999 Stock
         Incentive Plan ("the Plan") . Under the Plan, 4,000,000 shares
         were reserved for issuance upon the exercise of awards to be
         granted. In addition, the Company's compensation committee may
         grant both incentive and non-incentive stock options for common
         stock of the Company. The options generally have a term of seven
         years and become exercisable in three equal instalments commencing
         on the first anniversary of the date of the grant. The purchase
         price per share payable upon exercise of an option is no less than
         the fair market value of the share at the date of grant. As of
         December 31, 1999, options to purchase 502,800 shares were
         outstanding with exercise prices of $15 and $25 per share.

         A summary of the status of the Company's stock option plans as of
         December 31, 1999, and changes during the year then ended, is
         presented below:

<TABLE>
<CAPTION>
                                                                         WEIGHTED
                                                                         AVERAGE
                                                        SHARES        EXERCISE PRICE
                                                     -------------    --------------
<S>                                                     <C>                    <C>
Options outstanding at beginning of year............            --          $  --
Options issued in exchange for RSL COM restricted units    372,976           1.80
Granted during year.................................     1,579,561           8.90
                                                     -------------
Outstanding at end of year..........................     1,952,537           7.54
                                                     =============
Weighted average fair value of options granted
during the year.....................................         $9.00
                                                    ==============
</TABLE>

         Had compensation cost for the Company's stock options and
         restricted units been determined based on fair value at the grant
         date in accordance with SFAS No. 123, the Company's pro forma net
         loss and pro forma diluted net loss per share would have been as
         follows:

<TABLE>
<CAPTION>

                                                   YEAR ENDED DECEMBER 31,
                                             ------------------------------------
                                                1997        1998         1999
                                             ---------- ------------ ------------
                                                       ($ IN THOUSANDS)
                                                        ------------ ------------
Net loss:
<S>                                          <C>        <C>          <C>
   As reported.............................. $  (2,367) $    (7,121) $   (33,771)
   Pro forma................................ $  (2,367) $    (6,475) $   (34,357)

Net loss per share--basic and diluted:
   As reported.............................. $   (0.19) $     (0.37) $     (1.65)
   Pro forma................................ $   (0.19) $     (0.34) $     (1.68)
</TABLE>

               For the purpose of presenting pro forma information required
               under SFAS 123, the fair value of each restricted unit and
               option grant has been estimated on the date of the grant
               using the minimum value method for grants in 1997 and 1998
               and the period to November 22, 1999 (the date of the
               Company's initial public offering) and the Black-Scholes
               method for grants made after the Company became a public
               entity. The following assumptions were used: Dividend yield
               of 0.00%; risk-free interest rate of 6%; a three-year
               expected life; a volatility rate of 70% (when using the
               Black-Scholes method).

               Because the determination of the fair value of all options
               granted after the Company became a public entity included an
               expected volatility factor, in addition to the factors
               described in the preceding paragraph and because additional
               option grants are expected to be made each year, the above
               pro forma disclosures are not representative of the pro
               forma effects of reported net income for future years.

               h. Employee Stock Purchase Plan--During 1999, the Board of
               Directors approved an Employee Stock Purchase Plan (the
               "ESPP"), effective beginning November 23, 1999. Under the
               ESPP, the maximum number of shares to be made available
               under the ESPP is 5% of the number of outstanding shares.
               All full-time employees who have been employed by the
               Company for at least one calendar quarter are eligible to
               participate in the ESPP. Employee stock purchases are made
               through payroll deductions.

               Under the terms of the ESPP, employees may not deduct an
               amount that exceeds $25,000 in total value of stock in any
               one year. The purchase price of the stock will be the lower
               of 85% of the fair market value on the first trading day of
               the offering period or the last trading day of the purchase
               period. The ESPP shall terminate upon the first to occur of
               (i) December 31, 2009 or (ii) the date on which the ESPP is
               terminated by the Board of Directors. There were no
               purchases under the ESPP during 1999.

NOTE 12 -- RESEARCH AND DEVELOPMENT EXPENSES

               Research and development expenses (which commenced in 1997)
consist of the following:


                                                YEAR ENDED DECEMBER 31,
                                          ------------------------------------
                                             1997        1998         1999
                                          ---------- ------------ ------------
                                                    ($ IN THOUSANDS)
                                                     ------------ ------------
Salaries and related expenses............ $       92 $        948 $      1,735
Consulting and advisory fees.............         --          197          225
Travel...................................         --          146          125
Other....................................        202          260          253
                                          ---------- ------------ ------------
                                                 294        1,551        2,338
Less--reimbursement by Ericsson
(see Note 10b)...........................         --         (901)      (1,105)
                                          ---------- ------------ ------------
Total research and development expenses.. $      294 $        650 $      1,233
                                          ========== ============ ============


NOTE 13 -- INCOME TAXES

               a. Tax loss carryforwards--As of December 31, 1999, the
               Company had net operating loss carryforwards generated in
               the U.S. and Israel of approximately $12,046,000 and
               $6,548,000, respectively. The Company's U.S. net operating
               loss carryforwards will expire at various dates beginning in
               2011 if not utilized. In addition, a portion of those net
               operating loss carryforwards could be subject to limitation
               due to RSL COM's acquisition of the Company. The Company's
               net operating losses generated in Israel may be carried
               forward indefinitely.

               b.  In accordance with SFAS No.  109, the components of deferred
                income taxes as follows:


                                               YEAR ENDED DECEMBER 31,
                                         ------------------------------------
                                            1997        1998         1999
                                         ---------- ------------ ------------
                                                   ($ IN THOUSANDS)
                                                    ------------ ------------
Net operating losses carryforwards...... $      900    $   3,500   $   14,403
Less valuation allowance................       (900)      (3,500)     (14,403)
                                         ---------- ------------ ------------
Net deferred tax assets ................ $       --    $     --    $       --
                                         ========== ============ ============

               As of December 31, 1997, 1998 and 1999, a valuation
               allowance of $900,000, $3,500,000 and $14,403,000
               respectively, is provided as the realization of the deferred
               tax assets are not assured.

NOTE 14 -- SEGMENT REPORTING, GEOGRAPHICAL INFORMATION AND MAJOR
                          CUSTOMERS

               The Company operates in a single industry segment, IP
               communications services, and makes business decisions and
               allocates resources accordingly.


                                               YEAR ENDED DECEMBER 31,
                                         ------------------------------------
                                            1997        1998         1999
                                         ---------- ------------ ------------
                                                   ($ IN THOUSANDS)
                                                    ------------ ------------
Revenues by geographical location:
    United States....................... $      680 $      4,922 $      7,521
    Europe..............................         37          528        1,326
    South America.......................        284           34          113
    Far East............................        149           --        1,174
Other...................................         96          154          918
                                         ---------- ------------ ------------
    Total revenues ..................... $    1,246 $      5,638 $     11,052
Revenues from principal customers:
    Affiliates ......................... $      467 $      3,896 $      7,431
                                         ========== ============ ============
    Other principal customer............ $      276 $     --     $     --
                                         ========== ============ ============


                                                         DECEMBER 31,
                                                 ---------------------------
                                                     1998          1999
                                                 ------------  -------------
                                                      ($ IN THOUSANDS)
                                                               -------------
Long-lived assets:
    United States................................$      4,376  $       4,933
    Israel.......................................       2,077          1,899
    Other........................................       1,817          2,667
                                                 ------------  -------------
    Total long-lived assets......................$      8,270  $       9,499
                                                 ============  =============